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The Basis of Insurance

Life insurance is among the largest andinvolving loss by fire, windstorm, and
most important industries in the Unitedother perils, we cannot rely solely on
States and worldwide for that matter.logic; instead, we have to collect a
There are five categories when it comesmass of statistical data.
to insurance policies: fire, marine,For instance, if we are interested in
casualty, surety, and life. Inthe probability of a loss to our house
combination, these five forces controlby fire, we would have to collect all
billions and billions of dollars inthe statistics we can find concerning
assets and collect more than fifteenfires. We would need to know how many
billion dollars per year in premiums. Itfires occurred during a given time and
is extremely rare to come across ahow many houses were exposed to fire
business, or even a family home, thatlosses during that period. The same
doesn't have some form of protection inprincipal is used in determining the
regard to insurance, especially lifechance of death at any given age. If we
insurance.find out that out of 1,000 persons alive
The main purpose of insurance is toat the age of 75, only 911 live to reach
offset the possibility of loss resultingtheir seventy-sixth birthday, we can
from a number of potential tragediesexpress the chance of death during the
that expose themselves to a person orseventy-fifth year as the fraction 89
his/her property. When it comes to the1,000, or 8.9 percent-this percentage
question of what risk entails, it iscan now be used to determine what type
defined in The Dictionary of Insuranceof life insurance is necessary.
Terms, published by the Chamber ofLooking at the term "hazard," we are
Commerce in the United States, as "aconsidering perils, the things that
chance of loss." Webster defines risk inostensibly cause loss. It is necessary,
the same way. Another term commonly usedhowever, to go behind the perils to find
in insurance parlance is "hazard."the real cause. The fire that breaks out
It would help in the understanding ofin the garage, for example, is the
insurance however, if we wouldperil; but the pile of oily rags which
distinguish between these three terms:is left lying around is the cause of the
"risk," "chance of loss," and "hazard"fire and thus is the real cause of the
independently of one another.loss. Hazard may be defined as a
In the abstract, risk is defined ascondition that may create or increase
uncertainty, with reference to thethe chance of loss arising from a given
uncertainty of financial loss and hasperil. Things like carelessness, bad
little to do with the loss itself. Riskhighways, and dangerous employments are
principally has to do with thehazards, for they are conditions that
uncertainty of a loss, with the degreeincrease chance of loss.
of risk measured by the probableWith these definitions in mind, life
variation of actual experience frominsurance provides a mechanism for the
expected experience.sharing of losses, as well as for
Chance of loss is best described as aperforming other important social
fraction or percentage. It indicates thefunctions. The most important goal is to
probable number and severity of lossesprevent the losses before they occur.
out of a given number of exposures. IfAll in all, it is certainly in one's
you flip a coin, your chance of loss isbest interests to understand life
½, or 50 percent. In this case,insurance basics, investigate the risk
calculating the chance of loss is easy.of losses, and choose wisely amongst the
When it comes to life insurance, thevarious types of life insurance.
task is not as simple. With situations



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