The most important thing for a college student to understand is that life insurance is issued on the basis of age and health. Normally young people can demand very low premiums for life insurance. The advantage of starting a life insurance policy when young is that there are fewer health concerns.
The second thing that a college student should understand is that life insurance is all about statistics. If they have had a class in statistics understanding life insurance should be easy. There is a very large pool of people who would suffer significant loss if they died. They pool their risk so that those who experience this unfortunate event can be compensated by the very small contribution from the vast majority that survive. Inherent in this idea is that the probability of death increases with every passing year. This makes the amount each member of the pool pays into the pool increase each year because more of the participants will die in a given year.
The third thing a college student needs to know is that life insurance companies are corporations that are based on the idea of legal reserves. Even though they know that a certain percentage will die of a particular age group they must maintain reserves in the unlikely event that the death rate is higher for some unknown reason such as war. These legal reserve companies are “admitted” to do business by the various state insurance commissioners. Their reserves are monitored closely to make sure that the companies can keep their promises.
The fourth thing a college student needs to know is that even within a specific age there is a wide variation of health. I had classmates who died in their first year of college. One classmate died of a medical condition. This variation is like a “bell-shaped” curve. Most of the people are in the middle of the curve and are considered to be “standard” risks, however some are better than average and some are worse than average. Life insurance companies hire underwriters to evaluate the deviations and assign premiums that reflect how different the individual is from the standard risk. The reason that this is done is to maintain the risk pool and make sure it can keep its promises.
The fifth thing a college student needs to know is that since life insurance is all about statistics the companies can develop a wide variety of life insurance plans. Some may appear superior while in fact their costs are comparable. There is merely a different design to the plan. For example a student could buy a one year term life policy for $500,000 for very little in premium. For a multiple of the premium he could buy a $500,000 whole life policy. Neither is good, nor bad. They are just different. The whole life policy will remain in force at the same death benefit for the lifetime of the insured without changing the annual premium. The one year term policy will either cancel or renew at a higher premium at the end of the policy year. If a person knew when they were going to die, they could choose a policy that would maximize benefits. However few of us have that information.
The sixth thing a college student should know is that life insurance will probably form the foundation of their financial plan in the future. For this reason it is wise to select a life insurance agent who can service you for the foreseeable future. That doesn’t mean to select a peer but rather someone with whom you can mature. The advice of the life insurance agent could be very important as you mature and your needs change. At some point you will probably own a great deal more life insurance. Family, debts and retirement all play a role in determining how much life insurance to carry.
The final thing that a college student needs to know is that companies work hard to develop a reputation but the relationship with an agent trumps everything. If you have a good agent, you will find them to be very valuable in the future.