Far from its humble beginnings, the concept of life insurance has exploded in recent years into something much more far-reaching than a mere death benefit for a grieving family. It's a tool for businesses to preserve and pass on assets, a tool for individuals to strengthen retirement goals, and a tool for families to combat risks. Let’s take a look at the humble beginnings of this versatile tool and follow its progress into the dynamic product that it is today!
The Law of Large Numbers
The concept of life insurance is based on the law of large numbers. This basically means that the larger the group of people you have, the easier it is to spread out the financial burden of risk to members. A group of 100,000 people only need to contribute $10 each in order to create a financial reserve of $1,000,000 whereas a group of 100 people must contribute $10,000 each for the same result. Creating large groups in which each member contributed a small amount of money allowed there to be a significant benefit to a widow after the death of her spouse without breaking the bank for all other members.
Life Insurance — The Beginnings
Life insurance began as a loosely organized way to help widows and their children survive after the loss of a home’s breadwinner. Hundreds of years ago, women were not able to inherit land—and many peasant families had nothing to inherit to begin with. As working men died, they left no one to care for and support their families, so churches and other groups organized funds for the payment of their support. Some of these groups didn’t provide complete financial support for the widows, but just burial benefits for the recently deceased. Eventually, the clubs even expanded to offer other benefits like disability and dismemberment payments.
Life Insurance — The Middle Years
During the 1800’s, some companies determined that taking a premium in exchange for the promise of an insurance benefit was a more efficient and dependable way to offer a life insurance policy to a surviving spouse. This progress followed the Great Fire in New York in 1835 that left many families bereft emotionally and financially. During this time the face of insurance was changing as the automobile was making an impact and its insurance policies (created based on the historical policies of ship captains on the cargo their vessels carried) were becoming more and more popular.
Life insurance quickly grew from being an occasional luxury policy of the rich to a necessity in every family—something that could not be said for auto insurance. It was offered as a benefit by employers and provided by unions. In the 1900s inexpensive burial policies became very popular with door-to-door salesmen selling them and collecting the premiums.
Life Insurance — Today
Now life insurance has become as sleek and modern as the latest Apple gadget. Insurance premiums can be taken directly out of your bank account without you having to write a check and policies can be purchased online and issued electronically—without a piece of paper touching your fingertips.
Even the benefit itself has changed. While life insurance’s main attraction is still its death benefit, there are many other benefits you can add on in the form of insurance riders. These include additional death benefits for spouses and children, accelerated benefits that allow you to access your funds after you are diagnosed with a terminal illness, and accidental death benefits that double your death benefit should you die in an accident.
Life insurance policies are more frequently being considered investments that are to be considered in a family’s net worth. Their cash value accrual methods range from simple, fixed growth to variable growth that relies on the movement of the stock market to help your accumulation along.
No matter what you need your life insurance policy for or what benefits and riders you decide to take advantage of, it is a vital part of your family’s financial future. What was once merely a tool to help bury individuals and provide menial support to grieving widows has become a sophisticated tool to preserve wealth, as well as a utilitarian product to ensure a way of life.