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The Building Blocks of Life Insurance

Sep 9, 2008
What Is Life Insurance?

Life insurance provides protection against financial failure resulting from death. It is an insurance company's guarantee to pay a beneficiary a particular amount of money when an insured dies in exchange for appropriate payment of premiums.

What Is It Intended To Do?

Life insurance serves as refuge in the event of the insured's death. Life insurance gives financial fortification to survivors. It provides dependents with the needed funds to settle financial responsibilities and to compensate for the loss of income due to the insured's death. Life insurance policies are typically bought with a precise objective in mind - to protect a mortgage or an estate, to afford educational expenditures, for retirement, or for donations.

Why Is Life Insurance Essential?

People hold life insurance policies for countless reasons. Among the most frequent are to pay off a mortgage, or personal debts (car loans, credit cards), educational expenses for juvenile children, for beneficiaries to be able to uphold their present standard of living, for child care, for urgent financial needs, and for medical or funeral expenses.

How Can Life Insurance Needs Modify Over Time?

If an individual has completed raising their family, has paid off their mortgage and does not have any chief financial responsibilities, then their life insurance requirements will be less than when they were younger. A person may decide to no longer hold their policy or to decrease their coverage amount to a level just adequate enough to make certain that their survivors have sufficient funds to compensate final expenses upon the insured's death.

How Does Life Insurance Operate?

All aspects of life involve a certain level of risk, whether it is a fire, burglary, car accident, or injury. Insurance provides a way of shifting the financial penalties of particular risks from the person to an insurance company. When a person purchases life insurance, they are put together with other individuals who are comparable in age, sex, and health status, regardless of whether the company advertises a no medical exam term life insurance (http://www.equote.com/li/termlifeinsurance.html) plan.

Actuaries estimate how many people in each group are expected to die in a range of time. The more deaths expected in a group, the more funds will be required to pay death claims, and thus, more money will have to be gathered as premium payments. Since younger people are not as likely to die as older folk, premiums are normally lower at younger ages.

Annually, the insured pays the company for their policy. These funds are called "premiums." The insured also notifies the insurance company of who the beneficiaries of the insurance money are in the event that they (the insured) die. This is referred to as "designating a beneficiary."

If the insured dies during the active period of their policy, the life insurance company (http://www.equote.com/li/term-life-insurance-quote.html) will disburse the insurance money to the designated beneficiaries. Insurance companies can do this because only a small amount of people die annually, while many more individuals pay them premiums. The "risk" of death is allocated among many people to avert a financial loss to the beneficiaries of the people who do actually die.

What Is An Actuary?

An actuary is an individual who is professionally qualified in the technical facets of insurance, principally in the mathematics of insurance, such as measuring premiums, dividends, and appropriate policy reserves. Actuaries help in approximating the price of executing new benefits or benefit improvements and also perform statistical and financial studies. Actuaries in the U.S. attain professional status by passing a set of tests given by the Society of Actuaries (SOA).

Where Does The VA Insurance Program Get Its Actuarial Expertise?

The Insurance Actuarial Staff is situated at the Insurance Center in Philadelphia, Pennsylvania. The Actuarial Staff is accountable for the financial management and actuarial reliability of the life insurance programs that are managed and overseen by the Department of Veterans Affairs Regional Office and Insurance Center.

Among the staff's tasks are the calculation of premiums and dividends, measuring policy values, developing mortality and insurance knowledge studies, implementing suitable reserve levels and financial coverage. The Actuarial Staff is also responsible for the assessment of the financial impact of legislative suggestions that will influence life insurance programs.

The Actuarial Staff is accountable for the groundwork for financial statements released by the VA life insurance programs. These statements display the financial standing of each of the types of life insurance (http://www.youtube.com/watch?v=V5mRvPgZOn8) programs. Annually, independent auditors review these statements to make certain that the statements correctly reflect the financial standing of the various programs.

This is significant because an approving audit judgment means that the life insurance programs are competent enough to meet their responsibilities to policyholders and that all policyholders are being cared for fairly. For each fiscal year since 1992, the VA insurance program has been the recipient of an incompetent audit judgment. This means that the independent auditors have come to the conclusion that the financial statements correctly reflect the financial standing of the insurance programs.
About the Author
Sarah Martin is a freelance marketing writer based out of San Diego, CA. She specializes in financial planning and different types of life insurance . For a no medical exam term life insurance quote, please visit http://www.equote.com.
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