Time Travel

The easiest way to gain an understanding of why people buy life insurance is to take a quick economic time travel tour of this country from the early 1900's to the present day. From the very beginning, the proceeds of life policies have been used to pay for the funeral of the deceased. The next tiny step was to increase the death benefit to cover the funeral and the final expenses of the deceased. Final expenses could include medical bills incurred shortly before death, ambulance charges, cemetery costs and even short term debts and installment loans left by the deceased. This gave life insurance an element of survivor protection it had not had before.
By mid-century, many policyowners sought to use insurance as an estate creation or estate protection vehicle. The estate creation thinking was that "if I live, I will put money aside each month for our retirement and possibly an inheritance for the kids - if I die prematurely, I want to do the same thing". Of all the financial vehicles available, only life insurance can instantly create an estate.

As we reach the close of the twentieth century, the newest innovation of life insurance is the use of Accelerated Death Benefits. a person suffering from a critical, chronic or terminal illness may incur some huge medical bills. Companies now offer options which allow the policyowner to obtain a significant amount of the death benefit Before death actually occurs.

Why Buy Life & Health Insurance

What is your greatest asset?

Without a lot of thought, many of you might say, "my house, my car, my boat or my bank account". But for most of us, that answer would be wrong. For most of you, your Earning Ability is your greatest asset. Your ability to go into the workplace and bring home a paycheck is Your Greatest Asset. Any disruption could be viewed as a Financial Loss.

Life and Health insurance became important products as we began to recognize that the greatest asset of most individuals is their ability to earn. Since your earning power can be disrupted by economic death in the form of physical death, retirement death or living death, you must deal with that risk or chance of loss. Most of us try to transfer some or all of our risk to an insurance company.

In The Begining

Many insurance historians trace the basic concept of insurance back many centuries to the Chinese. In a principally agrarian society, Chinese farmers were faced with the problem of getting their crops to market. Most of them simply loaded their crops on a boat and used the rivers as transportation. Occasionally though, a boat would overturn and an entire harvest would be lost. The farmers began to transfer this risk to other farmers in a brilliantly simple way. Ten farmers from one area would get together at harvest and load the boats by putting one-tenth of every farmer's crop on each boat. If a boat sunk, each farmer lost a little, but no one lost everything.

This concept of sharing risk is the basis of all insurance products. A modern-day policy owner trades a small known loss (premium) for the insurance company's promise to pay for a large, unknown loss should it occur. all of the policy owners lose a little, but no one has to take the risk of losing everything.

A Fable on How Insurance Was Invented

There was a time very, very long ago when the gods often left their homes on Mt. Olympus to walk among men, learn their ways, and help them solve their problems.
It was after one of these forays that Zeus Returned to Olympus, his brow etched with worry. For days the heavens were wrapped in the gloom of dark clouds, for nothing could rouse the king of the Gods from his black mood. All of Olympus was abuzz with worry. What could be done? Surely something must be done to wrest their master from this state. It fell to Apollo, Zeus' favorite, to approach the king...

"Sire, what is troubling you, for surely none of us has caused you such displeasure?"

"Ah, no, my son, not you -- it's man"

"Man," the godly chorus affirmed. "Ever since he was spawned, there has been nothing but trouble..."

"No," Zeus muttered, shaking his head, "not this time. This time it is not man's fault, for the world I have created for him is full of risk and peril. A man can work and prosper all his life, only to lose all with a single stroke of misfortune."

"Ah..." the gods now understood. Zeus was angry with himself, for it was he who created the world that man now called his own, and it was he who created the risks and perils which robbed man of the fruits of his labors.

"But what can be done?" they asked among themselves, for surely no one would dare suggest that Zeus undo his own handiwork.

Finally Athena, wisest of the Goddesses, stepped forward. "Father, may I suggest a contest?"

"A contest?"

"Yes, Sire, for surely one of us on Olympus should be able to invent a tool that will make man equal to the world's perils."

Quickly, word of the quest spread through the heavens and all were eager to participate.

