| imes, it's good to go back to the basics. What is | | | | charge each individual in that group of 1000 people |
| insurance and how does it work? By really | | | | for a certain level of benefit. Let's say for $100,000 |
| understanding these two questions, we can make | | | | of benefit to paid out in the even that a person dies, |
| better decisions when choosing term life insurance or | | | | we know we can divide the $100K by 1000 (number |
| any insurance for that matter. So let's go back to the | | | | of people) and then charge each individual $100/per |
| basics and understand how insurance works and | | | | year. 999 of the people will pay $100 and not receive |
| more importantly, how it can work for you. | | | | a benefit but the one person who passes away will |
| Insurance has been around centuries in one form or | | | | be able to pass $100,000 down to their beneficiaries. |
| another and has really exploded into so many | | | | This in a nutshell, is the core functioning of life |
| variations and types that it can be overwhelming. | | | | insurance and indeed, insurance itself. |
| From Property and Casualty to Health to the one | | | | The more people we have in the pool, the better. |
| most relevant to our decision, life insurance...insurance | | | | Let's say there is a really bad year where five people |
| can be bought on most things and situations these | | | | in that "risk pool" die. The premium would become |
| days. Before we become overwhelmed with the | | | | $500 or five times the original amount. That's too |
| options, let's go to the heart of how insurance | | | | much volatility. Or let's say 1 person in a risk pool of |
| functions. | | | | 10 individuals dies. The premium then becomes |
| Insurance is based on the premise that a given | | | | $10,000. That doesn't work either. The way to |
| situation, whether it's the death of a financial provider | | | | address either situation is to have 100,000's or millions |
| (life), a catastrophic illness/injury (medical), or a tragic | | | | of people in the risk pool. This way, the odd years or |
| house fire (property and casualty), would so | | | | spikes in probability are smoothed out for a more |
| adversely affect a person or group of people | | | | stable premium. |
| financially, they would be unable to recover. It is a | | | | The life insurance carriers in this situation try to best |
| catastrophic loss that any given individual cannot | | | | estimate risk, probability, and premium so that they |
| financially survive. How do we do deal with that. Life | | | | attract as many people as possible into the pool. If |
| insurance typically involves a great deal of money as | | | | they can successfully do this, they are able to add a |
| we may need to replace the potential income from | | | | small percentage to the premium to both operate |
| an earner over decades. Health insurance bills can run | | | | their business and have a profit (if they are a Stock |
| hundreds of thousands....even millions of dollars. The | | | | Company model). The carriers have also taken this |
| total destruction of a person's house can also be | | | | core design and tweaked it over the years with |
| hundred's of thousand or millions of dollars. These are | | | | add-ons such as Riders or certain Exclusions that |
| big numbers and society needs a tool to somehow | | | | either augment or protect the original risk |
| offset these situations which although rare, do occur | | | | assessment. |
| to individuals within a group. The answer is insurance. | | | | Why is it important to go back to the basics? Well |
| Insurance, whether it's term life or some other type | | | | for one, you now will have a better understand of |
| has a simple premise and promise. If we can group | | | | why term life insurance might be a better or more |
| many individuals together (the more the better), then | | | | pure form of insurance than whole life or annuities. |
| we can spread an individual's risk of a catastrophic | | | | Insurance is about risk...not investment. There are |
| situation occurring among the whole group. We never | | | | better ways to invest than through life insurance as |
| know for certain which individual it might happen to | | | | we discuss in detail at our Term versus Whole life |
| which is why we need insurance in the first place. | | | | insurance article. |
| There is however, a probability or percentage chance | | | | We hope this helps give you a core understanding of |
| for any one individual based on historical data. If for a | | | | insurance. You can now compare and choose the |
| given population, 1 person out of 1000 dies from age | | | | right for you through our term life quoting engine as |
| 40-45 each year, we now can calculate how much to | | | | a final test! |