Life Insurance Products

Life Insurance Products

Methods for Providing Life Insurance Protection Yearly renewable term method Level Premium method

Yearly renewable term method

Provides protection for only One Year Insured in permitted to renew the policy for

successive one year periods with no evidence of insurability

Premium increase gradually during early years, but rises sharply during later years

E.g.: Standard death rate for males at age 30 = 1.73 for each thousand lives. Death Benefit=Rs1000, Group size=100000 Male, Period=1 Year The insurance company has to pay 1,73,000. This means each insured

must pay a premium of 1.73 (173000/100000)

Age Death Rate Calculation Premium

30 1.73 173000/100000 1.73

31 1.78 178000/(100000-173)=178000/99827=

1.78304

32 1.83 183000/(99827-178)=183000/99649

1.83644

Age Premium

40 3.02

50 6.71

60 16.08

70 39.51

80 98.84

90 221.77

98 657.98

99 1000

As premiums sharply increase during later years, renewable method becomes prohibitive in cost. So some insured’s may drop their insurance

The healthier members may drop their life insurance as the premium increases, but unhealthier ones will continue to renew their policies despite the premium increase. This situation leads to adverse selection against the insurer

Therefore, if insured wants life time protection, renewable term method is impractical.

Level Premium Method Premiums do not increase from year to year but remain level

throughout the premium paying period. Premiums paid during earlier years of policy are higher than is

necessary to pay current death claims while those paid in later years are inadequate for paying death claims. The excess premiums paid during early years are invested at compound interest and accumulated funds are then used to supplement the inadequate premiums paid during later years.

The method of investing in accumulating the fund in regulated by state law and is referred to a legal reserve.

To summarize, level premium is possible because the excess premiums are invested at compound interest and are used to supplement the deficiency in premiums during the later years

Level Premium Method

Age

Amount

Net Amount at Risk(Protection Element)

Legal Reserve(Saving element)

•Fig. represents the legal reserve under an ordinary life policy.

•As shown the legal reserve increases with time and is equal to the face

value of the policy at age100.

•Death claim=legal reserve + net amount at risk

The death claim consists of two elements : Legal reserve (savings element) Net amount at risk (protection element)

The legal reserve steadily increases over time and is equal to the face value of the policy at age 100.if the insured is still alive at age 100 the face amount of the policy is paid at that time.

As the legal reserve increases, the net amount at risk declines

To summarize, the fundamental purpose of Legal reserve is to provide life time protection

Cash Values The cash values are the by-product of the level

premium method , not the purpose of it As the policy holder has got the right to surrender

the policy ,it can be done with the available cash surrender value(% of total paid up value)

The cash values are below the legal reserve for several years but after the policy has been in force over an extended period ,such as 15 years, the cash surrender will equal the full reserve.

Types of life insurance products

Term Insurance (pure Insurance

Protection)

Cash Value Insurance (Protection and Savings)

Term Insurance Whole-life insurance

Endowment insurance

Money Back

ULIPs

Pension plans

Life insurance products

Life insurance products are referred as plans of insurance.

These plans have 3 basic elements: Death Cover providing for benefit paid on the

death of the insured person within a specified period

Survival benefit providing for benefit being paid on survival for a specified period

Maturity benefit

Types of Life Insurance Products

On the basis ofDuration

On the basis of Participation of Profits

On the basis ofSum Assured

On the basis ofNumber of lives covered

On the basis ofPremium Payment

Term, Endowment, Whole Life

Regular, Limited, Single

With Bonus, Without Bonus

Single, Joint-life policies

Annuity policies, Lump sum policies

Term insurance Term insurance typically provides pure death protection ,there is

no savings feature and therefore no cash surrender value (legal reserve)

Sum assured is paid on the event of death of the life assured occurring during the period and nothing is paid if the LA survives during the term period

The selected term premiums are usually payable throughout the term of the policy or till prior death of the LA.

Term insurance are the cheapest policies Term policies are always ‘without profits’ Term insurance with ROP and WROP.

Types of Life Insurance Products-On the basis of duration

Types of term insurance Straight or temporary term insurance

Policy can be bought for a definite term and carries death benefit only.

The policy is only issued under without profits plan The policy is not entitled to any surrender value and no

loan can granted thereon (no savings element) The policy can be(sometimes) converted in to other plans


Types of term insurance Renewable Term Policies

Policies are renewable at the expiry of the term for additional period without medical examination, but the premium rate will be altered according to the age attained at the time of renewal.

E.g. Insured purchases a 10 year term polocy at age 25 and survives this period. He or she has option of renewing the policy for additional 10 years without medical examination. However, the premium rate would be increasing according to the attained age.

