The Origins of Insurance
Take a moment to compose yourself from laughing so hard, and let me explain some more. Historically -and I mean back in the age of the Greeks- insurance was taken by shippers or receivers or financiers to cover the loss of goods shipped by sea and the vessel itself. The way it worked was this: the ship itself was used as collateral to secure a loan to finance the voyage. If the ship sunk or was lost, then the lender lost their investment. Thus the borrower (who was often the owner of the vessel) did not need to repay the loan. These were called “bottomry contracts.” If the trip was made safely, AND the ship’s master or owner repaid the loan, fine. But if the owner did NOT repay the loan, then the vessel became the property of the lender.
The Concept of Life Insurance
Thus the idea of anticipating by a financial arrangement some dire event involving a third party and some unknown risk is ancient. Likewise, the credit risk was recognized. By not too much of a stretch of the imagination, you can see how the same concept might apply to the financial value of a person’s life, especially if that person’s work is a substantial contributor to the financial welfare of someone else, such as a business partner or investor. And so, the person’s LIFE was insured, just as a home might be insured. If the person lives or the home is not destroyed, nothing happens. But if the WORST happens to either, then the value of the insurance payout passes to those who are designated to receive the payment: the beneficiaries. In this scenario, there is but one peril insured against death.
Life Insurance and Credit Risk
For most of us, death, itself, is a certainty. But the time of death is NOT, except in the most general sense of life expectancy for a particular population. Premiums are calculated based on the statistical probability of death at any given age. This brings us back to credit risk, one aspect of which is the inability of someone to pay a mortgage or other obligation on account of an untimely demise. If the bank knows that the life of their borrower is insured, then they may extend credit, because they are protected in case their borrower dies before the loan is paid.
Insurable Interest Explained
Likewise, those dependents who have a financial interest in their provider continuing to earn income and provide other benefits to a family have an insurable interest in the provider. Thus they can be the beneficiaries of a life insurance settlement paid upon death of the provider. And they may, on their own, buy the insurance on the LIFE of the provider. That is, to ensure the life of an individual, an applicant for life insurance coverage on someone else must have a greater financial concern in the insured LIVING than in them dying. And they’ll need more. The one whose life is being insured must consent. There is just one exception: parents who buy life insurance for their minor children.
The Evolution of Life Insurance
Although the financial interest of beneficiaries allows them to apply for life insurance on someone else in whom they have a financial interest, in recent history, the purchase of the insurance by the one whose life is insured has become the norm in family, non-commercial situations. Quite obviously, this is something that has been encouraged by the life insurance industry, because it is the “right thing to do” for your survivors. If that’s not enough to explain why it is called “life” insurance, then consider what “death” insurance would cover, if such a thing existed. It would ensure that people who are dead stay that way. If any of them come back to life, then the policy pays off. Thus far, there could be only 3 individuals who might be considered as possible insureds.
