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