Shopping for Life Insurance

When shopping for life insurance, it's essential to find a company that offers the
coverage you need at a price that fits your budget. Here's a guide to help you make
an informed decision:

1. Understand the Types of Life Insurance:

Term Life Insurance: Provides coverage for a specific period (e.g., 10, 20, 30
years). It's more affordable but doesn't build cash value.
Whole Life Insurance: A type of permanent insurance that covers you for life and
builds cash value over time.
Universal Life Insurance: Another form of permanent insurance that offers more
flexibility in premium payments and death benefits.
Variable Life Insurance: Offers permanent coverage with the potential for cash
value growth tied to investment options.

2. Consider What You Need:

Coverage Amount: How much life insurance do you need? A general rule of thumb
is 10-15 times your annual income, but it depends on your personal situation.
Duration: How long do you need coverage for? If you're planning to provide for
dependents until they are financially independent, a term policy may be the best
option.
Shopping for Life Insurance
3. Research Insurance Companies:
Here are a few highly-rated life insurance companies in the U.S. that are known for
their reliability and customer service:
State Farm: Known for its strong customer service and financial strength, offering
term and permanent policies.
Northwestern Mutual: A leader in whole life insurance with a focus on financial
planning.
Prudential: Offers a wide range of term, whole, and universal life policies, known
for its flexibility.
MassMutual: Offers permanent life insurance policies with strong cash value
growth and dividend payments.
New York Life: A top provider for whole and universal life insurance with a long-
standing reputation for stability.
AIG: Known for affordable premiums and offering both term and permanent life
insurance options.

[Note: Above research is based on International Company. Students can write answers as per their research
on Nepalese Insurance Company.]
Shopping for Life Insurance
4. Check Financial Strength Ratings:
Look for companies with strong ratings from independent agencies, such as:
A.M. Best: Measures an insurer's financial strength.
Moody’s and Standard & Poor’s: Offer ratings on the financial stability of
companies.
Ratings like "A" or higher are typically considered excellent.

5. Get Quotes:
It's important to shop around and get multiple quotes from different insurers to find
the best rate for the coverage you need. Many life insurance companies offer online
quote tools or you can work with an agent to get a tailored quote.
Shopping for Life Insurance
4. Check Financial Strength Ratings:
Look for companies with strong ratings from independent agencies, such as:
A.M. Best: Measures an insurer's financial strength.
Moody’s and Standard & Poor’s: Offer ratings on the financial stability of
companies.
Ratings like "A" or higher are typically considered excellent.

5. Get Quotes:
It's important to shop around and get multiple quotes from different insurers to find
the best rate for the coverage you need. Many life insurance companies offer online
quote tools or you can work with an agent to get a tailored quote.

6. Look for Additional Benefits:

Riders: Some insurers offer additional riders (optional add-ons) that can enhance
coverage. Common riders include accidental death benefit riders, waiver of
premium, and critical illness riders.
Living Benefits: Some policies allow you to access part of your death benefit while
alive, such as in cases of terminal illness.
Shopping for Life Insurance
7. Consider Customer Service and Claims Process:
Research the insurer’s reputation for customer service, ease of the claims process,
and their responsiveness to policyholders.

8. Review Terms and Conditions:

Make sure to carefully review the policy's terms and conditions to understand
exclusions, limitations, and how the policy can be modified in the future.

9. Ask for Professional Help:

If you're unsure about which policy to choose, it might be worth speaking to a
financial advisor or insurance broker who can guide you in selecting the right
coverage for your needs.
Shopping for Life Insurance: To help narrow down your options for life
insurance, let's go through a few key details:

1. What type of life insurance are you interested in?

2. How much coverage do you think you need?
3. What is your budget for premiums?
4. Do you want additional features (riders)?
5. Are there any specific insurance companies you are interested in or would
like to avoid?
6. Any health considerations or age factors?
7. Do you want to work with an agent, or would you prefer an online quote
process?
 INSURANCE CATEGORY
TAX on Income Life Non-Life
Corporate Tax on Profit 25% 30%

REDUCTION ON INCOME
A natural person who has procured life insurance and paid the premium
amount thereon shall be entitled to a deduction from the taxable income
LIFE INSURANCE
the lower of the actual annual insurance premium or Rs 40,000
PREMIUM (Previous FY 2021-22: Rs 25,000 or actual)

