This deck gives the reader a basic understanding of life insurance concepts. Terminologies and regulations are of UK region.

1. Life Insurance Basic Concept
– United Kingdom
By Avik Saha
Does not include reinsurance and annuities

2. Basic Terms
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Risk - Probability of loss
Life Insurance - Insurance to cover the loss arising from
death
Assured - Also called policy holder or proposer, the
owner of the life insurance policy
Life Assured - Also called insured, the person whose life
is used to underwrite the life insurance policy
Sum assured - Also called face amount, the amount of
money life insurance company pays if the risk
materializes
Beneficiary - Also called claimant, whom the life
insurance company pays the death benefit in the event
of life assured‟s death
Assured and Life Assured can be the same person.
Life assured has to be a person; policyholder can be a
person or organization

3. Basic Product Types
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Term assurance – pays out if death
occurs within the specified term
mentioned in the policy; policy does not
have any cash value
Endowment assurance – Pays out on
maturity or earlier death
Whole Life assurance – Pays out on
death whenever it happens
Endowment and Whole life policies have
cash values or investment components;
they are called „substantive policies‟

4. Term assurance (TA) – different
variations
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Level (LTA) – the sum assured remains the
same throughout the term
Renewable - the policyholder has the right to
take out a new policy on expiry of the existing
contract
Convertible - the policyholder has the option to
convert some or all of the sum assured to a
whole of life or endowment policy
Decreasing (DTA)- the sum assured decreases
over the term of the policy
Increasing - the sum assured increases over the
term of the policy
Family income policies - an income is provided
on death of the assured until the end of the policy

5. Endowment assurance –
different variations
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Non-profit - only the guaranteed sum assured is
payable
With-profits - the guaranteed sum assured and
any bonuses allocated at the time of claim are
payable
Unit-linked - the sum assured is directly linked
to the value of the underlying investments
Low-start - the initial premium is lower than an
ordinary policy but it is increased over the term to
ensure the full value of premiums are collected
Guaranteed bonds –
◦ Income Bond - only the income is guaranteed and not
the capital
◦ Growth Bond - both the capital and growth are
guaranteed as it is set at the beginning

6. Whole life assurance – different
variations
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Non-profit - only the guaranteed sum assured is
payable
With-profits - the guaranteed sum assured and
any bonuses allocated at the time of claim are
payable
Unit Linked - the sum assured is directly linked
to the value of the underlying investments
Single premium – used primarily for investment
purposes as the death value is typically 101% of
the policy value
Universal Life Policies – Regular premium unitlinked whole of life policies with a whole range of
bolt-on extras (explained later) giving total
flexibility. Policy holders pay in what they like,
when they like and choose from a gamut of
benefits

7. Bolt-on options
Also called Riders; these are additional features which
can be added to the main life assurance policy for an
extra charge
 Some of the bolt-on options –
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◦ Waiver of premium – premium for the policy is paid by the
life insurance company if insured is too ill to work
◦ Disability benefit – policy proceeds paid on permanent
disability
◦ Double Accident Benefit - sum assured doubled if death is
due to accident
◦ Increasing cover option – increase cover on specific events
e.g. birth of a child
◦ Critical Illness Cover – Payable on diagnosis of a critical
illness e.g. cancer, Alzheimer‟s etc
◦ Terminal Illness Cover – Payable on diagnosis of a terminal
illness (the life assured is expected to die within 12
months)

8. Income Protection Insurance
(IPI)
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Previously know has PHI (Permanent Health
Insurance)
Policy benefit payable if insured is too ill to
work
Deferred Period – waiting period generally in
weeks (e.g. 4, 8, 13, 26, 52) before the
payments begin. Longer the deferred period
lower the premium.
Benefit limited to a percentage of earnings,
typically 50 to 75% prior to illness to
encourage claimants to return to work
Some exclusions are applicable to policies
IPI policies can not be assigned to another

9. Business assurance
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Bought to protect partners in a
partnership, shareholders/directors of
a limited liability company or to protect
company‟s profits if a key person
leaves or dies (Key Person Insurance)

