CHAPTER FIVE

LIFE INSURANCE
POLICIES

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 I. LIFE INSURANCE

Life Insurers pay death benefits to designated beneficiaries when the insured dies.

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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Documents Needed for Policy (contract)

 Proposal form

 the Policy form

 the Medical Report

 any other supplementary contracts.

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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:

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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 6
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.

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Most term insurance policies are:

Renewable

Convertible

have no cash value or savings element.

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2. Whole Life Insurance

-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.

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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.

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has an investment or saving element called a cash

surrender value.

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.

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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.

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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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4. Modified Life Insurance

is a whole life policy in which premiums are lower

for the first three to five years and higher

thereafter.

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5. Juvenile Insurance
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.

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6. Industrial Life Insurance

 is a class of life insurance that is issued in small

amounts, and the premiums are payable weekly or

monthly.

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7. Group Life Insurance

that provides life insurance on a group of people in

a single master contract.

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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.

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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

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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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 Example
Commissioners 2001 Standard Ordinary (CSO) Table of
Mortality, Male Lives (selected ages)

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Calculating the NSP for a Five-Year Term
Insurance Policy, Male, Age 32

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Present Value of $1 at 5.5% compound
interest

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Cont…

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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.

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Consumers generally find it more convenient to pay for their

insurance in installment payments.

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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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 except that the calculations are

carried out to the end of the mortality table (age

99).
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1.2 Net Annual Level Premium

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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Ordinary Life Insurance:

The net annual level premium for a $1000 ordinary

life insurance policy issued at age 45 is calculated

in a similar manner. The same procedure is used

except that the calculations are extended to the

end of the mortality table.

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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 Insurance

Health insurance may be defined broadly as the type

of 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

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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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Cont…
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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