A natural person who has insured with a resident insurer/insurance

MEDICAL INSURANCE company for health insurance shall be entitled to a deduction from the
taxable income the lower of the actual premium paid or Rs 20,000.
A resident natural person who has insured a private building in his/her
INSURANCE OF PRIVATE ownership with a resident insurer/insurance company shall be entitled to
BUILDING a deduction of the actual annual premium paid for such insurance or Rs
5,000 whichever is lower.
 Life Insurance registered on PAN
• No Tax on death benefit.
• 5% Tax in Amount of Insurance on living benefit (Critical Illness, Disabilities)
• In case of Maturity Benefit: Sum Insurance is guaranteed. 5% capital gain tax on
bonus & sum insured.

Example:
Let’s suppose RAM completed his life insurance policy term. His policy details are as
follows: SA:Rs 500,000; Term: 15 years plan, Premium Per Year:Rs 35,000
Total Premium paid: Rs35000*15=Rs.Rs525k in 15 years,
Total calculated Bonus: Rs200k
Here, Tax Calculation and final Maturity value is:
Total Maturity value before tax= Sum Assured + Bonus Rs(500k+200k=Rs700k)
Capital gain = Total Maturity value before tax-Total premium paid (700k-525k)=Rs175k
Therefore TAX:Rs175k*5%=Rs8750
Final Maturity Value=Rs700,000-Rs8750=Rs691250

 Non-Life Insurance is registered on VAT

• 13% VAT added in premium.
• No capital gain tax as in non-life, principle of indemnity applies.
 Insurer has to pay 0.75% of total gross premium as a service fee.
 Insurer also has to pay 0.75% of total gross RI premium as a service fee in case
of international re-insurance party.
Determining The Cost of Life Insurance

How The Cost of Life Insurance Is Determined

The premium rate for a life insurance policy is based on two underlying
concepts: mortality and interest. A third variable is the expense factor
which is the amount the company adds to the cost of the policy to cover
operating costs of selling insurance, investing the premiums, and
paying claims.

Mortality
Life insurance is based on the sharing of the risk of death by a large
group of people. The amount at risk must be known to predict the cost
to each member of the group. Mortality tables are used to give the
company a basic estimate of how much money it will need to pay for
death claims each year. By using a mortality table a life insurer can
determine the average life expectancy for each age group.
Interest
The second factor used in calculating the premium is interest earnings.
Companies invest your premiums in bonds, stocks, mortgages, real
estate, etc., and assume they will earn a certain rate of interest on these
invested funds.

Expense
The third consideration is the expenses of operating the company. The
company estimates such expenses as salaries, agents' compensation,
rent, legal fees, postage, etc. The amount charged to cover each policy's
share of expenses of operation is called the expense loading. This is a
cost area that can vary from company to company based on its
operations and efficiency.

Insurance Premium:

Premium covers the risk of insurance. Insurance companies provide coverage in

exchange for premium. Premium is affected by the following.

 Age: An older person is more likely to die than younger person. Hence younger
person has lower premium.

 Health Status: A person with medical history has more death probability, hence,
higher premium. Similarly, lifestyle choices like smokers, drinkers, individuals in
high risk jobs have higher premiums.
 Gender: Women live longer than men, hence have lower premiums.

 Type of insurance: Term Life insurance is cheapest, whereas something like

Money Back or Annual Return endowment life insurances have higher
premiums.
 Benefit Amount: High benefit amount will result in higher premium.
 Pay mode: Single Premium costs the lowest if we talk about total premium paid.
Then comes Annual, semi-annual, quarterly, monthly.
 Other factors such as market interest rate, economic inflation rates, rural areas,
administrative fees etc. also play vital roles in premium amount.
Rate of Return on Saving Components

We will look at the possible returns that we can gain through insurance

i) Policy Benefit: This is the Face Value of the Insurance, it is commonly

called the Sum Assured. This is paid on death of the insured individual.

ii) Maturity Benefit: Some insurance policies have maturity benefit. This is
paid after the end of policy term.

iii) Bonuses: Bonuses are earned in participating insurance policies.

