INS 419: LIFE AND HEALTH

INSURANCE

DEPARTMENT OF ACTUARIAL SCIENCE AND

INSURANCE
 Course outline

How life policies are effected: underwriting and

rating
Types of cover available
Policy administration: conditions and documents
Claim settlement
 DEFINITIONS

 The following definitions are used in this lecture with relation to life assurance:
 Life assured - the person on whose life the policy depends.

 Assured - the original owner of the policy, who will receive the
• BENEFITS OF IT. OFTEN ALSO CALLED THE ‘INSURED’.


 Life office - the insurer issuing the policy.

 Sum assured - the amount payable on a claim, whether by death or
 maturity.

 Premium - the sum paid to purchase the policy and keep it going.
 This may be a single sum or a regular series of sums.

 Underwriting - the process of deciding whether to accept a life risk
 and what premium to charge.

 Proposer - a person who applies for a life policy.
 LEGAL PRINCIPLES

Life assurance is subject to the general principles of

English law but also has some of its own special laws.
A life policy is a contract between the insurer and the
assured, and the formation of that contract is subject
to the normal requirements of the law of contract for
it to be valid.
 ESSENTIALS OF A VALID LIFE ASSURANCE
CONTRACT

There are five requirements, all of which must be

complied with, for a life assurance contract to be
legally binding. They are:
offer and acceptance;
 consideration;
capacity to contract;
insurable interest;
consensus ad idem.
 OFFER AND ACCEPTANCE
 The general law of contract applies to life assurance, but with certain modifications. The
offer is not made by an insurer’s prospectus or advertisement. This is merely an invitation
to receive offers.
 The proposal form completed by the proposer is by law the offer. This is then considered
by the insurer, who may make any relevant enquiries and arrange for medical evidence if
necessary. The insurer, if prepared to accept the risk, will then issue a letter of acceptance
stating that it will issue a policy, provided that the first premium is paid within a specified
time, and on the understanding that the state of health of the proposer remains
unchanged.

 The letter of acceptance is, at law, a counter offer, which the proposer can accept by
paying the first premium. The legal authority for this is Canning v. Farquhar (1886).
Canning proposed for life assurance. The insurer notified him that his proposal had been
accepted at a stated premium, but that the insurance would not take effect until the first
premium had been paid. Before Canning paid the premium he fell over a cliff and was
seriously injured. The premium was then sent in, hut was refused by the insurer. Canning
subsequently died and a claim was made.
 The court held that the insurer was not liable because:
 the proposal and ‘acceptance’ did not constitute a binding contract, but were merely part
of the preliminary negotiations; and as the ‘acceptance’ contained a new term - the
amount of the premium it was a counter offer which could not continue after the risk had
changed since the statements in the proposal as to good health had become untrue.
 CONSIDERATION

A contract that is not under seal must have consideration

to be valid. In life assurance this is always present in the
form of the premium. Almost all life policies are issued
under hand and are therefore simple contracts. Legal
action cannot be taken on a simple contract after six years
have elapsed from the accrual of the right of action
(Limitation Act 1980). For example, a death claim should
be made within six years of the death.
A life policy can be issued under seal. However there will
still be consideration, the premium. In the case of
contracts under seal, the time limit for legal action is
twelve years.
 CAPACITY TO CONTRACT

Both the assured and the insurer must have the legal
capacity to contract. There are certain restrictions on
contractual powers in certain cases and these are
dealt with below.
 INSURABLE INTEREST
The proposer must have an insurable interest in
the life assured. Before 1774 this was not necessary,
and the lives of criminals and notorious people
were insured by people unconnected with them in
the hope of making a substantial profit on their
early death.
LIFE ASSURANCE ACT 1774
This situation was remedied by the Life Assurance
Act 1774. The Act may be summarised as follows:
 no interest, no insurance;
 the person interested (the proposer) must be named in the
policy; no greater sum than the interest can be recovered.
 Specific examples of insurable interest are as follows:
 A creditor on the life of the debtor for the amount of the debt: Von Lindenau v. Des
borough (1828).
 An employer on an employee for the value of services agreed to be rendered, or possibly
more on a ‘key person’ basis (see chapter 2- section M3). There may also be an interest for
the amount of any death benefit payable under a pension scheme.
 A partner in business has an insurable interest in their other partners, especially if there is
an agreement to buy out the share of a deceased partner - see chapter 2 - section Ml.
 The donee of a life-time gift has an interest in the life of the donor for seven years, to cover
any inheritance tax that might be payable - see chapter 10.
 Examples of situations in which no insurable interest exists are as follows:
 A parent has no interest in their child, as no financial loss would be suffered on death:
Halford v. Kymer (1830).
 A child has no insurable interest in its parent: Howard v. Refuge Friendly Society (1886).
 A beneficiary under a will does not have an interest in the testator. The will may be
changed and thus there is only a hope of benefiting.
 In Scotland a child has a right to be supported by its parent and vice versa. Thus, for those
domiciled in Scotland there would be an insurable interest in these circumstances.
 CASE LAW

