UNIVERSITY OF SARAJEVO

SCHOOL OF ECONOMICS AND BUSINESS

IN SARAJEVO

LIFE INSURANCE
RESEARCH PAPER

Subject/Course: Insurance in Economics

Professor: Jasmina Selimovi, PhD
Student: Guven olakovi
Index number: 71230
Study: Financial Management

Sarajevo, April 1, 2015

Content
Introduction
About Life Insurance
Risks in Life Insurance
Types Of Life Insurance
Technical Basics Of Insurance
Significance And Role Of Life Insurance
The offer of life insurance products in the market of
Bosnia and Herzegovina
Conclusion
References

Introduction

It is really strange that people insure their homes, furniture, cars, boats and other
things, and are reluctant to ensure your life, which is certainly the most valuable of
all, at the same time
there is a greater danger of losing it. " (Benjamin Franklin)

In describing the way of life, it is common to use words such as dynamic and
unpredictable. In contrast to our way of life is one of the basic human needs - the
need for security and stability.
Restful sleep and safety of anyone trying to achieve in their own way.
Way you hereby present a life insurance policy - one of the most attractive
investment in the world, because through it you invest in the safety of their own
future and the future of your loved ones, and accumulate funds invested.
Money paid in life insurance is legal instruments maximum protection and therefore
life insurance policy after the expiry of the insurance period, guarantees the
payment of the sum insured plus the imputed income.
No one wants to think about death or disability, but the reality is that the family
may need financial support in a situation where you would not be there to take care
of that. Would financial security of families was preserved in the event of your
untimely death? Do the kids can go to college? You took a loan for an apartment,
car, cash loan? Your income allows the family a normal life? What will happen if your
family is left without your income?
With life insurance policies can be quiet on these issues. Life insurance provides
your income and represents additional income when the time comes to retire. If
someone depends on you financially, it is almost certain that your life insurance
needs.
In this research paper we will try to emphasize everything related to life insurance
and try to make it closer to the reader.

About Life Insurance

(Definition and basic characteristics)
Life insurance is a contract between an insured (insurance policy holder) and an insurer or assurer,
where the insurer promises to pay a designated beneficiary a sum of money (the "benefits") in exchange
for a premium, upon the death of the insured person. Depending on the contract, other events such
as terminal illness or critical illness may also trigger payment. The policy holder typically pays a
premium, either regularly or as a lump sum. Other expenses (such as funeral expenses) are also
sometimes included in the benefits1

The main specific of life insurance is that insurance is a combination of the insured risk and
savings2. This insurance applies to all policies on which termination or duration of life of one or
more persons (the insured) comes to the payment of the amount insured by the insurer. So, life
insurance is a contract under which the insurer, as opposed to paying premiums, is obliged to pay
the insured or a person designated by him a certain sum or annuity in case of endowment certain
time or in case of death of the insured.
Life insurance the simplest can be defined as a contract under which the insurer undertakes to
according to collected premiums of the insured, the insured person to pay a certain sum or
annuity in case of death or in the event of his survival. For life insurance we can say that it is a
specific type of insurance because it is a security risk of death and consequently was the most
common form of insurance worldwide.
Sum insured is an essential element of the life insurance contract, as only the amount of sum
insured can determine the amount of premium 3. Such as already mentioned above, the sum
1 F.C. Oviatt (-) "Economic Place of Life Insurance and Its Relation to Society" "Sage
Publications , Inc." p.185
2 George E. Rejda (2008) "Principles of risk management and insurance"
Person/Addison wesley p.138
3 Marovi, B., Avdalovi, V.: Osiguranje i upravljanje rizikon, Birografika, Subotica,
2005. p.58