10. Basis of writing Life assurance
policies
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Life assurance policies can be written on the
following basis –
◦ Single Life – only one life assured
◦ Own Life – policy holder is the life assured
◦ Life of another – life assured is separate from the
policy holder
◦ Joint life first death – two life assureds, death
benefit payable on death of the first life assured
◦ Joint life second death - two life assureds, death
benefit payable on death of the second life
assured
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There is no limit on number of life assureds
for a life insurance policy

11. Group life assurance
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Life Assurance, IPI, Critical Illness
cover or Personal Accident Sickness
(PAS) cover can be purchased by
organizations for their
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Employees (by employers)
Borrowers (by lenders)
Partners (by partnerships)
Members (by clubs, trade unions etc)

12. Life insurance regulation in
UK
Erstwhile Financial Services Authority (FSA) is split into
PRA and FCA (“Twin Peaks”) from 1 April, 2013
 Insurance companies are regulated by Prudential
Regulation Authority (PRA)
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◦ promotes the safety and soundness of insurers
◦ protects policyholders
Financial Conduct Authority (FCA) – responsible for
business conduct of all firms and prudential regulation
of life insurance brokerages and advisory firms among
others
 Financial Policy Committee (FPC) – subsidiary of Bank
of England responsible for
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◦ horizon scanning for emerging risks to the financial system
◦ providing strategic direction for the entire regulatory regime

13. Insurable Interest
Proposal Form
Exclusion
Policy Life Cycle
GP Report
Mortality Table
Premium
Declinature
Cooling off period
Underwriting
Confirmation notice
Policy document
Policy set-up
Agent commission
New Business
Conversion
Alteration
Surrender
Assignment
Renewal Premium
Policy Loan
Withdrawal
Policy Admin
Death Claim
Terminal Bonus
Maturity
Claim Investigation
Claims

14. Underwriting - Financial
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Financial underwriting
◦ Can be for individual or corporate
◦ Premium set based on mortality table,
assumed interest rate for premium
invested, expense and frequency loading
◦ Expense Loading: charge to cover the
costs of setting up and running the policy
◦ Frequency Loading: charge to cover the
investment potential that is lost when
premiums are not paid annually in
advance

15. Underwriting - Medical
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Underwriter to consider –
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Underwriting procedure uses –
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Medical factors (smoking habits, existing conditions etc)
Occupational Factors (nature of job)
Hazardous sports and pastime and
Residential factors
Proposal form which the applicant fills-up
General practitioner‟s (GP) report
Medical examiner‟s report (in case needed)
Other questionnaires (in case needed)
Underwriting is based on utmost good faith
◦ Applicant to take reasonable care not to make misrepresentation
[Consumer Insurance (Disclosure and Representation) Act 2012]
◦ Consumer must respond honestly and with reasonable care to
questions asked
◦ Insurer can avoid contact in case of reckless misrepresentation

16. Underwriting
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…cont.
The life assured can be either
◦ Preferred risk (low risk)
◦ Standard risk (average or normal risk)
◦ Sub-standard risk (high risk)
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Strategy for sub-standard risk –
◦ limiting the policy e.g. by age
◦ Exclusions (no coverage if death from a particular disease
or activity)
◦ Extra premium
◦ „Rating up‟ by using a premium for an age that is older than
the life assured's actual age
◦ debts on the sum assured
◦ postponement of the policy for a defined period of time or
until certain events have occurred so that the risk reduces
◦ Declinature i.e. refusing to issue policy

17. New Business Procedure
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Legal requirements for valid life insurance
contract
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Offer and acceptance
Consideration (premium)
Legal capacity to contract
Insurable interest (policy holder shall suffer a loss if
life assured dies; unlimited interest in „self‟)
◦ consensus ad idem (Complete meeting of minds)
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Policy can be owned singly or jointly (joint
tenancy and tenancy in common). Under joint
tenancy, if one joint tenant dies the interest
automatically passes to the survivor(s). In case
of tenancy in common, if a tenant dies their share
passes to their estate and therefore, can be
disposed of by will of the deceased