However, most insurance companies because of the element of adverse selection, impose an age limit beyond which renewal is not permitted (mostly age 55-60)

Refer to KOTAK TERM PLAN


Types of term insurance

Convertible Term Policies

The Insured has a option to convert the term plan into some other contract (whole life,

endowment, endowment assurance) without any fresh medical examination

The period of conversion should not be later than 2 years before expiry of original

term. E.g. if original term=6 years, the option of conversion can be exercised before

the end of 4th year.

In some plans, the option can be exercised anytime before age 60

If the option of conversion is exercised, a new policy under the whole life or

endowment plan will be issued as the case may be, subject to the rate of premium

and terms and conditions prevailing on the date of conversion.


Types of term insurance

Convertible Term Policies The conversion is usually affected as the policy holders attain age, but it can also be

made retro active to his/her original age.

E.g. Original age of LA 25 years, conversion decision=32 years, so if LA decides to

convert the policy at 32 retroactive to his original age(25 years), the premium rates

would be the one paid if whole life had originally been purchased at 25. This means,

the lump sum has to be paid to insurer to bring the policy to the level it would have

originally been at age 25.

As price competition in term insurance has intensified, some insurers have determined

that by eliminating the conversion privilege, they can offer a lower price product.

The plan is useful to those who are initially unable to pay the larger premium required

for a whole life or a endowment.


1. Pure protection

2. Temporary protection

3. Keyman insurances are generally term insurances

Disadvantages:

1. Chances of adverse selection are more

Advantages of Term Life Insurance

Endowment Policies Pure Endowment Policy

A pure endowment is a contract that promises to pay the sum assured of the policy only if insured survives during the policy term

SA=Paid on Survival

Death=Nothing

Pure endowment is designed for the benefit of the policy holder and term policy for the benefit of dependents of life insured. So pure endowment has the element of investment and term has an element of protection.

Surrender values are allowed on this policy

Endowment Policies Ordinary Endowment Policy (also called

Endowment Assurance) Term + Endowment This is the policy which represents life insurance

in true sense. Provides a combination of both family protection

and investment It is taken out for a specified term of years, the

sum assured being payable either on life insured’s death during the period or on his survival to the end of the period.

Endowment Policies

Premiums are payable throughout the term of the policy or to a limited period or till the prior death of the life assured

The net premium rate for an ordinary endowment policy is equal to the net premiums of term and pure endowment policies issued at the same age for the same period of time

SA=Paid on Survival

Death= Sum Assured

Refer to Reassuring Life Ideally, once your protection needs are met, consider a saving

plan. The Reassuring Life Endowment Plan with

reversionarybonus* is one such policy. Besides being a savings option, it also acts as a highly reliable

safety net for your family in case something happens to you. The Reassuring Life Endowment Plan is ideal because it gives

you the incredible benefit of a reversionary bonus* which enhances your life cover, and hence your sum assured, dramatically, every year. So when the endowment policy matures you can receive almost double the initial sum assured.

Endowment Policies Joint Life Endowment Policy

Covers more than one life under single policy. The sum assured is payable on the expiry of the

term or on death of one of the assured lives during the endowment period

Premiums are payable through-out the endowment period or till the prior death of any of the life assured

Paid-up and surrender values are payable on the policy

Endowment Policies Anticipated Endowment Policy or Money-

back This policy is similar to endowment assurance

except that a part of SA is paid at certain interval before death within maturity of the policy and balance of SA is payable at maturity

In event of death anytime during the term of the policy that is before the maturity date, full SA is payable without any deduction of installments paid earlier

Endowment policies can be made partcipating at the option of the policy holder

Endowment Policies Double Endowment Policy

Under this policy if the life assured dies during the endowment period, the basic sum assured in payable and if he survives to the end of the term, double of the sum assured is paid.

Premiums are payable throughout the endowment term or till the prior death of the LA

Combination of endowment insurance and pure endowment for the same period and same amount

SA=Twice of Sum assured

Death= Sum assured

Endowment Policies Fixed term (marriage endowment policy)

This plan stipulates the date on which sum assured will be paid even if life assured died early.

That date can be chosen to coincide with the age of a son or daughter for whose marriage it would come in handy

The premium ceases if the death of the policy holder occurs earlier

Endowment Policies Education Annuity Policy

It an ordinary endowment which states that sum assured would be paid in installments commencing from a date which may be chosen as the likely date when the child may be old enough for higher education.

The difference is sum assured is not payable in lump sum but is payable in equal installments

SAFAL JIVANAn Endowment Plan that offers comprehensive

protection and savings in an easy and hassle free manner

"Safal Jeevan" is the simplest life insurance plan giving you complete freedom to choose from pre-packaged solutions, and decide how much and how long you want to pay premiums.

