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## IC - 38 **CORPORATE AGENTS** **LIFE****ACKNOWLEDGEMENT****This course is based on revised syllabus prescribed by Insurance Regulatory and**
**Development Authority of India (IRDAI) and prepared by Insurance Institute of**
**India, Mumbai.****AUTHORS/ REVIEWERS (in Alphabetical order)**Dr. R. K. Duggal
Dr. Shashidharan K. Kutty
CA P. Koteswara Rao
Dr. Pradip Sarkar
Prof. Madhuri Sharma
Dr. George E. Thomas
Prof. Archana VazeG – Block, Plot No. C-46, Bandra Kurla Complex, Bandra (E), Mumbai – 400 051.i## CORPORATE AGENTS **LIFE** **IC - 38****Year of Edition: 2023****ALL RIGHTS RESERVED**This course material is the copyright of Insurance Institute of India (III). This course
is designed for providing academic inputs for students appearing for the
examinations of Insurance Institute of India. This course material may not be
reproduced for commercial purpose, in part or whole, without prior express written
permission of the Institute.The contents are based on prevailing best practices and not intended to give
interpretations or solutions in case of disputes, legal or otherwise.This is only an indicative study material. Please note that the questions in the
examination shall not be confined to this study material only.Published by: Secretary General, Insurance Institute of India, G- Block, Plot C-46,
Bandra Kurla Complex, Bandra (E) Mumbai – 400 051 and Printed atAny communication regarding this study material may be addressed to [email protected]
mentioning the subject title and unique publication number mentioned on the coverpageii## PREFACEInsurance Institute of India, (the Institute) has developed this course material for
Insurance Agents based on the syllabus prescribed by Insurance Regulatory and
Development Authority of India (IRDAI). Industry experts were involved in preparingthe course material.The course provides basic knowledge of Life, General and Health insurance to
enable agents in the respective line of business to understand and appreciate their
professional career in the right perspective.The course is structured as four sections. (1) Overview - a Common section that
covers Insurance Principles, Legal Principles and Regulatory matters that Insurance
agents need to know. Separate sections are provided for those aspiring to become
(2) Life Insurance Agents, (3) General Insurance Agents and (4) Health Insurance
Agents.A set of model questions are included in the course to give students an idea of the
examination format and the types of objective questions that may be asked. The
model questions will also help them in revising what they have learnt.Insurance operates in a dynamic environment. Agents need to be up to date about
changes in the market. They should actively pursue knowledge through personal
study and participation in the in-house training programmes arranged by the
respective insurers.The Institute thanks IRDAI for entrusting this work to the Institute. The Institute
wishes all interested in studying the material a successful career in insurance
marketing.iii## CONTENTS|Chapter no.|Title|Page no.|
|---|---|---|
|**SECTION**|**LIFE INSURANCE **|**LIFE INSURANCE **|
|L-01|What Life Insurance Involves|2|
|L-02|Financial Planning|8|
|L-03|Life Insurance Products: Traditional|22|
|L-04|Life insurance products: Non-Traditional|32|
|L-05|Applications of Life Insurance|38|
|L-06|Pricing and Valuation in Life Insurance|43|
|L-07|Life Insurance Documentation|52|
|L-08|Life Insurance Underwriting|65|
|L-09|Life Insurance Claims <br>|78|iv## SECTION## LIFE INSURANCE1## CHAPTER L-01## WHAT LIFE INSURANCE INVOLVES**Chapter Introduction**We have seen some aspects related to Insurance in the common chapters. However,
when it comes to Life insurance, we need to look at them more deeply. An asset
The risk insured against
The principle of pooling
The contractLet us now examine the features of life insurance. This chapter will take a brief
look at the various components of life insurance mentioned above.**Learning Outcomes**2**A.** **Life insurance business – Components, human life value, mutuality****a)** **The Asset – Human Life Value (HLV)**We have already seen that an asset is a kind of property that yields value or a return.
For most kinds of property both the value and loss of value amounts can be measured
|
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CORPORATE AGENTS
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|L-05|Applications of Life Insurance|38|
|L-06|Pricing and Valuation in Life Insurance|43|
|L-07|Life Insurance Documentation|52|
|L-08|Life Insurance Underwriting|65|
|L-09|Life Insurance Claims <br>|78|iv## SECTION## LIFE INSURANCE1## CHAPTER L-01## WHAT LIFE INSURANCE INVOLVES**Chapter Introduction**We have seen some aspects related to Insurance in the common chapters. However,
when it comes to Life insurance, we need to look at them more deeply. An asset
The risk insured against
The principle of pooling
The contractLet us now examine the features of life insurance. This chapter will take a brief
look at the various components of life insurance mentioned above.**Learning Outcomes**2**A.** **Life insurance business – Components, human life value, mutuality****a)** **The Asset – Human Life Value (HLV)**We have already seen that an asset is a kind of property that yields value or a return.
For most kinds of property both the value and loss of value amounts can be measured
in precise monetary terms.**Example**If the estimated damage of a car meeting an accident is Rs 50000, the insurer will
compensate the owner for this loss.How do we estimate the amount of loss when a person dies?Is he worth Rs. 50,000 or Rs. 5,00,000?An Agent must be able to answer the above question when meeting a customer.
Based on this the agent can determine how much insurance to recommend to the
customer. It is in fact the first lesson a life insurance agent must learn.Luckily we have a measure, developed almost seventy years ago by Prof. Hubener.
It is known as **Human Life Value (HLV)** and is used worldwide.The HLV concept considers human life as a kind of property or asset that earns an
income. It thus measures the value of human life based on an individual’s expected
net future earnings. Net earnings means the income a person expects to earn each
year in the future, less the amount he would spend on himself. It thus indicates the
economic loss a family would suffer if the wage earner were to die prematurely.
These earnings are capitalised, using an appropriate interest rate to discount them.Although there are multiple parameters used to calculate HLV including taking into
account inflation, wage rise, future earning capacity etc., a simple thumb rule to
calculate HLV is to determine the amount that would generate the annual income
the family would be needing by way of interest. In other words HLV is the annual
contribution for the family by the breadwinner divided by the prevailing rate of
interest.**Example**Mr. Rajan earns Rs. 1,20,000 a year and spends Rs. 24,000 on himself. The net
earnings his family would lose, were he to die prematurely, would be Rs. 96,000 per
year. Suppose the rate of interest is 8% (expressed as 0.08).**Human-Life-Value (HLV) = Annual Contribution for Dependents ÷ Rate of****Interest**HLV = 96000/ 0.08 = Rs. 12,00,000HLV helps to determine how much insurance one should have for full protection. It
also tells us the upper limit beyond which providing life insurance may not be
reasonable.3In general, the amount of insurance should be around 10 to 15 times one’s annual
income. Thus one should grow suspicious if Mr. Rajan was to ask insurance of Rs. 2
crores, while earning only Rs. 1.2 lakhs a year. The actual amount of insurance
purchased would depend on factors like how much insurance one can afford and
would like to buy.**B.** **Risk and Life Insurance**As we have seen above, life insurance provides protection against those risk events
that can destroy or reduce the value of human life as an asset. There are three kinds
of situations where such loss can occur. They are typical concerns which ordinary
people face.**Diagram 1:** Typical concerns faced by ordinary peopleGeneral insurance on the other hand typically deals with risks that affect property
– like fire, loss of cargo while at sea, theft and burglary and motor accidents. They
also cover events leading to loss of name and goodwill. These are covered by liability
insurance.Finally there are risks that can affect the person. Termed as personal risks, these
may also be covered by general insurance.**Example**Accident insurance which protects against losses suffered due to an accident.**a)** **How exactly does life insurance differ from general insurance?**|General Insurance|Life Insurance|
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income. Thus one should grow suspicious if Mr. Rajan was to ask insurance of Rs. 2
crores, while earning only Rs. 1.2 lakhs a year. The actual amount of insurance
purchased would depend on factors like how much insurance one can afford and
would like to buy.**B.** **Risk and Life Insurance**As we have seen above, life insurance provides protection against those risk events
that can destroy or reduce the value of human life as an asset. There are three kinds
of situations where such loss can occur. They are typical concerns which ordinary
people face.**Diagram 1:** Typical concerns faced by ordinary peopleGeneral insurance on the other hand typically deals with risks that affect property
– like fire, loss of cargo while at sea, theft and burglary and motor accidents. They
also cover events leading to loss of name and goodwill. These are covered by liability
insurance.Finally there are risks that can affect the person. Termed as personal risks, these
may also be covered by general insurance.**Example**Accident insurance which protects against losses suffered due to an accident.**a)** **How exactly does life insurance differ from general insurance?**|General Insurance|Life Insurance|
|---|---|
| Indemnity: General insurance policies,<br>with the exception of Personal Accident<br>Insurance, are usually contracts of<br>indemnity i.e. after an event like fire, the<br>insurer assesses the exact amount of loss<br>that has occurred and compensates only<br>that amount of loss – no more, no less.| **Assurance:** Life insurance policies are<br>contracts of assurance.<br> The amount of benefit to be paid in<br>the event of death is fixed at the<br>beginning of the contract.<br> An assured sum is paid to the<br>nominees or beneficiaries of the<br>insured when he dies.|
| Duration: The contract is generally short<br>period or for one year renewable basis| The contract is generally long term<br>though some one year renewable<br>contracts are also prevalent|
| Uncertainty: In general insurance<br>contracts, the concerned risk event is| There is no such question Death is<br>certain once a person is born. What is|4|uncertain. No one can be certain about<br>whether a house would catch fire or a car<br>meet an accident.|uncertain is the time of death. Life<br>insurance offers protection against<br>the risk of premature death.|
|---|---|
| Increase in probability: In case of General<br>insurance perils like fire or earthquake,<br>the probability of happening of the event<br>does not increase with time.| In life insurance the probability of<br>death increases with age.|**b)** **Nature of life insurance risk**Since probability of death increases with age, lower premiums are charged for those
who are young and higher premiums for older people. One result was that old
individuals who were in good health, tended to withdraw while unhealthy members
remained in the scheme. Insurance companies faced serious problems as a result.
Their attempts to develop life insurance policies that people could afford led to the
development of level premiums.**c)** **Level premiums**The level premium is fixed such that it does not increase with age but remains
constant throughout the contract period. This means premiums collected in early
years is more than the amount needed to cover death claims of those dying when
young, while premiums collected in later years are less than what is needed to meet
claims of those dying at higher ages. The level premium is an average of both. The
excess premiums of earlier ages compensate for the deficit of premiums in later
ages. The level premium feature is illustrated below.**Diagram 2:** **Level Premium**Level premiums are required because life insurance contracts are long term
insurance contracts that run for 10, 20 or many more years. The concept of level
premiums, do not arise for general insurance policies, which are typically short term
and expire annually.5**Example**The level premium rate is arrived at by the insurers based on the mortality
(probability of death) during the term of the policy as the age of the insured would
increase every year. The rate once decided shall be constant for the entire term of
the policy.**d)** **The Principle of Risk Pooling and Life Insurance**We have already discussed the Principle of Pooling and Mutuality earlier. The
pooling principle plays two specific roles in life insurance.i. It **provides protection against the economic loss arising as a result of one’s****untimely death** . This is done by creating a fund that pools the contributions of
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Final IC 38 - CA_Life - English_002
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claims of those dying at higher ages. The level premium is an average of both. The
excess premiums of earlier ages compensate for the deficit of premiums in later
ages. The level premium feature is illustrated below.**Diagram 2:** **Level Premium**Level premiums are required because life insurance contracts are long term
insurance contracts that run for 10, 20 or many more years. The concept of level
premiums, do not arise for general insurance policies, which are typically short term
and expire annually.5**Example**The level premium rate is arrived at by the insurers based on the mortality
(probability of death) during the term of the policy as the age of the insured would
increase every year. The rate once decided shall be constant for the entire term of
the policy.**d)** **The Principle of Risk Pooling and Life Insurance**We have already discussed the Principle of Pooling and Mutuality earlier. The
pooling principle plays two specific roles in life insurance.i. It **provides protection against the economic loss arising as a result of one’s****untimely death** . This is done by creating a fund that pools the contributions of
many who have purchased a life insurance contract.**e)** **The Life Insurance Contract**The Policy document is the **evidence of the insurance contract** which a details all
the terms and conditions of the **insurance** .The contract states the sum assured of the life insurance policy. Life insurance is
regarded a **financial security** as the sum Insured is guaranteed by the contract. The
guarantee implies that life insurance is managed efficiently and conservatively;
strongly regulated and strictly supervised.Since Life insurance contracts involve both risk cover and savings, they are often
compared with financial products. They are also seen as a way of holding wealth
than as protection. Indeed, many life insurance products have a large cash value or
savings component which can form a significant part of an individual’s savings. Some
do argue that it may be better to buy only Term Insurance from an insurance
company and invest the balance premiums in instruments that yield higher returns.Let us consider the arguments for and against traditional cash value insurance
contracts.**a)** **Advantages**i. Insurance has historically been proven as a **safe and secure investment**
**offering** a minimum guaranteed rate of return, which may increase with
contract duration.ii. Regularity of premium payments requires compulsory planning of one’s
savings and results in savings **discipline** .iii. The Insurer takes care of professional investment management and **frees** the**individual** of this responsibilityiv. Insurance **provides liquidity** . The insured can take a loan on or surrenderthe policy and convert it into cash.v. Both cash value type life insurance and annuities may enjoy some **income**
**tax advantages.**vi. Insurance may be **safe from creditors’ claims**, generally in the event of theinsured’s bankruptcy or death.6**b)** **Disadvantages**i. As insurance gives relatively fixed and stable returns, it can be seriously
affected by inflation.ii. High marketing and other initial costs reduces the amount of cash value
accumulated in earlier years of life insurance policies.iii. The guaranteed yield may be below that of other financial instruments**Test Yourself 1**How does diversification reduce risks in financial markets?I. Collecting funds from multiple sources and investing them in one placeII. Investing funds across various asset classesIII. Maintaining time difference between investmentsIV. Investing in safe assets**Summary**a) Asset is a kind of property that yields value or a return.b) The HLV concept considers human life as a kind of property or asset that earnsan income. It thus measures the value of human life based on an individual’s
expected net future earnings.c) The level premium is a premium fixed such that it does not increase with agebut remains constant throughout the contract period.d) Mutuality is one of the important ways to reduce risk in financial markets, theother being diversification.e) The element of guarantee in a life insurance contract implies that life insuranceis subject to stringent regulation and strict supervision.**Key Terms**1. Asset2. Human Life Value3. Level premium4. Mutuality5. Diversification**Answers to Test Yourself****Answer 1** - The correct answer is II.7## CHAPTER L-02## FINANCIAL PLANNING**Chapter Introduction**In previous chapters we discussed life insurance and its role in providing financial
protection. Security is only one of the concerns of individuals who seek to allocate
their income and wealth to meet various needs of the present and the future. Life
insurance must be understood in the wider context of “Personal Financial Planning”.
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expected net future earnings.c) The level premium is a premium fixed such that it does not increase with agebut remains constant throughout the contract period.d) Mutuality is one of the important ways to reduce risk in financial markets, theother being diversification.e) The element of guarantee in a life insurance contract implies that life insuranceis subject to stringent regulation and strict supervision.**Key Terms**1. Asset2. Human Life Value3. Level premium4. Mutuality5. Diversification**Answers to Test Yourself****Answer 1** - The correct answer is II.7## CHAPTER L-02## FINANCIAL PLANNING**Chapter Introduction**In previous chapters we discussed life insurance and its role in providing financial
protection. Security is only one of the concerns of individuals who seek to allocate
their income and wealth to meet various needs of the present and the future. Life
insurance must be understood in the wider context of “Personal Financial Planning”.
