Insurance is part of the three major life cycle risks: a premature death; long life (old age, longevity); and our wellbeing (health risks, disabilities, loss of earning capacity, and unemployment).

Managing life’s risks can involve significant amounts of personal income giving more reason to choose how, what, when, and why to insure – none of which are easy financial or emotional decisions.

You will be up close in dealing with numerous bureaucracies and major institutions. You’ll be handed lengthy contracts with terminology that initially makes little sense in your life spectrum while you’ll possibly be asked to detail personal aspects of your health that you’d rather not disclose.

There are two major life insurance categories with several variations.

A term life policy contract term can vary, but most often are one-year renewals while the premium amount increases with age.

A whole of life policy contract contains most of the items listed in the term life policy contract but differentiates with the cost of premium payments that are generally, same for the term of the contract. You have to understand how and when the contract is paid up, and the amount of cash value that can build up over the life of the contract, and more.

Terms of life insurance contracts are very specific.

An insured class means a grouping of individuals satisfying underwriting criteria related to specified aspects of health, lifestyle, family history, gender, and other personal history. Based on these criteria, a life insured can be classified as either a smoker or a non-smoker, and in either a preferred or standard class. The determination of the class applicable to each life insured is used to establish his or her premium that is then specified in the policy schedule.

Evidence of insurability means the information that is used to determine if a life Insured is eligible for insurance. It may include medical examinations, doctors’ reports, blood and fluid tests, or any other evidence of the life insured’s health, lifestyle, or financial circumstances.

The contract also includes:

• The right of examination by the purchaser of life insurance – before signing

• Some restrictions on changing beneficiaries

• Date contract begins, renews, ends;

• The amount of death benefit, when it will be paid, or may not paid at all

• When premiums are paid with a defined grace period for non-payment

• The survivor privilege, conversion or exchange privilege

• Contractual with insurance company, rights as policy owner

• Named beneficiary or beneficiaries;

• Cancellation terms, particularly when the insurance company can contest the validity of the policy for certain policy time-frames due to suicide, material omissions, misrepresentations, fraud, etc.

In the above where the death benefit may not be paid, one only has to think of numerous salacious media programmes (and anecdotal evidence) where the death benefit had been illicitly obtained by one or more of the above methods, e.g. suicide was actually murder.

Yes, sometimes people do murder their loved ones to get their hands on the money.

And love probably has nothing to do with it!

How life insurance works

Life insurance, like other forms of insurance, is based on three concepts:

• Pooling many exposures into a group where to set premium rates, the insurer must be able to calculate the probability of death at various ages among its insureds in the pool

• Accumulating a fund through contributions (premiums) from the members of the group

• Paying from this fund for the losses of those who die each year.

The concept of pooling is critical to life insurance because the losses of the few can be paid for by relatively small contributions from the many.

Life insurance premiums are also adjusted for investment income, marketing/administrative costs, taxes, and actuarial risks.

Yearly renewable term life insurance is cost-prohibitive in later years due to adverse selection and the increased probability of death.

In whole of life (level premium) policies, the level premium is higher than necessary to pay claims and other expenses during the early years of the contract, but less than the cost of protection equal to the total death benefit during the later years.

Level premium policies allow for cash value accumulation and insureds may realise their cash value by surrendering the policy, taking out a loan, or letting the policy mature as part of the policy’s death benefit.

How does a life insurance company plan for the major financial coverage of a very bad occurrence year, e.g. massive casualties? In further articles, the role of re/insurance companies, such as the members of Bermuda International Long-Term Insurers and Reinsurers, will be illuminated.

As per usual, space does not permit me to write more than an overview of this extremely important topic. . I hope that you will find this topic useful in managing your personal financial affairs!

For full details on life insurance link to the below:

Excerpts from Bermuda’s First Financial Literacy Primer by Martha Harris Myron

Bermuda Islander Step 14: Managing Risk, the Consequences and Resolution, https://tinyurl.com/3w5ybarj

And the accompanying podcast: https://tinyurl.com/9hhshxmw

Risk Attribution For Enterprises and Individuals, Saylor Academy 2012, under Creative Commons Attribution – NonCommercial-ShareAlike 3.0 Licence, https://www.saylor.org/

• Martha Harris Myron is a native Bermuda islander with US connections, Author, YouTube Creator: The Bermuda Island Financial Literacy Network Channel, Google News Contributor, and a retired qualified international financial planner. Contact: martha.myron@gmail.com