The Pros And Cons Of Life Insurance

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purchased relieves pressure on the social welfare systems in many countries. Therefore, life insurance is generally viewed with favor by governments. Many countries have acknowledged this by granting tax relief to policyholders. Currently, tax incentives to life insurance policyholders are widespread among OECD member countries. A Swiss Reinsurance Company (1987) study demonstrates that privately purchased life insurance can substitute for government-provided benefits and vice versa. The obtained results of study indicate a significant negative relationship between social expenditures and life insurance premiums for a group of 10 OECD countries. Life insurance also takes an important role in relieving the burden of social pension systems (Skipper…show more content…
Thousands of individuals each pay relatively small life insurance premiums. These premiums are polled into funds used to invest in businesses and other ventures. In performing this intermediation function, policyholders do not need to provide direct lending and investing and therefore avoid additional costs. Second, life insurers create liquidity and decrease illiquidity. They “borrow” for longer term and lend for long term that is shorter then borrowed period. “Borrowing” means that insurers use funds entrusted to them by their policyholders to make long-term loans and other investments. This liquidity does not require insurers to repay loans…show more content…
Thanks to this role, life insurers allocate financial capital and insurance risk bearing capacity to the most attractive firms, projects and managers. In addition life insurers have an incentive to monitor managers and entrepreneurs to reduce the chances that they engage in unacceptable risk-increasing behavior since they have a continuing interest in the firms, projects, and managers to whom they provide financial capital. Consequently, life insurers encourage managers and entrepreneurs to act in the best interests of their various stakeholders. In other words, insurers and other financial intermediaries help resolve the principal agent problem. By doing so, insurers tangibly signal well-managed firms and foster a more efficient allocation of financial capital (Skipper

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