Buying a life insurance means that in case of a person's death the insurance company pays money according to the value of the policy to the heirs of the deceased either in lump sum or in installments.

People Involved in the Transaction

The life insurance works in the following way. There are three parties involved in this transaction i.e. the insured person who holds the policy, the insurer which is the company providing the policy and the owner of the life insurance policy. The owner is in most cases the same person but in some cases another person such as a wife can buy insurance for her husband, she becomes the owner and the husband becomes the insured. Owner of the insurance policy is known as the grantee and responsible for the payments. Another very important party that is of concern to the owner and insured is the beneficiary.

Beneficiaries

The term can be singular or plural and contains all persons who will receive the money according to the policy when he insured dies. Although beneficiaries are not a part of the insurance transaction but the owner of the policy designates them so hat they can receive the benefit for which the insurance policy was bough at the first place.

Terms and Conditions

Since insurance policy is also a legal contract therefore it specifies several terms and conditions according to the risks involved. Some provisions are also added in the contract such as in case of suicide during a time period usually two periods specified by the company, the value of the insurance becomes null.

Contestability period

This is the period in which if the insured dies, insurance company can contest the claim and may ask for more information before making a payment or denying the claim. This period is usually of two years and most contracts have it.

Face amount

The face amount of the insurance policy is the amount that is paid when policy gets mature. Usually at the time f death the policy matures or at a certain time specified in the contract.

How Insurer works

The insurance company calculates the overall policy price by adding the claims that it will have to pay, the administrative costs involved and the profit that they will be making. Actuaries by using mortality tables calculate the cost. The premium is given by the owner and it then invests the money received from all policy holders to create a pool. This pool of money is used to pay the claims. The price charged by the insurance company also tends to increase with older age because it's likely that a person will die in old ages.

Underwriting

The insurance company does an investigation before providing any agreement proposal. The investigations to evaluate the risks involved, the lifestyle and health of the person are carefully recorded and this method of checking is known as underwriting. Generally four categories of health are evaluated for life insurance. The preferred best, the preferred, the standard and the tobacco. The insurance company alone has the authority to decide which person will fall in which category and to be given a contract. Some people may be denied and some rated which means they are asked to pay higher premiums.

How is the money given?

When the insured dies the insurance company asks for death certificate before they will pay the claim. If there is a suspicion the death of the insured then the insurer may investigate the case. Afterwards the claim is paid to the beneficiaries.