It offers death benefit, maturity benefit and has an in-built accident cover.

Whole Life Policies Straight whole life Limited payment Whole life Single premium whole life Convertible whole life

Whole Life Policies Straight whole life or Continuous Premium Whole

life or ordinary life insurance Whole life are basically term policies for an unspecified

period. Maximum cover age (in plan) =85 yearsPresent age of LA=40 years, therefore term =85-40=45years,which would be the ppt which means

he has to pay premiums for correspondingly 45 years

SA=paid or not depends on the policy conditions

Death= Sum Assured

Whole Life Policies These policies have an investment or a savings

element called a cash surrender value. The cash values are due to the overpayment of insurance premiums during the early years. As a result the policy owner builds a cash equity in the policy

The policy may be surrendered for its cash value or the cash values may be borrowed under a loan provision.

The policy contains dividend options too (if issued as participating)

Whole Life Policies Although in case of whole life policies SA is paid on

death, some insurers pay the SA when the LA survives the entire term (as discussed earlier).

suitability Where the LA income is regular throughout to pay the

premiums even at old age where the LA does not require the insured sum during his

lifetime. Where the LA wants to make provisions for his dependents

after his death

Whole Life Policies Limitations Some persons are underinsured even after purchasing the policy

as Bcoz of the savings feature some persons may voluntarily

purchase or else be persuaded by a life insurance agent to purchase an ordinary life insurance when term insurance would be a better choice.

Example: A age 30 is a married graduate student with two dependents to support. He estimates he can spend only $500 annually on life insurance. the same premium would purchase about $56000 of whole life insurance. The same premium would purchase about $5lakh of term insurance from many insurers. so it is difficult to justify the purchase of a whole life policy if it leaves the insured inadequately covered.

Whole Life Policies Limited Payment Whole Life

It only differs in the manner in which premium is paid Premium is payable for a limited period although benefits

would accrue as such E.g. Rather than paying premium for 45 years, LA will pay it

only for a chosen limited term (3 or 5 years) Premium would be higher than in a straight whole life Suitability:

Income of LA is guaranteed for a specific period of time. E.g. Artists, Professionals working abroad, regular office workers

Suitable for officers serving in armed forces who have to retire before they reach their retirement age of 55 years

Whole Life Policies Single Premium Limited Whole Life

The limited period is only one year i.e. premium has to be paid one time

These policies are rare but are offered Suitability

Where the LA gets a windfall of income from some source and wants to invest its major part to secure himself

Whole Life Policies Convertible Whole Life

These policies give the holder an option to get it converted into an endowment policy

Usually, a clause is mentioned in such a conversion, “ that the option has to be exercised at the end of five years. If the option is not exercised, the policy will continue on its original term.

In some plans the option can be exercised at any time before age 60

The premium will be increased considerably and the LA is required to pay lump sum to the insurer that will bring the policy at the level it would have originally purchased.

No further underwriting decision on convertibility (no medical examination)

Types of Life Insurance Products-On the basis of Premium Payment

Single Premium: Whole Premium is paid at beginning of Policy Can be afforded by those who got a windfall income and

are expected not to continue such return in subsequent years

Regular Premium: Regular and equal premiums are paid at definite intervals Term to be decided before entering into contract These equal premiums can be paid monthly, quarterly,

half-yearly and quarterly

Types of Life Insurance Products-On the basis of Premium Payment

Limited Premium (3 or 5 years):

Premiums are paid for only 3 or 5 years but risk is

covered for entire term

Premiums would be higher than in regular one.

On the basis of Participation of Profits Without profit’ or ‘Non-participating’ policies

Not entitled to bonuses, which are declared after actuarial valuations.

‘With profit’ or ‘Participating’ policies Pay a slightly higher premium for the right to participate in

the progress of the insurer. Are popular because the bonuses are expected to be more

than the extra premium paid. “With Profit’ policies, where the premium is payable for a

limited period, will continue to participate even after the premiums have ceased

On the basis ofNumber of lives covered Single Life Policy Joint Life Policies

Two or more lives can be covered under one policy Usually cover married couples or partners. The SA is paid on the death of any of the insured persons during the term or

at the end of the term. Some plans also provide payment of SA. on the death of one life and

the policy is continued to cover the second life till maturity, without payment of further premium.

A joint life declaration is necessary to create a joint interest in the policy. In case of partnership insurance, the partnership deed will be examined to

ascertain the nature of financial interest of each partner. Each life will be underwritten separately. Bonuses will accrue on the single basic SA only

On the basis ofSum Assured Annuity Policy Lump Sum Policies

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Life Insurance Products