Life Insurance: On Their Pathway

Life-insurance companies have been in operation for over two hundred years, but their growth and importance accelerated with urbanization and industrialization as people found themselves less able to rely on their children for support in their old age. Farmers and owners of small businesses have less to provide for dependents in case of the death of the principal earner. Moreover, they usually find it necessary to invest all their savings in the farm or business. Industrialization created a salaried middle class that could save and needed to provide for dependents. Life insurance is a way to provide for dependents but it usually also combines insurance with investment.

People not only pay for the insurance fee. Yet, they also put their money as investment in such proportional forecast due to economic development. Although the benefit in short term is consider to small if the financial factor is the top of willingness, but many people trust that by participating in life insurance as a member, they have secured their negative impact due to their healthiness condition.

It is possible to buy life insurance without building up an asset. The holder of a term-insurance policy pays a premium just equal to the probability of death for his or her age group (plus sales and administrative costs). The insurance company with a large member of similar policies collects just enough in premiums to cover the death benefits to those who die in the current year plus its costs. The policyholders don’t build up any claim, and the insurance company’s assets are only a fraction of a year’s premiums. However, term-insurance rates rise with age, and become painfully high just as the insured person begins to think seriously of the possibility of death.

Many people find a so-called ordinary-life, or level-premium, policy more attractive than term insurance. The holder of an ordinary-life policy pays a more expensive premium in early life than he or she would for a term premium. The insurance company invests the excess premiums and accumulates the earnings in a reserve account. The ordinary-life premium remains constant. It is calculated so that the total premiums paid plus earnings on reserves less expenses will always cover death benefits. In effect, holders of ordinary-life policies pay in advance for their insurance so that they will not have to face increasing term-insurance premiums. In the process they build up an investment in the life-insurance reserve. If a policyholder cancels his or her policy he or she is entitled to get back most of the reserve against the policy. The amount that can be returned to the individual is called the cash surrender value. Policyholders may also borrow against the reserve at a rate specified in the policy.

With rising population and income the amount of insurance in force has grown rapidly; life-insurance reserves grow annually at a rate of about 6 billion dollars.

Since life-insurance contracts run for many years and promise a fixed minimum rate of interest on reserves, life-insurance companies invest most of their insurance reserves in long-term assets. Since their investment income is not taxed at the regular corporate rate they invest only limited amounts in tax-exempt state and local securities. Their liabilities are fixed in dollar amounts, so life-insurance reserves are not ordinarily invested in common stock.

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