Life Insurance

Products
Methods for Providing Life
Insurance Protection
Yearly renewable term method
Level Premium method
Yearly renewable term method
Provides protection for only One Year
Insured in permitted to renew the policy for
successive one year periods with no
evidence of insurability
Premium increase gradually during early
years, but rises sharply during later years
E.g.:
Standard death rate for males at age 30 = 1.73 for each thousand lives.
Death Benefit=Rs1000, Group size=100000 Male, Period=1 Year
The insurance company has to pay 1,73,000. This means each insured
must pay a premium of 1.73 (173000/100000)
Age Death Rate Calculation Premium
30 1.73 173000/100000 1.73
31 1.78 178000/(100000-
173)=
178000/99827=
1.78304
32 1.83 183000/(99827-
178)=
183000/99649
1.83644
Age Premium
40 3.02
50 6.71
60 16.08
70 39.51
80 98.84
90 221.77
98 657.98
99 1000
As premiums sharply increase during later years,
renewable method becomes prohibitive in cost. So
some insureds may drop their insurance
The healthier members may drop their life insurance
as the premium increases, but unhealthier ones will
continue to renew their policies despite the premium
increase. This situation leads to adverse selection
against the insurer
Therefore, if insured wants life time protection,
renewable term method is impractical.
Level Premium Method
Premiums do not increase from year to year but remain level
throughout the premium paying period.
Premiums paid during earlier years of policy are higher than is
necessary to pay current death claims while those paid in later
years are inadequate for paying death claims. The excess
premiums paid during early years are invested at compound
interest and accumulated funds are then used to supplement the
inadequate premiums paid during later years.
The method of investing in accumulating the fund in regulated by
state law and is referred to a legal reserve.
To summarize, level premium is possible because the excess
premiums are invested at compound interest and are used to
supplement the deficiency in premiums during the later years
Level Premium Method
Age
Amount
Net Amount at Risk
(Protection Element)
Legal Reserve
(Saving element)
Fig. represents the legal reserve under an ordinary life policy.
As shown the legal reserve increases with time and is equal to the face
value of the policy at age100.
Death claim=legal reserve + net amount at risk
The death claim consists of two elements :
Legal reserve (savings element)
Net amount at risk (protection element)
The legal reserve steadily increases over time and is
equal to the face value of the policy at age 100.if the
insured is still alive at age 100 the face amount of
the policy is paid at that time.
As the legal reserve increases, the net amount at
risk declines
To summarize, the fundamental purpose of Legal
reserve is to provide life time protection
Cash Values
The cash values are the by-product of the level
premium method , not the purpose of it
As the policy holder has got the right to surrender
the policy ,it can be done with the available cash
surrender value(% of total paid up value)
The cash values are below the legal reserve for
several years but after the policy has been in force
over an extended period ,such as 15 years, the cash
surrender will equal the full reserve.
Types of life insurance
products
Term Insurance
(pure Insurance
Protection)
Cash Value Insurance
(Protection and Savings)
Term Insurance Whole-life insurance
Endowment insurance
Money Back
ULIPs
Pension plans
Life insurance products
Life insurance products are referred as plans of
insurance.
These plans have 3 basic elements:
Death Cover providing for benefit paid on the
death of the insured person within a specified
period
Survival benefit providing for benefit being paid on
survival for a specified period
Maturity benefit
Types of Life Insurance Products
On the basis of
Duration
On the basis of
Participation of Profits
On the basis of
Sum Assured
On the basis of
Number of lives covered
On the basis of
Premium Payment
Term, Endowment, Whole Life
Regular, Limited, Single
With Bonus, Without Bonus
Single, Joint-life policies
Annuity policies, Lump sum policies
Term insurance
Term insurance typically provides pure death protection ,there is
no savings feature and therefore no cash surrender value (legal
reserve)
Sum assured is paid on the event of death of the life assured
occurring during the period and nothing is paid if the LA survives
during the term period
The selected term premiums are usually payable throughout the
term of the policy or till prior death of the LA.
Term insurance are the cheapest policies
Term policies are always without profits
Term insurance with ROP and WROP.