 The question of when insurable interest must exist in a life policy was in doubt
until 1854. However, in that year the case of Dalby v. India and London
Life Assurance Co. held that a life assurance contract is not a contract of
indemnity and that the amount and existence of the interest need be decided
only at the start of a policy. Therefore, insurable interest need only exist at the
date the policy starts and the situation at the claim stage is not relevant.
 The Life Assurance Act 1774 provides that a policy effected without
insurable interest is null and void. However, the Act does not impose any
punishment and the effecting of J such a policy is not a criminal offence.
 It is probable that an insurer can waive its right to avoid a policy for lack of
insurable interest. In the case of Worthington v. Curtis (1875). Mellish,
U said:
 The statute is a defence to the insurance company only if they choose to avail
themselves of it. If they do not, the question who is entitled to the money must
be determined as if the Statute did not exist.
 CONSENSUS AD IDEM

 This term means in complete agreement of mind. In any contract the

parties must be ad idem - of the same mind as to the subject-matter
of the contract. In ordinary commercial contracts, each party is
deemed to be equally able to assess the merits of the bargain offered.
As long as a seller makes no misrepresentations they are under no
duty to the buyer to express any opinion over what is offered for sale.
Hence the maxim caveat emptor, let the buyer beware, applies.
 This could not apply to life assurance as the proposer knows personal
facts of health, occupation and life risks that the insurer cannot
possibly know. It is on these facts that the premium is assessed. The
law therefore imposes on the proposer the duty of utmost good faith
or uberrima fides. The proposer thus has a duty to disclose all
material facts the insurer. The insurer must also observe uberrima
fides. By this means the parties car ad idem as to the risk proposed.
 A DUTY OF DISCLOSURE

 The proposer must disclose all material facts known by them to the insurer.
The Marine Insurance Act 1906 states that:
 every circumstance is material which would influence the judgement of a
prudent insurer in fixing the premium or determining whether he will take
the risk.
 The same principle applies in life assurance. The duty is to disclose
voluntarily, and the proposer cannot withhold a material fact because no
specific question was asked on that point in the proposal or medical
examination. A proposer might, however, be justified in inferring from the
fact that the question was not asked that the information undisclosed was not
regarded as material.
 For this reason, many insurers frame their proposal questions fairly widely
and may even have a question on the lines of ‘Is there any other factor which
may affect the risk on your life? In addition, the Statement of Long-Term
Insurance Practice, agreed in 1977 with the Department of Trade, made the
following provisions which have since been incorporated into the PIA rules.
 DURATION OF THE DUTY

 The duty of disclosure continues until the completion of the contract; that is, the payment of the first premium.
 In Looker v. Law Union and Rock Insurance Co. (1928). Looker proposed for a life policy and received
an acceptance letter stating that the policy would be issued on payment of the first premium, on condition that
his health remained unaltered. Before the premium was paid he fell ill. A friend paid the premium but Looker
subsequently died from the illness. It was held that his estate could not recover as there was a continuing duty
to inform the insurers of any material change in the risk up until completion of the contract.
 The case is supported by Marshall v. Scottish Employers’ Liability & General Insurance Co. (1901).
Here it was held that it is not sufficient that statements made in the proposal are true on the date when they are
made. If any material fact becomes known to the proposer before completion of the contract it must he
disclosed.
 B6C CONSEQUENCES OF BREACH OF DUTY
 If the proposer fails to disclose a material fact this renders the contract voidable at the option of the insurer.
The burden of proving non-disclosure is on the insurer. However, if an insurer discovers a non-disclosed fact
and then continues to accept premiums, it cannot afterwards repudiate liability on grounds of the non-
disclosure of that fact: Hemnmnings v. Sceptre Life Association Ltd (1905). This is because, by
knowingly accepting further premiums, the insurer is deemed to have ratified the contract.
 The case of Maihi v. Abbey Life Assurance Co. Ltd showed that, unless the non-disclosed fact was later
disclosed to a person authoriscd and able to appreciate its significance, the insurer did not lose its right to avoid
the contract. In this case, the proposer did not disclose alcoholism on his first proposal which resulted in a
policy. The alcoholism was discovered by the life office following a medical report requested after a second
proposal which was then declined. The life office did not check back to the first proposal and did not raise the
matter until a death claim was made on that policy. It was held that the life office was still able to repudiate the
claim on the first policy due to the non-disclosure.
 Types of contract and typical contract provisions

 There are three basic types of life assurance policy:

 term assurance;
 whole life assurance;
 endowment assurance.
 Term assurance policies just provide cover against death within a
specified period. The cover is pure protection with no investment
element. A payout is possible but not certain, i.e. the life assured may not
die during the term of the policy.
 Whole life and endowment policies are different in that a payout is
certain. Thus, there is an investment element in these policies and most
have a surrender (cash-in) value. For this reason, they are sometimes
called substantive policies. A whole life policy pays out on the death of the
life assured, whenever that occurs. An endowment policy will pay out n
the maturity date, or earlier death.

