What is Life and Health Insurance Exactly?
The first use of insurance was to insure property for over sea voyages. Soon after there was insurance for property that didn’t move, buildings, inventory, raw materials, and the like. It wasn’t until recently that life insurance has come into its prime. In the beginning of the 20th century limited life insurance policies were written to cover the cost of funerals but that was as far as they went. Then in the 1950’s people began to realize the need for health and life insurance as a means to offset unexpected occurrences.
The reason that health and life insurance started to become commonplace is that for all of the time that people were insuring their property they weren’t insuring their greatest asset. Unless someone is independently wealthy the greatest asset they have is their ability to earn money. This ability to secure a paycheck far outweighs any current asset that someone may have.
What is Economic Death
Any unforeseen event that limits the ability of an individual to secure a paycheck is considered an economic death. Even if the event is not substantial enough to force a person completely out of work, if it significantly lowers the income attainable, it can be construed as a partial economic death.
For example, Joe Smith works at a factory where he makes $50,000 a year. If he works for 40 years he can safely assume he’ll make $2,000,000. With a little financial planning this should be enough to assure him a nice retirement.
However, there are several circumstances that could limit this potential income. There are potential accidents, illnesses, or economic situations that may cause him to either not be able to perform his job or cause his company to go out of business. These situations, these risk factors, are considered his exposure.
Three Types of Economic Death
- Physical Death – This is the one that most people think of when life insurance is talked about. This is meant to compensate for the lost income of the insured upon premature death.
- Retirement Death – This is when the insured reaches retirement age without having amassed enough cash to sustain a living after no longer being able to work. There are multiple different policies designed specifically to help an individual compensate for a shortfall of income during the working years.
- Living Death – This is the term for a person who has suffered, through injury or illness, a disability. In this case the insured has not dies so although the income has stopped coming in the expenses have not. Disability insurance is often packaged with medical insurance because the two occupy the same financial area.
How Can an Individual Respond to Risk
There are four universal responses to risk. These responses, and the actions they produce, define the probability of an individual succeeding or failing in the avoidance of serious risk repercussions
- Avoidance – This is the most impractical of the choices. For instance, it makes no sense to try to avoid illness by not going out into public and staying locked in a home. This limits earning potential almost as much as the illness itself would have.
- Reduction – Trying to reduce the risks involved in life is a reasonable alternative. Eating healthy, exercising, and staying up to date on immunizations are all good ways to reduce the chances of becoming ill. Choosing a career that involves less dangerous activities would also apply here.
- Retaining – There is also the option of retaining the risk and offsetting it by setting aside individual assets to cover in case of an emergency situation. This is the “rainy day fund” scenario and may work on a short term basis but is lacking if the emergency becomes permanent.
- Transfer – This is what health and life insurance is about. Individuals purchase policies to transfer the risk of economic death to an insurance company for a set premium. This premium is dependent on several factors and generally is higher the longer one waits to employ it.
Risks that are Often Insured Against
There are an almost unlimited number of risks that can be insured against. Lloyd’s of London has become infamous for insuring celebrity body parts from Keith Richards two million dollar hands to Mariah Carey’s one billion dollar legs (CalgarySun.com 9). These are far from the norm but anything can be insured for a price. For those of us without such outlandish salaries the most common risks that are covered are accident and sickness.
These risks are monetarily offset in a legal contract that sets a premium (payable at a set interval) for an individual to obtain a lump sum disbursement upon either the completion of a set term or upon the occurrence of the risk that was being contracted to offset.