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