How Does Life Insurance Work?

Life Insurance helps people meet financial losses through the following laws and principles:

  1. Risk Sharing – a group of people places a fund together in preparation for an uncertain event;
  2. Law of Probability. Life insurance companies use the principle of probability in determining the mortality or life span of a particular age within a given period within a given group. For example, the probability of death is also called as life expectancy. Life expectancy differs from country to country, and also with various professions or medical conditions.
  3. Spreading losses. The fundamental advantage of life insurance model is that it helps people meet economic or financial losses by spreading these losses to over a large number of people. It’s like having a pie, and everyone should contribute to that pie according to his exposure to that risk. Whoever incurs the risk shall have a share of that pie.
  4. Risk selection – a systematic evaluation of an insurance applicant for the purpose of determining the classification of risk for possible coverage
  5. Policy reserve. The lawrequires that a life insurance company must accumulate funds from premium payments required to meet contract obligations. This fund is called policy reserve. This needs to be shared because there are some Filipinos who have a so-called trauma in these topics because of the failure of a company called CAP in the 90s or beyond.
  6. Law of Large Numbers – the morefrequent a particular event is observed, the more likely that the observed results will approximate the true probability of the event happening;