Life insurance companies are a fact of life for most people so you probably think you know all about them. Well, let’s test that theory. Here are six things that everyone should know about life insurance companies.
What is a life insurance company?
At its core, insurance is a type of contract (called a policy in the life insurance business) entered into between the insured and an insurance company that promises to pay the beneficiary of an individual or an entity when the insured dies under circumstances covered by the policy. In return, the individual promises to pay premiums in a certain amount and for a certain length of time.
According to Forbes.com, life insurance is one of the pillars of financial stability. This is especially true if you have a spouse or dependent children or others financially dependent upon you. Life insurance doesn’t just compensate for the loss of a life. It can help pay final expenses, payoff mortgages, put kids through college, and provide peace of mind for loved ones, especially at a time of unexpected death.
Life insurance, then, is a risk management tool and not an investment. A simple, plain vanilla term life policy (a group policy that provides coverage for a certain term of years for lower premiums) might fit the bill for you at your stage in life better than a whole life policy with investment components and lots of bells and whistles.
How does the premium system work?
The company pools the premiums from all of its clients’ risks which creates affordable premium payments for the insureds.
Life insurance companies also employ actuaries (mathematicians) who determine the liabilities associated with the life insurance policies and something they call “the reserves”. They use certain assumptions with respect to mortality (life expectancy), interest rates of return, lapse rates, and expenses to determine the reserves the company will need to pay the promises when due. For payments in a lump sum, actuaries must also deal with the concept of the time-value of money and present value. Actuaries also help determine the premiums the insureds pay.
Life insurance in the U.S. is massive, lucrative, and decidedly competitive. As of 2014, there were more than 800 life insurance companies who received $147 billion in direct premium payments. It’s easy to understand why it is such a big business because, in that same year, 180 million of us carried policies to financially protect our loved ones when we die. That’s because life insurance plays an important part in the financial security for your family.
Where are insurance companies located and how do I pick the right one?
Life insurance companies write insurance policies all across the U.S. The trick to picking the right one is to do your research on the various companies. Now, that’s a daunting prospect, given the more than 800 companies that sell life insurance. There are, however, certain things to concentrate on:
- Financial health and size of the company’s reserves;
- Check out the insurance company’s ratings with A.M. Best or Moody’s;
- Check with state insurance departments to find any consumer complaints against the company or search the National Association of Insurance Commissioners’ online database; and
- Use an insurance broker/agent who can help you assess your family’s needs to make recommendations based on the above specifications as well their personal experience with companies.
Remember, when it comes to deciding which company to use, you want a highly rated company but not necessarily the biggest company. You want to select the company whose policy provides the features that best serve your needs. For example, in recent years, some companies offer annuity payouts instead of lump sum payments. Some insureds want this flexibility to try to make sure the money lasts as long as possible for the benefit of their beneficiaries.