Life InsuranceLIFE INSURANCE Life insurance contract may be defined as the contract, whereby the insurer in consideration of a premium undertakes to pay a certain sum of money either on the death of the insured or on terminal / critical illness or on the maturity of the policy. > Objectives: = Provide protection for family = Elimination dependency = Bring peace of mind = Financial safeguardPREMATURE DEATH Premature death can be defined as (1) the death of a family head with outstanding unfulfilled financial obligations, or (2) the death of a person that creates negative business consequences. In a business situation, premature death may result in (1) the dissolution of the business if a co-owner dies or (2) a significant reduction in income if a key person dies. Costs of Premature Death First, the family’s share of the deceased breadwinner’s future earnings is lost forever. Second, death results in additional expenses such as funeral costs, uninsured medical bills, higher childcare expenses, estate settlement costs, and other final expenses. Third, because of insufficient income, some families will experience a substantial reduction in their standard of living. Finally, survivors face certain noneconomic costs such as intense grief, loss of a parental role model, and counselling and guidance for the children.Whole Life Assurance Assurance EndowmentLife Assurance Policies Whole Life Assurance Whole life insurance is a generic name for a cash-value policy that provides lifetime protection with level premiums. Whole life insurance is called ordinary life insurance if premiums are payable throughout the lifetime of the insured and limited payment life insurance if the premium period is less than the insured’s lifetime. Types of whole life assurance * Ordinary life insurance is a level-premium policy that accumulates cash values and provides lifetime protection to age 121. * limited-pay whole-life policy extends for the whole of life, but the premium payments are made for some shorter period of time.Life Assurance Policies Whole Life Assurance Uses of Ordinary Life Insurance * An ordinary life policy is appropriate when lifetime protection is needed. * Ordinary life insurance can also be used to save money. Limitations of Ordinary Life Insurance + The major limitation of ordinary life insurance is that some people are still substantially underinsured after the policy is purchased.Life Assurance Policies Variations in Whole Life Assurance |. Variable life insurance can be defined as a fixed premium policy in which the death benefit and cash values vary according to the investment experience of a separate account, which is similar to a mutual fund maintained by the insurer. Il. Universal life insurance (also called flexible premium life insurance ) can be defined as a flexible premium policy that provides protection under a contract that separates the protection and saving components. Ill. Variable universal life insurance is similar to a universal life policy with two major exceptions: The policyholder determines how the premiums are invested, which provides considerable investment flexibility. The policy does not guarantee a minimum interest rate or minimum cash value. One exception, however, is that the policy may have a fixed-income account, which may guarantee a minimum interest rate on the account value. IV. Current assumption whole life insurance is a nonparticipating whole life policy in which the premiums and/or policy values are based on the insurer’s current mortality, investment, and expense experience.Life Assurance Policies Variations in Whole Life Assurance Vv. Indexed universal life insurance is a variation of universal life insurance with certain key characteristics. First, there is a minimum interest rate guarantee, which is usually lower than the minimum interest rate guarantee on a regular universal life policy. Second, additional interest may be credited to the policy based on the investment gains of a specific stock market index, such as the (S&P) 500 Index. Third, there is a formula for determining the amount of enhanced (additional) interest credited to the policy; Fourth, often consumers misunderstand and or have unrealistic performance expectations for this type of policy. Finally, consumers find that policies regulated under federal securities laws, as well as state insurance regulation, provide more complete disclosure than policies not federally regulated.Life Assurance Policies Term Assurance In its purest form, a term policy is purchased for a specified time period and the face amount is payable only if the insured dies during this period. Types of Term Assurance * Renewable-term policies include a contractual provision guaranteeing the insured the right to renew the policy for a limited number of additional periods, each usually of the same length as the original term period. * The conversion provision grants the insured the option to exchange the term contract for some type of permanent life insurance contract without having to provide evidence of insurability. * Return of premium term insurance is a product that returns the premiums at the end of the term period, provided the insurance is still in force. * Decreasing term insurance is a form of term insurance where the face amount gradually declines each year.Life Assurance Policies Term Assurance Uses of Term Insurance * First, if the amount of income that can be spent on life insurance is limited, term insurance can be effectively used. + Second, term insurance is appropriate if the need for protection is temporary. * Finally, term insurance can be used to guarantee future insurability. Limitations of Term Insurance * First, term insurance premiums increase with age at an increasing rate and eventually reach prohibitive levels. + Second, term insurance is inappropriate if you want to save money for a specific need.Life Assurance Policies Endowment Types of Endowment: Ordinary Endowment pays the face amount of insurance if the insured dies within a specified period; if the insured survives to the end of the endowment period, the face amount is paid to the beneficiary at that time. Pure Endowment benefits are conditional on the survival of the policyholder. Joint Life Endowment covers more than one life under a single policy. The sum assured is payable on the expiry of the term or on the death o one of the assured lives during the endowment period. Double Endowment covers that if the life assured dies during the endowment period, the basic sum assured is payable and if he survives to the end of the term, double of the sum assured is paid.Life Annuity Policies * Auseful starting point for understanding annuities is to recognize that two periods arc associated with any annuity: (1) the period when the policyholder pays premiums to the in-surer, known as the accumulation period, and (2) the period when the insurer makes payments to the policyholder, known as the payout period.ory a —— Single premium [MN immediatety MIM Fixed number ot years Vee = a —— Cena ea ceearteeny Ce fakade ced area ae Soar) Poe oo nc ero PoaGENERAL CLASSIFICATIONS OF LIFE INSURANCE 1. Individual life insurance is sold to individuals, typically through life insurance agents. 