2. You will learn these
Life insurance – Types of life insurance
Premium – Factors determining premium
Life Insurance Corporation of India, Other Life insurance
companies.
Actuaries- Actuarial science – Functions of actuaries – Property
& liability coverage
3. What is Life Insurance
• A contract whereby the insurer, in consideration of a
premium paid either in lump sum or in periodic
installments, undertakes to pay an annuity or a certain
sum of money, either on death of the insured or on the
expiry of certain number of years.
A contract: Offer and acceptance
Premium: Consideration would be premium
Obligation: To make good the loss
Insurable interest: Should be present
Protection: To save the family against loss
4. Nature of Insurance
1. Family Protection
To protect against financial hardships
2. Investment of savings
Provide new source of income, immediate source if the insured dies
3. Additional way of earnings
The bonus and interest could be an additional earnings
4. Helpful during cessation of earnings
Provides certain sum of money or periodic income after
retirement
5. Benefits of Life insurance
Benefits
of Life
Insurance
Investment
Encourage
Saving
habits
Tax Relief
(Sec. 80C)
Protection
against
creditors
Helpful to
government
Economic
Protection
7. Classification of Policies
1. Whole Life Policy
A person is insured for whole life.
The insurance company cannot pay any money to the insured until he is alive.
The premium for such policy is very low.
Money is payable only after the death of the insured person to his legal heir or
his nominee.
This policy is more beneficial for the family of the deceased, as it provides
financial assistance to the family after the death of the insured person
2. Endowment Policy
Insurance is taken for a specific time in such policies.
Sum assured along with the bonus is given on his death to the dependent of
the family or on the expiry of the particular time, the insured get the specific
sum along with bonus.
It protects the family of the dead person or provides old-age pension to the
insured
8. Classification of Policies
3. Term Insurance Policy
The period of such policies is specific.
The premium of this policy is the lowest among all the insurance schemes.
Throughout the term of the policy, the premium is fix, and it does not change
In the term life insurance agreement, dependents will receive the specified
benefited amount in case of untimely death of the person
If insured survives, nothing is received
9. Classification of Policies
5. Pension Plan Policy
This policy is different from all other forms of life insurance policies.
As it does not provide any kind of life cover, but it offers a guaranteed income
after certain period of time or life time.
These insurance policies are taken to provide some financial support after
retirement.
6. ULIP - Unit Linked insurance policy
The private companies introduced ULIPs to merge the profits of life insurance
policies with mutual funds.
Specific amount of premium is invested in listed companies or bonds, funds
and remaining amount is used in fund management expense and life
insurance to provide balance.
Its benefits include:
Long term wealth creation
A concept of insurance + Investment
Tax benefits
10. Classification of Policies
6. Money Back Policy
A money-back plan provides liquidity during the plan tenure by paying a
percentage of the Sum Assured regularly through the plan tenure.
The money-back is paid during the plan tenure and is a percentage of the Sum
Assured. Money-back pay-outs are called Survival Benefits
Benefits are paid during the plan tenure and on maturity, the remaining Sum
Assured is paid along with vested bonuses
If insured dies, full Sum Assured is paid irrespective of the Survival Benefits
already paid.
E.g. Ramu has taken Money Back Policy of Sum Assured Rs. 1000000
having term of 25 years and pays regular premium. Money back starts
from 5th Year. (Survival benefits 20%, 5 Years)
Ramu receives Rs.2 lakhs every 5 years, i.e. in the 5th policy year, 10th policy
year, 15th policy year and 20th policy year.
At the end of the 20th policy year, Ramu has already received Rs.8 lakhs.
On maturity, Rs. 2 lakhs along with added bonuses would be paid to him and
the plan would terminate.
11. Classification of Policies
7. Children’s Policy
Child plans basically help in financial planning for child's future needs at the
right age.
It include plans that encompass children insurance plans and children
education plans
It has the following objectives:
Creating a corpus: For children, their marriage, education etc.
Protection of Children
The types of Child plans are:
1. Single Premium child plan: Premium paid in lump sum
2. Regular Premium CP: Premium paid quarterly, annually etc.
12. Child Policy - uniqueness
• How 'Waiver of Premium' (WOP) Works?
• A Child plan with 'Waiver of Premium' (WOP) ensures that in the event
of unfortunate dismiss of the policyholder (parent), the insurance
company pays the sum assured immediately to the child/nominee of the
family. But, the plan doesn’t end here.
• The insurance company keeps the plan active and continues to fund the
policy by paying the remaining premiums. Thus the money keeps
growing and is given to the nominee/ child on maturity.
13. Premium – Factors determining it
• A life insurance premium is a payment made to the life
insurance company, to pay for a life insurance policy.
• Premium payments are required to be made to the insurance company
for a life insurance policy, otherwise, the policy will lapse.
