Managing risk was the motivation for the development of insurance.
Risk is a word people use every day. We hear it all the time. Life is full of risks, and dealing with them is what people do. We all realize that some risks are greater than others, obviously. For instance, riding a bike in traffic without a helmet is a risk, but one that’s on a much different level than choosing a brand of ketchup we have never tried before. Risk is simply the chance that something may turn out differently than what we hope, plan or desire. And we all understand that, because we have all been there and done that.
However, risk is, in fact, a fuzzy thing that our brains often misunderstand. We all struggle to quantify and manage risk. And when it comes to planning for our family’s future, we may wonder how much money we need to invest and save or how much insurance coverage we should buy. After all, we don’t know what the future will bring or how to calculate potential risk. Risk is actually a risky business!
Thankfully, though, life insurance companies are in the business of understanding risk. It’s what they do, and they do it well. Risk is not a matter of guesswork for them because they are masters of data and statistics. Life insurance companies truly understand this often complex mathematical world – so we don’t have to.
By maintaining gigantic actuary tables (statistics on how regular people live their lives, sometimes built of data accumulated over centuries) and applying rigorous statistical methods to them, insurance companies can accurately measure the risks people take in their daily affairs.
From these tables, insurers develop fair, honest, reliable estimates of the risks people face in a challenging world. The underwriting process, which can be very detailed and personal, allows insurance companies to use this data to assess your unique situation, your personal risks.
When you purchase life insurance to protect your family, you can be confident that the insurance company has accurately calculated the risk of loss and is committed to providing the best possible security against that loss that your premiums can buy. Another way insurers help us manage risk is by giving people the ability to transfer wealth between generations as smoothly as possible. This also helps you build your life and invest in your community over time.
Most of us never consider that for insurance companies, managing risk also includes keeping their own financial situation healthy. The actuarial arts include making sure insurers collect enough premiums, and manage them well enough, so that the money is there for your family when you need it.
When we decide to purchase future security in the form of life insurance, we can feel confident that our insurance company has correctly assessed the risk in the form of payout and premiums. For this reason, life insurance does more than just help ensure your financial security; it also reduces your risk.