Friday, 25 June 2010

Life Insurance Basic Principles (Part I) - Definition

The Basic Principles of Life Insurance (Part I)

Life Insurance Defined: 4 Different Viewpoints

Economic Viewpoint
- A system for reducing financial risk by transferring it from a policyowner to an insurer.

Social Viewpoint
- The collective bearing of losses through contributions by all members of a group to pay for losses suffered by some group members.

Business Viewpoint
- Achieves the sharing of risk by transferring risks from individuals and businesses to financial institutions specializing in risk. The insurer is not in fact paying for the loss. The insurer writes the claim cheque, but is actually transferring funds from individuals who as part of a pool, paid premiums that created the fund from which the claims are paid.

Legal Viewpoint
- An insurance contract (policy) transfers a risk, for a premium (consideration), from one party (the policyowner) to another party (the insurer). It is a contractual arrangement in which the insurer agrees to pay a predetermined sum to a beneficiary in the event of the insured’s death. By virtue of a legally binding contract, the possibility of an unknown large financial loss is exchanged for a comparatively small certain payment. This contract is not a guarantee against a loss occurring, but a method of ensuring that payment is made for a loss that does occur.

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