Probably Not, 2nd Edition

5Life Insurance

Introduction

In this chapter we'll introduce the concept of insurance, using life insurance as our example. We'll also mention US Social Security. It is important to emphasize that the dollar numbers for Social Security change often and that the numbers used in the examples in this chapter are only approximations.

In order to calculate the cost of an insurance policy we need to introduce the financial concept of Present Value. While insurance premiums are definitely a probability‐based calculation, present value is not probability based or related. However, it is needed to bring meaning to insurance premium calculations.

Life Insurance

Insurance in its various forms is something that all of us deal with at some time or other. There are so many different kinds of insurance policies that it's impossible to consider discussing them all. We will concentrate on simple life insurance policies. Most people don't actually buy simple life insurance policies; insurance companies like to put together combinations of life insurance policies, savings accounts, annuities, and investment portfolios into big packages. There's nothing inherently wrong with doing this provided you understand what it is you're buying, what the terms of each of the components of the package are, and how all of these components interact.

There are also different forms of simple life insurance policies as well as different names for the same life insurance policy. The simplest life insurance policy, ...