The purpose of this chapter is to introduce the subject of financial planning.**Learning Outcomes**8**A.** **Financial planning and the individual life cycle****1.** **What is financial planning?**Most of us spend a major part of our lives working to make money. Financial planning
is a smart way to make money work for us.**Definition**Financial planning is a process of identifying one’s life’s goals, translating these
goals into financial goals and managing one’s finances to achieve those goals.Financial planning involves preparing a roadmap to meet both current and future
needs, which may be unforeseen. It plays a crucial role in building a life with less
worry. Careful planning can help to set one’s priorities and work to achieve your
various goals.**Diagram 1:** **Types of Goals**i. Goals may be **short term** : Buying an LCD TV set or a family vacationii. They could be **medium term** : Buying a house or a vacation abroadiii. The **long term** goals may include: Education or marriage of one’s child orpost retirement provision**2.** **Individual’s life cycle**From the day a person is born till the day of his/ her death, he/ she goes through
various stages in life, during which he/ she is expected to play a series of roles
These stages are illustrated in the diagram given below.**Diagram 2:** **The Economic Life Cycle**9**Life Stages and Priorities****a)** **Learner (till say age 20 -25)** :The stage when one is preparing for hisfuture byimproving his or her knowledge and skills. Funds are required
for financing one’s education. For instance, meeting the high cost of
fees for Medical or Management Education.**b)** **Earner (from 25 onwards)** :When one has found employment andperhaps earns enough to meet his or her needs and has some surplus to
spare.There are family responsibilities and one may also save and invest
in order to have money to meet the needs that may arise in the
immediate future.For instance, a young man takes a housing loan and
invests in a house.**c)** **Partner(on getting marriage at say 28 - 30)** : The stage when one ismarried and has a family of one’s own.This creates new needs like
having a house of one’s own, perhaps a car, consumer durables,
planning for children’s future etc.**d)** **Parent(say 28 to 35)** : The years when one becomes the parent of oneor more children.One now has to worry about their health and
education - getting them into good schools etc.**e)** **Provider(say age 35 to 55)** : The stage when children have grown intoteenagers, and includes their high school and college years. One is
concerned about the high cost of education to make the child qualified
to face the challenges of life.For instance, consider the amount that
needs to be set up to finance a medical course that runs for five years.In
many Indian homes, making provision for marriage and settlement of
girl children is a critical area of concern.Indeed, marriage and
education of children is a prime motive for savings for most Indian
families today.**f)** **Empty Nester(age 55 to 65):** The term ‘empty nester’ implies that theoffspring have flown away leaving the nest [the household] empty.This
is the period when children have married and sometimes have migrated
to other places for work, leaving the parents.Hopefully by this stage,
one has liquidated one’sliabilities [like housing loan and other
mortgages] and has built up a fund for reirement.It is also the period
when ailments like BP and Diabetes begin to manifest and plague one’s
life.Health care,financial independence and security of income become
|
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|
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concerned about the high cost of education to make the child qualified
to face the challenges of life.For instance, consider the amount that
needs to be set up to finance a medical course that runs for five years.In
many Indian homes, making provision for marriage and settlement of
girl children is a critical area of concern.Indeed, marriage and
education of children is a prime motive for savings for most Indian
families today.**f)** **Empty Nester(age 55 to 65):** The term ‘empty nester’ implies that theoffspring have flown away leaving the nest [the household] empty.This
is the period when children have married and sometimes have migrated
to other places for work, leaving the parents.Hopefully by this stage,
one has liquidated one’sliabilities [like housing loan and other
mortgages] and has built up a fund for reirement.It is also the period
when ailments like BP and Diabetes begin to manifest and plague one’s
life.Health care,financial independence and security of income become
very important at this stage.**g)** **Retirement – the twilight years (age 60 and beyond):** The age whenone has retired from active work and spends one’s savings to meet the
needs of life.The living needs of the husband and wife as long as both
are alive is the focus.One is concerned abouthealth
issues,adequateincome and loneliness.This is also the period when one
would seek to enhance the quality of life and enjoy many of the things
that one had dreamt of but could not achieve – like pursuing a hobby or
going on a vacation or a pilgrimage.Whether one ages gracefully or in
poverty would depend on how much one has provided for these years.10As we can see above, the economic life cycle has three phases: a student or Pre –
job phase; the working phase that begins between ages 18 to 25 and lasts for 35 to
40 years; and the retirement years that begin after one has stopped working.**3.** **Why does one need to save and purchase various financial assets?**The reason is that during each stage in an individual’s life, when one performs a
particular role, a number of needs come up for which funds have to be provided.**Example**When a person gets married and starts a family of his own, he may need to have his
own house. As children grow older, funds are needed for their higher education. As
an individual goes well past middle age, the concern is for having money to meet
health costs and post retirement savings so that one does not need to depend on
one’s children and become a burden. Living with independence and dignity becomes
important.The Savings – Investment process may be considered as being made of two decisions.**i.** **Postponement of consumption:** an allocation of resources between present andfuture consumption.**ii.** **Parting with liquidity** (or ready purchasing power) in exchange for less liquidassets. For instance, purchase of a life insurance policy would mean exchanging
money for a contract which is less liquid.Financial planning includes both kinds of decisions. One needs to plan in order to
save for the future and also must invest wisely in appropriate assets to meet the
various needs that will arise in future.**4.** **Individual needs**If we look at the stages of the life cycle that has been discussed above, we would
see that three types of needs can arise. These give rise to three types of financial
products.a) **Enabling future transactions**The first set of needs arise from funds for meeting a range of anticipated
expenditures that are expected to arise at different stages of the life cycle.
There are two types of such needs:**i.** **Specific transaction needs** : that are linked to specific life events whichrequire a commitment of resources. For instance making a provision for
higher education/ marriage of dependents; or purchase of a house or
consumer durables**ii.** **General transaction needs:** Amounts set aside from current consumptionwithout being earmarked for any specific purposes – these are popularly
termed as ‘future provisions’**b)** **Meeting contingencies**Contingencies are unforeseen life events that may call for large funds. These
cannot met from current income and need to be pre-funded. Some of these11events, like death and disability or unemployment, lead to a loss of income.
Others, like a fire, may result in a loss of wealth.Such needs may be addressed through insurance, if the probability of their
occurrence is low but cost impact is high. One may alternatively meet them by
setting aside a large amount of liquid assets as a reserve.**c)** **Wealth accumulation**The accumulation motive refers to an individual’s desire to invest for
accumulating wealth, taking advantage of favourable market opportunities.
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There are two types of such needs:**i.** **Specific transaction needs** : that are linked to specific life events whichrequire a commitment of resources. For instance making a provision for
higher education/ marriage of dependents; or purchase of a house or
consumer durables**ii.** **General transaction needs:** Amounts set aside from current consumptionwithout being earmarked for any specific purposes – these are popularly
termed as ‘future provisions’**b)** **Meeting contingencies**Contingencies are unforeseen life events that may call for large funds. These
cannot met from current income and need to be pre-funded. Some of these11events, like death and disability or unemployment, lead to a loss of income.
Others, like a fire, may result in a loss of wealth.Such needs may be addressed through insurance, if the probability of their
occurrence is low but cost impact is high. One may alternatively meet them by
setting aside a large amount of liquid assets as a reserve.**c)** **Wealth accumulation**The accumulation motive refers to an individual’s desire to invest for
accumulating wealth, taking advantage of favourable market opportunities.
Some individuals may take a cautious approach while investing, while some may
be willing to take more risks, with a view to earn a higher return. Higher return
is desired because it helps to increase one’s wealth or net worth more rapidly.
Wealth is linked with independence, enterprise, power and influence.**5.** **Financial products**Corresponding to the above sets of needs there are three types of products in the
financial market:|Transactional<br>products|Bank deposits and other savings instruments that enable one<br>to have adequate purchasing power (liquidity) at the right<br>time and quantum.|
|---|---|
|**Contingency**<br>**products like**<br>**insurance**|These provide protection against large losses that may be<br>suffered in the event of sudden unforeseen events.|
|**Wealth**<br>**accumulation**<br>**products**|Shares and high yielding bonds or real estate are examples of<br>such products. Here the investment is made with a view to<br>committing money for making more money.|An individual would typically have a mix of all of the above needs and thus may
need to have all three types of products. In a nutshell one may say there is:i. A need to save – For cash requirementsii. A need to insure – Against uncertaintiesiii. A need to invest – For wealth creation**6.** **Risk profile and investments**As an individual moves through various stages in the life cycle, from young earner
towards middle ages and then towards the final years of one’s work life, the risk
profile, or approach towards taking risks also changes.When one is young, one may be quite aggressive and willing to take risks in order to
accumulate as much wealth as possible. As the years pass however, one may become
more prudent and careful about investing. One is now concerned to secure and
consolidate one’s investments.Finally, as one nears retirement one may be more conservative. The focus is now to
have a corpus from which one can spend in the post retirement years. One may also
think about making donations for one’s children, for gifting to charity etc.12**One’s investment style also changes to keep pace with the risk profile.** This is
indicated below:**Diagram 3:** **Risk Profile and Investment Style****Risk Profile** **Investment Style****Test Yourself 1**Which among the following gives specific protection against unforeseen events?I. InsuranceII. Transactional products like bank Fixed DepositsIII. SharesIV. Debentures**B.** **Role of financial planning****1.** **Financial planning**Financial planning is the process of carefully evaluating a ~~c~~ lient’s current and future
needs along with his or her risk profile and income, to chart out a road map for
meeting various anticipated/ unforeseen needs through recommending appropriate
financial products.Elements of financial planning include: Investing - allocating assets based on one’s risk taking appetite, Risk management, Retirement planning, Tax and estate planning, and Financing one’s needsTo put it in a nutshell financial planning involves 360 degrees planning.13**Diagram 4:** **Elements of Financial Planning****2.** **Role of Financial planning**Financial planning is not a new discipline. It was practiced in simple form by our
fore fathers. There were limited investment options then. A few decades ago many
considered equity investment as akin to gambling. Savings were largely channelled
in bank deposits, postal savings schemes and other fixed income instruments. The
challenges facing our society and our customers are far different today. Some of
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needs along with his or her risk profile and income, to chart out a road map for
meeting various anticipated/ unforeseen needs through recommending appropriate
financial products.Elements of financial planning include: Investing - allocating assets based on one’s risk taking appetite, Risk management, Retirement planning, Tax and estate planning, and Financing one’s needsTo put it in a nutshell financial planning involves 360 degrees planning.13**Diagram 4:** **Elements of Financial Planning****2.** **Role of Financial planning**Financial planning is not a new discipline. It was practiced in simple form by our
fore fathers. There were limited investment options then. A few decades ago many
considered equity investment as akin to gambling. Savings were largely channelled
in bank deposits, postal savings schemes and other fixed income instruments. The
challenges facing our society and our customers are far different today. Some of
them are:**i.** **Disintegration of the joint family**The joint family has given way to the nuclear family, consisting of father,
mother and children. The typical head and earning member of this family has to
bear the responsibility for taking care of oneself and one’s immediate family.
This may call for a lot of proper planning and advice from a professional financial
planner.**ii.** **Multiple investment choices**A large number of investment instruments are available today for wealth
creation, each offering varying degrees of risk and return. To achieve financial
goals, one has to choose wisely and make the right investment decisions based
on one’s risk taking appetite. Financial planning can help with one’s asset
allocation.**iii.** **Changing lifestyles**Instant pleasure seems to be the order of the day. Individuals want to have the
latest mobile phones, cars, large homes, memberships of prestigious clubs, etc.
To satisfy these desires, people often borrow heavily and spend a good part of
their income to pay off loans, leaving little scope to save. Financial planning
helps to plan and one’s expenditure so that one can cut down unnecessary
expenses so as to maintain one’s present standard of living while upgrading it
over time.**iv.** **Inflation**Inflation is a rise in the general level of prices of goods and services in an
economy over a period of time. This leads to a fall in the value of money. As a
result, the purchasing power of money gets reduced. Inflation can play havoc14post retirement. Financial planning can help to ensure that one is equipped to
deal with inflation, especially in later years.**v.** **Other contingencies and needs**Financial planning also enables individuals to meet a number of other needs and
challenges like medical emergencies and tax liabilities. Individuals also need to
ensure that their estate consisting of their wealth and properties, smoothly pass
on to their loved ones after their death. There are other needs like the need to
do charity or meet certain social and religious obligations during one’s lifetime
and even thereafter. Financial planning is the means to achieve all this.3. **When is the right time to start financial planning?****Financial planning** is not meant only for the wealthy. Indeed, Planning should
ideally start one earns one’s first salary. There is no trigger point to tell when one
should begin to plan.**There is however an important principle that should guide us – the longer the**
**time period of our investments, the more they will multiply.**Hence one should start early. One’s investments would then get the maximum
benefit of time. Again, planning is not only for wealthy individuals. It is for
everyone. To achieve one’s financial goals, one must follow a disciplined approach.
An unplanned, impulsive approach to financial planning is one of the prime causes
of financial distress of individuals.**Test Yourself 2**When is the best time to start financial planning?I. Post retirement
II. As soon as one gets his first salary
III. After marriage
IV. Only after one gets rich**C.** **Financial planning - Types**Let us now look at the various types of financial planning exercises that an individual
may need to do.15**Diagram 5:** **Financial Planning Advisory Services**Consider the various advisory services that may be provided. There are six such
areas that are taken up Cash planning Investment planning Insurance planning Retirement planning Estate planning Tax planning**1.** **Cash planning**Managing cash flows has two purposes.i. To manage income and expenditures flow including establishing andmaintaining a reserve of liquid assets to meet unanticipated needs.ii. To systematically create and maintain a surplus of cash for capitalinvestment.Cash Planning involves a number of steps. One must prepare a budget and analyse
one’s income and expenditure flows to check on what regular and lump sum costs
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An unplanned, impulsive approach to financial planning is one of the prime causes
of financial distress of individuals.**Test Yourself 2**When is the best time to start financial planning?I. Post retirement
II. As soon as one gets his first salary
III. After marriage
IV. Only after one gets rich**C.** **Financial planning - Types**Let us now look at the various types of financial planning exercises that an individual
may need to do.15**Diagram 5:** **Financial Planning Advisory Services**Consider the various advisory services that may be provided. There are six such
areas that are taken up Cash planning Investment planning Insurance planning Retirement planning Estate planning Tax planning**1.** **Cash planning**Managing cash flows has two purposes.i. To manage income and expenditures flow including establishing andmaintaining a reserve of liquid assets to meet unanticipated needs.ii. To systematically create and maintain a surplus of cash for capitalinvestment.Cash Planning involves a number of steps. One must prepare a budget and analyse
one’s income and expenditure flows to check on what regular and lump sum costs
have been incurred. While fixed expenses cannot be controlled easily, one can
reduce, postpone and manage expenses that are variable. The next step is to
**predict future monthly income and expenses over the whole year and** design a
plan for managing these cash flows.Another part of the cash planning process is to design strategies for maximizing
discretionary income.**Example**One can restructure one’s outstanding debts.One can meet outstanding credit card debts through consolidating them and paying
them off through a bank loan with lower interest.16One may reallocate one’s investments to make them earn more income.**2.** **Insurance planning**There are certain risks to which individuals are exposed that can keep them from
attaining their personal financial goals. Insurance planning involves constructing a
plan of action to provide adequate insurance against such risks.The task here is to estimate how much insurance is needed and determining what
type of policy is best suited.**i.** **Life insurance** may be decided by estimating the income and expenserequirements of the dependents in the event of premature death of the
bread winner.**ii.** **Health insurance** requirements may be assessed in terms of thehospitalisation expenses that are likely to be incurred in any family medicalemergency.a. Finally **insurance for one’s assets** may be considered in terms of thetype and quantum of cover required to protect one’s home/ vehicle/
factory etc. from the risk of loss.**3.** **Investment planning**There is no one right way to invest. What is appropriate would vary from individual
to individual. Investment planning is a process of determining the most suitable
investment and asset allocation strategies based on an individual’s risk taking
appetite, financial goals and the time horizon to meet those goals.**a)** **Investment parameters****Diagram 6:** **Investment Parameters**The first step here is to define certain investment parameters. These include:17**i.** **Returns** : Returns on Investment is often the most important parameter thatpeople look for when they invest their money. The rate of return determines
how fast one’s wealth from investments would grow over time. The role of
returns can be appreciated when one considers the ‘Power of compounding’.
For instance, if an amount of Rs 1000 is invested today at 8% rate of interest,
at the end of five years, it would accumulate to Rs 1469 and at the end of
10 years it would more than double to reach Rs 2159. This expectation of
returns which helps to accumulate wealth is one of the prime motives of
investment. At the same time, one must note that higher rates of return may
be typically accompanied with higher levels of risk. One has to make a tradeoff between return and risk. This depends on an individual’s risk tolerance.**ii.** **Risk tolerance** : A measure of how much risk someone is willing to take inpurchasing an investment.**iii.** **Time horizon** : This is the amount of time available to attain a financialobjective. The longer the time horizon, the less concern is there about short
term liability. One can invest in longer term, in less liquid assets that earn
a higher return.**iv.** **Liquidity** : Individuals with limited investment capacity, or uncertain incomeand expenditure flows, or who are investing for meeting a particular
personal or business expenditure, would be concerned with liquidity [This
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For instance, if an amount of Rs 1000 is invested today at 8% rate of interest,
at the end of five years, it would accumulate to Rs 1469 and at the end of
10 years it would more than double to reach Rs 2159. This expectation of
returns which helps to accumulate wealth is one of the prime motives of
investment. At the same time, one must note that higher rates of return may
be typically accompanied with higher levels of risk. One has to make a tradeoff between return and risk. This depends on an individual’s risk tolerance.**ii.** **Risk tolerance** : A measure of how much risk someone is willing to take inpurchasing an investment.**iii.** **Time horizon** : This is the amount of time available to attain a financialobjective. The longer the time horizon, the less concern is there about short
term liability. One can invest in longer term, in less liquid assets that earn
a higher return.**iv.** **Liquidity** : Individuals with limited investment capacity, or uncertain incomeand expenditure flows, or who are investing for meeting a particular
personal or business expenditure, would be concerned with liquidity [This
refers to the ability to convert investment into cash without loss of value.]**v.** **Marketability** : The ease with which an asset can be bought or sold.**vi.** **Diversification** : The extent to which one seeks to diversify or spread theinvestments to reduce the risks.**vii.** **Taxes** : Many investments confer certain income tax benefits and one maylike to consider the post-tax returns of various investments.**b)** **Selection of appropriate investment vehicles**The next step is selection of appropriate investment vehicles based on the above
parameters. The actual selection would depend on the individual’s expectations
about return and risk.In India there are a variety of products that may be considered for the purpose of
investments. These include: Fixed deposits of banks/ corporates, Small savings schemes of post office, Public issues of shares, Debentures or other securities, Mutual funds Unit linked policies that are issued by life insurance companies etc.18**4.** **Retirement planning**It is the process of determining the amount of money that an individual needs to
meet his needs post retirement and deciding on various retirement options for
meeting these needs. Retirement planning involves three phases**a)** **Accumulation:** Accumulation of funds is done through various kinds ofstrategies to set aside money for investment with this purpose.**b)** **Conservation:** Conservation refers to the efforts made to ensure that one’sinvestments are put to hard work and that the principal gets maximised during
the individual’s working years.**c)** **Distribution:** Distribution refers to the optimal method of converting the corpusor principal into withdrawals/ annuity payments for meeting income needs
after retirement.**5.** **Estate planning**It is a plan for the devolution and transfer of one’s estate after one’s demise. There
are various processes like nomination and assignment or preparation of a will. The
basic idea is to ensure that one’s property and assets are smoothly distributed and
or utilised according to one’s wishes after one is no more.**6.** **Tax planning**Tax planning is done to determine how to gain maximum tax benefit from existing
tax laws and also for planning of income, expenses and investments taking full
advantage of the tax breaks. As per the tax laws in India, life insurance premium
paid by an individual on a life insurance policy on his/ her own life, on the life of
his/ her spouse and children is eligible for deduction under Section 80C of the
Income Tax Act for calculating the taxable income. Currently, this deduction is
allowed up to Rs.1,50,000 subject to conditions. The maturity proceeds (sum
assured plus bonus) of such policies are also exempted under Section 10 (10D).
