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Q: Why insurable risk is necessary in life insurance?
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What are the basic principles of life insurance?

There are, in fact, a wide variety of "basic" principles of life insurance. Some of these principles include risk management, risk pooling, and human life value.


What is insurance and principles of insurance?

Insurance is the concept that it is better to pool together uncertain risk and spread risk among many in order to better protect against uncertainty.It is vastly easier to budget for limited loss by mathematical probability that an event will occur to a limited number of people and spreading that risk than it is to prepare for unlimited risk to occur to one person.There are seven basic principles of insurance, which include subrogation, insurable interest, contribution and utmost good faith; in addition to indemnity, nearest cause, and minimization of loss. These principles are meant to safeguard insurance contracts.


In what way does insurance 'pool risk'?

Insurance pool risk by providing protection against disastrous risk such as fires,floods,earthquakes,accidents


What does the contribution principle determine in life insurance?

The concept has primary application to property insurance rather than to life insurance. In the context of property insurance, assume that the property owner or other person having an insurable interest in a building buys 2 policies from different insurers for, say $2million each. If a loss occurs and the insured makes a claim against one of the insurers, and it is paid, the paying insurer would have a right to recover half of its payment from the other insurer. In the context of life insurance, an insured can have multiple policies. As long as there is full disclosure to each of the insurers of the existence of the other(s), and each insurer is willing to underwrite the risk despite the existence of the other policy, each policy stands alone and pays upon the death of the insured. Naturally, the terms, conditions, and exclusions of the policy control whether or not payment is actually made.


How can some speculative risks have an insurable element?

You would be amazed at what can be insured. Specifically to your point, some investments are insured against down side exposure. The easiest example is private mortgage insurance. If you buy a home and have less than 20% to put down you are generally required to pay for mortgage insurance. That insurance is protecting the investor who holds your mortgage note against the market risk of you home value declining to the point that should they have to foreclose there is sufficient money to pay them their principal. They are speculating that the return on your note will be realized. If you put 20% or more down they will accept that risk. If you want them to speculate that with less down they will still get the return tehy expect, you have to insure the principal generally down to 80%. Once you Loan to value drops below 80% you can generally drop the insurance.

Related questions

What are the characteristics of an insurable risk?

The essence of an insurable risk is essentially one in which the person or entity insured has an "insurable interest". This means, that the insured must have a reasonable expectation of advantage, usually monetary, from the continued existence of the property or life insured. It need not be an ownership interest. For example, a spouse who did not have an ownership interest in her husband's car, but who had the right to use the car, would have a sufficient insurable interest in it to support a contract of insurance. The lack of an insurable interest makes an insurance contract essentially a gambling contract--because the person taking out the insurance really has nothing to lose if the property insured is destroyed.


Cancelling an insurance ab initio?

failure to disclose material facts that changes insurable risk


What is the function of insurance?

At its most basic, insurance deals with shifting risk. Otherwise stated, a person or entity that stands to incur a financial loss can transfer the financial risk of loss to an insurer. In return, the person or entity pays a premium to the insurer for accepting the risk of loss. A premium derives from a "rate", which is the cost of $1000 in coverage. Therefore, the premium is derived by multiplying the rate by the amount of coverage sought. Not all risks are insurable. One must have an "insurable interest" in the property or event to be insured. This means that the person seeking insurance must have a legal and economic stake in the continued existence of the item to be insured; this can be property or a life. Absent an insurable interest, insurance is essentially a wagering contract. Likewise, the object of the insurance must be legal and not contrary to public policy.


Why is insurance necessary?

for the tranference of extraordinary risk


Are pure risks always insurable?

Pure RisksPure risks, or those that have the possibility of loss or no loss, but no possibility of gain, are insurable, but there are criteria that must be met before they will be insured. So, no, they are not ALWAYS insurable. For example, a person who has been diagnosed with terminal cancer who attempts to acquire insurance will generally be refused. Though it is a pure risk because the person will either live (no loss) or die (loss), factors that determine eligibility for insurance are not met for that person. Likewise, a homeowner who has had previous fires in their homes may not be able to find insurance because they are considered too great a risk to insure, even though there will either be no fires (no loss) or there will be (loss) at their current home.There is another type of risk that is not insurable. Speculative risk, or risk with a possibility of gain, is that type of risk.


What is risk based insurance?

Both life and general insurance policies are risk based. In the case of life insurance policy, the risk is human life based. In general insurance, the risk whether cash/kind varies as per specific nature of the policy.In fact insurance policy is a substitute against avertment of risk factor.


How does life insurance differ from other types of insurance?

Life insurance is not based on risk pooling.


What are the essential feature of insurable risk?

A risk cannot be insured until it meets certain conditions.It means that the risk should not be created by the insured himself. That is,If the goods insured have been set of fire by the insured,the insurance company will not be responsible


What are insurance principles of risk reduction of portfolio risk?

insurance principles are the set guiding basis for different type of risks that occurs in every day life.They include:principle of insurable interestprinciple of subjugationprinciple of indemnityprinciple of utmost good faith(uberrima fides)principle of contribution


Is risk of loss through an economic depression insurable?

no its uninsurable


What are some high risk life insurance companies?

There are many high-risk life insurance companies available for customers looking for low-cost life insurance. A few of these companies include SelectQuote and GerberLife.


What are the basic principles of life insurance?

There are, in fact, a wide variety of "basic" principles of life insurance. Some of these principles include risk management, risk pooling, and human life value.