Costs, Insurability, and Underwriting

The insurer have to calculates the policy prices with intent to fund claims to be paid and administrative costs, and to make a profit. The cost of insurance is determined using  mortality tables calculated by actuaries. Actuaries are professionals who employ actuarial science which is based in mathematics. Mortality tables are statistically-based tables showing expected annual mortality rates. It is possible to derive life expectancy estimates from these mortality assumptions.

The three main variables in a mortality table have been age, gender, and use of tobacco. More recently in U.S., preferred class specific tables were introduced. The mortality tables provide a baseline for the cost of insurance. In practice, these mortality tables are used in conjunction with the health and family history of the individual applying for a policy in order to determine premiums and insurability. Mortality tables currently in use by life insurance companies in the U.S. are individually modified by each company using pooled industry experience studies as a starting point.

Recent U.S. select mortality tables predict that roughly 0.35 in 1,000 non-smoking males aged 25 will die during the first year of coverage after underwriting. Mortality approximately doubles for every extra ten years of age so that the mortality rate in the first year for underwritten non-smoking men is about 2.5 in 1,000 people at age 65. Compare this with the U.S. population male mortality rates of 1.3 per 1,000 at age 25 and 19.3 at age 65.

The mortality of underwritten persons rises much more quicklythan the general population. At the end of 10 years the mortality of that 25 year-old, non-smoking male is 0.66/1000/year. Consequently, in a group of one thousand 25 year old males with a $100,000 policy, all of average health, a life insurance company would have to collect approximately $50 a year from each of a large group to cover the relatively few expected claims. (0.35 to 0.66 expected deaths in each year x $100,000 payout per death = $35 per policy). Administrative and sales commissions need to be accounted for in order for this to make business sense. A 10 year policy for a 25 year old non-smoking male person with preferred medical history may get offers as low as $90 per year for $100,000 policy in the competitive U.S. life insurance market.

The Difference Between The Insured and The Policy Owner

There is a difference between the insured and the policy owner although the owner and the insured are often the same person. For example, if you buys a policy on your own life, you are both the owner and the insured. But if you buys a policy on other person's life, you are the owner and it other person is the insured. The policy owner is the guarantee and he or she will be the person who will pay for the policy. The insured is a participant in the contract but not necessarily a party to it.

The beneficiary receives policy proceeds upon the insured's death. The owner designates the beneficiary but the beneficiary is not a party to the policy. The owner can change the beneficiary unless the policy has an irrecovable beneficiary designation. With an irrecovable beneficiary, the beneficiary must agree to any beneficiary changes, policy assignments, or cash value borrowing.

In cases where the policy owner is not the insured, insurance companies have sought to limit policy purchases to those with an insurable interest. For life insurance policies, close family members and business partners will usually be found to have an insurable interest. The insurable interest requirement usually demonstrates that the purchaser will actually suffer some kind of loss if the CQV (celui qui vit) dies. Such a requirement prevents people from benefiting from the purchase of purely speculative policies on people they expect to die. With no insurable interest requirement, the risk that a purchaser would murder the CQV for insurance proceeds would be great. In at least one case, an insurance company which sold a policy to a purchaser with no insurable interest, was found liable in court for contributing to the wrongful death of the victim.