Have you ever wondered how a
death benefit is determined in a life
insurance contract? Whether or
not you choose a term life, whole life, or
universal life insurance
contract, every contract comes equipped with a tax free death
benefit, otherwise known as a face amount. But how does the
insurance company come up with the magic number for a death benefit?
It's all based on mortality tables using the health and age of the
proposed insured. Let's take a closer look at how insurance
companies rate each policy and how underwriting determines the
outcome.
We have all heard of the term
underwriting. However, underwriting can be used to analyze either
the health of a person or the justification of a financial
transaction, like a home mortgage loan. For our purposes we will be
concentrating on the underwriting of an individual for a life
insurance policy. Once a person has done the adequate research to
determine what type of policy would be the best fit, the underwriting
process of gathering information follows the signed application.
After the application, the insurance company will set up an
appointment with the proposed inured (the person applying for
insurance) with a para med (usually a mobile nurse or health careequivalent). The para med will take down vital statistics of the
proposed insured, including a blood test and urine analysis. This
information is then sent to a laboratory to be analyzed for the
insurance company.
Outside of the initial
physical of the para med, other information is also gathered to
determine the face amount of the policy. The age and sex of the
insured is considered. Additionally, past medical records will be
summoned from the acting physician to be reviewed by the insurance
company. The lifestyle of the proposed insured is also reviewed, as
a motocross racer has a much higher chance of being killed on the job
than a receptionist. Lastly, the insurance company must consider the
financial state, or suitability, of the client to determine if the
recommended policy will meet the client's needs.
Once all of this information
is gathered for the insurance company, the underwriter will then
analyze this information and come up with a tax free death benefit.
The underwriter basically calculates all of the risk (chance of
death) of the provided documentation against set mortality tables
before an offer can be considered. Generally speaking, the mortality
tables provide a societal average of what a reasonably healthy person
will live to be. For example, females tend to live longer;
therefore, on average the death benefit for a female is slightly
higher than a male. Mortality tables provide the insurance company
with a time line of profitability to make sure the death benefits
they offer do not put them in the red over the long term. Because of
this life insurance payouts are much higher today then they were 50
years ago, as people are living much longer; translating to higher
profits for the insurance company.
Only when all of this
information is analyzed can an offer from the insurance company be
made. This is why it is important to speak to a reputable agent
discussing the financial needs of your life insurance policy. If the
wrong policy is recommended based on absent facts, the long term
financial consequences could be severe. For example, a person who
wants a higher death benefit would be better off with a whole life
policy as opposed to a universal life policy which concentrates on
cash value accumulation. Pertinent questions must be addressed
upfront at the time of the application to adequately determine the
right policy. Bottom line, underwriting is a proven method that can
help the proposed insured come up with the appropriate face amount
for their family's needs if properly addressed.
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