Insurance company distributes surplus that it has earned during the year
to the insurance policies. Bonuses are often variable and depend upon
the profitability of the company.
Rate of Return on Saving Components

iv)Interest on saving component: Policies like universal life insurance earn

interest on the saving component of their insurance policy. Interest rates
are either pre-determined by the insurance company or depend upon the
market economy.

v)Returns on investment component: Policies like variable life insurance

earn investment returns on their investment component of the policy.
Investment returns depend upon the performance of chosen portfolio or
the performance of stock market.
Net Cost of Life Insurance

 Actual or Net cost of life insurance considers the returns of insurance

along with the premium paid to observe the actual cost of purchasing
the insurance.

Let’s look at following examples:

Above two examples are of insurance policies that have already expired or
matured.
We have actual numbers of premiums paid and the returns received, so it’s easy
to calculate.
Net Cost of Life Insurance

Further, we can adjust interest to the premium to find out

Interest Adjusted Cost of Life Insurance.
 Let’s assume that instead of purchasing insurance by paying premium, we
deposited the premium amount to bank. We would have earned interest on
each premiums. (compound interest)

 Interest adjusted premium approach uses this concept to find the cost of
insurance.

 Example: A man paid Rs 1000 premium for 10 years for insurance. The
insurance has now matured and pays back Rs 17000 to the man at the end of
10th year. Assume risk free interest rate = 6%

Interest adjusted premium amount = Rs 1000 * (1+i)^10 + Rs 1000 * (1+i)^9 + … + Rs 1000 * (1+i)^1
(1st year premium) (2nd year premium) (10th year premium)

(Here, 1st year premium earns compound interest for 10 years, 2nd year premium
for 9 years and so on.)
Net Cost of Life Insurance
1+0.06 10 −1 𝟏+𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒕𝒊𝒎𝒆 −𝟏
Interest adjusted premium = 𝑅𝑠 1000 ∗ ( ) (Formula = 𝒑𝒓𝒆𝒎𝒊𝒖𝒎 ∗ )
0.06 𝒊𝒏𝒕𝒆𝒓𝒆𝒔𝒕

= Rs 13180.795

Net Cost of Life Insurance = Rs 13180.795 – Rs 17000 = - Rs 3819.205

Net Cost of Life Insurance

 Now, how do we determine the cost of Life Insurance before purchasing

or when the policy is running/active.

 Actually, it is a very complex subject.

 Remember that in previously observed examples we had premium

amounts and even the returns from policy.

 But when we need to calculate cost of insurance before purchasing or

when the insurance policy is active, we will not have exact number
for returns of the policy.

 Example: A term insurance only pays the amount when the individual
dies, but we do not exactly know if he/she will die, or when he/she will
die.
 Similarly an endowment insurance will pay the amount when the
individual survives up to the end of the insurance term, but we cannot
be sure if he/she will definitely live.
Net Cost of Life Insurance

 Also dividends/bonuses of insurance depend upon the financial performance of

the insurance company, we cannot be sure of the exact amount that we will
receive.
 Interest on saving component of Universal Life Insurance fluctuate due to
economic conditions. Investment returns on investment component of Variable
Life Insurance change according to stock market indexes.

 To calculate the cost of insurance in such condition, we need to calculate the

expected amount of returns based upon probabilities and using statistical
methods.

 For this we need to calculate the probability for the insured individual to receive
each type of returns. Probability is different for every type of return.

 Mathematicians and Statisticians use very complex calculations and methods to

find out probabilities and calculate expected amount of each type of returns.

Therefore, determining cost of life insurance is a complex subject.

Example: (Only for understanding, not imp for examinations)

 A term insurance has insured amount of 1 lakh that will be paid on death, total
interest adjusted premium that the person needs to pay for is Rs 3000. Here,
let’s assume the probability of person dying is 2% (0.02).
Total Premium Paid = Rs 3000
Expected death return = Death probability * Insurance amount
= 0.02 * Rs 1,00,000
= Rs 2,000
Cost of Insurance = Rs 3000 – Rs 2000 = Rs 1000

This is only a very basic example that might not be exactly applicable.

 In real life, Mathematicians do extremely complex calculations with huge data

and incorporate mathematical modelling to find out death probability, and other
probabilities.