Life Assurance

Whereas general or nonlife insurance provides compensation in respect of a financial loss that may never arise, life insurance provides for specified cash payments to be made upon death an event that is certain to take place sometime. The principle of indemnity is not present in life insurance. Instead of being insured against some event occurring, you are assured of the payment of a determinable amount of money being made to your dependants on the occurrence of a specified event. It is for this reason that one often speaks of life assurance rather than of life insurance.

Life premiums

Another important distinction between general insurance and life assurance is concerned with the calculation of premiums. General insurance against a risk is a short-term contract, generally for a maximum of one year. On its expiry the contract may be renewed, but the renewal premium may not be at the same rate as the original premium. It may be higher or lower according to how the underwriters reassess the risk.

Life assurance, however, is not an annual contract, but one either for your whole life or for an agreed period of years. It would be a contradiction in terms were an agreement to be made for an assured sum to be payable on death in exchange for an annual premium if that premium could be varied from year to year by the insurance company. Clearly as you grow older you are more likely to die, so the insurance company's risk becomes greater. You might, of course, pay a small premium as a young person and a successively higher premium as you get older or contract various illnesses, but this would be impracticable. The modern method is for the premium to be for a fixed annual amount for the whole period of the insurance such that it reflects the average risk over the whole term. It is thus more than adequate for covering the risk in the early years but less than adequate in later years.

Premiums for life assurance are, therefore, what are called `level' premiums. They are calculated according to the assessed life expectancy of the assured person. Main factors affecting life expectancy include:

(a) sex - the average woman lives four years longer than the average man;

(b) age at entry - from past records it is known how many

years a person of any age can expect to live, on average, and assuming no bad record of health;

(c) occupation - life expectancy varies for different types of occupation;

(d) recreational activities - certain pursuits are considered

to be unduly hazardous, e.g. car racing, hang gliding, rock climbing;

(e) state of health -not only your present condition but your record of health in the past is taken into consideration; mortality and illness record of your immediate kin are also relevant.

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