Life insurance is a contract between a policyholder and an insurance company where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Understanding the basic principles of insurance is essential for anyone entering the life insurance industry.

Core Insurance Principles

1. Risk Transfer
Insurance works by transferring the financial risk of loss from an individual to an insurance company. In exchange for premium payments, the insurance company assumes the financial burden should a covered loss occur.

2. Risk Pooling
Insurance companies pool premiums from many policyholders to create a fund that pays for the losses of the few who experience covered events. This spreads risk across a large group, making losses more predictable and manageable.

3. Law of Large Numbers
As the number of exposure units (insured individuals) increases, the actual results approach the expected results with greater certainty. This allows insurers to predict losses and set appropriate premiums.

Insurable Interest

For a life insurance policy to be valid, the policyholder must have an insurable interest in the life of the insured. This means:
- A legitimate financial interest in the continued life of the insured
- Required at the time of policy application
- Examples: person insuring their own life, spouse, business partner, or key employee

Types of Risk

Pure Risk - Only possibility of loss or no loss (no gain possible)
- Example: Death, disability, property damage
- Insurable risks

Speculative Risk - Possibility of loss, no change, or gain
- Example: Stock investments, gambling
- Generally not insurable

Fundamental Risk - Affects large groups simultaneously
- Example: War, inflation, natural disasters

Particular Risk - Affects specific individuals
- Example: House fire, car accident
- Generally insurable

Requirements for Insurable Risks

1. Loss must be definite and measurable - Time and amount must be determinable
2. Loss must be fortuitous - Accidental and unintentional
3. Loss must not be catastrophic - Cannot affect entire pool simultaneously
4. Large number of similar exposure units - For accurate prediction
5. Loss must be economically feasible - Premium must be affordable relative to potential loss

Key Insurance Terminology

• Premium - Payment made to maintain insurance coverage
• Death Benefit - Amount paid to beneficiaries upon insured's death
• Policyholder/Owner - Person who owns the policy and pays premiums
• Insured - Person whose life is covered by the policy
• Beneficiary - Person who receives the death benefit
• Underwriting - Process of evaluating and classifying risk