This type of insurance covers the risks linked to the length of human life by ensuring the payment of a sum of money upon the occurrence, at a future time but uncertain in advance, of an event connected with the life of the insured subject. Technical and economic characteristics vary depending on whether the policy covers life, death or a mix of the two risks.
Life insurance policies provide a monetary payment if the insured person is still alive at an established age, so as to have sufficient income to maintain the habitual standard of living. These policies appear to have the features of a saving investment product in support of social-security purposes.
Death insurance policies are contracted to prevent that the disappearance of a given person could cause serious financial difficulties to other subjects. A particular type of coverage is that which is stipulated in conjunction with a mortgage, in which case the contract provides for the payment of a lump sum equal to the debt to be paid to the bank at the time of the event of death.
Comprehensive insurance covers both the risk of death and that of longevity. In this type of policy, the element of uncertainty is reduced, while the financial component is enhanced insofar as against the payment of a premium, the insurance will repay at maturity the original sum, plus interest accrued over time.
Under index-linked policies1, the capital varies according to the evolution of a given index; in the unit-linked instead, the capital is determined on the basis of the performance obtained from internal fund management similar to unit trusts or mutual funds. These policies have many similarities with mutual funds and show a strong financial setting in the determination of the premium.
In life insurance, the premium is a function of the assessment regarding the likelihood that the feared event will occur during the life of the contract ( "demographic assumptions"), which constitutes the actuarial component of the premium. The financial component which complements the actuarial one is based on the considerations about the length of time between the time of payment of premiums and the payment of principal/income, and about the need to update the capital insured on the basis of an estimate of expected returns on the sums paid2.
1 In index linked policies, the final capital is determined by using default parameters set in the policy.
2 In general, the following formula applies: P = s * v * p. For each: s: insured sums; v: discount factor based on the technical rate; p: probability that the risk event materializes; P: prize.
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Editor: Alberto Maria SORRENTINO
© 2009 ASSONEBB