What Life Insurance Involves

Life insurance business- Components, human life value, mutuality

i) Asset: Human Life Value (HLV)

ii) HLV concept considers human life as a kind of property or asset that earns an income.

iii) It easures the value of hu a life ased o a i dividual’s expe ted et future earnings.

1. Typical concerns faced by ordinary people

a) Dying too early

b) Living too Long

c) Living with disability

2. The level premium is a premium fixed such that it does not increases with age but remains

constant throughout the contract period.

3. Level premium has two components

i) Term or Protection component:- It consists of the portion of premium actually needed

to pay the cost of the risk.

ii) Cash Value Element: It is made up of accumulated excess payments of the policyholder.

It constitutes the savings component.

4. Mutuality & Diversification:

Mutuality is one of the important ways to reduce risk in financial markets, the other being

diversification.

5. Diversification

a) Under diversification the funds are spread out among various assets ( placing the eggs in

different baskets )

b) Under diversification we have funds flowing from one source to many destinations

6. Mutuality

a) Under mutuality or pooling, the funds of various individuals are combined (placing all eggs in

one basket)

b) Under mutuality we have funds flow from many sources to one.