The Concept of Life Insurance

There are many variations of life insurance and insurance policies cater to a wide variety of needs. It is possible to distinguish these types based on other measures giving an overall view as described below. In this paper, life insurances are analyzed and distinguished regarding the probability of dying and living of individuals and also mixed type. 1. 3. 1.

Life Insurance for the Probability of Dying Life insurances for the probability of dying are known for being oldest and the most classical type of life insurance. Here, the risk is the death of the insured person. Meaning that, the insurer has the responsibility to pay the insurance amount in case of the death of the insured. Insurer doesn’t make any payment if the insured is alive at the end of the period stated in the policy. There are two fundamental separations for this type of insurance: a. Whole Life Insurance 6 Whole Life Insurance guarantees an insured person for all his/her life.

The insurer is responsible for paying the amount of insurance stated in the policy to the relatives of the insured person no matter when he/she dies. This insurance is generally made on the purpose that the economical power is maintained for the relatives of the dead person. Generally, the premiums are constant for the payment period in whole life insurances. Payment of the premiums may either last for life long or continue until a certain age or a certain time. In fact, whole life insurance is expensive. Client is paying not only for insurance but for the investment portion also.

That extra cost might almost be worth it if these policies were a good investment vehicle but usually they aren’t. Moreover, it’s often impossible to tell what the return on the investment will be, and how much of what you pay in goes toward the insurance and how much toward the investment. 9 On the other hand, whole life insurance is an attractive financial product offering legacy asset and deferred asset benefits to the policy owner. Current asset benefits are particularly important to individuals during these times of economic uncertainty.

Many individuals are ready to make commitments to save for retirement as long as the commitment does not compromise their ability to handle more immediately pressing financial needs such as financing a child’s college education or wedding or financing the client’s own automobile purchases or an around-the-world cruise. However; it is not as profitable for those who want to have the life insurance done for 15 years or more. 10 b. Term Life Insurance Also called term assurance, term life insurance provides coverage for the beneficiaries in the event of death of the insured and the insurer is bound to pay the certain amount 9 10 http://www. martmoney. com/plan/insurance/term-or-whole-life-8011/ Accessed on 21. 02. 2012 George B. Kozol, JD, LLM, CLU, A Source of Retirement Income, Insurance and Risk Management 7 indicated in the policy to the insured person’s relatives only if that person dies within the time interval agreed on the policy. Many financial advisers commonly recommend term life insurance until such time that there are enough funds available from savings to cover heirs in which the term life insurance payout would cover. 11 The term life policies can be sold for at least a period of one year and may ensure a guarantee for the ages until 65 or even 70.

They are usually preferred by the people who will have the right to retire in order to have an economical guarantee against the risk of death that can happen until that date. By this way, they prevent the ones left behind to remain in poverty. 12 There are some penalty articles in term insurance policies for early leaves but the possibility to change their policies has been given to the insured people. (the notifications such as “alterable” or “renewable” put on the policy. ) Since there is no cash payment or no allocation of profit shares, the calculations are done in accordance to the premium base.

Premiums for term insurance are downright cheap for people in good health up to about age 50. After that age, premiums start to get progressively more expensive. Most companies simply won’t sell term policies to people over about age 65. 13 1. 3. 2. Life Insurance for the Probability of Living Here, the responsibility of the insurer to pay compensation depends on the condition that the insured person is living within the period assigned in the insurance policy. This type of insurance is divided into two as “pure endowment (capital)” and “income life insurance (annuity)”. 11 12 13 ttp://www. compassquote. com/blog/term-life-insurance/ Accessed on 21. 02. 2012 Pekiner, K. , 1974, No:1924/24 http://www. smartmoney. com/plan/insurance/term-or-whole-life-8011/ Accessed on 21. 02. 2012 8 a. Pure Endowment In this type, in case of the insured person is living at the end of the period assigned in the policy; insurer has to pay the amount assigned in the policy to him/her at once. If the insured person dies within this period, the insurer needn’t pay this amount. b. Income Life Insurance (Annuity) There are two kinds of practices of income life insurance.

The purpose in both insurances is the desire of the insured people to guarantee their older ages. 14 Principally, the insurer appoints an income to the insured person to be paid in certain intervals. As a rule, annuity payment is made for the whole life of the insured person. In the first type of income life insurance, the insured person has got some money in total. However, he/she is not sure if this money is sufficient enough until his/her death. Hence, he/she gives it to the insurer, wanting to obtain an income to be paid to him/her in certain intervals until he/she dies.

The insurer’s paying the appointed annuity may either begin after insured person”s payments or begin after a date stated in the contract. If the insured person dies at a date between the beginning of the insurance and beginning of the annuity payment, the money paid by the insured person until that date is given back to him in certain amount. Second type of income life insurance; the insured person pays generally annual premiums at certain intervals and demands to be paid an income (annuity) starting from a defined date. 1. 3. 3.

Endowment Life Insurance Regarding this type of life insurance, the insurance amount is paid to the insured person’s relatives in case of his/her death before the date agreed on the contract. 14 Ulas, I. 1997 9 Meanwhile, in case of his/her being alive for some certain time the insurer is again obliged to pay the amount agreed on the contract to the insured person. The probability of the realization of the risk in this type of life insurance is “certain” and the state of “uncertainty” that should be in the insurance doesn’t exist here.

Therefore, it is claimed that this insurance is in fact not an insurance but a savings operation. The risk here is the death of the insured person before a definite time. Besides, the savings element is his/her being alive at that age and on that date. The premiums of endowment life insurance are generally paid annually but if demanded they can also be paid as a net single premium.A recent survey by life insurers showed that the primary motive for buying life insurance is to provide protection for the family.

The term “protection,” although somewhat vague, appears to relate to financial losses resulting from death. A second major motive, as identified in the survey, is to save. Furthermore, assuming two general motives that the prospective insured has an equal desire for protection dollars and savings dollars and that the savings dollars are intended for retirement use. 15 Broadly, the purchaser of life insurance may choose from a wide variety of policies made available by any insurance company. The fundamental differences in these policies are sufficiently great that the choice is not easily rationalized.

The quantitative valuation of the choice, as proposed here, requires that assumptions be made relating to a prospective insured, his objectives in purchasing life insurance, the mortality 15 Solberg, H. J. 1962, p. 635 10 probability distribution facing him, and the price he attaches to money in the form of an interest rate. 16 The first assumption for purchasing a life insurance policy is to be a prospective insured which is strongly related to the motives or objectives of the prospective customer. According to its objectives, the coverage and the cost payment of life insurance policy are differentiated basically.

Therefore, the cost estimates of the insurance firms depend on the realization of some biometric events such as death or disablement. 17 In order that expected values can be computed for the policy of coverage which the prospective insured is choosing among, it is necessary to identify the probability distribution of mortality that he faces at the time, he exercises his choice. For that matter, mortality rates which are derived from mortality tables is counted as the second set of assumptions. 18 Moreover, the mortality tables can be also defined a life table as the most vital element in summing up the premiums representing the reality. 9 There are several functions of mortality tables, as following: • Identifying the uncertain risk (death) as certain by gathering a great number of people and pointing out the probabilities of death. • Identifying the amount of income that the insurer provided from premiums and so, showing the insurer the funds that he will be able to make investment.