Final answer:
In return for the annual premium, the owner of a term life insurance policy transfers the financial risk of death for the year to the insurer, securing coverage.
Step-by-step explanation:
The owner of a term life insurance policy effectively shifts the financial risk of death for the current year to the insurance company by paying the annual premium. This transaction allows the policyholder to receive coverage for the year, ensuring financial protection for their beneficiaries in the event of the policyholder's death.
In return for the premiums collected, the insurance company accumulates funds which can be invested in various assets, earning investment income. These assets need to be relatively liquid to ensure the company can pay out claims as they arise.
The owner of a term life insurance policy pays the annual premium to the insurance company in return for the financial risk of death being shifted to the insurance company for the current year. In other words, by paying the premium, the owner transfers the responsibility of covering the financial losses associated with their death to the insurance company.