 Term assurance

Term assurance is the most basic form of life assurance. It

will pay out only if the life assured dies during the term of
the policy.
If the life assured survives, no payment is made and the
policy expires.
LEVEL TERM ASSURANCE
The simplest form of term assurance is level term
assurance. This contract provides that the life office will
pay the sum assured only if the life assured dies during the
term of the policy, i.e. before the expiry date. The sum
assured does not vary during the term of the policy and
once it has expired the policy has no value.
 Renewable Term Assurance
 Some term assurances are ‘renewable’. This means that on the expiry date there is an option to
take out a further term assurance at ordinary rates without further evidence of health, as long as
the expiry date is not beyond, say, the age of 65.
 Each subsequent policy will have the same option. Thus, instead of purchasing a 20-year term
assurance, a 45-year-old man might effect a five year renewable term assurance which gives him
the option of renewing every five years
 Whenever the policy comes up for renewal, the premium will increase since it is based on the
current age of the life assured. If the insured elects the option, the life office cannot decline if.
Renewable term assurances are used when there is a definite initial need for cover but it is not
known how long the need will last. The policy can then be renewed as many times as required.
 CONVERTIBLE TERM ASSURANCE
 This is a level term assurance with an option which enables the assured to convert it, at any time
during its existence, to a whole life or endowment assurance, without further evidence of health.
The premium for the new policy will be that normally applicable to a whole life or endowment
assurance policy for a person of the life assured’s age at the time of conversion.
 If the original policy was issued with some form of extra premium, then the premium for the new
policy will be similarly treated. Often part conversion is allowed instead of total conversion, if only
part of the policy is converted, the sum assured on the first policy will be the original amount,
reduced by the amount of the sum assured on the new policy.
 The premiums charged for convertible term assurance will be slightly higher than for the ordinary
level term assurance to allow for the cost of the conversion option. The policies are used where
there is a current need for term assurance and a likelihood of a need for a substantive policy in the
future.
 Term assurance types

 DECREASING TERM ASSURANCE

 Term assurance of this type has a sum assured which reduces each year (or
possibly each month) by a stated amount, decreasing to nil at the end of the term.
It is normally used to cover a reducing debt, such as the capital outstanding on a
house purchase mortgage, with the sum assured being linked to the reduction in
the capital outstanding under the loan.
 Although the cover decreases each year, the premium remains constant. Premiums
are sometimes payable for a shorter period than the policy term itself. This is
because there might be a temptation for the assured to lapse the policy in the last
year or two, when the sum assured has reduced to a comparatively low level.
Therefore, for a 25-year policy, some life offices impose a premium paying period
of 20 years.
 Premiums for decreasing term assurance are either slightly cheaper than for a level
term assurance for the same initial sum assured and term, or the same but payable
for a shorter period.
 Some decreasing term policies also have a conversion option, although this is
limited to the sum assured which remains at the time of conversion.
 WHOLE LIFE POLICIES

 A whole life policy is a very simple policy which pays out a sum assured whenever the life assured dies.
Unlike term assurance, it is a permanent policy, not limited to an expiry date. Because a claim is certain,
premiums will be more expensive than for a term assurance, where a claim is merely possible or at worst
probable. Whole life policies are substantive policies and can often be used as security f or a loan either
from the life office or from another lender.
 El NON-PROFIT WHOLE LIFE POLICIES
 A non-profit whole life policy has a level premium, payable throughout life. It pays only a fixed sum
assured, whenever death occurs.
 There are also policies which offer a cessation of premiums on attainment of a certain age, often 80 or 85.
These contracts are slightly more expensive because premiums will be payable on average for a shorter
period. These policies are very rarely sold these days.
 E2 WITH-PROFITS WHOLE LIFE POLICIES
 These policies are almost the same as non-profit whole life assurances, the only difference being that the
amount payable on death is the sum assured plus whatever profits have been allocated up to the date of
death. Again, premiums can be payable throughout life or can cease at, for example, 80 or 85. They are used
for family protection and for inheritance tax funding.
 LOW-COST WHOLE LIFE POLICIES
 These policies are with-profits whole life contracts with a guaranteed level of cover. They are actually
written with two sums assured. The amount payable on death is the greater of:
 i) the basic sum assured plus bonuses; or
 ii) the guaranteed death sum assured.
 WHOLE LIFE POLICIES (2)

