Page 29 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Insurance Laws and Practices

Notes Self Assessment

Fill in the blanks:
5. A firm must be able to sell all it products at the ………………………….. price.
6. A heavy dependence upon loan capital relative to ……………………. capital increases the
risks for creditors and shareholders both.
7. Occurrence of some …………………………………… events may result in either gain or
loss, whereas others cause only loss.

8. Most people would agree that ……………………………………. arises out of some
malfunctioning of the economic system.

2.3 Need for Insurance

You need to know that the concept of insurance was sparked by the idea of pooling risk. People
with families and valuable property have always faced the possibility of loss; even the possibility
of such loss has caused individuals so much concern that they have ultimately refused to live
without having options for replacement of their loss. Thus, the practice of insuring property for
its replacement value has evolved. Even more importantly, the practice of replacing of the
economic value of a human life has also grown out of this thought process.
The following figure gives you a peek into the need for life insurance.

Figure 2.2: Life Insurance Needs

Source: http://www.mylifeinsurancequotes101.com/wp-content/uploads/2012/12/LI-Life-Insurance-
Needs.jpg

Insurance allows you to transfer the financial risk of certain types of losses to another entity,
usually an insurance company that is organized according to stringent federal and state
regulations specifically for the purpose of protecting you against losses. By transferring the
financial risk to such an entity and paying the required premiums, you can receive compensation
for loss in the form of either a lump sum or an annual amount of financial resources. This
compensation can maintain or replace your income stream. In this way, insurance helps you and
your family maintain financial stability if you get sick or become unable to work because of
disability, injury, or death.

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