Factors
determining
premium
Personal
Factors
Economic
Factors
•Age
•Gender
•Habits
•Health history
•Current health
•Life Style
•Profession
•Policy
•Mode of purchase
•Mode of premium payment
14. Personal Factors – Det. Premium
1. Age:
The first Factor, Young age has low risk to get life threatening diseases.
Premium is low if policy is bought at young age & Vice versa
2. Gender:
Study shows that women live 5 years more than men
They would end up in more number of premium than men
So premium cost will be lesser
3. Habits:
Smokers and drinkers have more risk in life
It would be disclosed to the insurer
They have to pay premium twice compared to non smokers/ drunkards
4. Health History:
Premium is linked to one’s health history
If the insured is health and fit, without any chronic disease, premium will be low
5. Current Health:
Insurer needs medical reports of the prospective client to decide the premium
The test includes blood sugar, Cholestrol, BP etc. (Medically Fit > Low Premium)
6. Life Style:
If insured is a risk taker, the premium would be higher
It includes activities like rock climbing, Sea Diving, Hot air balooning etc.
15. Economic Factors – Det. Premium
1. Profession:
It is based on the risk underlying in the profession
Shipping, Mining, Piloting aircraft professionals would pay more premium
2. Policy:
The longer tenure, more premium and vice versa
Whole life policy premium is costlier than term insurance
Term insurance also do not provide any benefits if insured does not die
3. Mode of Purchase:
Cost will increase if policy is purchased from agents (Commission, Admin exp. Etc.)
Intermediary costs are eliminated if purchased directly from the company
4. Mode of premium payment:
Regular premium (Quarterly, Semi Annual) is more expensive due to administration
and processing costs
Premium on Annual/ Lump sum will be lesser due to less involvement of regular
processing cost
16. Economic Factors – Det. Premium
1. Profession:
It is based on the risk underlying in the profession
Shipping, Mining, Piloting aircraft professionals would pay more premium
2. Policy:
The longer tenure, more premium and vice versa
Whole life policy premium is costlier than term insurance
Term insurance also do not provide any benefits if insured does not die
3. Mode of Purchase:
Cost will increase if policy is purchased from agents (Commission, Admin exp. Etc.)
Intermediary costs are eliminated if purchased directly from the company
4. Mode of premium payment:
Regular premium (Quarterly, Semi Annual) is more expensive due to administration
and processing costs
Premium on Annual/ Lump sum will be lesser due to less involvement of regular
processing cost
18. Procedure to compute LI Premium
STEP 1 – Calculate the number of persons die (Based on probability)
Understand the formula:
d(x) = I(x) * Q(x)
d(x) = Total amount of claim (No. of persons may die)
I(x) = No. of Persons in a particular age
Q(x) = Mortality Rate
STEP 2 – Calculate the total claim amount
Understand the formula:
T.C = d (x) * Insured amount
STEP 3 – Calculate the premium
There are 2 cases,
I - Insurer earns interest
II – Insurer does not earn any interest
19. Procedure to compute LI Premium
I - Insurer do not earns interest
Understand the formula: P = T.C. / Total number of persons
II - Insurer earns interest
Calculate the present value of the total claim d (x) * Insured amount * PV factor
Understand the formula: T.C. Pv/ Total number of persons
Example
2000 persons of all age 50 years are insured from Rs. 100000 for 1 year. It the
mortality rate for them is 0.004, Calculate the net single premium of this term
insurance in the following conditions:
(I) If the insurer earns no interest
(II) If the insurer earns interest at 6% p.a.
20. Procedure to compute LI Premium
Example
2000 persons of all age 50 years are insured from Rs. 100000 for 1 year. It the
mortality rate for them is 0.004, Calculate the net single premium of this term
insurance in the following conditions:
(I) If the insurer earns no interest
(II) If the insurer earns interest at 6% p.a.
STEP 1 = I (x=50) = 2000
Q (x=50) = 0.004
Therefore D(50) = 2000*0.004 = 8 persons may die (Based on probability)
STEP 2 = T.C = D(50)* Insured amount
= 8*100000 = Rs. 800000
STEP 3
(I) = T.C/ Total insured = 800000/2000 = Rs. 400 per year
(II) = 800000 (1+0.06)^-1 = 754717 (P.v. of total claims
= 754717/2000 = Rs. 377.35 per year
21. Do it
Example
5000 persons of all age 50 years are
insured from Rs. 150000 for 1 year. It the
mortality rate for them is 0.003, Calculate the
net single premium of this term insurance in
the following conditions:
(I) If the insurer earns no interest
(II) If the insurer earns interest at 9% p.a.