 SINGLE PREMIUM UNIT-LINKED WHOLE LIFE POLICIES

 These contracts- often called bonds - are the simplest form of unit-linked
policy. They are normally written as whole life contracts so that the
investor can continue the contract as long as they like. When the policy is
effected, the whole of the single premium is applied to purchase units in
the selected fund at the offer price ruling on the day of payment. The
policy can then be cashed in at any time, the surrender value being the
total value of the units at the bid price on the day of surrender. The
contracts are used purely for investment purposes.
 If the life assured dies, the death claim value will be paid out. In most
cases, the amount payable is 101% of the value of the units. This reduces
costs and makes it easier for older lives to invest by avoiding underwriting
although this varies between offices. Some offices offer more substantial
levels of life cover, for example, 120% at the age of 50, or 200% at the age
of 30.
 ENDOWMENT POLICIES
 The third basic type of policy is the endowment assurance. Here, the sum assured is
payable on a fixed - date the maturity date - or on the life assured’s earlier death. The
standard non-profit endowment assurance provides a level guaranteed sum assured on
death or maturity. Because there will be a payout at some stage, endowment assurances
are substantive contracts and can be used as security for loans either from the life office
itself or from other lenders.
 Level premiums are payable for the duration of the contract. Premiums for endowments
are generally more expensive than for whole life assurances because claim payments are
generally made earlier. The shorter the term of the endowment, the higher will be the
premium for a given sum assured because it will be payable for a smaller period. Terms
of less than ten years are rare because of the qualifying rules. However, since the
abolition of life assurance premium relief, they have become more common.
 With the exception of flexidowment policies, the endowment policies described below
are only suitable investments if investors do not want their money before the maturity
date and will not need to cash in the policy earlier. The best yield on an endowment
policy is always obtained by waiting until the maturity date.
 The reasons for this are really twofold.
 First, surrender values on life policies are generally on the low side. In many cases, the surrender value
in the early years of a contract can be less than the premiums paid in. Even in later years, the surrender
value is often substantially less than the maturity value.
 Second, under many offices’ structures, a terminal bonus is payable on death and maturity claims but
not on surrenders. Terminal bonuses can form a large proportion of the total claim value.
 ENDOWMENT POLICIES

NON-PROFIT ENDOWMENTS
 These are the most basic form of endowment, with level
premiums and a payout of only a fixed guaranteed sum assured
on maturity or earlier death. They are very rarely sold these
days.
WITH-PROFITS ENDOWMENTS
 The principles that govern with-profits contracts have already
been described in section Dl. These also apply to with-profits
endowment assurances, where the amount payable on maturity
or earlier death will be the guaranteed sum assured plus the
bonuses. If the policy runs to maturity, bonuses will be higher
than if it becomes a death claim because they will have been
added for a longer period.
 OTHER TYPES OF LIFE POLICY

 There are a few types of policy which do not neatly fit into the basic three types
mentioned above. These are dealt with in this section.
 Universal Life Policies
 Universal life policies are a development of regular premium unit-linked whole life
policies. In fact, these policies are basically standard unit-linked whole life policies
(described in section E5) but with a whole range of bolt-on extras for total flexibility.
The idea is that policyholders pay in what they like, when they like, and choose from a
whole range of benefits. All premiums paid are used to purchase units in the selected
fund(s) and each month the cost of whatever benefits currently apply is paid for by
cancelling the relevant number of units.
 The range of benefits available usually includes the following:
 death benefit;
 annual indexation option to automatically adjust the death benefit (and possibly other
benefits) in line with the RPI;
 guaranteed insurability options;
 waiver of contribution benefit during disability;
 regular income option;
 INDUSTRIAL ASSURANCE

 ‘Industrial life assurance’ is a misleading, rather than a descriptive, name. It is defined in the
Industrial Assurance Act 1923 as:
 The business of effecting assurance upon human life, premiums in respect of which are received by
means of collectors, and are payable at intervals not exceeding two months.
 There are various qualifications to this definition but a simpler description would be that industrial
life assurance is life assurance for the masses, made possible by a system of regular collection of
premiums, in cash, at frequent intervals at the homes of the policyholders. In recent years, the
tendency has been to refer to industrial assurance as home service insurance, a more descriptive
title.
 The principal features of the business are:
 Sums assured and premiums are small so that life assurance is brought within the reach of everyone.
 It is a statutory requirement that premiums are payable at intervals not exceeding two months and
are received by means of collectors. In practice, most premiums are payable at four-weekly intervals
and are collected from the homes of the policyholders, who do not have the trouble of remitting
premiums to the company.
 Claims are usually paid by the collector to the claimant in their own home.
 Only simple types of policy are issued; mainly endowment assurances and whole life assurances.
 Industrial assurance can only be transacted by registered friendly societies or industrial assurance
companies.
 GROUP LIFE ASSURANCE
 Group life assurance schemes were developed to enable employers to make provision
for the dependants of employees who died while in their service. They are usually
arranged in conjunction with an occupational pension scheme. In principle, a group
life assurance scheme is a collective term assurance, where a large group of lives is
insured, often at a low premium and with simplified underwriting. The insurer will
have to pay out each time one of the insured group dies. The insured group will change
frequently as new employees join and older employees leave or retire.
 Recently, life offices have offered employers more flexible packages incorporating
other benefits such as IPI and critical illness cover (see section L). The aim is to enable
a company to offer its employees a very good remuneration and benefits package.
 LEVEL OF LIFE COVER
 The level of life cover can be calculated in various ways. The most usual method is

to express the cover as a multiple of the employee’s annual salary. A typical formula
would be four times salary, which is the maximum sum assured allowed by the
Inland Revenue if it is incorporated in an approved occupational pension scheme.
 DURATION OF COVER
 The normal terms are that cover continues as long as the employee continues to

