Let’s say you can only purchase one insurance policy and you are asked to chose between two different policies. With the first policy, there is a good chance you will never have a loss and would never present a claim. It is 100% certain that you will suffer a loss and will have a claim with the second policy. Which one would you chose? The answer seems obvious and that consumers would chose the second policy everytime. However, consumers are way more likely to purchase insurance policies when there is only a chance they may suffer a loss. Seems backwards, doesn’t it?
That brings us to the subject of this article. Can you buy insurance when you and the insurance company know that a claim will definitely occur and they will have to pay out? Seems almost impossible, right?
You would think that no insurance company would issue a policy under such circumstances. However, they do so on a regular basis. Can you name it? If you said life insurance, you are almost correct. If you purchase a whole life insurance policy and maintain the premiums, a claim is certain. A flexible premium individual adjustable life policy (also know as universal life) that is properly funded to guarantee a death benefit could also fall in this category.
A claim is not certain with term life insurance policies. This is also true of almost every other type of insurance, auto, home, business, etc. (It could be argued that health insurance would fall into the certain to happen camp. These policies run for a specfied time period. Most common are 10 and 20 year term policies. After the original term expires, most term policies are then renewed on an annual basis with the premium going up substantially every year. For this reason, term policies are not certain to pay a claim since many consumers will not pay the ever increasing premiums.
This is not to say that purchasing term life insurance is a bad idea. In fact, it is necessary