Final answer:
Double indemnity refers to an additional benefit in life insurance that pays twice the face value in case of an accidental death, acknowledging the unpredictable nature of accidents and compensating for the imperfect information in risk estimation.
Step-by-step explanation:
The term double indemnity refers to a provision in some life insurance policies that provides an additional death benefit if the insured person's death is accidental. This is colloquially known as 'double indemnity' because the insurer agrees to pay twice the face value of the policy in the case of an accidental death.
Life insurance policies are designed to mitigate the financial risks associated with the loss of life. An accidental death benefit acts as an additional layer of protection, which acknowledges the unpredictable nature of mishaps and compensates for the imperfect information in risk estimation. Since insurers cannot predict individual risks with certainty, particularly in cases of accidents, this additional death benefit serves as further financial security for the beneficiaries.
Moreover, from an economic perspective, the concept of imperfect information is integral to insurance. Insurance is a transaction where individuals pay premiums to share the financial risks of future uncertain events. Because insurers and policyholders operate with imperfect information regarding these future events, insurance policies are designed to provide security against a range of outcomes, accounting for the variability of risk among individuals and the unforeseen nature of accidents.