18. New Business Procedure
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Pre-sale regulatory requirement –
◦ Services and Cost Disclosure Document (SCDD) – mentions type of products
sold by the firm, how cost of advice can be paid, how to complain, details of
ownership etc.
◦ Key Features Document (KFD) – mentions nature of policy, risk factors,
principal terms of the policy, definition of benefit, cancellation or withdrawal
rights etc.
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Post-sale regulatory requirement –
◦ Post-sale confirmation
◦ Cancellation notice
◦ Cooling off or free look period (period after policy issuance, normally 30 days
during which policy owner can decide to return the policy and get the full
premium back)
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Premiums can be paid by –
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renewal notice sent by the insurer
Standing order
direct debit
account collection or
Cash, Cheques, Credit or Debit cards

19. Non-payment of premiums
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Consequences of non-payment of premiums can be –
◦ Lapse
◦ Paid-up policy (policy with reduced sum-assured without requiring
further premium payment)
◦ Surrender
◦ Loan (automatic loan from cash value to pay premium)
◦ Policy stays fully in force
◦ Full cover ceases after a year
◦ Alternative premium payer and
◦ Reinstatement of lapsed policy (subject to conditions)
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Non-forfeiture Clause – ensures that policy is not lapsed due
to non-payment of premium by effecting one of the above
alternatives e.g. automatic loan
Grace period – time period after premium due date; if the
policy holder pays the premium during this period policy does
not lapse; typically 30 days for a annual premium-paying
policy

20. Policy Administration
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Policy alteration – following changes can be requested
to a in-force policy
◦ the premium
◦ the type of policy e.g. converting a term policy to
endowment
◦ the life assured
◦ the fund the future premiums are invested in (known as
redirection)or
◦ the fund that premiums that have already been paid could
be moved to another fund (known as switching)
◦ the sum assured
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Alterations require –
◦ agreement of the life office unless it is an option in the
policy
◦ agreement of the policyholder
◦ endorsement of the policy and
◦ a change to the office‟s records

21. Policy Administration
…cont.
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Policy Assignment – changing the policy
ownership can be of following types
◦ Absolute – gift or sale
◦ Mortgages (temporary assignment in connection with
a loan; reassigned to original owner once loan is
repaid)
◦ By operation of law e.g. in case of bankruptcy
◦ To trustees
Policies of Assurance Act 1867 regulates
assignments of life insurance policies
 Request can also be made by the policy
owner for Withdrawal, Surrender or Policy
Loan
 Policyholders are subject to surrender charge
and tax penalty for premature withdrawal
from certain policies
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22. Claims
Can be Maturity Claims or Death
Claims
 Claim is subject to 
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the payment of premiums
production of the policy
proof of title
proof of death, for a death claim
proof of age, for a death claim
Disability and Illness Claims –
◦ Arises on IPI, Critical Illness, Terminal
Illness or Personal Accident and Sickness
policies

23. With-Profit Policies
Policy value is indirectly linked to investment
performance
 Investment valuations happen annually; any
surplus is distributed to shareholders and withprofit policyholders
 Smoothed investment returns as any bad year is
compensated by surplus in good year
 Bonus
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◦ Normal bonus – allocated annually following
valuations
◦ Interim bonus - paid on claims and takes account of
any bonus that would have been accumulated since
the last valuation
◦ Terminal bonus – paid on claims

24. Unit linked policies
Policy value is directly linked to
investment performance
 Funds are valued daily and reflected in
unit prices
 Premium buys units
 Units are cancelled for withdrawal
 Unit link funds include instruments such
as Equity, International, European, North
American, Far Eastern, Fixed interest,
property, cash, building society etc
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25. Death Benefit/Maturity Value
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Death Benefit/Maturity value payable
is calculated as below –
Death Benefit/Maturity Value = Sum
Assured (or Unit value for unit linked
policies) + Bonus (for with profit
policies) + Advanced Premium Paid –
Premium Due – Outstanding Loan
plus interest – other charges

26. Trust
An equitable obligation binding the trustee to deal
with property over which he has control for the
benefit of beneficiaries of whom he may be one,
and any one of whom may enforce obligation
 Trust can be of different types e.g. express,
implied, resulting, bare, successive, fixed,
discretionary, statutory etc.
 Policies can be put in trust for favourable tax
treatment of the proceeds and better estate
planning
 Acts governing trusts are –
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◦ Trustee Act 1925
◦ Trustee Delegation Act 1999 and
◦ Trustee Act 2000