Concepts of life insurance
Insurance is a social device provides compensation for the effects of misfortune.
The insurance contract includes the insured (the policyholder) and the insurer (the
insurance company). The insured pays premiums and the insurer provides a
promise to indemnify losses.
We can consider insurance as an effective technique to manage or to mitigate the
negative impact of different kinds of risks.
Life insurance deals with risks that are related to persons. For instance,
1- Risk of death (premature death)
2- Risk of life
3- Risk of disability
Premature death means that income earner pass away early and his family will
have no one to support them financially.
Premature death creates extra expenses. For example, funeral expenses and legal
fees for the settlement period
Different kinds of needs appear once the bread winner or the family head dies. To
illustrate, fund to educate his children, covering his family basic needs, money to
raise kids and to finance college fees.
If someone is maintaining his health, taking a lot of precautions to be healthy, that
means he may live too long. Regard living too long this person will need fund to
maintain his standard of living. In other words, this person will need to buy a life
insurance policy. Conversely, if someone took all the required precautions to live a
healthy life, it’s not possible to reduce the risk of death to zero and in case of
death, this persons also will need a life insurance coverage to support his family
financially for the previous mentioned reasons regard the premature death.
Even if someone saved an amount of money during his lifetime, in case of his
death and due to inflation rates his family will need life insurance coverage or they
may suffer financially.
Different kinds of life risks
1- Maturity risk, includes the premature death or a person dies early leaving his
family without a suitable source of funding and satisfying their needs
2- Living too long, in case a person lives too long he will need extra fund for
himself. For instance, someone to take care of him, a nurse to follow up his
health condition, high level of medical care (drugs or medications) and some
persons may plan to enjoy the rest of their lives. The previous mentioned
reasons mean that those persons should think of having life insurance
coverage
3- Risk of disability, persons may face an accident, illness or any undesirable
actions that may end up with disability.
Laws in some countries defined disability as losing the ability to do the tasks
that a person used to perform before being disable. For instance, if a person
used to play piano. If this person lost one of his fingers and became unable
to play piano again that case can be classified as disability. Other countries’
laws defined disability as losing the total ability to do anything at all.
Disability is classified as partial disability and full or total disability.
In general, life insurance can be defined as a plan where a large group of
individuals agrees to share the burden of losses due to death through distributing
fund among beneficiaries through an insurance mechanism. the contract may
include the insurer, the insured and beneficiaries.
Characteristics of life insurance contract.
1- Death or living too long is not the subject of insurance contact but the time
of occurrence. (in other words, no one knows when the death will occur)
2- The degree of riskiness in life risks increases yearly (the probability of death
among old age persons is higher than the probability of death among young
age persons)
3- Life insurance risks include financial and non-financial losses, the policy
covers only financial losses as non-financial losses can’t be estimated.
Types of life insurance policies.
1- Term insurance contract, covers only a specific or limited period of time, for
instance, months or specific years
This kind of contracts may contain renewability option and convertibility option
Renewability option means that the insured may agree with the insurer to
include a condition to renew the policy before it ends and that cost the insured
extra premium. Or if the policy doesn’t contain renewability option in this case
once the policy ends the insured will be required to fill a new application and
provide a medical examination report as an evidence of insurability.
Convertibility option means that the insured has the right to convert his term
policy to any other kinds of life policies if his policy contains the convertibility
option. Insurance policy that contains convertibility option will cost high level
of premiums comparing to the policy that has no convertibility option.
In case the policy has no convertibility option from the beginning, the insured
will not be able to convert it unless he provides a medical examination report
and fill a new application.
Dr. Ahmed S. Abdelzaher
To be continued, have a wonderful day