Similarly, Death Claim amounts are exempt from Income Tax at the hands of the
recipient. One must note that the purpose here is to minimise and not evade taxes.Life insurance agents may be often required by their clients and prospective
customers to advise them not only about meeting their insurance needs but also for
support in meeting their other financial needs as well. A sound knowledge of
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or utilised according to one’s wishes after one is no more.**6.** **Tax planning**Tax planning is done to determine how to gain maximum tax benefit from existing
tax laws and also for planning of income, expenses and investments taking full
advantage of the tax breaks. As per the tax laws in India, life insurance premium
paid by an individual on a life insurance policy on his/ her own life, on the life of
his/ her spouse and children is eligible for deduction under Section 80C of the
Income Tax Act for calculating the taxable income. Currently, this deduction is
allowed up to Rs.1,50,000 subject to conditions. The maturity proceeds (sum
assured plus bonus) of such policies are also exempted under Section 10 (10D).
Similarly, Death Claim amounts are exempt from Income Tax at the hands of the
recipient. One must note that the purpose here is to minimise and not evade taxes.Life insurance agents may be often required by their clients and prospective
customers to advise them not only about meeting their insurance needs but also for
support in meeting their other financial needs as well. A sound knowledge of
financial planning would be of great value to any insurance agent.**Test Yourself 3**Which among the following is not an objective of tax planning?I. Maximum tax benefitII. Reduced tax burden as a result of prudent investmentsIII. Tax evasionIV. Full advantage of tax breaks19**Summary**Financial planning is a process of: Identifying one’s life’s goals, Translating these identified goals into financial goals and Managing one’s finances in ways that will help one to achieve those goalsBased on the individual life cycle three types of financial products are needed.
These help in: Enabling future transactions, Meeting contingencies and Wealth accumulationThe need for financial planning is further increased by the changing societal
dynamics like disintegration of the joint family, multiple investment choices
that are available today and changing lifestyles etc.The best time to start financial planning is right after one receives the first
salary.Financial planning advisory services include: Cash planning,
Investment planning,
Insurance planning,
Retirement planning,
Estate planning and
Tax planning**Key Terms**1. Financial planning
2. Life stages
3. Risk profile
4. Cash planning
5. Investment planning
6. Insurance planning
7. Retirement planning
8. Estate planning
9. Suitability information
10. Tax planning20**Answers to Test Yourself****Answer 1** - The correct option is I.
**Answer 2** - The correct option is II.
**Answer 3** - The correct option is III.21## CHAPTER L-03## LIFE INSURANCE PRODUCTS: TRADITIONAL**Chapter Introduction**The chapter introduces you to the world of life insurance products. It begins by
talking about products in general and then proceeds to discussing the need for life
insurance products and the role they play in achieving various life goals. Finally we
look at some traditional life insurance products.**Learning Outcomes**22**A.** **Overview of life insurance products****1.** **What is a product?**To begin with, let us understand what is meant by a ‘product’. In popular terms a
product is normally just considered as a commodity or good that is brought and sold
in the market.It is necessary to understand that every Product is a bundle of features or attributes
that confer certain benefits.All Companies try to differentiate their products by making them more attractive
to customers and offering different kinds of features and benefits. A life insurance
agent’s role is to understand and pitch on these features and benefits to make the
products of their companies unique and attractive compared to others.**Example**Colgate, Close up and Promise are all different brands of toothpastes. But the
features of each brand is different from the other.Products may be:**i.** **Tangible** : refers to physical objects that can be directly seen or felt by touch
(for instance a car or a television set)**ii.** **Intangible:** refers to products that can only be perceived indirectly.Life insurance is a product that is intangible.**2.** **Purpose of Life Insurance products.**Human beings possess **an immensely valuable asset** - **human capital – which is the**
**source of our productive earning capacity.** However, there is an uncertainty about
life and human well-being. Events like death and disease can destroy our Earning
capabilities and life savings. Insurance provides protection for such situations.Life insurance products offer protection against the loss of economic value of an
individual’s productive abilities, as a result of death or disability. The moment an
individual takes a life insurance policy and pays the first premium, **an immediate**
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agent’s role is to understand and pitch on these features and benefits to make the
products of their companies unique and attractive compared to others.**Example**Colgate, Close up and Promise are all different brands of toothpastes. But the
features of each brand is different from the other.Products may be:**i.** **Tangible** : refers to physical objects that can be directly seen or felt by touch
(for instance a car or a television set)**ii.** **Intangible:** refers to products that can only be perceived indirectly.Life insurance is a product that is intangible.**2.** **Purpose of Life Insurance products.**Human beings possess **an immensely valuable asset** - **human capital – which is the**
**source of our productive earning capacity.** However, there is an uncertainty about
life and human well-being. Events like death and disease can destroy our Earning
capabilities and life savings. Insurance provides protection for such situations.Life insurance products offer protection against the loss of economic value of an
individual’s productive abilities, as a result of death or disability. The moment an
individual takes a life insurance policy and pays the first premium, **an immediate**
**estate is created** in his/ her name and its proceeds are available to his/ her
dependents or loved ones.Life insurance provides peace of mind and protection to the near and dear ones of
an individual, in case of one’ unfortunate death. Beyond providing such protection,
life insurance fulfils other needs of the market, such as savings, wealth
accumulation, safety and security of investment and certain rates of return, which
are not discussed in this course.Life insurance industry has seen enormous innovations in product offerings over the
last two centuries. The journey began with death benefit products but over the
period, multiple living benefits like endowment, disability benefits, dreaded disease
covers and so on were added.23One of the major innovations of recent years was the creation of market linked
policies where the insured was invited to participate in choosing and managing his
investment assets. Another major innovation was the evolution of flexible
unbundled products, in which different benefits as well as cost components could
be varied by the policy holder as per changing needs, affordability and life-stages.**3.** **Suitability Information**In order to make insurance intermediaries including agents and brokers more
accountable and reduce instances of mis-selling, IRDAI has created a concept of
‘product suitability’. ‘Suitability information’ is the information of a prospect on
age, income, family status, life stage, financial and family goals, investment
objectives, insurance portfolio already held, etc. That is, before selling an insurance
policy to a client, an Agents should be able to justify the suitability of the product
for the client’s needs.In other words, the Agent takes into account the particular prospect’s risk profile age, income, family status, life stage, financial and family goals, investment
objectives, insurance portfolio already held, insurance needs etc. and decides
whether the product is suitable for that prospect. The nature of product, the
amount of premium, the mode of premium payment and tenure of the policy as well
as the manner of premium payment are also part of the parameters of ‘Suitability’.IRDAI mandates that the suitability information collected should be signed by the
prospect and the agent; and preserved by the Insurer as part of the policy records
and made available for inspection by the Authority.**4.** **Riders in Life Insurance Products**A rider is a provision typically added through an endorsement, which becomes part
of the contract. Riders are commonly used to provide supplementary benefits like
increasing the amount of death benefit provided by a policy, say, because of
accidents. Life insurance companies offer a number of riders through which the
value of their offerings get enhanced Riders help to customise different
requirements of a person into a single plan.Riders provide a means to provide benefits like Disability cover, accident cover and
Critical Illness cover as additional benefits in a standard life insurance contract.
Policy holders can avail of them by paying an extra premium.**Test Yourself 1**Which among the following is an intangible product?
I. CarII. HouseIII. Life insurance
IV. Soap24**B.** **Traditional life insurance products**We shall now learn about some of the traditional types of life insurance products.**Diagram 1:** **Traditional Life Insurance Products****1.** **Term insurance plans**Term insurance is a contract that is valid only during a certain time period. This
may range from the short time required to complete an airplane trip to multiple
years. Protection may extend up to age 65 or 70. One-year term policies are quite
similar to property and casualty insurance contracts. There is no savings or cash
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of the contract. Riders are commonly used to provide supplementary benefits like
increasing the amount of death benefit provided by a policy, say, because of
accidents. Life insurance companies offer a number of riders through which the
value of their offerings get enhanced Riders help to customise different
requirements of a person into a single plan.Riders provide a means to provide benefits like Disability cover, accident cover and
Critical Illness cover as additional benefits in a standard life insurance contract.
Policy holders can avail of them by paying an extra premium.**Test Yourself 1**Which among the following is an intangible product?
I. CarII. HouseIII. Life insurance
IV. Soap24**B.** **Traditional life insurance products**We shall now learn about some of the traditional types of life insurance products.**Diagram 1:** **Traditional Life Insurance Products****1.** **Term insurance plans**Term insurance is a contract that is valid only during a certain time period. This
may range from the short time required to complete an airplane trip to multiple
years. Protection may extend up to age 65 or 70. One-year term policies are quite
similar to property and casualty insurance contracts. There is no savings or cash
value element in this policy.In October 2020, IRDAI has introduced a Standard Individual Term Life Insurance
Product called, “Saral Jeevan Bima” (the Insurer’s name shall be prefixed to the
product name), a non-linked non-participating individual pure risk premium life
insurance plan, which provides for payment of Sum Assured in lump sum to the
nominee in case of the Life Assured’s unfortunate death during the policy term.Apart from certain benefits and riders specified by the Regulator, no other riders/
benefits/ options/ variants are allowed to be offered. Also, there shall be no
exclusions under the product other than the suicide exclusion. Saral Jeevan Bima is
to be offered to individuals without restrictions on gender, place of residence,
travel, occupation or educational qualifications.**a)** **Purpose**A Term Life insurance plan fulfils the main and basic idea behind life insurance,
which is to provide an assured sum of money to the dependents of the insured
on his/ her death.**The policy works as an income replacement plan also.** Here the payment of a
lump-sum amount is replaced by a series of monthly, quarterly or similar
periodical payments to the dependent beneficiaries.**b)** **Disability**
Normally a Term insurance policy covers only death. However, it is possible to
buy a Disability Protection Rider on the main policy. In such a case, if the insured
suffers from a specified disability during the term of the contract, a disability25benefit would be paid to the beneficiaries/ insured person. The benefits will
continue till the death of the insured person.**Diagram 2:** **Disability****c)** **Term insurance as a rider**Protection under Term Life is usually provided as a stand-alone policy but it
could also be provided through a rider in a policy.**Example**A rider to a pension plan provides for a death benefit to be payable if one dies
before the date when pension is to start.**d)** **Convertibility**Convertible term insurance policies allow a policyholder to change or convert a
term insurance policy into a permanent plan like “Whole Life” without providing
fresh evidence of insurability. This privilege helps those who wish to have
permanent cash value insurance but are unable to afford its high premiums.
When the term policy is converted into permanent insurance the new premium
rate would be higher.**e)** **Unique Selling Proposition** ( **USP)**The unique selling proposition (USP) of term assurance is its low price, enabling
one to buy relatively large amounts of life insurance on a limited budget.**f)** **Variants**A number of variants of term assurance are possible.**Diagram 3:** **Variants of Term Assurance****i.** **Decreasing Term Assurance**
These plans typically consist of decreasing term insurance which provides an
amount of death benefit that is equal to the balance that is due on a loan, if the
borrower dies before the loan is paid. These are often marketed as Mortgage
Redemption (discussed in Chapter 15) or Credit Life Insurance. The plans are26usually sold to lending institutions as group insurance to cover the lives of their
borrowers. Purchase of mortgage redemption insurance is often a condition of
the mortgage loan. Such plans may also be available for automobile or other
personal loans.**ii.** **Increasing term assurance**
As the name suggests, the plan provides a death benefit, which increases along
with the term of the policy. Premium generally increases as the amount of
coverage increases.**iii.** **Term insurance with return of premiums**
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one to buy relatively large amounts of life insurance on a limited budget.**f)** **Variants**A number of variants of term assurance are possible.**Diagram 3:** **Variants of Term Assurance****i.** **Decreasing Term Assurance**
These plans typically consist of decreasing term insurance which provides an
amount of death benefit that is equal to the balance that is due on a loan, if the
borrower dies before the loan is paid. These are often marketed as Mortgage
Redemption (discussed in Chapter 15) or Credit Life Insurance. The plans are26usually sold to lending institutions as group insurance to cover the lives of their
borrowers. Purchase of mortgage redemption insurance is often a condition of
the mortgage loan. Such plans may also be available for automobile or other
personal loans.**ii.** **Increasing term assurance**
As the name suggests, the plan provides a death benefit, which increases along
with the term of the policy. Premium generally increases as the amount of
coverage increases.**iii.** **Term insurance with return of premiums**
Another type of policy (quite popular in India) is term assurance with return of
premiums. Though the premium paid would be much higher than for a similar
term insurance plan without return of premiums, some customers may need such
policies.**g)** **Relevant scenarios**Term insurance may have relevance in the following situations:
i. Where the need for insurance protection is purely temporary, as in case ofmortgage redemption
ii. As an additional supplement to a savings plan.
iii. As part of a “buy term and invest the rest” philosophy, where one seeks onlycheap term insurance protection from the insurance company and wants to
invest the difference of premiums in other attractive investments.**Important****Limitations of term plans:** Term Insurance plans are available only for specific
periods and one may not be able to continue the coverage beyond a certain age,
say 65 or 70.**2.** **Whole life insurance**Whole life insurance is an example of a permanent life insurance policy. Here, the
life insurer offers to pay the agreed death benefit when the insured dies, no matter
when the death might occur. The premiums can be paid throughout one’s life or for
a limited time as specified.Whole life premiums are much higher than term premiums as whole life policies are
designed to remain in force until the death of the insured, and pay the death benefit
anytime. The Plan also provides for a cash value in the policy holder’s account. He/
she can withdraw cash in the form of a policy loan from this cash value or even
redeem it by surrendering the policy for its cash value.In case of outstanding loans, the amount of loan and interest get deducted from the
pay-out to the beneficiaries upon death.**A whole life policy is a good plan for the main earner of the family who wishes**
**to protect his/ her loved ones in the event of premature death and preserve his/**
**her capital against erosion from various events like terminal illness.** One can also
use the cash value of the whole life insurance policy for retirement needs, if27required. Whole life insurance thus plays an important role in household saving and
creating wealth to be passed on to the next generation.**3.** **Endowment Assurance**It is a contract in which the sum assured is payable to the nominees of the insured
in case of the death of the insured during the term of the policy. If the insured
survives the term the sum assured is paid to the insured.**The product has both death and survival benefit components.** Endowment
Assurance links one’s insurance and savings programmes by offering a safe and
compulsory method of savings accumulation.People buy endowment plans as a sure method of providing against old age or for
meeting specific purposes like having a fund for (a) educational purposes, (b)
meeting children’s marriage expenses or(c) paying a mortgage (housing) loan.**Government usually offers tax benefits on the premiums paid, which make it**
**attractive.** Many endowment policies mature at ages 55 to 65, when the insured is
planning for his/ her retirement. In such cases such policies can supplement
retirement savings.**Variants:** Endowment assurance has certain variants - discussed below.**4.** **Money Back Policy**
The Money Back policy is a popular endowment plan in India. It has a provision for
returning some part of the sum assured in instalments during the term and the
balance sum assured at the end of the term.**Example**A Money Back policy for 20 years may provide for paying survival benefits of 20% of
the sum assured each at the end of the 5 [th], 10 [th] and 15 [th] years and the balance 40%
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compulsory method of savings accumulation.People buy endowment plans as a sure method of providing against old age or for
meeting specific purposes like having a fund for (a) educational purposes, (b)
meeting children’s marriage expenses or(c) paying a mortgage (housing) loan.**Government usually offers tax benefits on the premiums paid, which make it**
**attractive.** Many endowment policies mature at ages 55 to 65, when the insured is
planning for his/ her retirement. In such cases such policies can supplement
retirement savings.**Variants:** Endowment assurance has certain variants - discussed below.**4.** **Money Back Policy**
The Money Back policy is a popular endowment plan in India. It has a provision for
returning some part of the sum assured in instalments during the term and the
balance sum assured at the end of the term.**Example**A Money Back policy for 20 years may provide for paying survival benefits of 20% of
the sum assured each at the end of the 5 [th], 10 [th] and 15 [th] years and the balance 40%
at the end of the full term of 20 years. If the life assured dies at the end of, say 18
years, the full sum assured and bonuses (explained in the next section) accrued are
paid as death benefit, even though the insured would have been paid a benefit of
60% of the face value already, as money back.Money Back plans have been popular because of their liquidity (cash back) element,
which make them attractive for meeting short and medium term needs. Such plans
provide full death protection also, if the individual dies at any point during the term
of the policy.**5.** **Participating (Par) and Non-Participating (Non-Par)Plans**The Life Insurance products can also be classified as Participating (Par) and Nonparticipating (Non-Par) products. The term “Par” implies policies which are
participating in the profits of the life insurer. “Non–Par”, on the other hand,
represents policies which do not participate in the profits. Both kinds are present
in traditional life insurance. Under all traditional plans, the pooled life funds, which
are derived from policyholders’ premiums, are invested as per regulatory norms.
