How it Works Life Insurance

In my previous article How to Manage Basic Ideas Risks In Life Insurance, has been mentioned that the risk (the possibility of loss or damage caused by illness, old age or death) in human life can not be avoided but the impact of that risk can be minimized. Ways in which life insurance to minimize this risk by way of transfer of risk, namely by providing compensation for losses to property owners or parties to be borne by the owner of the asset.

 
Then how the workings of the risk management of Life Insurance?
Life Insurance to manage risk by:
1. Moving the impact the loss of an individual to a group (group), and
2. Divide the losses suffered by the individual to all members of the group (the group).
Let's illustrate how to work the Life Insurance with a simple example.
We assume there are 1000 people aged 50 years and in good health. But the estimates, 10 people will probably die this year. For example, the economic value of losses incurred by a family left behind is about Rp. 200 million. So the total losses of about Rp 10 families. 2 billion. For every person from that group (of 1000) accounted for Rp. 5 million / year for mutual funds, the funds collected Rp. 5 billion / year.
The amount is certainly sufficient to pay Rp. 200 million to each family who lost / abandoned by the party members who have contributed to it if there is a risk that befall them. That is, the risks faced by the 10 people had been distributed to 1000 people who joined in the group or groups.
Stages of Life Insurance Business
Insurance business (as practiced by the life insurance companies) has several stages. Let's see what are the different stages.
1. Unify
Together people with interests similar insurance, in order to share the same risk.
2. Collect
Collecting funds (premiums) from a group of people who have been united in a certain amount under the agreement that had been predetermined.
3. Pay
Pay compensation (claims) to those who have suffered losses in the event of a self-insured risk.
In this life insurance business, the risks faced by each individual was transferred to the insurer (insurance company), who agreed to indemnify certain amount mentioned in the policy contract.