The idea of life insurance did not spring
up overnight. It resulted from an evolutionary growth - a search on the part
of men and women to solve a sociological problem.
WHAT IS LIFE INSURANCE ?
Death struck blindly into homes of the
rich and poor alike and placing unbearable hardships and handicaps upon the
survivors. So it was centuries ago in England, small groups of people banded
together into guilds and societies.
Members, by paying small sums into their
organizations, were assured that a certain small measure of relief would be
given to their home when the breadwinner was taken away.
Such were the efforts of the early days
of life insurance to meet peopleís need for help - of their frantic efforts
to find some ways to soften the economic blow of death.
Today, life insurance has emerged as
the provider of financial needs of mankind in various forms that suit their
needs. It is primarily purchased to provide an immediate estate. It protects
your familyís financial resources when you die, such as your home, car and the
income your family needs to pay household bills. Itís a contract between you
and the insurance company requiring the company to pay someone you name (beneficiary)
a certain amount of money when you die.
Life insurance has evolved as an economic
instrument which has stood the tests of time - and given people the security
they need to maintain financial soundness, morale and faith.
The fixing of prices or rates
as is usually called in life insurance is based on scientific principles. It
is a science that rests upon hundreds of years of study, of record keeping and
of constant checking.
WHAT ARE THE FUNDAMENTALS OF LIFE INSURANCE ?
In some lines of industry, the fixing
of prices is more of less a matter of rule of thumb. Within certain limits ,
prices are fixed largely on the basis of competition. But not so in the fixing
of life insurance rates.
The fundamental principle of life insurance is the sharing of the risk of death
by the members of a group. People standing together can do what an individual
standing alone cannot do. After centuries of struggling with the problem of risk,
people finally learned that the financial loss incident to death can be distributed
among the members of a group in such a way that loss falls lightly upon each one
in the group, rather than heavily upon the families of the unfortunate individuals
The rate which must be paid by each
member of the insuring group cannot be determined until the member or the members
of the group who will die within a given period of time is known (mortality
The statistics of the rate of death,
compiled for all ages, are known as the mortality tables. The data are based
on the mortality figures of very large groups of people accumulated over long
periods of time.
The price you pay for an insurance policy
is called premiums. This premium is determined by three factors, namely:
- the mortality rate,
- the management expense, and
- the interest factor i.e. the investment
yield from the life insurance fund.