Types of Life Insurance Products-
On the basis of duration
Types of term insurance
Straight or temporary term insurance
Policy can be bought for a definite term and carries
death benefit only.
The policy is only issued under without profits plan
The policy is not entitled to any surrender value and no
loan can granted thereon (no savings element)
The policy can be(sometimes) converted in to other plans
Types of Life Insurance Products-
On the basis of duration
Types of term insurance
Renewable Term Policies
Policies are renewable at the expiry of the term for additional
period without medical examination, but the premium rate will be
altered according to the age attained at the time of renewal.
E.g. Insured purchases a 10 year term polocy at age 25 and
survives this period. He or she has option of renewing the policy
for additional 10 years without medical examination. However,
the premium rate would be increasing according to the attained
age.
However, most insurance companies because of the element of
adverse selection, impose an age limit beyond which renewal is
not permitted (mostly age 55-60)
Refer to KOTAK TERM PLAN
Types of Life Insurance Products-
On the basis of duration
Types of term insurance
Convertible Term Policies
The Insured has a option to convert the term plan into some other contract (whole life,
endowment, endowment assurance) without any fresh medical examination
The period of conversion should not be later than 2 years before expiry of original term.
E.g. if original term=6 years, the option of conversion can be exercised before the end
of 4
th
year.
In some plans, the option can be exercised anytime before age 60
If the option of conversion is exercised, a new policy under the whole life or
endowment plan will be issued as the case may be, subject to the rate of premium and
terms and conditions prevailing on the date of conversion.
Types of Life Insurance Products-
On the basis of duration
Types of term insurance
Convertible Term Policies
The conversion is usually affected as the policy holders attain age, but it can also be
made retro active to his/her original age.
E.g. Original age of LA 25 years, conversion decision=32 years, so if LA decides to
convert the policy at 32 retroactive to his original age(25 years), the premium rates
would be the one paid if whole life had originally been purchased at 25. This means,
the lump sum has to be paid to insurer to bring the policy to the level it would have
originally been at age 25.
As price competition in term insurance has intensified, some insurers have determined
that by eliminating the conversion privilege, they can offer a lower price product.
The plan is useful to those who are initially unable to pay the larger premium required
for a whole life or a endowment.
Types of Life Insurance Products-
On the basis of duration
1. Pure protection
2. Temporary protection
3. Keyman insurances are generally term insurances

Disadvantages:
1. Chances of adverse selection are more

Advantages of Term Life Insurance
Endowment Policies
Pure Endowment Policy
A pure endowment is a contract that promises to pay the
sum assured of the policy only if insured survives during
the policy term
SA=Paid on Survival
Death=Nothing
Pure endowment is designed for the benefit of the policy
holder and term policy for the benefit of dependents of life
insured. So pure endowment has the element of
investment and term has an element of protection.
Surrender values are allowed on this policy
Endowment Policies
Ordinary Endowment Policy (also called
Endowment Assurance)
Term + Endowment
This is the policy which represents life insurance
in true sense.
Provides a combination of both family protection
and investment
It is taken out for a specified term of years, the
sum assured being payable either on life insureds
death during the period or on his survival to the
end of the period.
Endowment Policies

Premiums are payable throughout the term of the
policy or to a limited period or till the prior death of
the life assured
The net premium rate for an ordinary endowment
policy is equal to the net premiums of term and
pure endowment policies issued at the same age
for the same period of time

SA=Paid on Survival
Death= Sum Assured
Refer to Reassuring Life
Ideally, once your protection needs are met, consider a
saving plan.
The Reassuring Life Endowment Plan with
reversionarybonus* is one such policy.
Besides being a savings option, it also acts as a highly
reliable safety net for your family in case something
happens to you.
The Reassuring Life Endowment Plan is ideal because it
gives you the incredible benefit of a reversionary bonus*
which enhances your life cover, and hence your sum
assured, dramatically, every year. So when the
endowment policy matures you can receive almost
double the initial sum assured.

Endowment Policies
Joint Life Endowment Policy
Covers more than one life under single policy.
The sum assured is payable on the expiry of the
term or on death of one of the assured lives
during the endowment period
Premiums are payable through-out the
endowment period or till the prior death of any of
the life assured
Paid-up and surrender values are payable on the
policy
Endowment Policies
Anticipated Endowment Policy or Money-
back
This policy is similar to endowment assurance
except that a part of SA is paid at certain interval
before death within maturity of the policy and
balance of SA is payable at maturity
In event of death anytime during the term of the
policy that is before the maturity date, full SA is
payable without any deduction of installments
paid earlier
Endowment policies can be made partcipating at
the option of the policy holder
Endowment Policies
Double Endowment Policy
Under this policy if the life assured dies during the
endowment period, the basic sum assured in payable and
if he survives to the end of the term, double of the sum
assured is paid.
Premiums are payable throughout the endowment term or
till the prior death of the LA
Combination of endowment insurance and pure
endowment for the same period and same amount
SA=Twice of Sum assured
Death= Sum assured
Endowment Policies
Fixed term (marriage endowment policy)
This plan stipulates the date on which sum
assured will be paid even if life assured died
early.
That date can be chosen to coincide with the age
of a son or daughter for whose marriage it would
come in handy
The premium ceases if the death of the policy
holder occurs earlier
Endowment Policies
Education Annuity Policy
It an ordinary endowment which states that sum
assured would be paid in installments
commencing from a date which may be chosen as
the likely date when the child may be old enough
for higher education.
The difference is sum assured is not payable in
lump sum but is payable in equal installments
SAFAL JIVAN
An Endowment Plan that offers comprehensive
protection and savings in an easy and hassle
free manner
"Safal Jeevan" is the simplest life insurance
plan giving you complete freedom to choose
from pre-packaged solutions, and decide how
much and how long you want to pay
premiums.
It offers death benefit, maturity benefit and has
an in-built accident cover.

