IC-33 Chapter 2 : What Life Insurance Involves

What do you mean by insurance?

Insurance is a contract between the insurer (insurance company) and the insured in which insurer agrees to provide financial protection to the insured on happening of certain specified risks for a price called as premium.

Level Premium: The level premium is a premium fixed such that it does not increase with age but remains constant throughout the contract period.

Level premium has two components:

(1) Term or protection component: payment for cost of risk &

(2) Cash value element: saving component

Two ways to reduce risk are as follows:

  • Diversification: Under diversification the funds are spread out among various assets.
  • Mutuality: Under mutuality or pooling, the funds of various individuals are combined.