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How Life Insurance Works With You

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Life insurance -  is a contract between an individual with an insurable interest and a life insurance company to transfer the financial risk of a premature death to the insurer in exchange for a specified amount of premium. The three main components of the life insurance contract are a death benefit, a premium payment and, in the case of permanent life insurance, a cash value account.

The earliest records of life insurance come from ancient Rome, where burial clubs pooled money among the poor to pay for members' funerals [source: Imber]. Beginning in the Middle Ages, life insurance was dominated by fraternal and religious organizations, labor guilds, and mutual life insurance companies. Similar to credit unions, mutual life insurance companies are owned by the members, who share in any profits. In the late 17th century, astronomer Edmond Halley (yes, the comet guy) came up with the first actuarial tables for calculating the risk of insuring an individual based on mortality statistics [source: Warren]. The higher the risk, the higher the premium.

 Insurance Broker, If Required?

Risk calculation is still a big part of the life insurance business. When you apply for a life insurance policy, you'll be asked to fill out a full medical history (including your family medical history). You'll also be asked questions about your lifestyle and hobbies, your credit history, your driving record and your travel habits [source: SmartMoney.com]. All of this information is used by insurance actuaries to figure out how much they should charge you for a life insurance policy, or if they should deny you a policy altogether.

The most important factors that affect the price of life insurance premiums are age, sex and pre-existing medical conditions. Older people will generally pay more for a life insurance policy, as will men. Heart conditions, high blood pressure, mental illness, or a strong family history of heart disease or cancer will raise your insurance premiums.

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Permanent life insurance has a few variations. Most permanent products like Whole Life and Universal Life come with an investment aspect in the form of cash value accumulation. These usually tend to be 3 to 4 times as much as expensive as Term Life insurance. This in part has to do with the cash value accumulation and the fact that its “when you die” not “if you die” life insurance.

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There is however a less expensive Guaranteed Universal Life product that is a permanent life insurance focused more on pure protection rather than cash value. Any cash value that it does accumulate is used to keep the premiums level throughout. This product can be a better option if you are not interested in life insurance as an investment but more focused on leaving a legacy for your family and taking care of all of your final expenses such as funeral costs, hospital bills and any remaining financial responsibilities upon your death.

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