Education World & Insurance: Life Insurance Companies

Life Insurance Companies compensate (provide benefits to) the beneficiary of a policy upon the policy holder's death. They charge policyholders a premium that should reflect the probability of making a payment to the beneficiary as well as the size and timing of the payment. Despite the difficulties of forcasting the life expectancy of a given individual, life insurance companies have historically forecasted with reasonable accuracy the benefits they will have to provide beneficiaries. Because they hold a large portfolio of policies, these companies use actuarial tables and mortality figures to forecast the percentage of policies that will require compensation over a given period, based on characteristics such as the age distribution of policy holders.

Life insurance companies also commonly offer employees of a corporation a group life policy. This service has become quite popular and has generated a large volume of business in recent years. Group policies can be provided at a low cost because of the high volume.

Types of Life Insurance:
Some of the more common types of life insurance policies aredescribed here:

Whole Life Insurance:
From the perspective of the insured policy holders, whole life insurance protects them until death or as long as the premiums are promptly paid. In addition, a whole policy provides a form of savings to the policy holder. It builds a cash value that the policy holders is entitled to even if the policy is cancelled. From the perspective of the life insurance company, whole life policies generate periodic (typically, quarterly and semiannual) premiums that can be invested until the policy holder's death, when benefits are paid to the beneficiary. The amount of benefits are paid to the beneficiary. The amount of benefits is typically fixed.
Present value of benefits on whole life policy= L * mt * PVIFAr,n
where, L= Amount of each policy
mt= Mortality rate
n= number of year
r= cost of money

Term Insurance:
Term Insurance is temporary, providing insurance only over a specified term and doesnot build a cash value for policy holders. The premiums paid represent only insurance, not savings. Term insurance, however, is signigicantly less expensive than whole life insurance. Policy holders must compare the cash value of whole life insurance to the additional costs to determine whether it is preferable to term insurance. Those who prefer to invest their savings themselves will likely opt for term insurance.
People who need more insurance now than later may choose decreasing term insurance, in which the benefits paid to the beneficiary decrease over time. Families with mortgages commonly select this form of insurance. As time passes, the mortgage balance decreases, and the family is more capable of surviving without the breadwinner's earnings. Thus, less compensation is needed later years.

Universal Life Insurance:
Universal life insurance combines the features of term and whole life insurance. It specifies a period of time over which the policy will exist but also builds a cash value for the policy holder over time. Interest is accumulated from the cash value until the policy holder uses those funds. Universal life insurance allows felexibility on the size and timing of the premiums too. The growth in a policy's cash value is dependent on the place of the premiums. The premium payment is divided into two portions. The first is used to pay the death benefit identified in the policy and to cover any administrative expenses. The second is used for investments and reflects savings for the policy holder.