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