Policy holders who opt for ‘par products’ are eligible to receive, in addition to a28guaranteed sum assured, a share in the surpluses( bonuses) that are generated by
the insurer. These are known as ‘With Profit’ plans.**6.** **Non-participating products**The Policy holders who buy non-linked without profit [non par] plans are paid a
benefit that is fixed and guaranteed at the beginning of the contract and nothing
more. Non-participating products may be offered either under a ‘linked platform’
or a ‘non-linked platform’. These are known as ‘Without Profits’ plans.**Example**One may have an endowment policy of twenty years providing a guaranteed addition
of 2% of sum assured for each year of term, so that the maturity benefit is sum
assured plus a total addition of 40% of the sum assured.Under the IRDAI’s guidelines on traditional non-par policies, the benefits to be paid
on the happening of a specified event, have to be explicitly stated at the outset and
not linked to an index or benchmark. The same applies to additional benefits that
are accrued at regular intervals. This means that the return on these policies must
be disclosed at the time of taking the policy.**Important**Death benefits are subject to regulations of IRDAI issued from time to time. At
present, as per the new Regulation 9 of IRDAI (Non-linked) Products Regulation,
2019 pertaining to traditional products, the minimum death cover is as follows:For all non-linked individual life insurance products, the minimum Sum Assured on
death during the entire term of the policy shall not be less than 7 times the
annualized premium, for limited or regular premium products, and 1.25 times the
single premium for single premium products.For participating products, in addition to the sum assured on death, the bonus and
additional benefits as stated in the policy and accrued till the date of death shall
become payable on death as part of the death benefit, if not paid earlier. In
essence, there are **two variants**, participating and non-participating plans.i. For **participating polices** the bonus is linked to the investment performanceof the fund and is not declared or guaranteed before. The **bonus, once it is**
**announced, becomes a guarantee** . It is usually paid in case of death of the
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be disclosed at the time of taking the policy.**Important**Death benefits are subject to regulations of IRDAI issued from time to time. At
present, as per the new Regulation 9 of IRDAI (Non-linked) Products Regulation,
2019 pertaining to traditional products, the minimum death cover is as follows:For all non-linked individual life insurance products, the minimum Sum Assured on
death during the entire term of the policy shall not be less than 7 times the
annualized premium, for limited or regular premium products, and 1.25 times the
single premium for single premium products.For participating products, in addition to the sum assured on death, the bonus and
additional benefits as stated in the policy and accrued till the date of death shall
become payable on death as part of the death benefit, if not paid earlier. In
essence, there are **two variants**, participating and non-participating plans.i. For **participating polices** the bonus is linked to the investment performanceof the fund and is not declared or guaranteed before. The **bonus, once it is**
**announced, becomes a guarantee** . It is usually paid in case of death of the
policyholder or maturity benefit. This bonus is also called **reversionary**
**bonus** .
ii. In case of **non-participating policies**, the return on the policy is disclosed inthe beginning of the policy itself.**7.** **Pension Plans and Annuities**A pension plan is typically a fund into which money is paid during a person’s
employment years and from which money is drawn to support the person after his
[retirement from work in the form of periodic payments.](https://en.wikipedia.org/wiki/Retirement)29Pension plans are designed on group (usually employer driven) or individual basis. A
group pension may be a "defined benefit plan", where a fixed sum is paid regularly
to a person, or a "defined contribution plan", under which a fixed sum is invested
[which becomes available at retirement age. Pensions are essentially guaranteed life](https://en.wikipedia.org/wiki/Life_annuity)
[annuities, thus insuring against the risk of longevity. A pension created by an](https://en.wikipedia.org/wiki/Life_annuity)
employer for the benefit of an employee is commonly referred to as an occupational
or employer pension.On retirement, the money in the member's account is used to provide retirement
benefits, typically by purchasing an annuity which then provides a regular income.
An annuity is a long-term investment issued by an insurance company designed to
help protect one from the risk of outliving one’s income. Through annuitization,
one’s contributions are converted into periodic payments that can last for life.Individuals can avail of pension benefits by purchasing pension plans from insurance
companies. Pension plans can be **on accumulation or deferred** **basis** which allows
a person to contribute in two ways, (i) in lump sum, or (ii) over a period of time; so
that he/ she can get a pension from the desired age/ date (called as the ‘vesting’
date). One can opt to receive pensions/ annuities on monthly, quarterly, half-yearly
or annual modes. Pension plans are available on an **immediate basis** also, from the
very next month of purchase, on payment of a lump sum amount, called as
immediate annuity.The Indian insurance industry has several deferred and immediate annuity products
marketed by Life Insurers. Each product has its own features, terms, conditions and
annuity options.**Saral Pension:** To provide uniformity across Insurers, to reduce confusion in the
market about annuity schemes, and to make available a product that will broadly
meet the needs of an average customer, in January 2021, IRDAI mandated all Life
Insurers to introduce a standard, immediate annuity product, with simple features
and standard terms and conditions on an individual (not group) basis. Such a
standard product will make it easier for the customers to make an informed choice,
enhance the trust between the Insurers and the insured, and reduce mis-selling as
well as potential disputes.The standard individual immediate annuity product is called, “Saral Pension”,
prefixed by the Insurer’s name. The product offer two (and only two) annuity
options as follows:a) Life annuity with 100% Return of Purchase Price; andb) Joint Life annuity with a provision of 100% annuity to the secondary annuitant
on death of the primary annuitant and return of 100% Purchase Price on death
of last survivor.Mode of Annuity payment would be Monthly, Quarterly, Half-Yearly and Yearly.
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annuity options.**Saral Pension:** To provide uniformity across Insurers, to reduce confusion in the
market about annuity schemes, and to make available a product that will broadly
meet the needs of an average customer, in January 2021, IRDAI mandated all Life
Insurers to introduce a standard, immediate annuity product, with simple features
and standard terms and conditions on an individual (not group) basis. Such a
standard product will make it easier for the customers to make an informed choice,
enhance the trust between the Insurers and the insured, and reduce mis-selling as
well as potential disputes.The standard individual immediate annuity product is called, “Saral Pension”,
prefixed by the Insurer’s name. The product offer two (and only two) annuity
options as follows:a) Life annuity with 100% Return of Purchase Price; andb) Joint Life annuity with a provision of 100% annuity to the secondary annuitant
on death of the primary annuitant and return of 100% Purchase Price on death
of last survivor.Mode of Annuity payment would be Monthly, Quarterly, Half-Yearly and Yearly.
Details are available on IRDAI’s website at the following link
=
[https://www.irdai.gov.in/ADMINCMS/cms/whatsNew_Layout.aspx?page](https://www.irdai.gov.in/ADMINCMS/cms/whatsNew_Layout.aspx?page=PageNo4353&flag=1) PageNo43
[53&flag=1](https://www.irdai.gov.in/ADMINCMS/cms/whatsNew_Layout.aspx?page=PageNo4353&flag=1)30**Test Yourself 2**The premium paid for whole life insurance is _____________ than the premium paid
for term assurance.I. Higher
II. Lower
III. Equal
IV. Substantially higher**Summary**Life insurance products offer protection against the loss of economic value of
an individual’s productive abilities, which is available to his/ her dependents or
to the self.A life insurance policy, at its core, provides peace of mind and protection to the
near and dear ones of the individual in case something unfortunate happens to
him or her.Term insurance provides valid cover only during a certain time period that has
been specified in the contract.The unique selling proposition (USP) of term assurance is its low price, enabling
one to buy relatively large amounts of life insurance on a limited budget.While term assurance policies are examples of temporary assurance, where
protection is available for a temporary period of time, whole life insurance is an- example of a permanent life insurance policy.**Key Terms**1. Term insurance2. Whole life insurance3. Endowment assurance
4. Money back policy
5. Par and non-par schemes
6. Reversionary bonus**Answers to Test Yourself****Answer 1** -The correct option is III.
**Answer 2** - The correct option is I.31## CHAPTER L-04## LIFE INSURANCE PRODUCTS: NON-TRADITIONAL**Chapter Introduction**The chapter introduces you to the world of non-traditional life insurance products.
We start by examining the limitations of traditional life insurance products and then
have a look at the appeal of non-traditional life insurance products. Finally we look
at some of the different types of non-traditional life insurance products available
in the market.**Learning Outcomes**32**A.** **Overview of non-traditional life insurance products****1.** **Non-traditional life insurance products – Purpose and need**In the previous chapters we have considered some of the traditional life insurance
products which have insurance as well as a savings element in them.People have been questioning the ability of traditional life insurance policies to
provide a rate of return comparable to other assets in the financial market. Issues
have also been raised about the way they are structured into a single package of
benefits and premiums.**2.** **Limitations of traditional products**a) A critical examination would reveal the following areas of concern:b) **Cash value component:** The savings or cash value component in traditional policies
is not well defined. This makes it less transparent about mortality, interest rates,
expenses and other parameters that are made.c) **Rate of return:** It is not easy to ascertain the rate of return on traditional policies
because the value of the benefits under “With Profit policies” can be known only
when the contract ends. This makes it difficult to compare these policies with other
financial instruments.d)e)f) **Surrender value:** The method of arriving at the cash and surrender values (at any
point of time), are set by the life insurer and not transparent.**Yield:** The yield on these policies are much lower than those from other
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products which have insurance as well as a savings element in them.People have been questioning the ability of traditional life insurance policies to
provide a rate of return comparable to other assets in the financial market. Issues
have also been raised about the way they are structured into a single package of
benefits and premiums.**2.** **Limitations of traditional products**a) A critical examination would reveal the following areas of concern:b) **Cash value component:** The savings or cash value component in traditional policies
is not well defined. This makes it less transparent about mortality, interest rates,
expenses and other parameters that are made.c) **Rate of return:** It is not easy to ascertain the rate of return on traditional policies
because the value of the benefits under “With Profit policies” can be known only
when the contract ends. This makes it difficult to compare these policies with other
financial instruments.d)e)f) **Surrender value:** The method of arriving at the cash and surrender values (at any
point of time), are set by the life insurer and not transparent.**Yield:** The yield on these policies are much lower than those from other
investments.**3.** **Features of Non-Traditional Policies:** Life insurance companies starteddesigning policies with certain innovative features, some of which are given
below:a) **Direct linkage with investment gains:** Policies with direct linkage with thecapital market were designed in an attempt to make investment gains.
b) **Policies that can beat inflation:** Policies were designed to give returnscloser to the inflation rates. The change was that insurers started thinking
that life policies need to match if not beat inflation.
c) **Policies with Flexibility:** Policies which allowed customers to decide (withincertain limits) the amount of premium they wanted to pay; and the amount
of death benefits and cash values they wanted, got designed.
d) **Surrender value:** Policies that gave better surrender values available undertraditional policies were also designed by insurers.These policies became very popular and even began to replace traditional products
in many countries, including India.33**Test Yourself 1**Which among the following is a non-traditional life insurance product?I. Term assuranceII. Universal life insuranceIII. Endowment insuranceIV. Whole life insurance**B.** **Non-traditional life insurance products****Some non-traditional products**We shall discuss some of the non-traditional products which have emerged in the
Indian market and elsewhere.**1.** **Universal Life and Variable Life**Universal Life policy was introduced in the United States in 1979 and quickly became
very popular. Its features are **flexible premiums, flexible face amount and death**
**benefit amounts.** Unlike traditional policies, where fixed premiums have to be paid
periodically to keep the contract in force, universal life policies allow the
policyholder (within limits) to decide the amount of premiums he or she wants to
pay for the coverage.Variable Life was introduced in the United States in 1977.It is a typeof “Whole Life”
policy where the death benefit and cash value of the policy fluctuates according to
the investment performance of a special investment account into which premiums
are credited.The design and sale of the above two kinds of products, both of which were called
Variable Insurance Products, have been discontinued and are not allowed in India
since2019,further to the issue of IRDAI (ULIP) Regulations, 2019.**2.** **Unit linked insurance**Unit Linked Plans, also known as ULIPs were first introduced in UK during the
1960s.They have today emerged as one of the most popular and significant products,
displacing traditional plans in many markets.Unit linked policies help to overcome the limitations of traditional products.
The premium paid by the policyholder gets divided into two major portionsthe first portion which is utilised for providing insurance cover, andthe second portion that gets invested into the fund opted by the insured.The benefits under such contracts are wholly or partially determined by the value
of units credited to the policyholder’s account at the date when payment is due.34In many markets these policies were positioned and sold as investment vehicles with
an attached insurance component.Unlike traditional savings policies that are bundled, Unit linked contracts are
unbundled. Their structure is transparent with the charges to pay for the insurance
and expenses component being clearly specified.**Diagram 1:** **Premium break-up**After deducting the charges from the premium, the balance of the account and
income are invested in **units** .**The Value of Units**The value of units is defined by a rule or formula, which is outlined in advance.
Typically the value of the units is given by the Net Asset Value (NAV), which reflects
the market value of the assets in which the fund is invested. Different persons could
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displacing traditional plans in many markets.Unit linked policies help to overcome the limitations of traditional products.
The premium paid by the policyholder gets divided into two major portionsthe first portion which is utilised for providing insurance cover, andthe second portion that gets invested into the fund opted by the insured.The benefits under such contracts are wholly or partially determined by the value
of units credited to the policyholder’s account at the date when payment is due.34In many markets these policies were positioned and sold as investment vehicles with
an attached insurance component.Unlike traditional savings policies that are bundled, Unit linked contracts are
unbundled. Their structure is transparent with the charges to pay for the insurance
and expenses component being clearly specified.**Diagram 1:** **Premium break-up**After deducting the charges from the premium, the balance of the account and
income are invested in **units** .**The Value of Units**The value of units is defined by a rule or formula, which is outlined in advance.
Typically the value of the units is given by the Net Asset Value (NAV), which reflects
the market value of the assets in which the fund is invested. Different persons could
arrive at the same benefits payable by following the formula.The Formula is as follows:Net Asset Value [NAV] = Market Value of Assets of the fund/ Number of units of the
fundsThus, Policyholder benefits do not depend on the assumptions of the life insurancecompany.Unit linked policies allow policy holders to choose between different kinds of funds.
