Do you know why life insurance reserve is required? The reserve in life insurance is required for the following reasons:
1. To meet a number of claims
The reserve is required to meet the amount of claim whenever the given event takes place. The incurring of this liability does not bother the insurer at all if in any given period it receives by way of consideration from the policyholders concerned an amount which is equal to the amount it has to pay during this period.
The insurer must have sufficient amount to meet the claims. Therefore, the reserve is essential to meet these claims.
2. To build up funds
Decides being essential for meeting the future cost of claims, the ‘reserve’ is also useful to build up funds that can be invested for long period to earn at least assumed rate of return.
The invested funds help not only to the insurer to obtain a required amount of return but are also helpful for the economic development of the country. The insurers are in an accumulate a huge fund and, therefore, can contribute a significant amount for country’s advancement.
3. Policyholders are benefited
The accumulated fund or the reserve belongs to policyholders. This fund is safely and profitably invested by the insurers who are in a position to do that.
The main purpose of creating reserve is to meet the obligation of payment of claim whenever it arises. How should the reserve be created is the main problem of the insurer.
The assumed rates of mortality and interest are mainly taken into consideration while calculating reserve for a particular policy, assumed mortality rate, assumed rate of interest, nature of policy, a period of premium payments and duration of the policy.
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