work for the employer. Therefore, cover will cease if the employee leaves service or
retires. The terms of the group life scheme will reflect this and so there will be a
condition stating that cover will not be provided after, say, age 60 for females and
65 for males. Usually the expiry date will match the normal retirement date in the
pension scheme.
 ANNUITIES
 An annuity is a contract to pay a set amount (the annuity) every year while the annuitant (the
person on whose life the contract depends) is still alive.
 Annuities are usually expressed in terms of the annual amount payable although in practice
they can be payable monthly, quarterly, half-yearly or yearly. An annuity can be payable in
advance or in arrears. For example, where an annuity is effected on 1 January 2000 the first
annual payment is due on 1 January 2000 if it is in advance or on 1 January 2001 if it is in
arrears.
 Where an annuity is payable in arrears, it can either be with proportion or without
proportion. This is because each payment is made at the end of the period to which it relates.
Thus, when the annuitant dies there will be a period since the last instalment date for which
no payment has been made. Under a with proportion annuity, a proportionate payment will
be made to cover this period. This is not the case for a without proportion annuity, where no
payment is made.
 Most annuities are paid for by a single premium which is often called the consideration for
the annuity. However, deferred annuities are often purchased by regular premiums. Annuity
rates have reduced substantially over the last few years due to declining gilt yields and
improving life expectancy.
 Annuities are commonly used by retired people to provide an income that is guaranteed to
last for life. Annuities are also provided by pension arrangements and these are covered in a
separate course. This section describes the types of life annuity currently available.
 ANNUITIES (2)

 IMMEDIATE ANNUITY
 An immediate annuity contract provides, in return for a single premium, an annual
payment starting immediately and continuing for the rest of the annuitant’s life.
 These contracts are often purchased by retired people who want an income that is
guaranteed to last for the rest of their life, no matter how long (or short) that may be.
 DEFERRED ANNUITY
 A deferred annuity is a contract which provides for an annuity to be payable commencing
at some future date. The period between the date of the contract and the date the annuity is
to commence often called the vesting date or the maturity - date - is the deferred period
 TEMPORARY ANNUITY
 A temporary annuity is an annuity which is payable for a fixed period or for the annuitant’s
lifetime, whichever is the shorter. It thus differs from an immediate annuity, which is
guaranteed to continue throughout life. If the annuitant survives the fixed period, the
annuity ceases. The annuity will also cease if the annuitant dies during that period.
 N4 ANNUITY CERTAIN
 An annuity certain is a contract to pay an annuity for a specified period regardless of
whether the annuitant survives. It does not depend on the age of the annuitant as payment
is guaranteed for the set period whatever happens.
 Supplementary benefits

 BENEFITS
 A particularly important condition is that relating to the payment of benefit. This will have to
describe exactly what benefit is payable when. As large sums of money could be involved
there should be no ambiguity. This is relatively simple for a straight term assurance where the
sum assured is only payable on death. However, it is more complicated for PHI policies,
where there has to be a definition of disability, and critical illness policies, where there has to
be a list of the diseases, the diagnosis of which produces benefit.
 A3 ADDITIONAL BENEFITS
 If any additional benefits are being added to a basic policy type the appropriate wording will
have to be added. This might be by endorsement or as an extra page, or pages. This might
apply to additional benefits such as:
 waiver of premium;
 disability benefit;
 double accident benefit;
 increasing cover option;
 critical illness cover;
 terminal illness cover;
 health care benefits.
 Underwriting

 Underwriting is the name given to the procedure of assessing a proposal and

deciding whether to accept the risk and, if so, at what rate of premium.
 Each office has its own schedule of rates for particular types of policy. The rate is
usually expressed per £1,000 sum assured and varies with the age of the client and
terms of the policy. These ordinary rates are based on the average mortality
experience. If a life proposed shows features which suggest that there is an above
average risk of death then these must be investigated to decide whether the risk can
be accepted at ordinary rates, or whether some special terms might be required.
 An underwriter must bear in mind that a life assurance contract is based on utmost
good faith. The proposer is in possession of all material facts relating to the risk and
has a duty to disclose them. However, material facts may be omitted or only partially
disclosed. The job of the underwriter is to recognise impairments, even if they are
not specifically disclosed. Vague answers on a proposal such as check-up’ or
stomach-pain’ may describe some trivial condition. On the other hand they may
reveal something much more serious which may require special underwriting
treatment. The underwriter must use skill to assess whether the proposal can be
accepted at ordinary rates or, if not, at what special terms.
 UNDERWRITING PROCEDURE AND FORMS

The basic form used to process an application for life

assurance is the proposal form. This document, which is
signed by the proposer, requests the life office to issue
the desired policy to the assured and gives the basic
information required to assess the application.
DI PROPOSAL FORM
The form usually falls into three sections:
the first identifies the life to be assured;
the second specifies the details of the contract required;
the third section gives the details of the life risk.
 PROPOSAL PROCEDURE
 When a proposal form is received by the head office of a life
company it must be processed. The first task is to check the
office’s index of proposers to see whether any earlier proposals
have been made for that life. If so, the documentation for
those proposals is obtained to aid the underwriting of the
current proposal. The proposal must be checked to make sure
that all questions have been answered and the relevant
declaration signed.
 Alternatively, if the underwriter feels that the proposal cannot
be accepted immediately, they can:
 obtain further information on which to make a decision;
 impose some form of special terms;
 decline the proposal.
 MEDICAL FACTORS
 MEDICAL FACTORS