Each fund would have a different portfolio mix. The investor gets to choose between
a broad option of debt, balanced and equity funds, defined below. Even within these
broad categories there may be other types of options.|Equity Fund|Debt Fund|Balanced Fund|Money Market Fund|
|---|---|---|---|
|~~This fund invests~~<br>the major portion of<br>the money in equity<br>and equity related<br>instruments.<br>|~~This fund invests~~<br>major portion of the<br>money in Govt.<br>Bonds, Corporate<br>Bonds, Fixed<br>Deposits etc.<br>|~~This fund~~<br>invests in a mix<br>of equity and<br>debt<br>instruments<br>|~~This fund invests~~<br>money mainly in<br>instruments such as<br>Treasury Bills,<br>Certificates of Deposit,<br>Commercial Paper etc.<br>|There is also provision to switch from one kind of fund to another if performance of
one or more funds is not found to be up to the mark.35Some of the specific features of ULIP Policies are given below:**i.** **Unitising**Benefits under ULIP policies are determined by the value of units credited to the
policyholder’s account at the date when the claim payment is due to be made. A
unit is created by dividing an investment fund into a number of equal parts.**ii.** **Transparent structure**The charges for insurance cover and expenses in ULIPs are clearly specified. Once
these charges are deducted from the premium, the balance of the account and
income from it are invested in units.**iii.** **Pricing**Under ULIPs, the insured decides the amount of premium that he/ she can
contribute at regular intervals.In all Life Insurance policies, the initial costs are very high. Under traditional
policies, the premium charges for meeting these costs are spread throughout the
policy term.In the case of ULIPs, they are deducted from the initial premiums itself. This
significantly reduces the amount allocated for investment. This is why the value of
the benefits, vis-à-vis the premiums paid, would be very low and even less than the
premiums paid in the early years of the contract.**iv.** **Death Benefit**Unlike in traditional policies, the amount of death benefit in ULIP policies is a
multiple of the premiums paid. In case of death during the term of the policy, the
beneficiary would be paid the higher of the Sum Assured [which is a multiple of the
premium] or the Fund Value (unit price multiplied by the number of units) standing
to his or her account.**v.** **The bearing of investment risk**The value of the units depends on the value of the life insurer’s investments, which
are not guaranteed.The life insurer, though expected to manage the portfolio efficiently, does not give
any guarantee about unit values. Hence, the investment risk is borne by the
policyholder/ unit holder.36**Test Yourself 2**Which of the following statements is/ are incorrect?I. Variable life insurance is a temporary life insurance policy
II. Variable life insurance is a permanent life insurance policy
III. The policy has a cash value account
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the benefits, vis-à-vis the premiums paid, would be very low and even less than the
premiums paid in the early years of the contract.**iv.** **Death Benefit**Unlike in traditional policies, the amount of death benefit in ULIP policies is a
multiple of the premiums paid. In case of death during the term of the policy, the
beneficiary would be paid the higher of the Sum Assured [which is a multiple of the
premium] or the Fund Value (unit price multiplied by the number of units) standing
to his or her account.**v.** **The bearing of investment risk**The value of the units depends on the value of the life insurer’s investments, which
are not guaranteed.The life insurer, though expected to manage the portfolio efficiently, does not give
any guarantee about unit values. Hence, the investment risk is borne by the
policyholder/ unit holder.36**Test Yourself 2**Which of the following statements is/ are incorrect?I. Variable life insurance is a temporary life insurance policy
II. Variable life insurance is a permanent life insurance policy
III. The policy has a cash value account
IV. The policy provides a minimum death benefit guarantee**Summary**A critical concern with respect to life insurance policies was giving a competitive
rate of return comparable to other assets in the financial marketplace.Some of the trends that led to the increase in non-traditional life products
include unbundling, investment linkage and transparency.Universal life insurance is a form of permanent life insurance characterised by
its flexible premiums, flexible face amount and death benefit amounts, and the
unbundling of its pricing factors.ULIPs became one of the most popular and significant products, replacing
traditional plans in many markets.ULIPs provide the means for directly and immediately cashing on the benefits of
a Life Insurer’s investment performance.**Key Terms**1. Universal life insurance2. Variable life insurance3. Unit linked insurance4. Net asset value**Answers to Test Yourself****Answer 1** -The correct option is II.**Answer 2** - The correct option is I.37## CHAPTER L-05## APPLICATIONS OF LIFE INSURANCE**Chapter Introduction**Life insurance does not merely seek to protect individuals from premature death. It
has other applications as well. It can be applied to the creation of trusts with
resultant insurance benefits; it can be applied for creating a policy covering key
personnel of industries and also for redeeming mortgages. We shall briefly describe
these various applications of life insurance.**Learning Outcomes**38N’s
**A.** **Applications of Life insurance****1.** **Married Women’s Property Act**Section 6 of the Married Women’s Property Act, 1874 tries to ensure that the
benefits under a life insurance policy will pass on in a secure manner to the wife
and children through creation of a trust for the purpose.**Diagram 1:** **Beneficiaries under MWP Act**The section provides that when a married man takes a policy on his own life and
clearly expresses on the face of such policy that it is for the benefit of his wife or
his wife and children, and to be held in a trust for their benefit only, the proceeds
of such a policy shall not, so long as the objects of the trust remains, be subject to
the control of the husband or to his creditors or form part of his estate.**Features of a policy under the MWP Act**i. Each policy will remain a separate Trust. Either the wife or child (over 18years of age) can be a trustee.ii. The policy shall be beyond the control of court attachments, creditors andeven the life assured.iii. The claim money shall be paid to the trustees.iv. The policy cannot be surrendered and neither nomination nor assignment isallowed.v. If the policyholder does not appoint a special trustee to receive andadminister the benefits under the policy, the sum secured under the policy
becomes payable to the Official Trustee of the State in which the office at
which the insurance was effected is situated.39**Benefits**The Trust is set up under a deed that cannot be revoked or amended. It can contain
one or more insurance policies. It is important to appoint a trustee who would be
responsible for administering the trust property, including investing the insurance
proceeds, on behalf of the beneficiaries. These benefits are secured from passing
to future creditors**2.** **Key-man Insurance**Keyman insurance is an important form of business insurance.**Definition**Key-man Insurance can be described as an insurance policy taken out by a business
to compensate that business for financial losses that would arise from the death or
extended incapacity of an important member of the business.Many businesses have key persons responsible for a major part of its profits or has
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becomes payable to the Official Trustee of the State in which the office at
which the insurance was effected is situated.39**Benefits**The Trust is set up under a deed that cannot be revoked or amended. It can contain
one or more insurance policies. It is important to appoint a trustee who would be
responsible for administering the trust property, including investing the insurance
proceeds, on behalf of the beneficiaries. These benefits are secured from passing
to future creditors**2.** **Key-man Insurance**Keyman insurance is an important form of business insurance.**Definition**Key-man Insurance can be described as an insurance policy taken out by a business
to compensate that business for financial losses that would arise from the death or
extended incapacity of an important member of the business.Many businesses have key persons responsible for a major part of its profits or has
knowledge and skills that are vital to the organisation and difficult to replace. Key
man insurance is taken by employers on the life of such key persons to facilitate
business continuity and offset the costs and losses which are likely to be suffered in
the event of the loss of a key person. Keyman insurance does not indemnify the
actual losses incurred but compensates with a fixed monetary sum as specified on
the insurance policy.Keyman insurance is allowed as a term insurance policy where the sum assured is
linked to the profitability of the company rather than the key person’s own income.
The premium is paid by the company. In case the key person dies, the benefit is
paid to the company. The proceeds of Keyman insurance is taxable at the hands of
the company.**a)** **Who can be a key-man?**A key person can be anyone directly associated with the business whose loss can
cause financial strain to the business. For example, the person could be a
director of the company, a partner, a key sales person, key project manager, or
someone with specific skills or knowledge which is especially valuable to thecompany.**b)** **Insurable losses**The following are the losses for which key person insurance can provide
compensation:i. Losses related to the extended period when a key person is unable to work,to provide temporary personnel and, if necessary to finance the recruitment
and training of a replacement40ii. Insurance to protect profits. For example, offsetting lost income from lostsales, losses resulting from the delay or cancellation of any business project
that the key person was involved in, loss of opportunity to expand, loss of
specialised skills or knowledge**3.** **Mortgage Redemption Insurance (MRI)**A person taking a loan to buy a property, may be required to pay for mortgage
redemption insurance by the bank, as part of the loan arrangement. “Mortgage
Redemption Insurance” is popularly referred to “Credit Life Insurance policy”.**a)** **What is MRI?**It is an insurance policy that provides financial protection for home loan
borrowers. It is basically a decreasing term life insurance policy taken by
mortgagor to repay the balance on a mortgage loan if he/ she dies before its full
repayment. It can be called a loan protector policy. This plan is suitable for
people whose dependents may need assistance in clearing their debts in case of
the unexpected demise of the policyholder.**b)** **Features**The insurance cover under this policy decreases each year unlike a term
insurance policy where insurance cover is constant during the policy period.**Test Yourself 1**What is the objective behind Mortgage Redemption Insurance?I. Facilitate cheaper mortgage rates
II. Provide financial protection for home loan borrowers
III. Protect value of the mortgaged property
IV. Evade eviction in case of default**Summary**Section 6 of the Married Women’s Property Act, 1874 provides for security of
benefits under a life insurance policy to the wife and children.The policy effected under MWP Act shall be beyond the control of court
attachments, creditors and even the life assured.Keyman insurance is an important form of business insurance. It can be
described as an insurance policy taken out by a business to compensate at for
financial losses that would arise from the death or extended capacity of an
important member of the business.41Mortgage redemption insurance is basically a decreasing term life insurance
policy taken by a mortgagor to repay the balance on a mortgage loan if he/ she
dies before its full repayment.**Key Terms**1. Married Women’s Property Act
2. Keyman insurance
3. Mortgage Redemption Insurance**Answers to Test Yourself****Answer 1** - The correct option is II.42## CHAPTER L-06## PRICING AND VALUATION IN LIFE INSURANCE**Chapter Introduction**The objective of this chapter is to introduce to the learner the basic elements that
are involved in the pricing and benefits of life insurance contracts. We shall first
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IV. Evade eviction in case of default**Summary**Section 6 of the Married Women’s Property Act, 1874 provides for security of
benefits under a life insurance policy to the wife and children.The policy effected under MWP Act shall be beyond the control of court
attachments, creditors and even the life assured.Keyman insurance is an important form of business insurance. It can be
described as an insurance policy taken out by a business to compensate at for
financial losses that would arise from the death or extended capacity of an
important member of the business.41Mortgage redemption insurance is basically a decreasing term life insurance
policy taken by a mortgagor to repay the balance on a mortgage loan if he/ she
dies before its full repayment.**Key Terms**1. Married Women’s Property Act
2. Keyman insurance
3. Mortgage Redemption Insurance**Answers to Test Yourself****Answer 1** - The correct option is II.42## CHAPTER L-06## PRICING AND VALUATION IN LIFE INSURANCE**Chapter Introduction**The objective of this chapter is to introduce to the learner the basic elements that
are involved in the pricing and benefits of life insurance contracts. We shall first
discuss the elements that constitute the premium and then discuss the concept of
surplus and bonus.**Learning Outcomes**43**A.** **Insurance pricing – Basic elements****1.** **Premium**In ordinary language, the term premium denotes the price that is paid by an insured
for purchasing an insurance policy. It is normally expressed as a rate of premium
per thousand rupees of sum assured. The premium rates depend on the age of the
prospect and the plan.These premium rates are available in the form of tables of rates that are available
with insurance companies.**Diagram 1:** PremiumThe rates printed in these tables are known as “Office Premiums”. They are in most
cases the same throughout the term and are expressed as an annual rate.**Example**If the premium for a twenty year endowment policy for a given age is Rs. 4,800, it
means that Rs. 4,800 has to be paid each year for twenty years.However it is possible to have some policies in which the premiums are payable only
in the first few years. Companies also have single premium contracts in which only
one premium is payable at the beginning of the contract. These policies are usually
investment oriented.**2.** **Rebates**Life insurance companies may also offer certain types of rebates on the premium
that is payable. Two such rebates are: For sum assured
For mode of premum44**Rebate for sum assured**The rebate **for sum assured** is offered to those who buy policies with higher
amounts of sum assured. It is offered as a way of passing on to the customer,
the gains that the insurer may make when servicing higher value policies. The
logic is that the effort and cost required to process a policy of Rs 50,000 or
5,00,000 remains the same. But higher sum assured policies yield more premium
and so more profits.**Rebate for mode of premium**Similarly a rebate may be offered **for the mode of premium** . Life insurance
companies may allow premiums to be paid on annual, half yearly, quarterly or
monthly basis. More frequent the mode, more the administrative costs for
collecting and accounting the premium. Again, in the yearly mode, the insurer
can utilise this amount during the entire year and earn interest on it. Insurers
would hence encourage payment via yearly and half yearly modes by allowing a
rebate on these. They may also charge a little extra for monthly mode of
payments, to cover additional administrative expenses involved.**3.** **Extra charges**The tabular premium is charged for those individuals who are not subject to any
significant factors that would pose an extra risk. They are known as **standard**
**lives** and the rates charged are known as ordinary rates.If a person proposing for insurance suffers from certain health problems like
heart ailments or diabetes that can pose a hazard to his life, he or she is
considered to be sub-standard. The insurer may decide to impose an extra
premium by way of a health extra. Similarly an occupational extra may be
imposed on those engaged in a hazardous occupation, like a circus acrobat.
These extras would result in the premium being more than the tabular premium.Again, an insurer may offer certain extra benefits under a policy, which are
available on payment of an extra premium.**Example**A life insurer may offer a Double Accident Benefit or DAB (where double the sum
assured is payable as a claim if death is a result of accident). For this it may
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would hence encourage payment via yearly and half yearly modes by allowing a
rebate on these. They may also charge a little extra for monthly mode of
payments, to cover additional administrative expenses involved.**3.** **Extra charges**The tabular premium is charged for those individuals who are not subject to any
significant factors that would pose an extra risk. They are known as **standard**
**lives** and the rates charged are known as ordinary rates.If a person proposing for insurance suffers from certain health problems like
heart ailments or diabetes that can pose a hazard to his life, he or she is
considered to be sub-standard. The insurer may decide to impose an extra
premium by way of a health extra. Similarly an occupational extra may be
imposed on those engaged in a hazardous occupation, like a circus acrobat.
These extras would result in the premium being more than the tabular premium.Again, an insurer may offer certain extra benefits under a policy, which are
available on payment of an extra premium.**Example**A life insurer may offer a Double Accident Benefit or DAB (where double the sum
assured is payable as a claim if death is a result of accident). For this it may
charge an extra premium of one rupee per thousand sum assured.Similarly a benefit known as Permanent Disability Benefit (PDB) may be availed
by paying an extra per thousand sum assured.**4.** **Determining the premium**Let us now examine how life insurers arrive at the rates that are presented in
the premium tables. This task is performed by an actuary. The process of setting45the premium in case of traditional life insurance policies like term insurance,
whole life and endowment considers following elements: Mortality
Interest
Expenses of management
Reserves
Bonus loading**Diagram 2:** **Components of Premium**The first two elements give us the Net premium. By adding [also called ‘loading’]
the other elements to the net premium we get the gross or office premium**a)** **Mortality and Interest**Mortality is the first element in premiums. It is the chance or likelihood that a
person of a certain age would die during a given year. To find out the expected
Mortality of a person, “Mortality Tables” are used.**Example**If the mortality rate for age 35 is 0.0035 it implies that out of every 1000 people
who are alive as on age 35, 3.5 (or 35 out of 10,000) are expected to die between
age 35 and 36.The table may be used to calculate mortality cost for different ages. For
example the rate of 0.0035 for age 35 implies a cost of insurance of 0.0035 x
1000 (sum assured) = Rs. 3.50 per thousand sum assured.The above cost may be also called the “Risk Premium”. For higher ages the risk
premium would be higher.46**Example**If we need to have Rs. 5 per thousand to meet the cost of insurance after five
years and if we assume a rate of interest of 6%, the present value of Rs. 5 payable
after five years would be 5 x 1/ (1.06) [5 ] = 3.74.If instead of 6% we were to assume 10%, the present value would be only 3.10.
In other words the higher the rate of interest assumed, the lower the present
value.From our study of mortality and interest there are two major conclusions we can
derive Higher the mortality rate in the mortality table, higher the premiumswould be
Higher the interest rate assumed, lower the premium**Net premium**
The estimates of mortality and interest give the “Net Premium”**Gross premium**
Gross premium is the net premium plus an amount called loading. There are
three considerations or guiding principles that needs to be borne in mind when
determining the amount of loading:**b)** **Expenses and reserves**Life insurers have to incur various types of operating expenses including: Agents training and recruitment,
Commissions of agents,
Staff salaries,
Office accommodation,
Office stationery,
Electricity charges,
Other miscellaneous etc.All these have to be paid from premiums that are collected by insurers.
These expenses are suitably loaded to the net premium.**c)** **Lapses and contingencies**In addition to expenses, there are other factors that can make the calculations
of life insurers go wrong.One source of risk is that of lapses and withdrawals. A lapse means that the
policyholder discontinues payment of premiums. In case of withdrawals, the
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derive Higher the mortality rate in the mortality table, higher the premiumswould be
Higher the interest rate assumed, lower the premium**Net premium**
The estimates of mortality and interest give the “Net Premium”**Gross premium**
Gross premium is the net premium plus an amount called loading. There are
three considerations or guiding principles that needs to be borne in mind when
determining the amount of loading:**b)** **Expenses and reserves**Life insurers have to incur various types of operating expenses including: Agents training and recruitment,
Commissions of agents,
Staff salaries,
Office accommodation,
Office stationery,
Electricity charges,
Other miscellaneous etc.All these have to be paid from premiums that are collected by insurers.
