Insurance Function in Managing Risk


Humans are never free from the name risk (the possibility of loss or damage). Every risk cannot be avoided, but the impact of these risks can be minimized in several ways, including:

1. Avoiding risks

Avoiding risks can be done by eliminating habits or activities that might pose a risk. For example, someone who is worried about getting lung cancer due to smoking habits can avoid it by breaking the habit.

2. Manage risk

Controlling risk can be done by reducing the frequency and impact of losses that may arise. For example, a motorcyclist must wear a helmet and maintain his motorbike regularly, to control possible losses.

3. Accept a risk

Accepting risk is done by maintaining existing risks. For example, a rich person with a lot of assets may not feel the need to buy health insurance because he thinks he can pay for a doctor if he is sick.

4. Reduce risk

Transferring risk can be done by transferring risk from an individual to a company. For example, a family head who is worried that his family will lose income if he becomes sick or dies can buy insurance products from a life insurance company.

Life insurance companies manage risk by:

a. Transferring the impact of harm from an individual to a group;

b. Share the losses suffered by the individual among all group members.

Life Insurance Business Stages

1. Unifying, namely bringing together people with the same insurance interests, to share the same risks.
2. Collecting, that is, collecting funds or premiums from a group of people who have been united earlier.
3. Pay, namely paying compensation or claims to those who suffer losses.

Determinants of Premium Amount

In the insurance business, the risks faced by each individual are transferred to the insurer (life insurance company), who agrees to compensate for a certain amount of losses as stated in the policy contract. To compensate for this loss, the insurance company determines the premium to be paid by the insured individual. In setting the premium, several things need to be considered:

  1. Possible losses
  2. The value of each loss
  3. Administrative costs required to run a business, such as collecting premiums from each member, measuring losses, paying claims, etc.
  4. The threshold of error that may arise when predicting losses
  5. Other factors such as financial, health, and social factors.

Errors in measuring these factors can cause losses for life insurance companies, such as setting premiums smaller than they should be.

The life insurance business is nothing but sharing. This aims to spread the losses suffered by a person to all group members who have the same risk.

The insurance company acts as a representative, managing the funds raised on behalf of the group community. Life insurance companies must also arrange in such a way that neither party feels disadvantaged.

Not all risks can be insured. A risk can be insured if:

1. Life insurance companies can calculate financial losses.
2. There are many people with the same type of risk.
3. The economic value or life insured and the risks borne have an insurable interest.

Law of Large Number

Life insurance, as a means of spreading risk, can only work if the life insurance company can bear a large amount of the same risk. Here applies what is called the law of large numbers. The law of large numbers states that if the amount of exposure to losses increases, the predicted loss will be closer to the actual loss. The use of the law of large numbers allows the number of losses to be better predicted.

1. Protect the family from loss of income if the main breadwinner dies.

This is the main function of life insurance. As long as we have a breadwinner (spouse, children), during that time we still need life insurance. For life insurance to be able to play its function as a substitute for income, the sum insured (UP) of the life must be large enough to provide interest/returns equal to the monthly salary if it is left in deposits, bonds / Sukuk, or fixed income mutual funds.

2. Protect the family from debt burdens.

Maybe the house we live in, the vehicle we use, the things we own, etc., partly or wholly taken out of debt. Debt is the worst inheritance a husband and father can give.

Debt not only burdens the family that is left behind, but also the person who inherits it because, in the afterlife, debt will not be considered as paid off. For life insurance to play a role in freeing the family from debt, the life UP must be at least equal to the debt the family has.

3. Provide some valuable heritage for children.

Financial planners often suggest that the life insurance contract period is limited to the stage when the children are independent or until the debt is paid off. In a way, this is probably what is obligatory. But planning life insurance as an inheritance is equally important, especially in this era. Maybe it's true that the parents have made it through the years of raising children, and now all of the children are independent.

But being independent does not mean rich and lots of money. Maybe their income is just barely enough, so they can't buy a house or a vehicle. Now houses are expensive. Maybe they can afford to pay the installments, but not for the down payment.

The existence of inheritance, including life insurance coverage, will greatly help fulfill their needs or desires, one day. Even if the UP soul is not enough to buy a house in cash, at least you can make a down payment. Rest assured, children will be very grateful to parents who still insure their souls even though they are adults.

4. As final expenses  (death costs).

Passing away costs money. For wages for bathing people, for funerals, snacks for people who mourn, for tahlilan, printing Yasin books, arranging death certificates, and so on.

Especially in urban areas, the burial ground is expensive, it can be millions of rupiah just for rent for three years. And the cost of tahlilan, for those who carry it out, is even more expensive. There are two options: whether you want to order the children to pay for all these costs or prepare yourself while still alive. Life insurance can be viewed as a way to prepare for the last expenses of our life.

5. Become alms for the last time.

This is an additional function of life insurance that is rarely mentioned by financial planners. If the first function is over (the child is independent), the second function is over (the debt is paid off), and so are the third and fourth functions (the children are so rich they don't need any inheritance from their parents and are okay with final expenses ), then UP souls can be donated to the poor, places of worship, charities, or social activities.

This will be the last deed of worship for the person concerned, reducing the record of his sins, and illuminating his journey in the eternal realm.

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