CHAPTER FIVE

LIFE INSURANCE
POLICIES

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• Life insurance is a contract between
an .
insurance
insure where policy holder
the insurer and to
promises
pay
r a designated beneficiary a sum of
an
money in exchange for a
upon premium, death of an
the
(often the policy
insured
holder).
person
 Purpose of life Insurance
Financial protection:
To provide dependents of the insured with
Financial protection.
Financial compensation.
To support family income of the insured To cover
personal loans and other debts.
The family of the insured and the
creditors
will then be protected from loss of money.
To accumulate an educational fund
It will be used to pay tuition fees for children when
they join higher education.
 I. LIFE INSURANCE
Life Insurers pay death benefits to designated beneficiaries
when the insured dies.
I. Costs of Premature Death
The family's share of the deceased bread winner's earnings is
lost forever.
Additional expenses are incurred because of funeral expenses,
uninsured medical bills, estate settlement costs,
a reduction in families standard of living
Certain non economic costs are incurred, such as emotional
grief, loss of a parental role model, and counseling and
guidance for the children.

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 Proposal form
Documents Needed for Policy (contract)

 The Policy form

 The Medical Report
 Any other supplementary contracts.
II. LIFE INSURANCE UNDERWRITING
UNDERWRITING- is the process of assessing an
individual’s anticipated mortality. i.e. is the relative
incidence of sickness or disease among a given group of people
in order to determine:
1. Whether to approve that person for insurance coverage and
2 .The risk classification to which the proposed insured should
be assigned.

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2. FACTORS CONSIDERED IN LIFE INSURANCE
UNDERWRITING.
 Age
 Gender
 Current Physical Condition
 Personal Medical History
 Family Medical History
 Occupation
 Moral Hazard
 Financial Position
 Habits
 Avocation

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 3. SOURCES OF INFORMATION FOR UNDERWRITING
SOURCES OF INFORMATION FOR UNDERWRITING
Proposal Form

Medical Report

 Attending Physicians Statement

 Agent’s/ Salesman’s Report

 Questionnaires and Interview

 Underwriting Manuals

 Inspection Report

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4. UNDERWRITING DECISIONS

the Underwriter assesses and evaluates the risk and

accordingly makes a decision as to accept the risk or

decline the proposal.

There could be a number of options to the underwriter.

The following four options are some of them.

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1. To accept the risk and issue an insurance policy

immediately, average (standard) risk

2. To accept the risk immediately but with an adjustment

for substandard factors.

3. To postpone the underwriting decision until information

ordered is received or until an extra risk of a temporary

nature (pregnancy, child birth) is expected to lapse.

4. To decline the risk

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 Types of Life Insurance

1.Term Insurance

2. Whole Life Insurance

3. Endowment Insurance

4. Modified Life Insurance

5. Juvenile Insurance

6. Industrial Life Insurance

7. Group Life Insurance

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1. Term Insurance
The period of protection is temporary, such as 1, 5, 10, or 20
years.
 Unless the policy is renewed, the protection expires at the end
of the period.
 Most term insurance policies are:
 Renewable
 Convertible
 have no cash value or savings element.
2. Whole Life Insurance: It is a cash value policy that provides
lifetime protection. Types of whole life insurance:-
A. Ordinary life insurance
B. Limited payment life insurance
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A. Ordinary Life Insurance
-also called (straight life and continuous premium whole
life) provides lifetime protection to age 100, and the
death claim is a certainty.
If the insured is still alive at age 100, the face amount
of insurance is paid to the policy owner at that time.
Premiums do not increase from year to year but
remain level throughout the premium paying
period.
Has an investment or saving element called a cash
surrender value.

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Contains cash surrender or non forfeiture options (if
participating), and settlement options that can be used to
meet a wide variety of financial needs and objectives.
B. Limited payment life insurance
The insurance is permanent, and the insured has lifetime
protection.
The premiums are level, but they are paid only for a certain
periods.
3. Endowment Insurance
Pays the face amount of insurance if the insured dies
within a specified period, if the insured survives to the end
of the endowment period; the face amount is paid to the
policy owner at that time.
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 Term Insurance Endowment Insurance

 Provides only protection • Provide protection along

for the term specified in
the policy document. with inv’t opportunity.