These expenses are suitably loaded to the net premium.**c)** **Lapses and contingencies**In addition to expenses, there are other factors that can make the calculations
of life insurers go wrong.One source of risk is that of lapses and withdrawals. A lapse means that the
policyholder discontinues payment of premiums. In case of withdrawals, the
policyholder surrenders the policy and receives an amount from the policy’s
acquired cash value.47Lapses usually happen within the first three years, especially in the first year of
the contract.**d)** **With Profit (participating) policies and Bonus loading**The concept of ‘With Profit’ policies originated when Life insurers started the
practice of charging a high loading in advance to create a buffer to keep them
solvent even in adverse situations. If subsequent experience proved to be more
favourable, the life insurer would share some of the profits it made as a result
with policy holders by way of bonus.In sum we can say that:**Gross premium = Net premium + Loading for expenses + Loading for**
**contingencies + Bonus loading****Test Yourself 1**What does a policy lapse mean?I. Policyholder completes premium payment for a policy
II. Policyholder discontinues premium payment for a policy
III. Policy attains maturity
IV. Policy is withdrawn from the market**B.** **Surplus and bonus****1.** **Determination of surplus and bonus**Every life insurance company is expected to undertake a periodic valuation of its
assets and liabilities. Such a valuation has two purposes:i. To assess the financial state of the life insurer and determine if it is solventor insolvent
ii. To determine the surplus available for distribution among policyholders/share holders**Definition**Surplus is the excess of value of assets over value of liabilities. If it is negative, it is
known as a strain.Let us now see how the concept of surplus in life insurance is different from that of
profit of a firm.48Firms in general look at profits in two ways. Firstly, profit is the **excess of income**
**over outgo** for a given accounting period, as it appears in the profit and loss
account. Profit also forms part of the balance sheet of a firm - it may be defined as
the **excess of assets over liabilities** . In both instances, profits are determined at
the end of the accounting period.**Surplus = Assets - Liabilities**Let us understand what liabilities mean in life insurance. For a given block of life
insurance policies, the life insurer has to make provision for meeting future claims,
expenses and other expected pay-outs that may arise. The insurer also expects to
receive premiums in future for these policies.Liabilities are thus the present value of all payments that have to be made less the
present value of premiums expected to be received on these policies. The present
value is arrived at by applying a suitable rate of discount [the interest rate]
Surplus arises as a result of the life insurer’s actual experience being better than
what it had assumed. Life insurers are obliged to share the benefits arising as a
result with holders of it’s with profit policies.**Example**The profits of XYZ firm as on 31 [st] March 2013, is given as its income less expenses or
its assets less liabilities as on that date.In both instances, the profit is clearly defined and is known.**2.** **Bonus**Insurers have to declare and distribute its divisible surplus among the policy holders
and shareholders of the company [if any] in the form of a bonus. In India, the United
Kingdom and many other countries, distribution of surplus is popular.Bonus is paid as an addition to the basic benefit payable under a contract. Typically
it may appear as an addition to basic sum assured or basic pension per annum. It is
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receive premiums in future for these policies.Liabilities are thus the present value of all payments that have to be made less the
present value of premiums expected to be received on these policies. The present
value is arrived at by applying a suitable rate of discount [the interest rate]
Surplus arises as a result of the life insurer’s actual experience being better than
what it had assumed. Life insurers are obliged to share the benefits arising as a
result with holders of it’s with profit policies.**Example**The profits of XYZ firm as on 31 [st] March 2013, is given as its income less expenses or
its assets less liabilities as on that date.In both instances, the profit is clearly defined and is known.**2.** **Bonus**Insurers have to declare and distribute its divisible surplus among the policy holders
and shareholders of the company [if any] in the form of a bonus. In India, the United
Kingdom and many other countries, distribution of surplus is popular.Bonus is paid as an addition to the basic benefit payable under a contract. Typically
it may appear as an addition to basic sum assured or basic pension per annum. It is
expressed, for example, as Rs. 60 per thousand sum assuredThe most common form of bonus is the **reversionary bonus** . Once declared these
bonus additions, made each year, get attached to the policy and cannot be taken
away. They are called ‘Reversionary’ bonuses because they are received only at the
time of a claim by death or maturity. Bonuses may also be payable on surrender
provided the contract is eligible through having run for a minimum term [say 5 years]49**Types of reversionary bonuses****Diagram 3:** **Types of Reversionary Bonuses****i.** **Simple Reversionary Bonus**This is a bonus expressed as a percentage of the basic cash benefit under the
contract. In India for example, it is declared as amount per thousand sum
assured.**ii.** **Compound Bonus**Here the company expresses a bonus as a percentage of basic benefit and
already attached bonuses. It is thus a bonus on a bonus. A way to express it may
be as @ 8% of basic sum assured plus attached bonus.**iii.** **Terminal Bonus**As the name suggests, this bonus attaches to the contract only at the time of its
termination [by death or maturity]. It is applicable only for the claims arising in
the ensuing year. Thus terminal bonus declared for 2013 would only apply to
claims that have arisen during 2013-14 and not for subsequent years. Terminal
bonuses depend on the time duration of the contract and increase with it. A
contract that has run for 25 years would have higher terminal bonus than one
which has run for 15 years.**3.** **The Contribution Method**Another method of distribution of surplus adopted in North America is the
“Contribution” method. Here, the surplus, i.e. the difference between what was
expected to happen and what actually happened over the year with respect to
mortality, interest and expenses is declared and distributed as dividends.The dividends can be paid in cash, by way of adjustments/ reductions in future
premiums, by allowing purchase of non-forfeitable paid up additions to the policy
or as accumulations to the credit of the policy.50**4.** **Unit Linked Policies**The Principles of Pricing and other features of ULIP Policies have already been
covered in an earlier chapter.**Summary**In ordinary language, the term premium denotes the price that is paid by an
insured for purchasing an insurance policy.The process of setting the premium for life insurance policies involves
consideration of mortality, interests, expense management and reserves.Gross premium is the net premium plus an amount called loading.A lapse means that the policyholder discontinues payment of premiums. In case
of withdrawals, the policyholder surrenders the policy and receives an amount
from the policy’s acquired cash value.Surplus arises as a result of the life insurer’s actual experience being better than
what it had assumed.Surplus allocation could be towards maintaining solvency requirements,
increasing free assets etc.The most common form of bonus is the reversionary bonus.**Key Terms**1. Premium2. Rebate3. Bonus
4. Surplus
5. Reserve
6. Loading
7. Reversionary bonus**Answers to Test Yourself****Answer 1** - The correct option is II.51## CHAPTER L-07## LIFE INSURANCE DOCUMENTATION**Chapter Introduction**We have seen that the insurance industry deals with a large number of forms and
documents in Chapter 7. There are some documents specific to life insurance, which
are discussed in this chapter. Here, we are also discussing the main provisions
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insured for purchasing an insurance policy.The process of setting the premium for life insurance policies involves
consideration of mortality, interests, expense management and reserves.Gross premium is the net premium plus an amount called loading.A lapse means that the policyholder discontinues payment of premiums. In case
of withdrawals, the policyholder surrenders the policy and receives an amount
from the policy’s acquired cash value.Surplus arises as a result of the life insurer’s actual experience being better than
what it had assumed.Surplus allocation could be towards maintaining solvency requirements,
increasing free assets etc.The most common form of bonus is the reversionary bonus.**Key Terms**1. Premium2. Rebate3. Bonus
4. Surplus
5. Reserve
6. Loading
7. Reversionary bonus**Answers to Test Yourself****Answer 1** - The correct option is II.51## CHAPTER L-07## LIFE INSURANCE DOCUMENTATION**Chapter Introduction**We have seen that the insurance industry deals with a large number of forms and
documents in Chapter 7. There are some documents specific to life insurance, which
are discussed in this chapter. Here, we are also discussing the main provisions
incorporated in a policy document. Provisions related to grace period, policy lapse
and non-forfeiture and certain other privileges are also discussed.**Learning Outcomes**52**A. Proposal stage documentation**Further to the common points discussed about the Prospectus and the Proposal Form
in Chapter 7, there are some additional points that Life Insurers need to understand.**Prospectus:** In insurance, ‘Prospectus’ means a document in physical, electronic or
any other format issued by the insurer to sell or promote the insurance product.
The prospectus of an insurance product shall clearly state(a) the Unique Identification Number (UIN) allotted by the Authority for theconcerned insurance product:
(b) the scope of benefits;
(c) the extent of insurance cover;
(d) the warranties, exclusions/exceptions and conditions of the insurance coveralong with explanations.
The prospectus should also provide:(a) a description of the contingency or contingencies to be covered by insurance;
(b) the class or classes of lives or property eligible for insurance under the termsof such prospectus.
In Life insurance, the prospectus should also mention about the Riders (also called
Add-on covers in Health and General Insurance) allowable on the product and their
benefits.**Proposal Form:** In respect of Life insurance, the details of the proposers’ family
members (including parents) indicating their longevity, status of health and
ailments suffered by any of them, are collected through the Proposal form.
Depending on the product, the medical details of the life proposed for insurance,
his/ her personal history of disease and personal characteristics may also be asked
for. The Proposal Form is the document by which insurers get all the information
that they need from the prospect.Section 45 of the Insurance Act, provides that the Policy shall not be called in
question on the ground of mis-statement after three years. Agents have an
important role in guiding the prospect to give answers to all the questions in the
Proposal Form/ Medical Forms etc. truthfully and advising them of the implications
of not doing so in terms of Section 45.Proposal Forms for Life Insurance should state the requirements of Section 45 of the
Act. While answering the questions in the Proposal Form for obtaining life insurance
cover, the prospect is to be guided by the provisions of Section 45 of the Act.Similarly, Section 39 of the Act is about the provision of nomination. Wherever the
facility of Nomination is available to the proposer, the Agent shall inform him/ her
of the provisions of Section 39 of the Act and encourage the proposer to avail the
facility.Aspects related to the personal financial planning of the life proposed including his/
her work span, projected income and expenses, as well as needs for savings and
investment, health, retirement and insurance may also be asked in the Life
Insurance Proposal Form.53**Age Proof:** Age being an important factor for assessing the risk profile of the life to
be insured, Life insurers collect documentary evidence to verify correct age. Valid
age proofs may be standard or non-standard, as discussed in Chapter 7.Life insurers look into the following documents as well.**a)** **Agent’s Confidential Report**The agent is the primary underwriter. All material facts and particulars about the
policyholder, relevant to risk assessment, need to be revealed by the agent in his/
her report. This means that matters of health, habits, occupation, income and
family details need to be mentioned in the report.**b)** **Medical Examiner’s report**In many cases, the life to be insured has to be medically examined by a doctor who
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facility of Nomination is available to the proposer, the Agent shall inform him/ her
of the provisions of Section 39 of the Act and encourage the proposer to avail the
facility.Aspects related to the personal financial planning of the life proposed including his/
her work span, projected income and expenses, as well as needs for savings and
investment, health, retirement and insurance may also be asked in the Life
Insurance Proposal Form.53**Age Proof:** Age being an important factor for assessing the risk profile of the life to
be insured, Life insurers collect documentary evidence to verify correct age. Valid
age proofs may be standard or non-standard, as discussed in Chapter 7.Life insurers look into the following documents as well.**a)** **Agent’s Confidential Report**The agent is the primary underwriter. All material facts and particulars about the
policyholder, relevant to risk assessment, need to be revealed by the agent in his/
her report. This means that matters of health, habits, occupation, income and
family details need to be mentioned in the report.**b)** **Medical Examiner’s report**In many cases, the life to be insured has to be medically examined by a doctor who
is empanelled by the insurance company. Details of physical features like height,
weight, blood pressure, cardiac status etc. are recorded and mentioned by the
doctor in his report called the medical examiner’s report. The underwriter of the
insurance company thereby gets an account of the current health position of the
life to be insured.Many proposals are underwritten and accepted for insurance without calling for a
medical examination. They are known as non–medical cases. The medical
examiner’s report is required typically when the proposal cannot be considered
under non-medical underwriting because the sum proposed or the age of the
proposed life is high or there are certain characteristics which are revealed in the
proposal, which call for examination and report by a medical examiner.**c)** **Moral Hazard report**Moral Hazard is the likelihood that a client's behaviour might change as a result of
purchasing a life insurance policy and such a change would increase the chance of
a loss. This is one factor that Life insurance underwriters take into account seriously
when assessing the risk.Life insurance companies seek to guard against the possibility of individuals seeking
to make a profit from the purchase of life insurance through actions like ending
one’s own life or the life of another. Life insurance underwriters would thus look
for any factors which might suggest such hazard. For this purpose, the company may
require that a Moral Hazard Report has to be submitted by an official of the
insurance company.**Example**Vikas recently purchased a life insurance policy. He then decided to go on a skiing
expedition at a site which was touted to be one of the most dangerous skiing places
on earth. In the past he had refused to undertake such expeditions.54**B. Policy Stage Documentation****1.** **First Premium Receipt**An insurance contract commences when the life insurance company issues a first
premium receipt (FPR).
**The FPR is the evidence that the policy contract has begun.** The first premium
receipt contains the following information:i. Name and address of the life assured
ii. Policy number
iii. Premium amount paid
iv. Method and frequency of premium payment
v. Next due date of premium payment
vi. Date of commencement of the risk
vii. Date of final maturity of the policy
viii.Date of payment of the last premium
ix. Sum assuredAfter the issue of the FPR, the insurance company will issue subsequent premium
receipts when it receives further premiums from the proposer. These receipts are
known as renewal premium receipts (RPR). The RPRs act as proof of payment in the
event of any disputes related to premium payment.**2.** **Policy Document**The policy document is the most important document associated with insurance. **It**
**is evidence of the contract between the assured and the insurance company.** It
is not the contract itself. If the policy document is lost by the policy holder, it does
not affect the insurance contract. The insurance company will issue a duplicate
policy without making any changes to the contract. The policy document has to be
signed by a competent authority and should be stamped according to the Indian
Stamp Act. Life insurers are very careful while designing the policy document
because they bear onus of responsibility for any ambiguity or confusion that may
arise in the interpretation of its wordings.The standard policy document typically has three parts:**a)** **Policy Schedule**The policy schedule forms the first part. It is usually found on the face page of
the policy. The schedules of life insurance contracts would be generally similar.
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receipts when it receives further premiums from the proposer. These receipts are
known as renewal premium receipts (RPR). The RPRs act as proof of payment in the
event of any disputes related to premium payment.**2.** **Policy Document**The policy document is the most important document associated with insurance. **It**
**is evidence of the contract between the assured and the insurance company.** It
is not the contract itself. If the policy document is lost by the policy holder, it does
not affect the insurance contract. The insurance company will issue a duplicate
policy without making any changes to the contract. The policy document has to be
signed by a competent authority and should be stamped according to the Indian
Stamp Act. Life insurers are very careful while designing the policy document
because they bear onus of responsibility for any ambiguity or confusion that may
arise in the interpretation of its wordings.The standard policy document typically has three parts:**a)** **Policy Schedule**The policy schedule forms the first part. It is usually found on the face page of
the policy. The schedules of life insurance contracts would be generally similar.
They would normally contain the following information:55**Diagram 1:** **Policy document components**i. Name of the insurance companyii. Some common details of a policy are: Policy owner’s name and address
Date of birth and age last birthday
Plan and term of policy contract
Sum assured
Amount of premium
Premium paying term
Date of commencement, date of maturity and due date of last premium
Whether policy is with or without profits
Name of nominee
Mode of premium payment – yearly; half yearly; quarterly; monthly; viadeduction from salary
The policy number – which is the unique identity number of the policycontractiii. The insurer’s promise to pay. The events on the happening of which and theamounts that are promised to be paid. This forms the heart of the insurance
contractiv. The signature of the authorised signatory and policy stampv. The address of the local Insurance Ombudsman.**b)** **Standard Provisions**The second component of the policy document is made up of standard policy
provisions, such as relating to proof of age, premium payment grace period etc.
which are normally present in all life insurance contracts. Some of these
provisions may not be applicable in the case of certain kinds of contracts, like
term, single premium or non-participating (with profits) policies. These standard
provisions define the rights and privileges and other conditions, which are
applicable under the contract.**c)** **Specific Policy Provisions**The third part of the policy document consists of specific policy provisions that
are specific to the individual policy contract. These may be printed on the face
of the document or inserted separately in the form of an attachment.56While standard policy provisions, like days of grace or non-forfeiture in case of
lapse, are often statutorily provided under the contract, specific provisions are
generally linked to the particular contract between the insurer and the insured.**Example**A clause precluding death due to pregnancy for a lady who is expecting at the time
of writing the contract.**Test Yourself 1**What does a first premium receipt (FPR) signify? Choose the most appropriate
option.I. Free-look period has ended
II. It is evidence that the policy contract has begun
III. Policy cannot be cancelled now
IV. Policy has acquired a certain cash value.**C. Policy conditions and privileges****Grace Period**As mentioned in Chapter 4, the Grace Period provision enables a policy that would
otherwise have lapsed for non-payment of premium, to continue in force during the
grace period. Every life insurance contract undertakes to pay the death benefit on
the condition that the premiums have been paid up to date and the policy is in
force. The “Grace Period” clause grants the policyholder an additional period of
time to pay the premium after it has become due.The premium however remains due and if the policyholder dies during this period,
the insurer deducts the premium from the death benefit. If premiums remain unpaid
even after the grace period is over, the policy would then be considered lapsed and
the company is not under obligation to pay the death benefit. The only amount
payable would be whatever is applicable under the non-forfeiture provisions.**Important****Lapse and Reinstatement/ Revival**We have already seen that a policy may be said to be in lapse condition if premium
has not been paid even during the days of grace. The good news is that most lapsed
life insurance policies can be reinstated [revived]. As per IRDAI Product Regulations,
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otherwise have lapsed for non-payment of premium, to continue in force during the
grace period. Every life insurance contract undertakes to pay the death benefit on
the condition that the premiums have been paid up to date and the policy is in
force. The “Grace Period” clause grants the policyholder an additional period of
time to pay the premium after it has become due.The premium however remains due and if the policyholder dies during this period,
the insurer deducts the premium from the death benefit. If premiums remain unpaid
even after the grace period is over, the policy would then be considered lapsed and
the company is not under obligation to pay the death benefit. The only amount
payable would be whatever is applicable under the non-forfeiture provisions.**Important****Lapse and Reinstatement/ Revival**We have already seen that a policy may be said to be in lapse condition if premium
has not been paid even during the days of grace. The good news is that most lapsed
life insurance policies can be reinstated [revived]. As per IRDAI Product Regulations,
a Non-Linked Policy can be revived within 5 years from the date of unpaid premium,
whereas a Linked Policy can be revived within 3 years.**Definition**Reinstatement is the process by which a life insurance company puts back into force
a policy that has either been terminated because of non-payment of premiums or
has been continued under one of the non-forfeiture provisions.A revival of the policy cannot however be an unconditional right of the insured. It
can be accomplished only under certain conditions:57**i.** **Revival application within specific time period:** The policy owner must
complete the revival application within the time frame stated in the
provision for such reinstatement, say five years from the date of lapsation.**ii.** **Satisfactory evidence of continued insurability:** The insured must presentto the insurance company satisfactory evidence of continued insurability of
the insured. Not only must her health be satisfactory but other factors such
as financial income and morals must not have deteriorated substantially.**iii.** **Payment of overdue premiums with interest:** The policy owner is requiredto make payment of all overdue premiums with interest from due date of
each premium.**iv.** After having evaluated the evidence of continued insurability the insurermay decide to revive the policy as per existing terms and premium or even
offer revival with increase in premium or reduced risk cover or both.**Perhaps the most significant of the above conditions is that which requires**
**evidence of insurability at revival.** The type of evidence called for would depend
on the circumstances of each individual policy. If the policy has been in a lapsed
state for a very short period of time, the insurer may reinstate the policy without
any evidence of insurability or may only require a simple statement from the insured
certifying that he is in good health.The company may however require a medical examination or other evidence of
insurability under certain circumstances:i. If the grace period has expired since long and the policy is in a lapsedcondition for say, nearly a year.ii. If the insurer has reason to suspect that a health or other problem may bepresent. Fresh medical examination may also be required if the sum assured
or face amount of the policy is large.**Important**Revival of lapsed policies is an important service function that life insurers seek to
actively encourage since policies in lapsed state may do little good to either insurer
or policyholder.**Non-forfeiture provisions**The Insurance Act, 1938 (Section 113) protects policies (which have acquired
surrender value), from lapsation, by keeping them alive to the extent of paid-up
sum assured even without payment of further premiums. This is because the
policyholder has a claim to the cash value accumulated under the policy.**a)** **Surrender values**Surrender value is the amount you stand to get when you decide to make a
premature exit from the plan, i.e. when you have decided to completely withdraw
or terminate the policy before its maturity.Life insurers normally have a chart that lists the surrender values at various times
and also the method that will be used for calculating the surrender values. The58formula takes into account the type and plan of insurance, age of the policy and
the length of the policy premium-paying period.The actual amount of cash one gets in hand on surrender may be different from the
surrender value amount prescribed in the policy. The actual amount may differ on
account of any accrued bonuses, recoveries etc.**Guaranteed Surrender Value [GSV]:** The law in India as per IRDAI Guidelines
(revised in 2019) provides for a Guaranteed Surrender Value [GSV] to be payable if
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surrender value), from lapsation, by keeping them alive to the extent of paid-up
sum assured even without payment of further premiums. This is because the
policyholder has a claim to the cash value accumulated under the policy.**a)** **Surrender values**Surrender value is the amount you stand to get when you decide to make a
premature exit from the plan, i.e. when you have decided to completely withdraw
or terminate the policy before its maturity.Life insurers normally have a chart that lists the surrender values at various times
and also the method that will be used for calculating the surrender values. The58formula takes into account the type and plan of insurance, age of the policy and
the length of the policy premium-paying period.The actual amount of cash one gets in hand on surrender may be different from the
surrender value amount prescribed in the policy. The actual amount may differ on
account of any accrued bonuses, recoveries etc.**Guaranteed Surrender Value [GSV]:** The law in India as per IRDAI Guidelines
(revised in 2019) provides for a Guaranteed Surrender Value [GSV] to be payable if
all premiums have been paid for at least two consecutive years. This Value arrived
as a percentage (say 30%) of premiums paid is called Guaranteed Surrender Value.