insured in the insurance of persons represents an upper bound obligations of insurers. If the
insured event occurs the insurer is obliged to pay the sum insured under those conditions under
which it was agreed regardless of the amount of damage that has occurred since the sum insured
is determined regardless of how much it will damage. Therefore occurrence of the insured event
the insured person becomes entitled to payment of the insured sum and is not obliged to prove
damages suffered as well as the amount of damage. As this type of insurance does not include a
material interest, it can be concluded in case of death or consequences of an accident third party.
not just the policyholder.
Life insurance is an upgrade of the social (compulsory) insurance. In addition to social functions,
life insurance is a source of credit, which is necessary both for the individual and for the
economy. Individual life insurance policy can provide the guarantee necessary to obtain credit,
and the economy is a source of funds can still invest. Within the life insurance premiums are
accumulated having the character of savings, which is long-term, pre-determined and with
already defined in terms purpose. In order to obtain the basic principle, equalization of premiums
(funds) and life insurance obligations under this insurance, it is necessary that the savings part of
the premium together with interest during the insurance period accumulates. These funds form
the so-called, mathematical reserve, which represents the amount of funds needed to fulfill the
future liabilities of insurers (insured amount) less the value of future obligations of policyholders
(savings premiums).
Technique life insurance is based on the theory of probability, the law of large numbers and are
used and the corresponding mathematical and statistical models and actuarial methods. Requires
the full compensation risk, that is completely secure execution of the insurance obligations.
According to the basic principle of insurance mathematics, mathematical expectation of the
present value of all payments net premium is equal to the mathematical expectation of the
present value of payments to the insured sum. However, expectation of payment is not the same
for each year. It increases with the age of the insured because it increases the likelihood of death.
If the insured paid each year life insurance premium equal to the mathematical expectation of
payment in the same year would be considered to pay natural premium. Natural premiums would
normally grow with age and would be sufficient to cover the risk of the current year ie. Total sum

premium you would pay a certain set of people (the insured) would be equal to the payment of
the insured sums insured. In this case there would be no mathematical reserves, ie.
The part of the premium that remains for the payment of the following year of insurance.
However, since it is very difficult in older age when the risk of death higher paying high
premiums is realistic rather than natural premium paying an average premium. The premium
paid by the insured in the first years of insurance is higher than the natural premium, and in
recent years has decreased so that the difference in these years are covered by the mathematical
reserves. Thus the insurer uses only part of the premium paid to cover its obligations in the same
year, and the remainder of saving for next year. Part of the premium that is paid out to
policyholders in the same year the risk premium, and the remaining part of the premium for the
following year's premium savings. Thus the net premium consists of two parts: the risk premium
and savings premiums.
Risk premium for specific year of insurance is equal to the mathematical expectation of payment
during the year. The remaining part of the premium is the premium savings consisting of safety
reserves and mathematical reserves.
Mathematical reserves at time t is defined as the sum of all to that point due net premiums, net of
payments made up to that time (ukamaene up to that point). As the payments are paid entirely
from the risk premium can be said that the mathematical reserve is equal to the sum to time /
matured net premiums net of the associated risk premium. Therefore, the mathematical reserve is
defined as: the sum of all past due up to that point (and interest-bearing) deposit premium, ie.
The amount that remains when the net premiums refuses risk premium. The problem of
calculating mathematical reserves to the problem of construction of mortality tables, one of the
central problems of life insurance mathematics (Actuarial). Insurers each year are calculated
mathematical reserves in order to invest part of their capital and get a satisfactory return on
invested funds4.

4 Emmett J. Vaughan , Therese M. Vaughan (2002) "Fundamentals of Risk and

Insurance" John Wiley&Sons p.240

The main task (goal) of insurers is to always have a positive mathematical reserves that could
safely perform its obligations. If the insured wishes to terminate the insurance underwriter will
then have the insured to recover part of the current mathematical reserves relating to his
insurance because the mathematical reserve should be used to cover future risks for insurers
disappeared interruption insurance. This interruption insurance with returnable premium is called
the purchase of insurance. Problem heights purchase insurance comes down essentially to the
problem of calculating mathematical reserves.
There are some specific types of insurance for which it is necessary to construct specific
mortality tables, calculate premiums and mathematical reserves. Such, for example. Group
insurance (insurance where insurance a person depends on the life and death of several people ie.
A group of people), insurance of people with an increased risk of death due to disease or
performance of a particular profession that is a danger to life.

Risks in Life Insurance

The main risks covered by insurance life are survivorship certain age and
death risk. However, in the course of a life insurance contract affects many
risks that need to be computed in the premium to be paid. Additional risks
and uncertainties created by the characteristics of this type of insurance:
long-term contracts and fixed premium payable throughout the life insurance
although the risk increases with age of the insured: the interest rate is
determined at the beginning of the insurance period and is mainly
determined by fixed and constant. Any changes that are happening in the
market, fluctuations and fluctuations, negative movements in market interest
rates, competition in the insurance market may affect the investment
portfolio of the insurer.
Generally, the risks to which insurers life encounter are:
Equity Risk - is associated with the fact that placements insurer can drop
value (an unforeseen increase in interest rates).
Determining the risk premium5 - is associated with the basic characteristic
of life insurance contracts, ie, long-term life insurance contracts. The
premium is fixed throughout the life insurance and it is necessary to
determine the beginning of the period. Determination of the premium is
linked to mortality, interest rates and costs so that when determining
5 Emmett J. Vaughan , Therese M. Vaughan (2002) "Fundamentals of Risk and
Insurance" John Wiley&Sons interpreted from this