 The underwriter will look for medical factors affecting longevity. Little importance will be
attached to colds, influenza, or any of the usual childhood illnesses. Accidental injuries which
have fully healed (for example, a broken leg from a football injury) will not usually be
investigated. What will receive attention is any condition which could reduce the expectation
of life.
 Obviously it is beyond the scope of this subject to go into the details of the various relevant
medical conditions, but the following disclosures will normally be investigated:
 heart diseases;
 circulatory diseases;
 overweight;
 digestive system diseases;
 cancer; U liver diseases;
 eye diseases;
 tropical diseases;
 respiratory diseases;
 kidney diseases;
 glandular disorders;
 diseases of the nervous system;
 OCCUPATIONAL FACTORS

 The occupation of the proposer may also be material for underwriting

purposes. The underwriter should look at the occupation to see whether it
presents a greater than average risk of death. Some occupations may result in a
higher than average risk of death by accident. Others may predispose a person
to a higher risk of disease.
 Some examples of occupations with above average risk of death by accident are:
 scaffolders;
 steeplejacks;
 steel erectors;
 trawlermen;
 underground miners;
 oil rig workers;
 bomb disposal workers,
 divers;
 professional boxers;
 handlers of radioactive materials
 RESIDENTIAL FACTORS
 Residential factors, including climatic risks, used to be very important in life assurance
underwriting, but are now much less significant. The advances in transport, medicine and
public health over the last few decades have minimised these risks and there have been wide-
scale reductions in residential extras.
 Many offices’ policies are valid no matter in what country the life assured resides. However, if
a proposer lives abroad at the time of the proposal, the underwriter must consider whether
the area of residence presents any extra risks. The risks may arise from political instability or
warfare. This has been evident in recent years in parts of Africa, the Middle East and
Southeast Asia. Often the purpose for which the proposer lives abroad is relevant. For
example, a police inspector may merit a higher premium than an engineer.
 Tropical countries may produce extra health risks because of the prevalence of tropical
diseases, poor sanitation and less sophisticated medical facilities. Occupation may be a factor,
for example, for a mineral prospector working in an isolated area. This might warrant a higher
premium than a business manager in a large city.
 FINANCIAL FACTORS
 Underwriters should take note of financial factors in their underwriting. Most proposals do
not present any problems here, but cases where the sum assured looks very high for the
circumstances of the life assured should be looked at carefully. If a policy is sold (particularly
by a company representative) for a sum assured and/or premium which is inconsistent with
the life assured’s circumstances, is this a bonafide sale? Could it be a case of overselling,
which would be a possible breach of the best advice rules required by the Financial Services
Act 1986? The fact-find should be checked for a justification of the sale, although the life
office will not be able to do this if the policy was sold by an independent financial adviser as it
would not then have the fatt-find.
 METHODS OF DEALING WITH UNDER-AVERAGE
LIVES

 increasing extra risks - the risk increases with the passing of time. Two examples
are:
 - overweight, tends to affect health much more in later years; and
 - chronic bronchitis, tends to be progressive leading to emphysema.
 reducing extra risks - the risk is at its greatest at the outset, and reduces with the
passing of time. Two examples are:
 - tuberculosis, as the risk of recurrence decreases rapidly after completion of full
 treatment; and
 - carcinoma where treatment is successful and risk of recurrence reduces as
years
 pass.
 constant extra risks - the risk is constant while the life is exposed to the risk. Two
examples are:
 - aviation risks; and
 - motor racing.
 Let us look at a variety of methods of dealing with under-average lives.
 ORDINARY RATES FOR LIMITED TYPES OF
POLICY
A number of impairments are acceptable at ordinary rates if
the policy expires before a certain age. If the extra risk is an
increasing one, becoming more critical in later life, then a
proposal might be accepted only for a policy expiring or
maturing not later than a specified age, for example, the age
of 65. A whole life proposal might be declined, but an
endowment maturing at 65 could be offered.
Exclusions
Monetary
Rating-up
Debts
Postponement
Declinature
 CALCULATION OF PREMIUMS

