Life insurance is expected saving

Life insurance can also be understood as expected saving. Assume a person is purchasing an endowment policy (which has a maturity value) for a sum of Rs 1, 00, 000 for a term of 10 years. In each of the ten years he pays premium for the cover. When the policy matures at the end of ten years the life insurance company pays him Rs 1, 00, 000 (it is assumed that the policy is without profit).

If he were to die on any day before the maturity date the life insurance company would have paid a death claim of Rs 1, 00, 000 to his nominee.

We can restate the concept of life insurance as a guarantee of expected savings of the policyholder. The policyholder expected that he would be able to build up a saving of Rs 1, 00, 000 in ten years - for which he was contributing through payment of premium. This expectation is guaranteed by the insurance company. If premiums are paid as stipulated in the policy the insurance company would make available to him (if he survives 10 years) or his nominee (if he were to die on any day before date of maturity of the policy) his expected savings of Rs 1, 00, 000.

Even in a Term assurance policy (where there is no maturity value) precisely this is what is happening. A takes a loan of Rs 10, 00, 000 from a bank. Repayment period is 20 years. He is regularly repaying the loan through monthly installments. He also purchases a term insurance policy to cover the loan. Assume that A dies at the end of twelve years. The life insurance company pays Rs10, 00, 000 to the bank who after recovering the outstanding loan pays the balance to A’s legal heirs. Virtually this too is a case of guaranteeing the expected savings.

Key words:

Expected savings
Guarantee
Term assurance
Maturity value