premiums must take into account the risks that are associated with all three
factors (mortality may exceed the expected mortality rate that is determined
can not be too high so that in this case can not sustain in the long run to
secure placements, insurance costs may be underestimated).
Risk adjustment of assets and liabilities 6 - refers to maturity. Mathematical
reserve is long-term and represents an obligation of insurers. On the other
hand placements and are extremely long. If it happens some unexpected
situations (purchase or poorly estimated mortality) insurers must sell their
investments below their actual value and thus incurs a loss on the assets
side and on the side of the obligation. Because of these situations, there is a
tendency of replacing placements in the long term placements in the short
and short term. instead of fixed interest rates are introduced products with
variable interest rates, and thus the variable premium.
Unpredictable risks7 - associated with uncertainty, which can happen in the
future (changes in market conditions, changes in laws, etc.)
RISK EXCLUDED FROM LIFE INSURANCE
Under the law of insurance from life insurance excluded are the following risks:

suicide of insured person

intentional murder of insured persons by the user security

6 Emmett J. Vaughan , Therese M. Vaughan (2002) "Fundamentals of Risk and

Insurance" John Wiley&Sons interpreted
7 Emmett J. Vaughan , Therese M. Vaughan (2002) "Fundamentals of Risk and
Insurance" John Wiley&Sons interpreted

occurrence of death of the insured due to war

occurrence of death of the insured person to death by a court preceeding or when

committing the crime with premeditation8

TYPES OF LIFE INSURANCE

Life insurance can be divided according to a number of criteria. Based on their
distinguishing characteristics, it is possible to identify six distinct types of life
insurance contracts: (1) term insurance, (2) whole-life, (3) endowment, (4) universal
life, (5) variable life policies, and (6) variable universal life. We can divide life
insurance products into two classes: those that provide pure life insurance
protection, called term insurance, and those that include a savings or investment
element, which are called cash value policies.
TERM INSURANCE
As already stated, term insurance provides temporary protection and is typically
renewable and concertible without evidence of insurability. Term insurance is
appropriate when income is limited, or when there are temporary needs. The
premium is increased at each renewal date and is based on insured's attained age.
Because term insurance has no cash value, it cannot be used for retirement or
savings purposes.
Types of term insurance:

-yearly renewable term

5-,10-,15-,20-,25-, or 30-year term

-term to age 65

8 Dr. Jelena Koovi (2006) "Aktuatorske Osnove Formiranja Tarife u Osiguranju lica
" Ekonomski fakultet , Beograd p.38

-decreasing term

-reentry term

-return of premium tern insurance9

Yearly renewable term insurance is issued for one-year period and can be renew
every year up to some stated age. Premiums increase with age at each renewal
date. Most yearly renewable term policies are also possible to convert to a cashvalue policy with no evidence of insurability.
5-,10-,15-,20-,25-, or 30-year term insurances are also renewable and they
increase when the policy is renewed.
A term to age 65 policy provides protection to age 65 and then expires. It can be
converted to a permanent plan to insurance, but the decision must be exercised
before age 65.
Decreasing term insurance provides a death benefit that decreases at a
predetermined rate over the life of the policy. Term lengths is between one and 30
years.
Reentry term is a term policy in which renewal premiums are based on lower
mortality rate if the insured can periodically demonstrate acceptable evidence of of
insurability.
Return of premium term insurance returns preimums at the end of the term
period, which means the premiums paid for coverage is returned if the insured party
survives the policy's term .
WHOLE LIFE INSURANCE
Whole life insurance is a cash-value policy. The strength of a whole life insurance
policy is that it provides guaranteed cash values and benefits in return for fixed
premiums. A trade-off to consider is that a whole life policy may build cash value at
a lower rate than alternative coverage options10.
The whole-life insurance policy was the original type of lifetime policy. It provides
protection at a level premium for the entire lifetime of the insured. This lifetime
protection is possible because the premium is set at a level that is higher than
necessary to fund the cost of death claims during the early years of the policy, and
9 Emmett J. Vaughan , Therese M. Vaughan (2002) "Fundamentals of Risk and Insurance" John Wiley&Sons p.138

10 https://www.genworth.com/,

the excess premiums are used to meet the increasing death claims as the insured
group grows older.
UNIVERSAL LIFE INSURANCE
Universal life insurance is a variation of whole life insurance. It is a permanent
policy providing cash value benefits based on current interest rates. The feature
that distinguishes this policy from whole life is that the premiums, cash values and
level amount of protection can each be adjusted during the contract term as the
insured's needs change11.
VARIABLE LIFE INSURANCE
Variable life insurance is designed to combine the traditional protection and savings
features of whole life insurance with the growth potential of investment funds. This
policy has two distinct components: the general account and the separate account.
The general account is the reserve or liability account of the insurance provider, and
is not allocated to the individual policy. The separate account is comprised of
various investment funds within the insurance company's portfolio, such as an
equity fund, a money market fund, a bond fund, or some combination of these.
Because of this underlying investment feature, the value of the cash and death
benefit may fluctuate, thus the name "variable life" 12.