 Like all types of insurance, in life assurance the policyholders all pay premiums into a common fund from
which all claims are paid out. In order for the insurer to be sure it will have enough funds to pay out all the
claims, there has to be a relationship between the premium charged and the benefit given under a policy.
 With general insurance (e.g. motor, marine etc.) it is very hard to predict how many claims will occur and
how much they will cost. For example, how many ships will sink next year and what will be their value?
However, in life assurance it is much easier to predict how many claims there will be. This is because
mortality tables can be used. Mortality tables are the results of the study of mortality (i.e. deaths) over the
last couple of hundred years. These can be used to predict with a considerable degree of accuracy how
many claims an insurer can expect each year from lives of a given age.
 A mortality table shows for each age the number of persons living at that age and the number of persons
dying at that age. By dividing the number of living by the number dying, the mortality rate can be
calculated. The mortality rate is the chance of dying at a specified age.
 All insurers have mathematicians - called actuaries - whose job is to calculate what premiums to charge
from the mortality tables. A specimen mortality table is shown in appendix 4. According to this table, out
of 100,000 male babies born, 1,980 die before they are one year old and 98,020 are still living at age one.
In the next year, 117 die aged one last birthday and 97,903 survive to age two. The numbers dying and
surviving at each later age are shown until at age 108 not a single survivor out of the original 100,000
remains alive.
 The fourth column in the table (qx) is the probability that a person aged x will die before reaching x + 1,
and is thus the mortality rate for that age. The fifth column (ex) is the expectation of life for a person aged
x. Thus a person aged 40 can expect to live on average a further 32.01 years.
 POLICY DOCUMENTS

 Once a proposal has been accepted by the life office and the first premium
paid, the office can prepare the policy. The first step is to allocate a policy
number, if this has not already been done. There are a number of different
methods used by life offices to produce policies and therefore an almost
infinite variety of internal documents used by different offices.
 Policy documents usually consist of pre-printed terms and conditions which
are consistently applied to all contracts of that particular type, together with
a personalised policy schedule, which is often computer produced. They
usually contain the following sections:
 heading;
 preamble;
 operative clause;
 schedule;
 conditions;
 definitions.
 The Schedule

 The Schedule will contain all the individual details for that contract, such as:
 policy number;
 life assured;
 date of birth;
 assured (or insured);
 policy date;
 type of policy;
 maturity or expiry date;
 premium amount;
 premium frequency;
 sum assured and when payable;
 fund selected (for unit-linked policies);
 allocation percentage (for unit-linked policies).
 The conditions

The conditions will explain the detailed terms relating to

that type of policy. These will be standard terms such as:
unit allocation procedure;
unit valuation procedure;
consequences of non-payment of premiums;
explanation of bonus system;
surrender provisions;
fund switching rights;
claims procedure;
charging structure;
procedure for notices of assignment.
 Exclusions

There might also be standard exclusions, for

example:
suicide (for life policies);
intentional self-inflicted injury (for IPI);
AIDS and HIV (for IPI);\
war etc. (for IPI);
participation in a criminal act (for IPI);
pregnancy and childbirth (for IPI).
 The definitions

The definitions section will explain the meaning of

words or expressions used in the policy document
that are not in general everyday use. Examples might
be:
life assured;
sum assured;
assured;
bid price;
offer price;
valuation date.
 BENEFITS

 A particularly important condition is that relating to the payment of benefit. This will have
to describe exactly what benefit is payable when. As large sums of money could be involved
there should be no ambiguity. This is relatively simple for a straight term assurance where
the sum assured is only payable on death. However, it is more complicated for PHI
policies, where there has to be a definition of disability, and critical illness policies, where
there has to be a list of the diseases, the diagnosis of which produces benefit.
 A3 ADDITIONAL BENEFITS
 If any additional benefits are being added to a basic policy type the appropriate wording
will have to be added. This might be by endorsement or as an extra page, or pages. This
might apply to additional benefits such as:
 waiver of premium;
 disability benefit;
 double accident benefit;
 increasing cover option;
 critical illness cover;
 terminal illness cover;
 health care benefits.
 ENDORSEMENTS

 An endorsement is an addition to a standard policy document. It might be

added at outset to set out the terms of an additional benefit - see the previous
section. Endorsements are also used to set out the terms of alterations to
existing policies - see section C.
 A5 POLICY OWNERSHIP
 The policy document will show who the owner of it is. This will often be the life
assured - i.e. an own life policy. It might however be another individual (a life
of another policy) or a company, as on a key person policy.
 Once a policy has been issued, its ownership can be changed in a number of
ways, such as:
 absolute assignment;
 mortgage;
 trust;
 bankruptcy.
 These topics are dealt with later in this chapter, and in the next chapter.
 POLICY RECORD

 The office also has to create its own internal record of the policy for administrative purposes. This
was once done by having policy register books or a policy register card system. Now almost all offices
have computerised systems and therefore, when the policy is produced, the relevant details will be
put into the computer’s policy data file to create the record. Manual records in paper form may also
be kept in addition to the computer record. Whichever record system is used, the following details
need to be recorded:
 policy number;
 life assured;
 address for correspondence;
 type of policy;
 term;
 sum assured;
 premium amount;
 premium frequency;
 any special conditions;
 branch of office involved;
 intermediary;
 unit allocation;
 unit fund.
 PREMIUM COLLECTION

