by Jet Villamor
Life insurance is a very vital component of financial planning hence, it is very important that we also understand some of the basics.
Life insurance revolves around the concept of risk-sharing. Meaning a group of people contributes so as not to burden only one for a loss. Risk sharing can be clearly illustrated during a Friday night out by a group of friends. A five thousand peso bill paid by only one person is definitely huge compared to dividing it by 10. The more people sharing the bill, the lesser will be the cost to one.
Where did this concept start?
“In the little kingdoms around the Mediterranean sea, hundreds of years before the Christian era, a plan of risk sharing was developed by the merchant tradesmen.
Often in a storm, when the sea raged, it would be possible to avoid shipwreck if the ship could be lightened by throwing part of the cargo overboard. The merchants realized that it would be to the advantage of each to reimburse the loss suffered by a man whose goods were thrown overboard – rather than face the possible loss of the whole ship. Share the risk equally, they reasoned, and no one individual suffers an overwhelming loss.”*
Such is basically the concept of life insurance. People of the same age and same risk class are grouped together. That is why, underwriting in life insurance is very important to maintain equitability between the insured.
“Later, in the middle ages, guilds were formed of people in the same trade or occupation, such as bakers or silversmiths, etc. They agreed to help each other in the expenses involved if some of their membesrs became sick or died. At each meeting, they would pass a box around, taking a collection toward a fund that would be used when a member became ill or died. In a sense, they were beginning to recognize the monetary value of the human life.”*
The Life Insurance industry has actually evolved from a mere protection product (where misconceptions usually arise as being a product triggered only by death) to as high-tech and as complicated as any investment product linked to a stock market.
In the early days of the insurance industry it was practically more of the non-life that really gained acceptance and a wide following from the public. It was not until the 18th century when Benjamin Franklin made this very bold observation which might just have been the turning point of the life insurance industry:
“It is strange anomaly that people will insure their houses, their ships, their merchandise, and yet neglect to insure their lives, surely the most important of all to their families, and more subject to loss…”* (B. Franklin)
Primarily life insurance came into being because of the three hazards of life. Some may call them, income robbers – but really these are the common risks that everyone is facing everyday of our lives, they are: Death, Disability and Old age.
In the early days, life seemed to be very simple, when somebody died, it was true that it became a serious economic issue – but solving it was not as complicated as we do it today. There would seem to be so much food that can be generated at home in the farm and somehow the widow and kids could survive. However, with the advent of the industrial revolution, when people started leaving their farms in search of jobs in cities and highly industrialized zones, they became more dependent on wages and salaries. Because of this, a death of the breadwinner was definitely tragic, not only emotionally but more on the economic survival of the family. Simply because in the city, there was no easy substitute for the hard-earned income. And, hence, the concept of income replacement came into being. An economist put it this way, “There are only two sources of income: a man at work, or money at work.”*
When a person physically stops working because of whatever reason, be it health, or whatever, money should be there to be working for him.
The income-robbers that we have mentioned above are what we call the inevitable things in a man’s life. When we talk of death, it means dying too soon. When we talk of old age, we are talking about living too long. Permanen disability actually happens in-between both. But one thing is for certain, one of these three things will really happen in any one man’s life – the only problem is, we never really know when.
A life insurance policy makes certain that any eventuality in a man’s life will be covered. Life insurance makes certain the uncertain. Life insurance protects families. Life Insurance is dignity in old age. Life Insurance is the best gift a breadwinner can ever give to his/her family.
Life Insurance has to be paid for, whether or not it is bought. If you are not willing to pay for it today with your few thousands, then your are in effect telling your family to pay for it someday, for you. They will be paying for it by the things that they will have to do without. Your children will be paying for it by not being able to go through college because you are no longer there. Or, they will have to vacate the house that you’ve bought for them because the bank foreclosed it – because they can no longer pay the amortization. You just have to make that decision once. Will you be the one to pay for it today, or your kids or family will.
* LIAMA (Life Insurance Agency Management Association)