The value depends on the duration of premium paid. The GSV is required to be
mentioned in the policy document.**b)** **Policy loans**Life insurance policies that accumulate a cash value also have a provision to grant
the policyholder the right to borrow money from the insurer by using the cash value
of the policy as a security for the loan. The policy loan is usually limited to a
percentage of the policy’s surrender value (say 90%). Note that the policyholder
borrows from his own account. He or she would have been eligible to get the amount
if the policy had been surrendered. In that case the insurance would have been
terminated.Insurers charge interest on policy loans, which are payable semi-annually or
annually. Although loan and interest are repayable periodically, If the loan has not
been repaid, the insurer deducts the amount of outstanding (unpaid) loan and
interest from the policy benefit that is payable. A loan provides relief to
policyholder in case of financial emergencies while keeping the insurance alive.Since the loan is granted on the policy being kept as security, the policy has to be
assigned (explained in later para) in favour of the insurer. Where the policyholder
has nominated (explained in later para) someone to receive the money in the event
of death of the insured, this nomination shall not be cancelled but the nominee’s
right will be affected to the extent of the insurer’s interest in the policy.**Example**Arjun bought a life insurance policy wherein the total death claim payable under
the policy was Rs. 2.5 lakhs. Arjun’s total outstanding loan and interest under the
policy amounts to Rs. 1.5 lakhs. Hence in the event of Arjun’s death, the nominee
will be eligible to get the balance of Rs. 1 lakh.**Special policy provisions and endorsements****a)** **Nomination**i. Under Section 39 of the Insurance Act 1938, the holder of a policy on his/her own life may nominate the person or persons to whom the money secured
by the policy shall be paid in the event of his/her death.
ii. The life assured can **nominate one or more than one person** as nominees.
iii. Nominees are entitled for **valid discharge** and have to **hold the money as a****trustee** on behalf of those entitled to it.
iv. Nomination can be done either **at the time the policy is bought or later** atany time before the maturity of the Policy.59v. Nomination may be incorporated in the text of the Policy itself or by anendorsement on the Policy. Nominations need be communicated to the
insurer and registered by the insurer in the records relating to the Policy.
vi. Nomination can be cancelled or changed at any time before Policy matures,by an endorsement or a further endorsement or a will as the case may be.**Important**Nomination only gives the nominee the right to receive the policy monies from
the insurer in the event of the death of the life assured. However, the money
would be belonging to the legal heir only. **A nominee does not have any right**
**to the whole (or part) of the claim.** However vide Section 39(7) of Insurance
Act,1938, in respect of all policies maturing for payment after 26 [th] December,
2014, nomination in favour of parents, spouse, children or spouse and children
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iv. Nomination can be done either **at the time the policy is bought or later** atany time before the maturity of the Policy.59v. Nomination may be incorporated in the text of the Policy itself or by anendorsement on the Policy. Nominations need be communicated to the
insurer and registered by the insurer in the records relating to the Policy.
vi. Nomination can be cancelled or changed at any time before Policy matures,by an endorsement or a further endorsement or a will as the case may be.**Important**Nomination only gives the nominee the right to receive the policy monies from
the insurer in the event of the death of the life assured. However, the money
would be belonging to the legal heir only. **A nominee does not have any right**
**to the whole (or part) of the claim.** However vide Section 39(7) of Insurance
Act,1938, in respect of all policies maturing for payment after 26 [th] December,
2014, nomination in favour of parents, spouse, children or spouse and children
by the owner of the policy on his/ own life makes the nominees beneficially
entitled to the amount payable by the insurance company.Where the nominee is a minor, the policy holder needs to appoint an appointee.
The appointee needs to sign the policy document to show his or her consent to
acting as an appointee. The appointees lose their status when the nominee
reaches majority age. The policy holder can change the appointee at any time.
If no appointee is given, and the nominee is a minor, then on the death of the
life assured, the death claim is paid to the legal heirs of the policyholder.Where more than one nominee is appointed, the death claim will be payable to
them jointly, or to the survivor or survivors. Nominations made after the
commencement of the policy have to be intimated to the insurers to be
effective.Section 39(11) of the Insurance Act says that where a policyholder dies after the
maturity of the policy but the proceeds and benefit of his policy has not been
made to him because of his death, his nominee shall be entitled to the proceeds
and benefit of his policy.**Diagram 2:** **Provisions related to nomination****b)** **Assignment**Since life insurance policy carries a promise or a debt that the insurance
company owes the insured, it is considered a security for money or property.60We have seen that loan is advanced against by the insurers against the surrender
value of the policy. Similarly, many financial institutions including banks
advance loan against the security of the insurance policy by having it assigned
it in their favour.The term assignment ordinarily refers to transfer of property by writing in favour
of another person.The assignment of a life insurance policy implies the act of transferring the
rights, title and interest in the policy (as property) from one person to another.
The person who transfers the rights is called **assignor** and the person to whom
property is transferred is called **assignee** . On assignment, the ownership of the
policy changes and hence nomination is cancelled, except when assignment is
made to the insurance company for a policy loan.There are two types of assignments.**Diagram 3:** **Types of Assignment**|Conditional Assignment|Absolute Assignment|
|---|---|
|Conditional assignment<br>provides that the policy<br>shall revert back to the<br>life assured on his or<br>her surviving the date of<br>maturity or on death of<br>the assignee.| Absolute assignment provides that all rights, title and<br>interest which the assignor has in the policy are<br>transferred to the assignee without reversion to the<br>former or his/ her estate in any event.<br> The policy thus vests absolutely with the assignee. The<br>latter can deal with the policy in whatever manner he or<br>she likes without the consent of the assignor.|Absolute assignment is more commonly seen in many commercial situations
where the policy is typically mortgaged against a debt assumed by the
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The person who transfers the rights is called **assignor** and the person to whom
property is transferred is called **assignee** . On assignment, the ownership of the
policy changes and hence nomination is cancelled, except when assignment is
made to the insurance company for a policy loan.There are two types of assignments.**Diagram 3:** **Types of Assignment**|Conditional Assignment|Absolute Assignment|
|---|---|
|Conditional assignment<br>provides that the policy<br>shall revert back to the<br>life assured on his or<br>her surviving the date of<br>maturity or on death of<br>the assignee.| Absolute assignment provides that all rights, title and<br>interest which the assignor has in the policy are<br>transferred to the assignee without reversion to the<br>former or his/ her estate in any event.<br> The policy thus vests absolutely with the assignee. The<br>latter can deal with the policy in whatever manner he or<br>she likes without the consent of the assignor.|Absolute assignment is more commonly seen in many commercial situations
where the policy is typically mortgaged against a debt assumed by the
policyholder, like a housing loan.**Conditions for valid assignment**Let us now look at the conditions that are necessary for a valid assignment.i. The assignor must have **absolute right and title or assignable interest** tothe policy being assigned.ii. The assignment should **not be opposed to any law in force** .iii. Assignee can do another assignment, but cannot do nomination becauseassignee is not the life assured.**Important** : A life insurance policy can be assigned wholly or partially The assignment must be signed by the transferor or assignor or dulyauthorized agent and attested by at least one witness.61 The transfer of title has to be specifically set forth in the form of anendorsement on the policy or a separate instrument.
The policyholder must give notice of the assignment to the insurer,without which the assignment will not be valid. Section 38(2) specifies that an insurer may accept the assignment, ordecline the same, if it has sufficient reason to believe that such
assignment is not bona fide or is not in the interest of the policyholder
or in public interest or is for the purpose of trading of insurance policy. However, the insurer shall, before refusing to act upon the endorsement,record in writing the reasons for such refusal and communicate the same
to the policyholder not later than thirty days from the date of the
policyholder giving notice of such transfer or assignment.**Diagram 4:** **Provisions related to assignment of insurance policies****Commonly extended privileges to policyholders**a) **Duplicate Policy:**A life insurance policy document is only an evidence of a promise. Loss or
destruction of the policy document does not in any way absolve the company of
its liability under the contract. Life insurance companies generally have
standard procedures to be followed in case of loss of the policy document.Normally the office would examine the case to see if there is any reason to doubt
the alleged loss. Satisfactory proof may need to be produced that the policy has
been lost and not dealt with in any manner. Generally the claim may be settled
on the claimant furnishing an indemnity bond with or without surety.If payment is shortly due and the amount to be paid is high, the office may also
insist that an advertisement be placed in a national paper with wide circulation,
reporting the loss. A duplicate policy may be issued on being sure that there is
no objection from anyone else.b) **Alteration**Policyholders may seek to effect alterations in policy terms and conditions.
There is provision to make such changes subject to consent of both the insurer
and assured. Normally alterations may not be permitted during the first year of62the policy, except for change in the mode of premium or alterations which are
of a compulsory nature – like change in name or/ address;
readmission of age in case it is proved higher or lower;
request for grant of double accident benefit or permanent disabilitybenefit etc.Alterations may be permitted in subsequent years. Some of these alterations
may be affected by placing a suitable endorsement on the policy or on a separate
paper. Other alterations, which require a material change in policy conditions,
may require the cancellation of existing policies and issue of new policies.Some of the main types of alterations that are permitted arei. Change in certain classes of insurance or term [where risk is not increased]
ii. Reduction in the sum assured
iii. Change in the mode of payment of premium
iv. Change in the date of commencement of the policy
v. Splitting up of the policy into two or more policies
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no objection from anyone else.b) **Alteration**Policyholders may seek to effect alterations in policy terms and conditions.
There is provision to make such changes subject to consent of both the insurer
and assured. Normally alterations may not be permitted during the first year of62the policy, except for change in the mode of premium or alterations which are
of a compulsory nature – like change in name or/ address;
readmission of age in case it is proved higher or lower;
request for grant of double accident benefit or permanent disabilitybenefit etc.Alterations may be permitted in subsequent years. Some of these alterations
may be affected by placing a suitable endorsement on the policy or on a separate
paper. Other alterations, which require a material change in policy conditions,
may require the cancellation of existing policies and issue of new policies.Some of the main types of alterations that are permitted arei. Change in certain classes of insurance or term [where risk is not increased]
ii. Reduction in the sum assured
iii. Change in the mode of payment of premium
iv. Change in the date of commencement of the policy
v. Splitting up of the policy into two or more policies
vi. Removal of an extra premium or restrictive clause
vii. Change from without profits to with profits plan
viii. Correction in name
ix. Settlement option for payment of claim and grant of double accident benefitThese alterations generally do not involve an increase in the risk. There are
other alterations in policies that are not allowed. These may be alterations that
have the effect of lowering the premium. Examples are extension of the
premium paying term; change from with profit to without profit plans; change
from one class of insurance to another, where it increases the risk: and increase
in the sum assured.**Test Yourself 2**Under what circumstances would the policyholder need to appoint an appointee?I. Insured is minorII. Nominee is a minor
III. Policyholder is not of sound mind
IV. Policyholder is not married**Summary**Matters of health, habits and occupation, income and family details need to be
mentioned by the agent in the agent’s report.Details pertaining to physical features like height, weight, blood pressure,
cardiac status etc. are recorded and mentioned by the doctor in his/ her report
called the medical examiner’s report.Moral hazard is the likelihood that a client's behaviour might change as a result
of purchasing a life insurance policy and such a change would increase the
chance of a loss.An insurance contract commences when the life insurance company issues a first
premium receipt (FPR). The FPR is the evidence that the policy contract has
begun.63The policy document is the most important document associated with insurance.
It is the evidence of the contract between the assured and the insurancecompany.The standard policy document typically has three parts which are the policy
schedule, standard provisions and the policy’s specific provisions.The grace period clause grants the policyholder an additional period of time to
pay the premium after it has become due.Reinstatement is the process by which a life insurance company puts back into
force a policy that has either been terminated because of non-payment of
premiums or has been continued under one of the non-forfeiture provisions.A policy loan is different from an ordinary commercial loan in two respects,
firstly the policy owner is not legally obligated to repay the loan and the insurer
need not perform a credit check on the insured.Nomination is where the life assured proposes the name of the person(s) to
which the sum assured should be paid by the insurance company after their
death.The assignment of a life insurance policy implies the act of transferring the
rights right, title and interest in the policy (as property) from one person to
another. The person who transfers the rights is called assignor and the person
to whom property is transferred is called assignee.Alteration is subject to consent of both the insurer and assured. Normally
alterations may not be permitted during the first year of the policy, except for
some simple ones.**Key Terms**1. Agents Confidential Report
2. Medical Examiner’s Report
3. Moral Hazard Report
4. First Premium Receipt (FPR)
5. Policy document
6. Policy schedule
7. Standard provisions
8. Special Provisions
9. Grace period
10. Policy lapse
11. Policy revival
12. Surrender value13. Nomination
14. Assignment**Answers to Test Yourself****Answer 1** - The correct option is II.**Answer 2** - The correct option is II.64## CHAPTER L-08## LIFE INSURANCE UNDERWRITING**Chapter Introduction**A life insurance agent’s work does not stop once a proposal is secured from a
prospective customer. The proposal must also be accepted by the insurance
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death.The assignment of a life insurance policy implies the act of transferring the
rights right, title and interest in the policy (as property) from one person to
another. The person who transfers the rights is called assignor and the person
to whom property is transferred is called assignee.Alteration is subject to consent of both the insurer and assured. Normally
alterations may not be permitted during the first year of the policy, except for
some simple ones.**Key Terms**1. Agents Confidential Report
2. Medical Examiner’s Report
3. Moral Hazard Report
4. First Premium Receipt (FPR)
5. Policy document
6. Policy schedule
7. Standard provisions
8. Special Provisions
9. Grace period
10. Policy lapse
11. Policy revival
12. Surrender value13. Nomination
14. Assignment**Answers to Test Yourself****Answer 1** - The correct option is II.**Answer 2** - The correct option is II.64## CHAPTER L-08## LIFE INSURANCE UNDERWRITING**Chapter Introduction**A life insurance agent’s work does not stop once a proposal is secured from a
prospective customer. The proposal must also be accepted by the insurance
company and result in a policy.Every life insurance proposal has to pass through a gateway where the life insurer
decides whether to accept the proposal and if so, on what terms. In this chapter we
shall know more about the process of underwriting and the elements involved in theprocess.**Learning Outcomes**65**A.** **Underwriting – Basic concepts****1.** **Underwriting purpose**Underwriting has two purposesi. To assess the risk, classify the risk and decide the terms of acceptance or todecline the risk.
ii. To prevent anti-selection against the insurer**Definition**The term **underwriting** refers to the process of evaluating each proposal for life
insurance in terms of the degree of risk it represents and then deciding whether or
not to grant insurance and on what terms.**Anti-selection** is the tendency of people, who suspect or know that their chance of
experiencing a loss is high, to seek out insurance with a view to gain in the process.**Example**If life insurers were to be not selective about whom they offered insurance, there
is a chance that people with serious ailments like heart problems or cancer, who
did not expect to live long, would seek to buy insurance.In other words, if an insurer did not exercise underwriting discretion, it would be
selected against and may suffer losses in the process.**2.** **Equity among risks**The term “Equity” means that applicants who are exposed to similar degrees of risk
must be placed in the same premium class. The Mortality table, used to determine
premiums, represents the mortality experience of standard lives or average risks.
