How Does Life Insurance Work?
Humans have always been ritualistic about handling the remains of their deceased family members. From the Egyptians and their complex mummifying methods to the ancient Romans and their burial ceremonies, the process of burying people has always involved a complicated and often expensive send off to the afterlife.
The concept behind life insurance came into being with the ancient Romans and their burial clubs. Burial clubs were groups of people who would all chip in to pay the burial expenses of one of the members. These clubs would also make some payments to the deceased’s surviving family members as well.
They did this because the financial burden of a death and burial could be devastating to a family. As a group, it was a small burden. Life insurers combine this group method of attacking costs with the law of large numbers in order to not only cover death benefits in the policies they issue, but also to turn a profit.
Life insurance is the process of accepting premium payments from individuals in exchange for issuing policies that pay out a benefit to beneficiaries after the death of the insured. The premiums of all policy holders are pooled together and a portion of them is saved in a “reserve”.
The amount that is required to be in the reserve depends on the amount of death claims the insurer will most likely pay based on the size and dynamics of the group. This number is assessed based on the experience of similar groups. Because premium assets are pooled and not all policyholders actually die and receive a death benefit, insurance companies are able to pay out claims and still profit.