The Main Aspects of Life Insurance and Its Importance to Humans
Nowadays, it is hard to find a person, who does not know what insurance is. Everyone around seems to make sure that they have insurance on every aspect of their lives, since it sounds vitally important to insure your house, care, health, and most importantly, life. Life insurance is, without any doubt, the most important among the list. You can buy a new house, car; you can even fix your health to some extent, while life is the phenomenon that you only experience once. However, statistics show that, despite the known importance of the insurance of one’s life, 43% of the worldwide population does not own life insurance. (Trusted Choice, n.d.) In this paper, all of the main aspects of the life insurance will be covered, exploring the importance of such insurance. Life is the most valuable human’s possession, and death can be sudden, therefore, life insurance is the most important type of insurance, which provides you with the thought that even if you pass away suddenly, your relatives will have a safe and financially protected future.
Overview of the life insurance
The majority of the insurances seem to be of a selfish kind. Health insurance, for example, usually covers the needed amount of money for the medical services, once you need them, having an automobile insurance means not worrying if you get in a car accident, and so on. Life insurance, on the contrary, is quite an altruistic choice. Once one dies, they are free of any financial worries in this world, their relatives, however, may be stuck with the unexpected money issues. Therefore, having a life insurance has no actual financial benefit for the person, yet all of the benefit goes to the relatives of the dead individual.
Life insurance “is a method with which a group of people can cooperate to alleviate the loss which results from the premature death of the members of that group.” (Ahmeti, 2013, p. 188) Despite having a word ‘life’ in its name, life cannot actually be protected, or fixed with the certain amount of money. What actually is being protected is the wealth of one, which can later be used as the income source. Even if the process of insuring that your income can later be used by other people, in case of your sudden death seems unnecessary, there are many situations, in which life insurance is justified. These situations include paying off debts, providing for the children, making sure that the funeral is payed for, supplementing the retirement, and protecting the business.
Life insurance is a complicated phenomenon, which needs thorough investigation, due to the importance of it. There are many types of life insurance, but the main two are term life insurance and whole, or permanent life insurance. Term insurance means that it will pay off only in case of death during a set period of time, which usually is from one to thirty years. This type of insurance is usually divided into two subtypes: level term and decreasing term insurance policies. In contrast, whole life insurance provides the individual with the support over the course of his or her life. While being more complicated, there are many policies under permanent insurance. The policies that are possible under the whole life insurance are “traditional whole life, universal life, and variable universal life, and there are variations within each type.” (Insurance Information Institute, n.d.)
Life insurance is a unique, as it is responsible for an event, which will most certainly happen. “It is not a question of whether the policyholder will have a claim, but instead when.” (Smith, n.d.) Due to being unique and complex, it is important to explore various aspects of life insurance from both insurance company and a person, whose life is insured sides.
In the context of the current study, risk management can be looked at from two different sides: customer and company. Managing risk is one of the key concepts of any successful business. No matter how sustainable, or even perfect the approach and the whole structure seems, it is vital to assess as many possible risks as possible. It is always easier to prevent the issue, than to deal with its consequences later. On the other hand, life insurance usually means investing large sums of money; therefore, customers also have to assess the possible risks, when it comes to insuring your life.
There are many categories of risk, which companies have to take into account, when providing life insurance services. The main risk is strategic risk, which eventually divides into insurance risk, investment risk and operational risk that are also divided into various subcategories. “Strategic risk is the risk arising from inadequate planning or a company’s failure to effectively adapt to the business environment.” (Bernier, 2008) Life insurance is an incredibly serious business, as people are basically insuring their most valuable possession. Therefore, a life insurance company cannot afford having a weak strategy. One of the main business tools that life insurance companies, along other businesses, use to reduce the risks is the diversification rule. “Life insurance companies rely upon this principle – they spread their risk by insuring many, many people.” (Spitzer, 2010) While this method reduces the risks in a great way, it does not account for all of the possible threats. Therefore, risk management in life insurance business is one of the top priority factors.