Whole Life Policies
Straight whole life
Limited payment Whole life
Single premium whole life
Convertible whole life
Whole Life Policies
Straight whole life or Continuous Premium Whole
life or ordinary life insurance
Whole life are basically term policies for an unspecified
period.
Maximum cover age (in plan) =85 years
Present age of LA=40 years, therefore
term =85-40=45years,which would be the ppt which means
he has to pay premiums for correspondingly 45 years
SA=paid or not depends on the policy conditions
Death= Sum Assured
Whole Life Policies
These policies have an investment or a savings
element called a cash surrender value. The cash
values are due to the overpayment of insurance
premiums during the early years. As a result the
policy owner builds a cash equity in the policy
The policy may be surrendered for its cash value or
the cash values may be borrowed under a loan
provision.
The policy contains dividend options too (if issued
as participating)
Whole Life Policies
Although in case of whole life policies SA is paid on
death, some insurers pay the SA when the LA
survives the entire term (as discussed earlier).
suitability
Where the LA income is regular throughout to pay the
premiums even at old age
where the LA does not require the insured sum during his
lifetime.
Where the LA wants to make provisions for his dependents
after his death

Whole Life Policies
Limitations
Some persons are underinsured even after purchasing the policy
as
Bcoz of the savings feature some persons may voluntarily
purchase or else be persuaded by a life insurance agent to
purchase an ordinary life insurance when term insurance would
be a better choice.
Example: A age 30 is a married graduate student with two
dependents to support. He estimates he can spend only $500
annually on life insurance. the same premium would purchase
about $56000 of whole life insurance. The same premium would
purchase about $5lakh of term insurance from many insurers. so
it is difficult to justify the purchase of a whole life policy if it leaves
the insured inadequately covered.

Whole Life Policies
Limited Payment Whole Life
It only differs in the manner in which premium is paid
Premium is payable for a limited period although benefits
would accrue as such
E.g. Rather than paying premium for 45 years, LA will pay
it only for a chosen limited term (3 or 5 years)
Premium would be higher than in a straight whole life
Suitability:
Income of LA is guaranteed for a specific period of time.
E.g. Artists, Professionals working abroad, regular office
workers
Suitable for officers serving in armed forces who have to
retire before they reach their retirement age of 55 years
Whole Life Policies
Single Premium Limited Whole Life
The limited period is only one year i.e. premium
has to be paid one time
These policies are rare but are offered
Suitability
Where the LA gets a windfall of income from some
source and wants to invest its major part to secure
himself

Whole Life Policies
Convertible Whole Life
These policies give the holder an option to get it converted
into an endowment policy
Usually, a clause is mentioned in such a conversion, that
the option has to be exercised at the end of five years. If
the option is not exercised, the policy will continue on its
original term.
In some plans the option can be exercised at any time
before age 60
The premium will be increased considerably and the LA is
required to pay lump sum to the insurer that will bring the
policy at the level it would have originally purchased.
No further underwriting decision on convertibility (no
medical examination)
Types of Life Insurance Products-
On the basis of Premium Payment
Single Premium:
Whole Premium is paid at beginning of Policy
Can be afforded by those who got a windfall income and
are expected not to continue such return in subsequent
years
Regular Premium:
Regular and equal premiums are paid at definite intervals
Term to be decided before entering into contract
These equal premiums can be paid monthly, quarterly,
half-yearly and quarterly
Types of Life Insurance Products-
On the basis of Premium Payment
Limited Premium (3 or 5 years):
Premiums are paid for only 3 or 5 years but risk is
covered for entire term
Premiums would be higher than in regular one.
On the basis of
Participation of Profits
Without profit or Non-participating policies
Not entitled to bonuses, which are declared after actuarial
valuations.
With profit or Participating policies
Pay a slightly higher premium for the right to participate in
the progress of the insurer.
Are popular because the bonuses are expected to be more
than the extra premium paid.
With Profit policies, where the premium is payable for a
limited period, will continue to participate even after the
premiums have ceased
On the basis of
Number of lives covered
Single Life Policy
Joint Life Policies
Two or more lives can be covered under one policy
Usually cover married couples or partners.
The SA is paid on the death of any of the insured persons during the term or
at the end of the term.
Some plans also provide payment of SA. on the death of one life and
the policy is continued to cover the second life till maturity, without
payment of further premium.
A joint life declaration is necessary to create a joint interest in the policy.
In case of partnership insurance, the partnership deed will be examined to
ascertain the nature of financial interest of each partner.
Each life will be underwritten separately.
Bonuses will accrue on the single basic SA only
On the basis of
Sum Assured
Annuity Policy
Lump Sum Policies
Thank You