 Unless a policy is a single premium contract, a system will have to be set up to handle
payment of renewal premiums. The new business department usually sets up the
policy records, making arrangements to collect future premiums, which is most
commonly done by direct debit. The renewals department are then left to take any
further action necessary. Renewal premiums under ordinary branch policies will be
payable annually, half- yearly, quarterly, or monthly. Premiums can also be payable
weekly under industrial policies.
 At law, the obligation is on the policyholder to pay premiums. The life office has no
legal obligation to send any reminder if premiums have not been paid, although in
practice it will do so. The policy will show both the amount and the due dates of the
premium and enables the policyholder to pay the premium on the due date.
 Normally the policy will provide days of grace after the due date, during which the
premium can still be paid. The position on death of the life assured during the days of
grace, but before payment of the premium, will be specified in the policy and varies
from office to office. However, the general position is that the claim would be paid,
subject to deduction of any outstanding premiums. The usual period of grace is 30
days or one month, although, if premiums are payable monthly, only fourteen days
may be allowed.
 RENEWAL NOTICES

The simplest method of premium collection is by

sending a renewal notice to the policyholder. The
renewal notice shows the premium due (net of tax
relief, if applicable) d the due date. It will normally be
sent to the policyholder some two or three weeks
before the due date. The policyholder will return part
of the renewal notice with his remittance for the
premium and the life office will apply it to the policy.
Virtually all life offices use a computerized system to
prepare and dispatch the notice. Most offices will not
allow monthly premiums to be paid by renewal notice.
 REINSTATEMENT
 Once a policy has lapsed due to non-payment of premiums the office is off- risk. The
office may later receive a request from the policyholder to reinstate or revive the policy.
This may be possible but is entirely at the discretion of the office involved. The office may
agree to reinstate the policy subject to payment of all the arrears, a late payment charge
and a satisfactory declaration of health. The policyholder will have to declare that he is in
good health and, as the duty of disclosure is also revived, give details of any deterioration
in the risk since the date of the proposal.
 ALTERATIONS
 The office will have an alterations department whose job it is to alter policies if requested
by the policyholder. Unless the policy wording gives the policyholder a right to make the
alteration, the office does not have to agree to it and can decline if it wishes. The reasons
for an alteration request are almost infinite and the most common reasons are given
below.
 The most common alterations are as follows:
 Increase in the sum assured - this may involve fresh underwriting unless given as a policy option. It is
often required on mortgage policies when the loan is increased and will involve an increased premium.
 Decrease in the sum assured - this is easy to arrange as no fresh underwriting is required and the premium
will decrease (which may be the reason for the alteration).
 Conversion of policy - this is usually by virtue of an option, for example, convertible term being converted
into whole life or endowment (where more permanent cover is needed).
 Extension of term, increasing the period covered by the policy - this is often required for a mortgage policy
if the term of the loan is extended.
 Reduction of term on an endowment - this will result in an increased premium if the sum assured is
maintained.
 PAID-UP POLICIES

 If a policyholder can no longer afford to pay premiums he may request that the policy be
made paid-up. This means that no further premiums are payable and cover continues at
an appropriately reduced level. Only substantive policies (endowments and whole life
assurances) can be made paid-up; a term assurance will just lapse if premiums cease.
 The reduced paid-up sum assured will normally bear some relation to the number of
premiums actually paid as opposed to the total originally payable. Thus if a 20-year
endowment was made paid-up after premiums had been paid for ten years, the reduced
paid-up sum assured would probably be half the original sum assured. Any future bonus
would be based on the reduced sum assured.
 The office will require completion of the appropriate letter of authority to make this
alteration. The policy will be endorsed to show the reduced sum assured.

 ASSIGNMENTS
 An assignment is a transfer of ownership from one person to another. This frequently
happens with life policies, so knowledge of the legal principles involved is necessary
when dealing with claims or surrenders. An assignment may be temporary or
permanent, and can confer an absolute interest or a limited interest.
 Claim Settlement

 The job of the claims department is to pay claims as efficiently and speedily
as possible. However, the office must make sure that every claim is valid, and
that it is paying the right amount to the right person.
 In general, claims are subject to:
 payment of all due premiums;
 production of the policy;
 proof of title - the onus of which is on the claimant;
 proof of death on a death claim;
 proof of age on a death claim.
 There are two different types of claim - maturity claims and death claims.
The considerations concerning lost policies, which are the same for both
types of claim (as well as surrenders and loans), are dealt with later. It must
be remembered that it is the claimant’s duty to prove title and he must
produce all the documents required to prove his ownership these are called
the documents of title.
 MATURITY CLAIMS

When an endowment policy matures, it becomes the

subject of a maturity claim. This is usually initiated
by the life office writing to the policyholder a month
or two before the maturity date. The letter will:
remind the policyholder of the maturity date;
state the amount payable;
list the requirements for payment;
enclose the relevant form of discharge.
 DEATH CLAIMS

When a death claim occurs the correspondence will

normally be initiated by the claimant, or solicitors for the
estate, who will write to the office informing them of the
death and requesting the amount payable. The first step is
for the office to search its index of lives assured to
ascertain all the policies on that life. Then the date of
death must be obtained, as the amount payable may
depend on the exact date of death for example, the profits
on a with-profits policy or the sum assured on a
decreasing term policy will vary according to the precise
date of death. The offices initial reply will quote the
amount payable, subject to the admission of the claim.