Permanent Life Insurance

Insurance is a financial contract designed to transfer risk from an individual or entity (the insured) to
an insurance company (the insurer). Contracts are priced based on the probability of insurable events
occurring, allowing insurance companies to cover the risk without jeopardizing their business.

Before issuing a contract, an insurance company will assess the insured to determine their riskiness. This
is a process known as underwriting, where the insurance company will set the price of the contract – the
premium – based on the history and characteristics of the insured individual. The ability to transfer risk is
one of the great innovations of finance.

Life insurance is a financial contract that pays out when the life of the insured ends. This paper is designed to give an overview of life insurance as a concept, including an analysis of life insurance as an investment. We observe anecdotally and empirically that some types of life insurance are sold more as investments than as risk transfer contracts. We call this practice into question through analysis of after-tax returns for traditional investments and life insurance. We suggest that the motivations to sell insurance as an investment are, in many cases, related to conflicts of interest.