We’re all familiar with the concept of life insurance. It’s a favorite motif in mystery television programs and novels. The young wife “bumps off” the old husband to get his million dollar policy. Or a friend covers up another’s suicide so as not to deny his wife and children of the life insurance pay off. We’re all familiar with it, but do we really KNOW what life insurance is all about? Today, we’re going to take a closer look and find out.
Brief History of Life Insurance
Life insurance has its root in the “burial clubs” of ancient Rome. You could pay a membership to the club to ensure that you received a “proper” and “appropriate” funeral, complete with professional mourners. Modern life insurance began in the early 1700s in London, with the Amicable Society for Perpetual Assurance. You joined the Society (males only) and paid a yearly amount for one to three shares. Once a year, the Society made a payment to your heirs based on how many shares you had been paying for. It was a way to ensure that you didn’t leave your wife and children destitute.
Life insurance was introduced into the United States in the 1760s, when Presbyterian and Episcopalian ministers developed a similar scheme for their ranks. By then, the practice of setting premiums based on age and overall health had been established. At the outbreak of the Civil War, over a dozen life insurance companies were begun, nearly all of them associated with specific occupations or firms. In the 1870s, the first military life insurance was founded, with both the Army and the Navy playing a part.
Types of Life Insurance
Life insurance typically takes one of three forms:
- Term life insurance – issued for a set period of time, typically from 5 to 20 years. Premiums are set and guaranteed for the length of the policy.
- Whole life insurance – issued for the policy holder’s lifetime. Premiums are set and typically do not change. Whole life has a cash value, which can be used as a savings component or even as an estate planning tool.
- Universal life insurance – issued for the policy holder’s lifetime. Unlike whole life policies, the premiums are flexible, and can be raised or lowered throughout the lifetime of the policy holder. Like whole life policies, universal policies also have a cash savings component.
How Life Insurance Premiums Are Determined
Since the 1750s, when the first life table – a chart showing the risk of death at any age – was issued, premiums have been determined partially by the policy holder’s age at the time of the policy’s purchase. General health was taken into account not long after, as insurer’s began to see individual’s waiting until becoming ill or aged to purchase a policy.
Policy premiums are still determined by age and general health, although a recent change has been to take the individual’s family medical history also into account when determining how much your monthly premium will be. However, age and health have rarely, if ever, affected the total amount of the policy.
Life insurance is something we all know. And now, we know it a little better.