8 - Mortality Risk and Life Insurance

Summary

Learning Objectives

In this chapter, we discuss mortality risk and life insurance. Specifically, we examine the necessity of having life insurance and the appropriate amount of coverage. We then study how the premiums are determined. We also look at different types of life insurance policies.

Who Needs Life Insurance?

Life insurance is a contract whereby an insurance company promises to pay a sum of money to the designated beneficiary if the insured passes away. That sum of money is referred to as the death benefit or the face value of the policy. In exchange, the insured has to pay an insurance premium to the company. Typically, an insurance premium is paid monthly while the insured is still alive. However, the insured can choose to pay it in one lump sum at the start of the policy. In some cases, the person who pays the premiums is not the insured. That person is referred to as the owner of the policy. For example, if you purchase life insurance for your spouse, you are the owner while your spouse is the insured.

The primary reason for getting life insurance is to protect against financial problems associated with the insured's premature death. These financial problems include the loss of the insured's future earnings, which could lead to a lower standard of living for his or her family (i.e., dependents). They also include funeral expenses, unpaid medical bills, and outstanding debts.