Risk management of the life insurance is also vitally important from a customer’s point of view. The majority of insurances are valuable, however are replaceable, if needed, while life is a once-in-a-lifetime phenomenon. Before deciding to make any investment, one has to evaluate all of the advantages, disadvantages and risks, with latter being the most important aspect. Despite being an important part of everyone’s lives, life insurance is the decision that is made once and for all. Therefore, it has to be a certain one. Spitzer (2010) states that “you spend too much money if you take too little risk, and you can lose big if you take too much risk.” Even if assessing risks in life insurance seems hard for an average person, this process can be done with the help of any framework for managing risk. The example of such framework is Larry Swedroe’s framework for managing investment risk. (Spitzer, 2010) The framework consists of three steps, which are created to help you make a final decision. During the first step, one has to answer two questions: “do you have a long enough time-horizon to reduce the risk to an acceptable level?” and “is the combination of your job security and your holdings of liquid assets secure enough to permit taking the risk?” (Spitzer, 2010) in case of the negative answers for both of the questions, the risk is too big to take. During the second stage, one has to realize whether he or she is psychologically ready to take the risk. And if he or she is ready, then the final stage will help one finally decide if the risk is worth it. “Don’t risk what you can’t afford to lose in order to try to gain what you don’t need.” (Spitzer, 2010) In the case of life insurance, the average person will most likely take the risk, as providing safety for yourself and your family is definitely worth taking the risk. What is more, the extent of the risk depends on the type of insurance.
Risks in society
Risk is the word with rather negative connotation. When it comes to something negative, people tend to avoid it at all costs. However, not everyone understands that negative surrounds us all the time and we can only choose to respond to it in a healthy way. Risk is also the phenomenon, which we face on a daily basis. Risk in society is responsible for three major burdens: worry and fear, discourage of innovation, and large sums of emergency funds.
There are three basic categories of risk: pure and speculative risk, fundamental and particular risk, and enterprise risk. In case of pure risk, there are only two scenarios – loss or no loss, while in speculative risk, there may be some benefit. Fundamental risk is responsible for affecting a large number of people, while particular risk only affects an individual. Enterprise risk “encompasses all major risks faced by a business firm, which include: pure risk, speculative risk, strategic risk, operational risk, and financial risk.” (Virtual University of Pakistan, n.d.) Pure risks are respectively put into several types: personal risks, property risks, direct and indirect loss, and liability risks. All of the mentioned risks are faced by people every day, therefore, insurance serves as a tool of support, both financial and psychological. Once one knows that they are supported by someone, they will feel less afraid to face everyday challenges. Having an insurance of any kind means putting your risks into the hands of someone, who is in the stronger financial position. Having life insurance means having someone take care of your close ones, in case of your passing away unexpectedly.
Insurances are designed to let people live, to some extent, an anxiety-free life and free them of the burden of having to think every day about what will happen, if they had to die suddenly, and what complications they will cause their dear ones. No one wants to have people worry about the unexpected money issues in an already complicated time.
Relationship between risk and life insurance
When talking about risk, for the majority of companies it is a “center of organization’s operations.” (Mburu, 2016) However, in case of insurance companies, risk becomes both an aspect of the internal business management, as well as the object of the companies’ work. Apart from calculating the potential risks that the company may face during its existence, an insurance company has to help their customers assess the risks in their lives, in order to provide the services for them.
Risk becomes one of the key words in the insurance sphere. In the life insurance branch, particularly. While in the majority of the insurance policies, what is feared may not happen, in the field of life insurance, the event will happen with the 100% rate. People come to insurance companies, willing to invest large sums of money, due to knowing that living, in general, has the risks. One of the major risks in the current society is sudden death. As much as people do not want to talk about it, each one of us can be a subject to a sequence of events, which eventually lead to a tragic and unexpected passing away. According to TJ Wood Insurance (2016), insurance is “about a chance.”
Life insurance has the direct relationship with the risk, as it becomes an integral part of the company’s management, as well as the way that the company makes money, in contrast to usually being something that is not desired to happen.