Soon the day for judging the entries was at hand. All of the Gods and Goddesses, the important and the unimportant, gathered near the throne of Zeus to see who would win... who would give man his chance.

First to show his entry was Vulcan, armorer of the Gods. His answer was a sword... keen of blade, massive in size, yet so perfectly balanced that a child could wield it without strain.

All were impressed. Zeus, however, was not.

"Fine as your blade is, oh Vulcan, can it stop fire? -- for I have seen man lose all by fire".

The bearded God grew silent and hung his head. "No, Sire, it cannot fight the blast of fire."

"Then you have failed, my friend."

And so it was ... one after another... the Gods failed. If their tool could conquer the wind, it was of no use against the hail. If it was able to offer protection from the lightning, it could not stop the wind, and so on and so on. Finally, all of the major Gods had displayed their answers to man's dilemma, only to have Zeus point out the weakness in each.

"Is there no one with an answer?" lamented the heavenly king!

All looked around for an answer. None was sounded. Finally, a small voice piped out from the very rear of the throne. "Sire, I have the tool which will give man a chance."

"Who said that? Come forward!"

Like the waves on the shore, the crowd parted, and before Zeus stood a minor God... one so minor that in fact none knew his name.

"And what is your answer, small one?"

"This," the stranger replied, producing a scroll of paper.

Laughingly, the divine audience jeered at the newcomer -- but Zeus did not laugh. "You do not amuse us," thundered the master of Olympus as he prepared to hurl a lightning bolt.

"Wait!", cried Athena, "hear him out. Perhaps he can succeed where strength and magic have failed."

"Yes, Sire, my magic comes only from logic, and my strength only from numbers."

"Very well, explain."

"First, Sire, man loses all to the perils of the world because he faces them alone. Sire, do all men suffer the fate that has so disturbed you?"

"No, only a very few lose all, but there are many that lose a great deal."

"And some that lose nothing, Sire?"

"Yes, there are those who lose nothing, but..."

"Suppose, Sire, that groups of men would join together and that each member of these groups would pay a little of what they own to a pool, and that out of this pool would come the wealth to make whole the losses of any one member..."

"Hmmm, wise, small one, but what if one man faced greater risk of loss than another? -- say a farmer as opposed to a teacher. A farmer has property to measure his wealth, while the teacher has ideas, which are difficult to destroy."

"Well, Sire, we would group only like risks together. Thus, all would be equal among the members of each group."

"Don't some men lead riskier lives than other?"

"Yes, Sire, but with experience we could predict which type of man is more likely to suffer a loss, and have him pay more into the pool."

"But how would we know what a man's risks truly are?"

"Sire, we would have many men to deal with. Although some would surely surprise us with greater losses, there would be others who would be just as surprising with fewer losses. We could accurately predict the picture among all men in a group by using the Law of Large Numbers."

"But how do we assign man to the proper group?"

"Sire, we have men make statements to us on something called an application -- and these statements, which I humbly have named Representations, would give us an accurate picture of each man's risk."

"But what if man did something purposely to cause his own loss? Surely then your plan would fail."

"Ah, your majesty. I too, have considered this. We would announce to each man that there would be certain risks, like the one that concerns you, for which we could not offer protection -- these, Sire, I call Exclusions."

"Interesting stranger, pray continue."

"With variations, Sire, my plan could protect all that man owns -- his animals, his crops, his house -- even, Sire, his health -- and, may I be so bold, his life." The stranger noticed a dark look form on the imperial brow. "No, Sire, man would not become immortal, but he could guarantee that his family would not suffer financially if he were to travel across the River Styx before his time."

Zeus pulled himself to his feet. "Stranger," he trumpeted, "Come forward. You have done well. What do you call this plan of yours?"

"Sire, I call it Insurance -- and this piece of paper I hold in my hand is the most important part of the plan -- for it contains the promises the group makes to each man."

"The most important part, you say. Then from now on, all shall know this paper by your name. What is your name, young God?"

"Policius, Sire."

"Good, then I proclaim that all shall call these papers, Insurance Policies' for all time."