What is Life Insurance?

The basic premise behind insurance of any kind is spreading the risk out among many people while collecting enough money to ensure that the insurance company makes a profit for its shareholders. The company must always have enough money to cover its responsibilities should most of the policyholders pass away at nearly the same time. For life insurance to function responsibly there must be a substantial cash reserve to fall back on at all times.

But, you say, how does it work? Imagine a small village of 100 people that take up a collection for the surviving widow and her children whenever the financial head of the household dies. If some of the people happen to be having a bad week financially then the collection might be pretty small and some families make out better than other ones.

Now imagine that it's done more much more methodically with every family in the village putting $5.00 into the community pot every week. Most everyone can afford $5.00 per week. While some people may balk at putting out $1300.00 at a clip if financial heads of households die at the typical rate of once each year, with everyone putting $5.00 weekly (or whatever figure the village decides on) one can be confident

that whenever a financial breadwinner dies there will be enough money available to take care of every family. A nice lump sump to pay off their house and few months living expenses would certainly be a reasonable expectation. Although the actual implementation of this concept has grown vastly more complicated over the years the basic premise of the sharing of risk remains the same.

With children being born and growing up to form their own families in the village there will always be emergency needs for cash but also a sufficient number of people adding to the community pot every week so that every family will be taken care of financially. Assuming, of course, that their family is part of the "community pot" concept and has been supporting it financially with their own contribution.