Have you ever wondered about the history of Life Insurance? Where did it all began, and why are so many high-rise buildings owned by life insurance companies? Based on my personal and professional experience, I have a sneaky suspicion that this topic is not going viral (because history is boring to lots of people and life insurance is a taboo topic for even more people). There are, however, people who ask me to give a simple explanation about how life insurance started.
Life Insurance in Ancient Rome
Thousands of years ago Romans created burial clubs because they believed that people needed to have a proper burial so their spirit could properly travel into the after-life. Communities agreed to place a fraction of their earnings in a common fund that could be used to properly bury their members. This process lacked sophistication, this was the beginnings of life insurance.
Life Insurance in England
It is widely believed that the modern form of insurance we understand today began with a group of merchants in the shipping industry. Lloyd’s coffee house was the famous gathering place of shipping merchants and investors who formed associations to purchase shares to spread risk among the members. On long voyages the ships were subject to fires, piracy, and shipwrecks. In return for their investment, they would receive their money back in interest along with goods acquired from other places around the globe.
Life Insurance in America
More recently in America, the colonists who migrated from Europe were dying in large numbers because of disease and famine. When the head of the household died, it put a large financial strain on the family. Often, a small number of the locals would contribute funds to help the family survive, but this practice often placed a financial hardship on their families.
Since people knew death was such a common occurrence that would eventually impact everyone, the colonists agreed to place money into a common fund so if someone in that community died during the year, a small amount of money contributed from a larger number of people could pay to support the effected family without draining any one family’s finances.
Over time, these communities grew larger and some of the colonists became more sophisticated in their understanding of life expectancy. Equipped with more knowledge, these specialists began to learn more about pooling risk and resources to create large cash reserves to pay insurance claims. Investors began to see the financial potential and created companies to sell life insurance at a profit.
Modern Life Insurance – Cheaper now, but purchased less
Following World War I people increasingly purchased life insurance, and by 1920, there were more than 120 million life insurance policies owned in the U.S. Based on census data, that equaled approximately one policy for every adult person in the U.S.
Nowadays, life insurance is a very precise industry that studies the life expectancy of huge groups of people, and can predict with incredible accuracy how many years the average person will live, and how many people per thousand will pass away in each ten-year band. This accuracy, along with increased life expectancy has benefited the clients by lowering insurance premiums since the 1980s.
Despite the good news, sales have fallen steadily, and now LIMRA estimates (2010 report) that only 44% of U.S. households have individual life insurance coverage, which is a 50 year low, but life insurance has remained an important piece of a family’s financial planning.
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