How Life Insurance Works

People buy life insurance to provide money for their families if they die young. When you buy a life insurance policy, you pay a monthly, quarterly or annualpremiumfor thetermof the policy. The term can be as short as one year or as long as a lifetime. If you die within the term of your policy, yourbeneficiarywill receive a fixed amount of money.

The earliest records of life insurance come from ancient Rome, where burial clubs pooled money among the poor to pay for members' funerals [source:Imber]. Beginning in the中世纪, life insurance was dominated by fraternal and religious organizations, labor guilds, andmutuallife insurance companies. Similar tocredit unions, mutual life insurance companies are owned by the members, who share in any profits. In the late 17th century, astronomer Edmond Halley (yes, thecometguy) came up with the firstactuarial tablesfor calculating the risk of insuring an individual based on mortality statistics [source:Warren]. The higher the risk, the higher the premium.

Risk calculation is still a big part of the life insurance business. When you apply for a life insurance policy, you'll be asked to fill out a full medical history (including your family medical history). You'll also be asked questions about your lifestyle and hobbies, yourcredit history, your driving record and your travel habits [source:SmartMoney.com]. All of this information is used by insuranceactuariesto figure out how much they should charge you for a life insurance policy, or if they should deny you a policy altogether.

The most important factors that affect the price of life insurance premiums are age, sex andpre-existing medical conditions. Older people will generally pay more for a life insurance policy, as willmen. Heart conditions, high blood pressure, mental illness, or a strong family history of heart disease orcancerwill raise your insurance premiums. Insurance companies also offer higher rates to people who participate in "dangerous" hobbies like skydiving or scuba diving. Smokers can expect to pay rates that are twice as high as non-smokers [source:SmartMoney.com].

To collect on a life insurance policy, a surviving family member must fill out an official claim. Usually, he or she will also have to provide a certified death certificate that states the date, location andcause of death. In some cases, he or she will also be asked for original copies of the insurance policy. Once approved, the claim is settled with one lump sum payment to the person indicated in the policy as the beneficiary.

不幸的是,生活insurance claims can also be denied. Many life insurance policies don't cover suicide. If an insurance company suspects that a claim is fraudulent, it will investigate it fully. If it finds that the claimant lied about the cause of death, or that the policyholder neglected to mention pre-existing medical conditions or dangerous hobbies, it could deny payment.

But does everyone need life insurance? And what are the best times to buy a policy? Read on to learn more.