Risk management tools in life insurance
Due to risk being the main focus of the insurance companies, it is safe to assume that insurance companies have been familiar with risk management for a longer time than the majority of the businesses. Ingram (2001) points out that “many risk management techniques are so old hat to insurance companies that they are almost unconsciously performing them.” Some of the key principles to risk management are having clear lines of responsibility for risk management, separating risk managers and risk takers, limiting risks quantitatively, having a system that reacts to the positions, which exceed limits promptly, applying risk management to the new products, focusing on both “earnings fluctuation & economic value fluctuations” (Ingram, 2001), needing to assess all of the material risks, and many others.
The most powerful tools for managing risk in the life insurance sphere, however, are hedging and reinsurance. Reinsurance in its essence is the insurance, which insurance company itself purchases. “Reinsurance transactions provide an immediate enhancement to insurers’ earnings and equity” (Adiel, 1996) Hedging is the business strategy, which is used in “limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities.” (Business Dictionary, n.d.) Hedging with the life insurance products have shown to follow the general theory of financial market. It is stated that one should only invest more in the risky asset “if the return rate of the risky asset is higher.” (Choi, 2016) According to Choi (2016), if “the volatility of the risky asset is higher, the risk-free interest rate is higher, the continuous premium rate from the general insurance is higher, the mortality rate is higher, the expiration date of the life insurance is longer, and the risk from the general insurance is higher” one should invest less in the risky asset. Hedging and reinsurance stay one of the most powerful toll sin the life insurance business since the field began functioning.
Legal principles of risk and life insurance
Apart from being responsible for protecting the lives of people, insurance companies belong to the business. In order to operate successfully in a specific country, all of the companies need to make sure to follow all of the legal aspects of running business. Life insurance, particularly, has to be under various legal principles, as it involves death of an individual, as well having to take case of one’s funds after their passing away.
Some of the core legal principles in life insurance business are: principle of indemnity, principle of insurable interest, principle of utmost good faith, and principle of subrogation. These principles insure that all of the processes under the contract are done lawfully, and with no legal damage to the people, who are involved. Principle of indemnity states “that insurers pay no more than the actual loss suffered.” (Dave, 2018) Every person has a legal right to insure anything, which may create a legal liability to him or her in the future. When it comes to life, not life itself is being insured rather, it is the monetary interest in your life after your death. Principle of subrogation “allows an insurer to sue a third party that has caused a loss to the insured and pursues all methods of getting back some of the money that it has paid to the insured as a result of the loss.” (Dave, 2018) Not only the customer is interested in having financial support, after he or she passes away. Any company would want to recover the money they pay off as the insurance, if the is a possibility to do so. Despite all of the previous principles being solely legal, the last, yet not the least one, the principle of utmost good faith is based on the mutual faith between the company and the customer. “In simple terms, while applying for insurance, it becomes your duty to disclose your relevant facts and information truthfully to the insurer.” (Dave, 2018) Obviously, insurer is also obligated to hide no information from the client, while signing the contract.
Apart from the mentioned principles, any insurance company also operates on Doctrine of Adhesion, Principle of Waiver and Estoppel, endorsements, and co-insurance. Legal principles are the way of making sure that all of the work inside the company is under the law, so that the customers are protected on all of the aspects.
Life is the most valuable possession of any person. When one dies, it seems that they do not lose anything, yet the people close to them suffer from a deep emotional trauma. In addition, there may be some complications in the financial sphere, with the person, who died leaving their relatives with debts and unexpected expenses, while they already are struggling. In order to prevent such unpleasant situations, there is life insurance. Life insurance is the way of making sure that your relatives will be safe from any financial burdens, in case of you sudden death. Among all of the other existing insurances, life insurance is the most important and complicated one. While having heath, or homeowner insurance does not mean that you will suffer from the potential risks, life insurance is all about when you will die or how you will die, not if you will die. The current study explored all of the most important aspects of the life insurance, covering both informal and legal sides, as well as both company and customer sides.
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The terms offer and acceptance. (2016, May 17). Retrieved from
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"The terms offer and acceptance." freeessays.club, 17 May 2016
"The terms offer and acceptance." freeessays.club, 17 May 2016
"The terms offer and acceptance." freeessays.club, 17 May 2016
"The terms offer and acceptance." freeessays.club, 17 May 2016