 They offer just the • They offer death as well

death benefits. as maturity benefits.

• The premium charged • The premiums payable

by term insurance for endowment plans
plans is much less than are more expensive
the endowment plans. than term plans
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By Megersa H. (M Sc in AcFn) 2022
4. Modified Life Insurance: It is a whole life policy in which
premiums are lower for the first three to five years and higher
thereafter.
5. Juvenile Insurance: It refers to life insurance purchased by a
parent or adult on the lives of children younger than a certain
age, such as age 14 or 15.
Insurers generally require the child to be at least one month
old before he or she can be insured. Some insurers, however,
will insure a child as young as one day old.
6. Industrial Life Insurance: It is a class of life insurance that is
issued in small amounts, and the premiums are payable weekly
or monthly.
7. Group Life Insurance: It provides life insurance on a group of
people in a single master contract. 15
 Payment of Premium
Normally annual premium payments are made in
advance.
But, it is also possible to arrange for semi-annual,
quarterly or monthly premium payments.
A grace period of 30 days is given to the insured to make
payment of renewal premium or installments of
premiums.
If the insured dies during this grace period, the sum
Assured less the amount past due will be payable to his
beneficiary.

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Life Insurance premium Determination

Insurance premium is the price of an insurance

protection. It keeps the policy in force. Premium

may be paid annually, Quarterly, or Monthly
A difference must be made between the following

types of premiums:

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1. Net Single Premium (NSP)

-the present value of the future death benefit. It is that

amount, which together with compound interest, will

be sufficient to pay all death claims.

 In calculating the NSP, only mortality and investment

income are considered.

 Insurance company expenses or the loading elements

are considered later, when the gross premium is

calculated.
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The NSP is based on three basic assumptions

1. Premiums are paid at the beginning of the policy

year,
2. Death claims are paid at the end of the policy
year, and
3. The death rate is uniform throughout the year.

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 Ordinary Life Insurance
In calculating the NSP for an ordinary life policy,
the same method described earlier for the five year
term policy is used
Calculating the Net Single Premium for Term
Insurance
For yearly renewable term insurance, the cost of
each year’s insurance is easily determined:

 amount of   probabilit y   PV $1 for period 

       
 insurance   of death   funds are held 

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 Steps to determine Net Single premium
1. Determine the PV of Birr 8,285,000
PV = FV/(1+i)n
PV = 8,285,000 = 7,531,818.18
(1.10)
2.Divide the PV by the number of insured to arrive at the
NET SINGLE PREMIUM.
7,531,818.18
NSP = = Birr 7.862
958,000

Every Insured will have to pay NSP of Birr 7.862 at the

beginning of the Term policy. The Insurer will, then, collect a
total of Birr 7,531,818.18 which will grow to Birr 8,28,50000 in
one year time at 10%
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 TERM INSURANCE
With the above example as a background, let us try to
determine the Net Single Premium for a Term policy.
Consider the following information:
3- Year term policy for Birr 5,000 to be issued at the
beginning of the year.
Number of policy holders at age 30 is 958,000
Interest rate is 10%
Single premium payment at the beginning of the year.
Death claims to be paid at the end of the year in
which the incident occurred.
CSO, 1980 mortality rate.

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 CSO MORTALITY RATE, MALE, 1980
Year Age Number Number Probability of
Living Dying Dying

1 30 958,000 1,657 0.00173

2 31 956,343 1,702 0.00178
3 32 954,640 1,747 0.00183

Expected death claims

Year Age Number Amount of Expected Death
Dying policy Claim
1 30 1,657 5,000 8,285,000
2 31 1,702 5,000 8,510,000
3 32 1,747 5,000 8,735,000
Total Expected Death Claims =
25,530,000 25
 1 2 3 4 = (2*3) 5 6
Yr Death PV PV of No. of (4/5)
Claims
Present
Factor at
value of
Claims
Total claims
Insured Annual
10% Net Prem
1 8,285,000 0.9091 7,531,893.5 958,000 7.862

2 8,510,000 0.8264 7,032,664 958,000 7.341

3 8,735,000 0.7513 6,562,605.5 958,000 6.850

25,530,000 21,127,163 22.053

So each Insured must pay in advance the sum of Birr
22.053 for three years protection. It helps the insurer to
meet the expected death claims that occur in each year
1 2 3 4 = (2 + 3) 5 6= (4 – 5)
Yr Beg Bal Int 10% B.B + Interest Death Claims End Bal

