How is Life Insurance Created?

Life Insurance

All life insurance products are actuarially created by evaluating and calculating the relationships of mortality, interest, expense, and the financial values attached to each based on time. These factors determine the premium at which a policy will be sold. The premium must be adequate to pay the expenses incurred in creating, offering, and maintaining the product, paying all promised benefits, and of course, increasing the insurer's profit and surplus.

These duties belong to the company's actuarial department, whose primary responsibility is to ensure that the company's insurance operations are conducted through a sound financial basis. This includes determining appropriate premium rates and most importantly, establishing adequate policy reserves. The actuarial department develops new policies, analyzes earnings, provides statistical data from which the annual dividend scale is established, and conducts mortality, lapse, and other various studies.

From an economic viewpoint, insurance is a system for reducing financial risk through the transfer of those risks from policy owners, and pooling those losses by the insurer. Insurance achieves the sharing of risk by transferring risks from individuals and businesses to other financial institutions specializing in risk.

From the viewpoint of society, insurance is a “device” for accumulating funds to meet uncertain economic losses through the transfer of the risks of many individuals to one person, a group of persons, or an organization. The social aspect of insurance involves the collective shouldering of losses through contributions by all members of a group to pay for losses suffered by some group members. Insurance therefore, substitutes certainty for uncertainty through the pooling of hazards to which groups of people are exposed.

Uncertain risks of individuals are combined, making the possible loss more certain, and this offers a financial solution to the problems created by the loss. Small, periodic contributions by the individuals provide a fund from which those who suffer loss could be reimbursed. Insurance thus manages the uncertainty of one party through the transfer of particular risks to another party (the insurer) who offers a restoration, at least partially, of economic losses suffered by the insured individual.

Finally, from a legal standpoint, an insurance contract transfers a risk (for a premium) from one party (the policy owner), to another party (the insured). By virtue of a legally binding contract, the possibility of an unknown large financial loss is exchanged for a comparatively much smaller certain payment. This contract is not a guarantee against a loss occurring, but a method of ensuring that payment will be received for a loss that does occur (indemnification). Of course, every insurance company will add cost and pricing variables to the actual historical results of that company when designing and pricing its products.

The bottom line and purposes of what we have just read is to realize that life insurance is not a gimmick. It is a strategically designed product that we should not be afraid to obtain. Run a free term life insurance quote on yourself at our website pivot.com and see just how low the premiums vs. benefit really are. It’s solid protection at a low cost, how can we go wrong? 

About the author: Kyle McDonald holds FIC, FICF, FSCP® & CLTC designations. His viewpoint on life insurance is simple, “Anyone with a family must have life insurance. In the end, life insurance is for others you care about, not you.” He is ready to help you and your family get the best option available. Contact Kyle today at   1-800-651-1953 or KMcDonald@Pivot.com.