Life Insurance

Pure Risk- means that there is only a chance of loss-the loss may or may not happen- and there is no possibility for gain. The risk associated with the chance of an accident is an example or pure risk. Only pure risk is insurable.

Speculative risk- involves both an uncertainty of loss and of gain. Insurance does not protect individuals against losses arising out of speculative risk because these risks are undertaken volunatrily. E.g. betting at the race track & investing in the stok are examples of unisurable risk.

• The immediate specific event causing loss and giving rise to risk. It is the cause of a risk.
• e.g. when a building burns, fire is the peril. When a person dies, death is the peril.

Any factor that gives rise to peril.

For purposes of life insurance, there are three basic types of hazards: physical, moral, and morale.

Arise from material, sturtural, or operational features of a risk situation.

e.g. slippery floors or unsanitary conditions

Arise from people's habits and values.

e.g. filing a false claim

Arise out of human carelessness or irresponsibility.

e.g. failing to take safety precautions is an example of morale hazard.

• STARR--
• Sharing, Transfer, Avoidance, Reduction, Retention

Sharing- Sometimes, when a risk cannot be avoided and retention would involve too much exposure to loss. By sharing the risk w/ someone else, an individual also shares potential losses. That is the individual's own loss may not be as great if it occurs, but the individual may have to pay a portion of the losses experienced by others.

Transfer- means transferring the risk of loss to another party, usually an insurance company, that is more willing or able to bear the risk. Some non-insurance transfers of risk occur, such as when one agrees to assume the risk of another under the terms of a written contract.

Avoidance- deals with risk by avoiding the risk in the 1st place. Usually means not undertaking an activity that could involve the chance of loss. eg. by never flying, one could eliminate the risk of being in an airplane crash.

Reduction- risk reduction can work in one of two ways: it can reduce the chance that a particular loss will occur, or it can reduce the amount of a potential loss if it occurs. e.g installing a smoke alarm in a home would not lesson the possibility of fire, but it would reduce the risk of the loss from the fire.

Retention- simply means doing nothing about the risk. People assume or retain the risk and, in effect, become self-insurers. e.g. the insured would pay a smaller portion of the loss than the insurer such as paying a deductible.

The individual must have a legitimate interest in the preservation of the life or property insured.

-It can also be based on a financial loss that will take place if an insured individual dies. e.g. 2 partners in a business, each of whom brings substantial expertise to that business. If one partner dies, the business could fail, resulting in a loss to the other partner.

Affects- it affects who may purchase a policy but not who may benefit from a policy. e.g. an individual could purchase life insurance on her own life and name a charitable organization as the beneficiary.