Life Insurance

I

Introduction

Life Insurance, assumption by an insuring organization of the risk of death of a policyholder. Unlike loss in insurance on property, loss in life insurance is certain to occur and is total. The element of uncertainty is when death will occur. Mortality is subject to the laws of probability, however, and life-insurance premiums can be calculated from mortality tables, which indicate the average number of people in each age and gender group that will die each year. A person trained to make such calculations, known as an actuary, determines the amount of premiums to be collected yearly from each group in order for the principal (the premiums) and its earned interest to equal the benefits to be paid to the policyholders' beneficiaries. The principal payment required annually constitutes the net premium. A loading charge to cover company expenses and contingencies is added to the net premium, yielding the total, or gross premium, which the insured pays.

II

History

The earliest known type of life insurance was the burial benefits that Greek and Roman religious societies provided for their members. Neither these religious societies nor any premodern systems for paying death benefits employed actuarial calculations. They were frequently financed on a postassessment basis; that is, contributions were made by all surviving members following one member's death. As a result, funds were not always available to pay claims.

The tontine annuity system, founded in Paris by the 17th-century Italian-born banker Lorenzo Tonti, although essentially a form of gambling, has been regarded as an early attempt to use the law of averages and the principle of life expectancies in establishing annuities. Under the tontine system, associations of individuals were formed without any reference to age, and a fund was created by equal contributions from each member. The sum was invested, and at the end of each year the interest was divided among the survivors. The last remaining survivor received both the year's interest and the entire amount of the principal.

The first life-insurance company in North America was founded in 1759 in Philadelphia. It was named the Corporation for the Relief of Poor and Distressed Presbyterian Ministers and of the Poor and Distressed Widows and Children of Presbyterian Ministers.

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III

Types of Life Insurance

Life insurance may be classified in a variety of ways. A classification depending primarily on the manner in which the premium is collected comprises regular ordinary, debit, and group life insurance. Regular ordinary insurance can be further classified into whole life, limited-payment life, endowment, and term. Debit life insurance can be classified into debit ordinary and industrial. Life insurance may also be classified as participating and nonparticipating, depending on whether or not the policyholder shares in the savings or the profits of the insurer.

A

Regular Ordinary Life Insurance

Regular ordinary life and debit ordinary life insurances are generally sold in units of $1000, and premiums are payable on an annual, semiannual, quarterly, or monthly basis. Ordinary life insurance may be used to provide a lump sum or continuing income to family beneficiaries, or it may be used by a firm to insure the life of a business executive. With the exception of term life insurance, ordinary life insurance builds cash values that can be borrowed to help families meet emergencies or take advantage of business opportunities. A medical examination usually is required to buy life insurance.

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