1 21,126,774* 2,112,677.40 23,239,451.40 8,285,000 14,954,451.4

2 14,954,451.4 1,495,445.14 16,449,896.54 8,510,000 7,939,896.54

3 7,939,896.54 793,989.66 8,733,886.20 8,735,000 -1113.80*

ACTURIAL NOTATIONS: -
T = time (years)
X = age
Lx = number of people living during age x.
(Lx – Lx +1) = dx = number of people dying during age x.
(Dx/Lx) = px = probability of dying during age x.
(Lx+1/Lx) = qx = Probability that an individual at age x.
Survives age x.
Formula to determine Net Single Premium:

S(dx/ S(dx1/ s(dxT 1/

  
NSP Lx) Lx Lx (1r)T
 (1r) (1r)2
Using this formula the Net Single Premium is
computed as follows
Year Age Number Living Number dying
t x Lx dx
1 30 958,000 1,657
2 31 956,343 1,702
3 32 954,640 1,747

Birr 22.053
Using this formula the Net Single Premium is
computed as follows
Year Age Number Living Number dying
t x Lx dx
1 30 958,000 1,657
2 31 956,343 1,702
3 32 954,640 1,747

Birr 22.053
1.2 Net Annual Level Premium
Most life insurance policies are not purchased

with a single premium because of the large amount

of cash required.
Consumers generally find it more convenient to

pay for their insurance in installment payments.

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If premiums are paid annually, the net single premium

must be converted into a net annual level premium,

the net annual level premium (NALP) is determined

by dividing the net single premium by the present

value of a life annuity due (PVLAD) of $1 for the
premium paying period.

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 NLP- EXAMPLE
No. of insured PV of $ 1 payable PV of $ 1
Yr Age Paying premium Beginning of year Premium
1 30 958,000 1 958,000
2 31 956,343 0.9091 869,411
3 32 954,640 0.8264 788,915
TOTAL

PV

2,616,326
 Gross Premium
 is determined by adding a loading allowance to
the net annual level premium.
 The loading allowance must cover all operating
expenses, provide a margin for contingencies, and, in
the case of stock life insurers,

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 Three major types of expenses are reflected in the loading
allowance:

 Production expenses are the expenses incurred before the agent

delivers the policy, such as policy printing costs, underwriting

expenses, and the cost of the medical examination.
 Distribution expenses are largely selling expenses, such as the

first year commission, advertising, and agency allowances.

 Maintenance expenses are the expenses incurred after the
policy is issued, such as renewal commissions, costs of collecting
renewal premiums, and state premium taxes.

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 Health
Health insurance may be defined broadly as the type of
Insurance
insurance that provides indemnification for expenditure
and loss of income resulting from loss health.
 Health insurance is insurance against loss by sickness or
bodily injury.
Types of Health Insurance:
There are two types of insurance in the generic term health
insurance:
1. Disability Income Insurance and
2. Medical Expense Insurance

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Disability Income Insurance:
Disability income insurance is form of health
insurance that provides periodic payment when the
insured is unable to work as a result of illness or injury.
Medical Expense Insurance:
Medical expense insurance provides for the payment

of the cost of medical care that results from sickness

and injury.

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 Personal Accident Policy
It provides compensation for death or bodily

injuries caused by violent, accidental, external and

visible means.
 The injuries shall be the direct cause of death, loss

or disablement.
 In the event of death of the insured, the benefit is to

be given to his representative.

 Death or disablement should occur within 12

calendar months from the date of the accident.

 Worker’s Compensation Policy
 This policy indemnifies the insured against all sums for

which he is to be liable to pay compensation for any worker

who sustains death or bodily injury by an accident or
occupational diseases arising from his work and during the
time of his work.
 The worker should be employed by the insured, and the

category of work assigned to him and the place of work

should be specified in the Schedule.
 The policy does not provide compensation for death or
disablement resulting from suicide attempted suicide or
intentional self-injury 41
 End of Chapter Five

06/29/2024 By: Abatneh M.(MSc) 40