#3 The ins & outs of Life Insurance

Insurance 101-How does life insurance work?

Why insure and the principles of life insurance

Insurance is a way of financially protecting ourselves, or others, for the payment of money if a loss occurs. It removes uncertainty by transferring a known, or unknown, financial consequences to someone else – usually an insurance company.

This security comes by paying an insurance company an agreed sum of money, called a Premium.

Most types of insurance are optional, so why take it out?

You could put the money in a bank instead of paying into an insurance company. But, could you save enough? Insurance covers risks you can’t prepare for so you don’t have to save huge amounts of money.

But how can insurers provide compensation when so many losses occur every day, e.g. claims for death, disabilities, medical procedures and traumatic events like cancer, heart attack, or a stroke.

With lots of similar risks, insurers can predict the number of losses they might have. They won’t know exactly, but experience and statistical data will give them a pretty good idea. In fact, only a small proportion of policyholders will actually suffer a loss in any given year.

An insurance company offers its protection by grouping together people who all feel exposed to the same risk.

By collecting an amount of money, a premium, from each person, the insurer can accumulate a fund called an Insurance Pool, out of which losses can be paid.

Finally, there are two Principles of Insurance for which you must know about:

1. Insurable Interest

2. Upmost Good Faith

You must answer all the questions in the Proposal fully, as well as truthfully. If you aren’t sure, it is very important that you ask what the question really means, or how much detail is required.

By misleading, or withholding detail that an insurer may want to know, they can cancel your policy and/or refuse to pay you the compensation you are insuring.

What are differences between normal life insurance and funeral cover?

Those older, or in poor health, are often attracted to funeral insurance.  There are few, or no medical questions asked, and it is easily arranged by phone, mail, or electronically.

Full cover does not commence for one, two, or even three years after the policy is started.  Premiums are refunded if death occurs within this timeframe.

Premiums are usually level and cease at age 85, or when the premiums paid are equal to the amount to be paid out.  Be sure to read the policy wording.

Compared to standard life insurance, it is much more expensive, but it may be the best cover you can buy if you have medical issues.