2. Group life insurance is a plan in which coverage can be provided for a number of persons under one contract, called a master policy, usually without evidence of individual insurability. It is generally issued to an employer for the benefit of employees but may be used for other closely knit groups. 3. Credit life insurance is sold through lending institutions to short-term borrowers contemplating consumer purchases and through retail merchants selling on a charge account basis to installment buyers. It includes mortgage protection life insurance of 10 years’ duration or less that is issued through lenders.Tax Benefit from Life Insurance Policies Cash value life insurance policies are an income tax-advantaged method of saving. The tax advantages arise from the interaction of the following aspects of the tax code: 1. Death benefits are not taxable as income. (They may he subject to estate taxes.) 2. No income tax is paid on the annual increase in cash value while the policy is in force. 3. If the policy is surrendered, the policyholder pays income tax on the difference between the cash surrender value and the sum of all premiums less policyholder dividends.AMOUNT OF LIFE INSURANCE TO OWN Human Life Value Approach Human life value can be defined as the present value of the family’s share of the deceased breadwinner’s future earnings. |n its basic form, the human life value can be calculated by the following steps: 1, Estimate the individual’s average annual earnings over his or her productive lifetime. 2. Deduct federal and state income taxes, Social Security taxes, life and health insurance premiums, and the costs of self-maintenance. The remaining amount is used to support the family. 3. Determine the number of years from the person’s present age to the contemplated age of retirement. 4, Using a reasonable discount rate, determine the present value of the family’s share of earnings for the period determined in Step 3.AMOUNT OF LIFE INSURANCE TO OWN Needs Approach The second method for estimating the amount of life insurance to own is the needs approach, which analyses the various needs that must be met if the family head should die, and then determines the amount of money needed to meet these needs. The total amount of existing life insurance and financial assets is then subtracted from the total amount needed. Any difference, remaining between needs and resources is the amount of new life insurance that should be purchased. Among the most important needs for most families are the following: Income freon ero) ERE Preis Pree ory Cerene ar) ESmeaias eee ay STN ee PearGENERAL PROVISIONS OF LIFE INSURANCE CONTRACTS Entire Contract Clause To prevent the use of other evidence, most states require the inclusion of a clause in life insurance policies stating the policy and the application attached to it constitute the entire contract between the insurer and the insured. Ownership Clause In most cases, the insured is the policy owner. The person designated as the owner has vested privileges of ownership, including the right to assign or transfer the policy, receive the cash values and dividends, or borrow against it. Beneficiary Clause A primary beneficiary is the person first entitled to the proceeds of the policy following the death of the insured. A contingent beneficiary is entitled to the policy benefits only after the death of the primary or direct beneficiary Incontestable Clause This means the contract’s validity cannot be questioned for any reason after it has been in force during the lifetime of the insured for two years. Suicide Clause Almost universally, suicide during a stipulated period after inception of the contract is excluded.GENERAL PROVISIONS OF LIFE INSURANCE CONTRACTS Misstatement of Age Clause clause provides that in the event the insured has misstated his or her age, the policy face amount will be adjusted to the amount of insurance the premium paid would have purchased at the correct age. Grace Period If the insured does not pay the premium on the due date, technically the contract will lapse. The time of lapsing, however, is subject to a modification that is in the nature of a grace period and is almost universally required by statute. Reinstatement Reinstatement is not an unconditional right of the insured. It can be accomplished only if the risk has not changed for the insurance company and only if, by payment of the back premiums with interest, the reinstated policy would have the same reserve as it would have had if the policy had not been lapsed. Aviation Exclusions At one time, nearly all life insurance policies excluded death resulting from aviation. War Clause During times of war, or when war appears imminent, insurance companies usually insert a clause in their policies that provides for a return of premium plus interest rather than payment of the face amount of the policy if the insured dies under excluded circumstances.MORTALITY TABLE A mortality table is a statistical table that shows how long people of each age are expected to live and how frequent dezths are for a given age or occupation. Insurers use a mortality table to determine the average duration of the life remaining to a number of persons of a given age. A mortality table is also known as a life table, an actuarial table, or morbidity table. = Itsummarizes the probability of living and dying; = An instrument for anticipating future mortality rates on the basis of past mortality records; = It starts from point and estimates yearly;RESERVE In life insurance, reserve is not an accumulation of profit. It represents a liability which is to be met adequately by the insurer when it arises. The reserve is that fund (premiums and interests) which will be sufficient to pay future claims. 1. Terminal Reserve: It is obtained out at the end of the year and used for calculating the amount for surrender value or paid up values and also used for distribution of bonus. 2. Initial Reserve: The amount which the insurer has with him in the beginning after premium collected. It is used for determining the interest rate earned by the insurer. 3. Mean Reserve: Arithmetic average of initial and terminal reserve during a year. It is used for valuation purposes.RESERVE Methods of Calculating Reserve: 1. Retrospective Method: It is derived entirely by reference to past experience. 2. Prospective Method: Determining how much is required to be paid in future and how much premium will be receive in future. Both methods is applied in two approaches- i. Group Approach and ii, Individual ApproachSURRENDER VALUE Surrender value (SV) is the amount that the policyholder will get from the life insurance company if the insured decides to exit the policy before maturity. If the insured finds it is impossible to continue paying premium on a policy, he/ she can surrender it to the insurance company and acquire a value what is known as surrender value. The form of surrender value could be in cash or reduced paid up insurance or automatic premium loan or purchase of annuity. Two bases of calculating SV: 1. Accumulation Approach: SV= Full reserve — Surrender Charges ( Charges include initial expenses, adverse mortality and financial selection, contribution to profit, cost of surrender) 2. Saving Approach: SV= (Sum assured + accumulated value of future expenses + future bonus) — (accumulated value of future premiums +expense incurred in surrendering)