Advice for your online life insurance from Go Direct

The life insurance industry is one type of business that rarely loses. This is because Online life insurance is based on the law of probabilities in which a stated number of people will die but not all of them simultaneously. From that conclusion, it is relatively easy to figure out where profits of insurance firms come from. Simply stated, only a small number of people will die from causes covered in their policy contracts. The rest of the premiums paid by so many policyholders will end up as reserves and eventually profits for the firm.

Finance Issues

Based on mortality rates computed by actuaries employed by insurance companies, they can reasonably compute the number of deaths (and hence the number of claims) that they will have to pay. From this mortality tables, based on age of the insured party and other factors such as lifestyles and prior medical history, they can now compute for the premiums they will charge each prospective client. An insurer’s business model is the result of combining its underwriting (assuming risks) and investing activities.

It is rare for an insurance company to go bankrupt unless its investments are in the wrong places and result in a financial disaster. But do not be lulled by its rarity. It can still happen and there is the most recent example of the collapse of insurance giant American International Group or AIG. It suffered a liquidity problem because it ventured into a very risky type of investment instrument – the so-called credit default swaps or CDS. On the surface, CDS are also insurance contracts that stipulate payments based on a credit party defaulting. Unless fund reserves are kept in order, policyholders are in danger of holding worthless pieces of paper.

Control Your Finances!

The underwriting side is a pretty straightforward proposition. An insurance company needs to determine the insurance rate it will charge for covering a particular type of risk. This rate is actually the premium that is paid by the policy buyers in return for the firm to accept them as risks. This is called risk management which is an attempt to hedge against the risk of a contingent loss-causing event. How do insurers manage risks? The can select which risks they are willing to insure against. They can also charge higher premiums for certain types of risks. Or they may refuse outright to cover any risk in which they think they will lose money once a claim is filed. In other words, the probability of a contingent loss happening and a claim being made is very high and the premiums they charge will not compensate for that risk.

The investing side deals mainly with the finance aspects of the business. It involves finding the right investment vehicles that will offer a reasonable return for a reasonable level of risk. High risk, high returns or low risk, low returns. The Insurance Commission of most countries determine what investment areas are allowable for firms to invest in. The areas of investment deemed as too risky are prohibited such as hedge funds or the other highly speculative investment activities. This is to protect the policyholders from excessive risks taken by the insurance firm in the hopes of earning more income from investments. Another safety measure is the obligation to set aside a fixed portion of premiums received in a reserve fund to meet expected future claims when these are made.