They include the vast majority of individuals who propose to take life insurance.**a)** **Risk classification**To usher equity, the underwriter engages in a process known as **risk classification**
i.e. individual lives are categorised and assigned to different risk classes depending
on the degree of risks they pose. There are four such risk classes.**Diagram 1:** **Risk classification**66**i.** **Standard lives**
These consist of those whose anticipated mortality corresponds to the standard
lives represented by the mortality table.**ii.** **Preferred risks**
These are the ones whose anticipated mortality is significantly lower than
standard lives and hence could be charged a lower premium.**iii.** **Substandard lives**
These are the ones whose anticipated mortality is higher than the average or
standard lives, but are still considered to be insurable. They may be accepted
for insurance with higher (or extra) premiums or subjected to certain
restrictions.**iv.** **Declined lives**
These are the ones whose impairments and anticipated extra mortality are so
great that they could not be provided insurance coverage at an affordable cost.
Sometimes an individual’s proposal may also be temporarily declined if he or
she has been exposed to a recent medical event, like an operation.**3.** **Underwriting process**Underwriting process takes place at two levels: At Field level
At Underwriting department level**a)** **Field or Primary level**Field level underwriting is also known as **primary underwriting** . It includes
information gathering by an agent or company representative to decide whether
an applicant is suitable for granting insurance coverage. The agent plays a
critical role as primary underwriter. He is in the best position to know the life
to be insured.Many insurance companies may require that agents complete a statement or a
confidential report, asking for specific information, opinion and
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Key Terms
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These are the ones whose anticipated mortality is higher than the average or
standard lives, but are still considered to be insurable. They may be accepted
for insurance with higher (or extra) premiums or subjected to certain
restrictions.**iv.** **Declined lives**
These are the ones whose impairments and anticipated extra mortality are so
great that they could not be provided insurance coverage at an affordable cost.
Sometimes an individual’s proposal may also be temporarily declined if he or
she has been exposed to a recent medical event, like an operation.**3.** **Underwriting process**Underwriting process takes place at two levels: At Field level
At Underwriting department level**a)** **Field or Primary level**Field level underwriting is also known as **primary underwriting** . It includes
information gathering by an agent or company representative to decide whether
an applicant is suitable for granting insurance coverage. The agent plays a
critical role as primary underwriter. He is in the best position to know the life
to be insured.Many insurance companies may require that agents complete a statement or a
confidential report, asking for specific information, opinion and
recommendations to be provided by the agent with respect to the proposed life.**Fraud monitoring and role of agent as primary underwriter**Much of the decision with regard to acceptance of a risk depends on the facts
that have been disclosed by the proposer in the proposal form. It may be difficult
for an underwriter who is sitting in the underwriting department to know
whether these facts are untrue and have been fraudulently misrepresented with
deliberate intent to deceive.The agent plays a significant role here. He or she is in the best position to ensure
that the facts that have been represented are true, due to his/ her direct and
personal contact with the proposed life.67**b)** **Underwriting at the Department level**The main level of Underwriting is at the Department or Office level. It involves
specialists and persons who consider all the relevant data on the case to decide
whether to accept a proposal for Life insurance and on what terms.**4.** **Methods of underwriting****Diagram 2:** **Methods of Underwriting**Underwriters may use two types of methods for the purpose:|Judgment Method|Numerical Method|
|---|---|
|~~Under~~<br>~~this~~<br>~~method~~<br>subjective judgment is used,<br>especially when deciding on<br>a case that is complex.<br>|~~Under this method underwriters assign positive~~<br>rating points for all negative or adverse factors<br>(negative points for any positive or favourable<br>factors).<br>|
|~~**Example:**Deciding whether~~<br>life insurance can be given to<br>a <br>person<br>staying<br>in<br>a <br>disturbed country/ area.<br>|~~**Example:** A person with history of cardiac~~<br>ailments and/ or early deaths in the family may<br>be assigned positive points. The total number of<br>points so assigned will help an underwriter in<br>deciding the extent of risk involved.<br>|
|~~In such situations, the~~<br>department may get the<br>expert opinion of a medical<br>doctor who is also called a<br>medical referee.|~~The sum total of these positive/negative points,~~<br>and/or is referred to as Extra Mortality Rating<br>(EMR). Higher EMR indicates that the life is<br>substandard.<br>If<br>the<br>EMR<br>is<br>very<br>high,<br>underwriters may decline insurance.|**Underwriting Decisions**Let us now consider the various kinds of decisions that underwriters may take with
regard to a life proposed for underwriting.**a)** **Acceptance at ordinary rates (OR)** is the most common decision. This ratingindicates that the risk is accepted at the same rate of premium as would
apply to an ordinary or standard life.68**Diagram 3:** **Underwriting decisions****b)** **Acceptance with an extra:** This is the most common way of dealing with thelarge majority of sub-standard risks. It involves charging an extra over the
tabular rate of premium.**c)** **Acceptance with a lien on the sum assured:** A lien is a kind of hold whichthe life insurance company can exercise (in part or whole) on the amount of
benefit it has to pay in the event of a claim.
**Example: Consider the case of an insured who** has suffered and recovered
from a certain disease like TB. Imposition of Lien would imply that if this
person were to die from a relapse of the TB, within a given period, only a
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Declined lives
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regard to a life proposed for underwriting.**a)** **Acceptance at ordinary rates (OR)** is the most common decision. This ratingindicates that the risk is accepted at the same rate of premium as would
apply to an ordinary or standard life.68**Diagram 3:** **Underwriting decisions****b)** **Acceptance with an extra:** This is the most common way of dealing with thelarge majority of sub-standard risks. It involves charging an extra over the
tabular rate of premium.**c)** **Acceptance with a lien on the sum assured:** A lien is a kind of hold whichthe life insurance company can exercise (in part or whole) on the amount of
benefit it has to pay in the event of a claim.
**Example: Consider the case of an insured who** has suffered and recovered
from a certain disease like TB. Imposition of Lien would imply that if this
person were to die from a relapse of the TB, within a given period, only a
decreased amount of death benefit may be payable.**d)** **Acceptance with a restrictive clause:** For certain kinds of hazards arestrictive clause may be applied which limits death benefit in the event of
death under certain circumstances.**Example** is a pregnancy clause imposed on pregnant ladies that limits
insurance payable in the event of pregnancy related deaths occurring within
say three months of delivery.
**e)** **Decline or postpone:** Finally, a life insurance underwriter may decide todecline or reject a proposal for insurance. This would happen when there
are certain health/ other features which are so adverse that they
considerably increase the risk.
**Example:** An individual who suffers from cancer and has little chance of
remission, would be a candidate for rejection,Similarly in some cases it may be prudent to postpone acceptance of the risk
until such time as the situation has improved and become more favourable.69**Example**A lady who has just had a hysterectomy operation may be asked to wait for a few
months before insurance on her life is allowed, to allow any post operation
complications that may have arisen to disappear.**Test Yourself 1**Which of the following cases is likely to be declined or postponed by a life insurer?I. A healthy 18 year old
II. A sports person
III. A person suffering from AIDS
IV. A housewife with no income of her own**B.** **Non-medical underwriting****1.** **Non-medical underwriting**A large number of life insurance proposals may typically get selected for insurance
without conducting a medical examination to check the insurability of a life to be
insured. Such cases are termed as **non-medical proposals** .In view of multiple reasons including the costs involved, in some types of policies,
Life insurers grant insurance without insisting on a medical examination**2.** **Conditions for non-medical underwriting**However non-medical underwriting calls for conditions like applicability to certain
class of lives, certain plans of insurance, certain upper limits of sum insured, entry
age limits, maximum term of insurance etc.to be followed.
**3.** **Rating factors in underwriting**Rating factors refer to various aspects related to financial situation, life style,
habits, family history, personal history of health and other personal circumstances
in the prospective insured’s life that may pose a hazard and increase the risk.
Underwriting involves identifying these hazards and their likely impact and
classifying the risk accordingly.Rating factors may be broadly divided into two – those which contribute to moral
hazard and those which contribute to physical [medical] hazards. Life insurance
companies often divide their underwriting into categories accordingly. Factors like
income, occupation, lifestyle and habits, which contribute to moral hazard, are
assessed as part of **financial underwriting**, while medical aspects of health fall
under **medical underwriting** .**a)** **Female insurance**Women generally have greater longevity than men. However they may face some
problems with respect to moral hazard. This is because many women in Indian
society are victims of male domination and social exploitation. Evils like dowry
deaths exist even today. Longevity of women can also be affected from problems
connected with pregnancy.70Insurability of women is governed by need for insurance and capacity to pay
premiums. Insurance companies may thus decide to grant full insurance only to
those who have earned income of their own and may impose limits on other
categories of women. Similarly some conditions may be levied on pregnantwomen.**b)** **Minors**
Minors have no contracting power of their own. Hence a proposal on the life of
a minor has to be submitted by another person who is related to the minor in
the capacity of a parent or legal guardian. It would also be necessary to ascertain
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Acceptance at ordinary rates (OR)
|
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companies often divide their underwriting into categories accordingly. Factors like
income, occupation, lifestyle and habits, which contribute to moral hazard, are
assessed as part of **financial underwriting**, while medical aspects of health fall
under **medical underwriting** .**a)** **Female insurance**Women generally have greater longevity than men. However they may face some
problems with respect to moral hazard. This is because many women in Indian
society are victims of male domination and social exploitation. Evils like dowry
deaths exist even today. Longevity of women can also be affected from problems
connected with pregnancy.70Insurability of women is governed by need for insurance and capacity to pay
premiums. Insurance companies may thus decide to grant full insurance only to
those who have earned income of their own and may impose limits on other
categories of women. Similarly some conditions may be levied on pregnantwomen.**b)** **Minors**
Minors have no contracting power of their own. Hence a proposal on the life of
a minor has to be submitted by another person who is related to the minor in
the capacity of a parent or legal guardian. It would also be necessary to ascertain
the need for insurance, since minors usually have no earned income of their
own. Three conditions would generally be sought when considering insurance for
minors:**i.** **Whether they have a properly developed physique**Poor physique can be a result of malnutrition or other health problems posing
grave risks.
**ii.** **Proper family history and personal history**If there are adverse indicators here, it may pose risks.
**iii.** **Whether the family is adequately insured**It is necessary to check if the family has a culture of insurance. One must be
on guard if no other member of the minor’s family has been insured. Amount
of insurance is generally linked to that of parents.
**c)** **Large sums assured**
An underwriter needs to be wary when the amount of insurance is very large
relative to annual income of the proposed insured. Generally sum assured may
be assumed to be around ten to twelve times one’s annual income. If the ratio
is much higher than this, it raises the possibility of selection against the insurer.**Example**
If an individual has an annual income of Rs. 5 lakhs and proposes for a life
insurance cover of Rs. 3 crores, it raises a cause for concern.Typically concerns can arise in such instances because of the possibility that
such a large amount of insurance is being proposed in anticipation of suicide or
as a result of expected deterioration in health. A third reason for such large
sums could be excessive misselling by the sales person.Large sums assured would also mean premiums increasing in proportion and raise
the question of whether the payment of such premiums would be continued. In
general, the premium payable should be within one third of an individual’s
annual income**d)** **Age**
Mortality risk is closely related to age. The underwriter needs to be careful when
considering insurance for people of advanced ages.**Example**
If the insurance is being proposed for the first time after age 50, there is a need
to suspect moral hazard and enquire about why such insurance was not taken
earlier.71We must also note that chances of occurrence of degenerative diseases like
diseases of the heart and kidney failure increase with age and become higher at
older ages. Life insurers may also seek for some special reports when proposals
are submitted for high sums assured/ advanced ages or a combination of both.**Example**
Examples of such reports are ECG; EEG; X-Ray of the chest and Blood Sugar test.
These tests may reveal deeper insights about the health of the proposed life
than the answers given in the proposal or an ordinary medical examination can
provide.**Examples**
When a proposal is submitted at a branch located far away from the place of
residence of the proposed insuredA medical examination is done elsewhere even when a qualified medical
examiner is available near one’s place of residence.A third case is when a proposal is made on the life of another without having
clear insurable interest, or when the nominee is not the near dependent of the
life proposed.In each such case an enquiry may be made. Finally, when the agent is related
to the life assured a moral hazard report may be called from a branch official
like the agency manager/ development officer.**e)** **Occupation**Occupational hazards can arise from three sources: Accident
Health hazard
Moral hazard**Diagram 4:** **Sources of Occupational Hazards****i.** **Accidental hazards** arise because certain kinds of jobs expose one to the
risk of accident. There is any number of jobs in this category – like circus
|
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Female insurance
|
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These tests may reveal deeper insights about the health of the proposed life
than the answers given in the proposal or an ordinary medical examination can
provide.**Examples**
When a proposal is submitted at a branch located far away from the place of
residence of the proposed insuredA medical examination is done elsewhere even when a qualified medical
examiner is available near one’s place of residence.A third case is when a proposal is made on the life of another without having
clear insurable interest, or when the nominee is not the near dependent of the
life proposed.In each such case an enquiry may be made. Finally, when the agent is related
to the life assured a moral hazard report may be called from a branch official
like the agency manager/ development officer.**e)** **Occupation**Occupational hazards can arise from three sources: Accident
Health hazard
Moral hazard**Diagram 4:** **Sources of Occupational Hazards****i.** **Accidental hazards** arise because certain kinds of jobs expose one to the
risk of accident. There is any number of jobs in this category – like circus
artistes, scaffolding workers, demolition experts and film stunt artistes.**ii.** **Health hazards** arise when the nature of the job is such as to give rise to
possibility of medical impairment. There are various kinds of health hazards.72 Some jobs like that of **rickshaw pullers** involve a lot of physical strain andimpact the respiratory system. Situations where one may be exposed to **toxic substances** like mining dustor carcinogenic substances (that cause cancer) like chemicals and nuclear
radiation. Working in **high pressure environments** like underground tunnels or deepsea, can cause acute decompression sickness. Finally, **overexposure** to certain job situations (like sitting crampedbefore a computer or working in a high noise setting) can impair
functioning of certain body parts in the longer run.**iii.** **Moral hazard** can arise when a job involves proximity or can cause
predisposition towards criminal elements or to drugs and alcohol. An example
is that of a dancer in a nightclub or an enforcer in a liquor bar or the
‘bodyguard’ of a businessman with suspected criminal links. Again the job
profiles of certain individuals like superstar entertainers may lead them to
intoxicating lifestyles, which sometimes come to tragic ends.When an occupation falls under any such hazardous category, the applicant for
insurance may need to complete an occupational questionnaire that asks for
specific details of the job, duties involved and risks exposed to. A rating may
also be imposed for occupation in the form of a flat extra (for example Rupees
two per thousand sums assured.) Such extra may be reduced or removed when
the insured’s occupation changes.**f)** **Lifestyle and habits**Lifestyle and habits are terms, covering a wide range of individual lifestyle
characteristics, which may be brought out in the agent’s confidential reports
and moral hazard reports, suggesting an exposure to risk. In particular three
features are important:**Smoking and tobacco use** : Use of tobacco is not only a risk in itself but also
contributes to increasing other medical risks. Companies charge differential
rates today for smokers and non-smokers and users of other forms of tobacco
usage like _gutkha_ and _paan masala_ .**Alcohol:** Drinking alcohol occasionally or in modest quantities is not considered
a hazard. However, long term heavy drinking can impair liver functioning, affect
the digestive system and lead to mental disorders. Alcoholism is also linked with
accidents, violence, family abuse, depression and suicides.**Substance abuse** : Substance abuse refers to the use of various kinds of
substances like drugs or narcotics, sedatives and other similar stimulants. Some
of these are even illegal and their use indicates criminal disposition and moral
hazard.73**Test Yourself 2**Which of the following is an example of moral hazard?I. Stunt artist dies while performing a stunt
II. A person drinking copious amounts of alcohol because he is insured
III. Insured defaulting on premium payments
IV. Proposer misplacing policy document**C.** **Medical underwriting****1.** **Medical underwriting**Let us now consider some of the medical factors that would influence an
underwriter’s decision. These are generally assessed through medical underwriting.
They may often call for a medical examiner’s report. Let us look at some of the
factors that are checked.**Diagram 5:** **Medical Factors that influence an Underwriter’s Decision****a)** **Family history**The impact of family history on mortality risk has been studied from three
angles.**i.** **Heredity** : Certain diseases can be transmitted from one generation to
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Examples
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