Life Insurance Overview

Life Insurance Overview

• Life insurance provides financial protection against the death of an insured person, ensuring that their dependents are safeguarded from financial loss.
• The goal of life insurance is to provide financial security for one's family after death, considering factors like funeral costs, daily expenses, loan repayments, and education costs.
• It is essential to re-evaluate life insurance policies annually or when experiencing major life events, such as marriage, divorce, or the birth of a child.

Types of Life Insurance Policies

• Protection policies provide a benefit in the event of a specified event, typically a lump sum payment, and are designed to provide financial protection.
• Investment policies aim to facilitate the growth of capital by regular or single premiums, providing a savings component.

Key Concepts of Life Insurance

• Life insurance is based on three concepts: pooling many individuals into a group, accumulating the fund from contributions, and paying from this fund for losses incurred by those who die each year.
• Life insurance differs from other forms of insurance in its certainty, as a benefit will always become payable, and the financial loss is not objectively measured.

How Life Insurance Works

• A life insurance contract involves three main components: a death benefit, a premium payment, and a cash value account (in the case of permanent life insurance).
• The death benefit is the amount paid to the insured's beneficiaries upon their death, determined by the insured and the insurer.
• Premium payments are determined by the insurer using actuarially based statistics, considering factors like age, medical history, and lifestyle.
• Cash value accounts serve as a savings component, allowing the insured to accumulate capital that can be used for any purpose while alive, and also mitigate the insurer's risk.

Background to Life Insurance

• The earliest life insurance policies were annual contracts, where the policyholder would pay a premium to the insurer, and if the insured died, the insurer would pay a lump sum to the policyholder or their estate.
• The development of level premium contracts in the 18th century allowed policyholders to lock in a regular premium for a number of years, making it more popular and attractive.

Origins of Life Insurance

• Life insurance originated in ancient Rome, where 'Burial Clubs' were formed to ensure proper burial ceremonies.
• Modern life insurance began in 17th century England, initially as insurance for traders and merchants, and later developed into modern life insurance policies in the 18th century.
• The first company to offer life insurance was the Amicable Society for a Perpetual Assurance Office, founded in London in 1706.

Insurance and Assurance

• The terms 'Insurance' and 'Assurance' are often confused, but in general, 'Insurance' refers to providing cover for an event that might happen, while 'Assurance' is the provision of cover for an event that is certain to happen.
• In the United States, both forms of coverage are called 'Insurance', while in the United Kingdom, the word 'Assurance' is used specifically for life insurance.
• 'Insurance' is seen as an investment designed to protect against a risk, while 'Assurance' is different, as dying is not something that may happen, but is something that will happen.