22. Do it
Answer
STEP 1 = I (x=45) = 4000
Q (x=45) = 0.006
Therefore D(45) = 4000*0.006 = 24 persons may die (Based on probability)
STEP 2 = T.C = D(45)* Insured amount
= 24*200000 = Rs. 4800000
STEP 3
(I) = T.C/ Total insured = 4800000/4000 = Rs. 1200 per year
(II) = 4800000 (1+0.08)^-1 = 4444444 (P.v. of total claims
= 4444444/4000 = Rs. 1111per year
23. Life Insurance Corporation of India
• Life Insurance in its modern form came to India from England in
the year 1818.
• Oriental Life Insurance Company started by Europeans in Calcutta
was the first life insurance company in India.
• In the year 1912, the Life Insurance Companies Act, and the
Provident Fund Act were passed
• On 19th of January, 1956, life insurance in India was nationalized
• Life Insurance Corporation of India was created on 1st September,
1956
• Objective: To spread life insurance much more widely and to the
rural areas to reach all insurable persons in the country, providing
them adequate financial cover at a reasonable cost
1818 From
England
1st Insurance
Oriental
Insurance Co.
1912 LIC Act
19.1.1956 LI
was
Nationalized:
• LIC
• GIC
• National
Insurance
• Oriental
• New India
1956 - LIC
24. Life Insurance Corporation of India
• LIC had 5 zonal offices, 33 divisional offices and 212 branch
offices, apart from its corporate office in the year 1956
• Today LIC functions with 2048 fully computerized branch offices,
113 divisional offices, 8 zonal offices, 1381 satellite offices and the
Corporate office
25. Objectives of LIC
• Spread Life Insurance widely and in particular to the rural areas and to
the socially and economically backward classes and providing them
adequate financial cover against death at a reasonable cost.
• Maximize mobilization of people's savings by making insurance-
linked savings adequately attractive.
• Conduct business with utmost economy and with the full realization
that the moneys belong to the policyholders.
• Act as trustees of the insured public in their individual and collective
capacities.
• Meet the various life insurance needs of the community that would
arise in the changing social and economic environment.
• Involve all people working in the Corporation to the best of their
capability in furthering the interests of the insured public by providing
efficient service with courtesy.
• Promote amongst all agents and employees of the Corporation a
sense of participation, pride and job satisfaction
SOCIETY
ECONOMY
CLIENTS
EMPLOYEE
26. Actuaries – Actuarial Science -
Functions
• An insurance actuary is a professional that analyzes financial risk using
mathematics, statistics and financial theories.
• They help insurance companies determine good risks or those the companies are
less likely to have to pay out claims to as the result of a loss
• They determine risk for life insurance companies and for property, liability and
other kinds of insurance
ANALYZE FINANCIAL RISK IMPROVES PROFITABILITY
Mathematics, Statistics Analytical Skills
http://www.actuariesindia.org/subMenu.aspx?id=12&val=What_is_an_Actuary?
27.
28. Actuaries
• “Actuary” means a person skilled in determining:
the present effects of future contingent events or in finance
modeling and risk analysis in different areas of insurance,
Calculating the value of insurance risks,
Designing and pricing of policies, working out the benefits
recommending rates relating to insurance business, on the basis of
empirically based tables
29. Actuarial Science
• Actuarial science is the discipline that applies mathematical and statistical
methods to assess risk in insurance, finance and other industries and
professions
Statistics
Probability
Business & Economy Knowledge
30. Functions of Actuaries
i. Establishing estimates for unpaid claim liabilities, unearned
premium and other estimated liabilities
ii. Insurance product premium pricing
iii. Surrender value calculations
iv. Management of pooled savings products
v. Reinsurance program design and management
vi. Underwriting policy definitions
vii. Solvency calculations and reports
viii. Strategic asset management and capital
ix. Corporate strategy and planning and control management,
including mergers and acquisitions
31. Functions of Actuaries
i. Establishing estimates for unpaid claim liabilities, unearned
premium and other estimated liabilities:
Unpaid Claim Liabilities means obligations for future payment of claims
due to past events
Unearned premium is the premium corresponding to the time period
remaining on an insurance policy
ii. Insurance product premium pricing
Actuary uses risk modeling techniques to price various insurance
policies which is justifiable to insurer and insured
iii. Surrender value calculations
It is the cash amount offered to the policy owner by the issuing life
carrier upon cancellation of the contract
iv. Management of pooled savings products
Management of ULIP and investment
32. Functions of Actuaries
v. Reinsurance program design and management
Based on the ability to project losses, the insurer size and structure
It is also linked to the risk tolerance of the insured
vi. Underwriting insurance policies
The process of assessing risk, ensuring that the cost of the cover is
proportionate to the risks faced by the individual, measuring risk
exposure and determining the premium
vii. Solvency calculations and reports
The continuation of the function and existence of the company must be
secured.
The benefits of the claimants and policyholders must be secured
viii. Strategic asset management and capital
The funds (Premium) collected should be managed properly
ix. Corporate strategy and planning and control management,
including mergers and acquisitions