VARIABLE UNIVERSAL LIFE INSURANCE

Variable universal life insurance combines the features of universal life with variable
life and gives the consumer the flexibility of adjusting premiums, death benefits and
the selection of investment choices. These policies are technically classified as
securities. Unfortunately, all the investment risk lies with the policy owner; as a
result, the death benefit value may rise or fall depending on the success of the
policy's underlying investments. However, policies may provide some type of
guarantee that at least a minimum death benefit will be paid to beneficiaries 13.

11 George E. Rejda (2008) "Principles of risk management and insurance"

Person/Addison Wesley p.142
12 Emmett J. Vaughan , Therese M. Vaughan (2002) "Fundamentals of Risk and
Insurance" John Wiley&Sons
13 www.businessdictionary.com

ENDOWMENT INSURANCE POLICIES

Endowment policies carry premiums higher than those on conventional whole life
policies and term insurance, but are useful in meeting special lump sum needs such
as college expenses or for buying a retirement home. Also called endowment life
policy or endowment policy14.

Technical basics of insurance

Life insurance is based on the principles of the law of large numbers, which is
the fundamental law of the theory of probability and statistics. The essence
of this law is that it is. when viewed large number of cases. I can see it
coming in the occurrence of an event is greater. and the deviations are
14 www.businessdictionary.com

smaller. If A designated event viewed individually, he presents the case,

while in a large number of observation stations legality. Therefore, the
legality manifests itself only in the bulk of cases, it is not visible in the
individual units of which the mass is composed, or acts of certain groups of
these units. Thus. for example. if ten people died certain age five or so. This
does not mean that the probability of death for men and age 50%. It is
known that every man must die, but no one knows when that will be.
because the death of a person as uncertain event. If. however. watching a
large group of people, it can be with a high percentage of accuracy that will
determine annually in that group to die a certain number of people.
Therefore, the law of large numbers has importance in ensuring, by
eliminating uncertainty insurers and predicting the occurrence of the insured
event. Therefore the weight. ie. Multitude of insured objects is more likely
more accurate determination of future insurance cases, and thus the
calculation of future financial obligations on the basis of which is determined
by the amount of funds needed to cover them.
Primary elements in life insurance ratemaking: (1) Mortality tables, (2) Interest rate, (3) Costs
of implementing insurance.
Mortality Tables
Mortality tables contain a number of indicators of which is the basic leveled
probability of mortality on the basis of which is calculated on all other
biometric functions: probability of survival. trends in the number of living and
the number of deaths within a given set, based on calculated probabilities of
death. The main factors of mortality were: age. gender, occupation, lifestyle,
climate and so on. Other characteristics can also be included to distinguish different risks,
such as smoking status, occupation and socio-economic class. There are even actuarial tables that
determine longevity in relation to weight. A mortality table is also known as a "life table," an
"actuarial table" or a "morbidity table."

Picture 1.0

2001 Commissioners Standard Ordinary Mortality TableMale Lives15

Interest Rate
All life insurance policies provide for the payment of the premium before the
contract goes into effect, but the benefits will not be paid until some time in the
future. Because the insurance company collects the premium in advance and does
not pay claims until a future date, it has the use of the insureds money for some
time, and it must be prepared to pay him or her interest on it. Life insurers collect
vast sums of money, and since their obligations will not mature until some time in
the future, they invest this money and earn interest on it. Because they do earn
interest on the funds they collect, they do not need to collect the full amount of
future losses from the members of the group. They can collect something less than
the full amount of the losses, invest it, and then pay the losses out of the total fund
15 Emmett J. Vaughan , Therese M. Vaughan (2002) "Fundamentals of Risk and
Insurance" John Wiley&Sons

of principal and interest. The allowance for interest is made by discounting the
future claims to obtain their present value. If we bring the interest into the
computation of premiums, the net premium will be something less than would be
necessary to charge each insured for his or her cost of the death claims of the
group.

Costs of implementing insurance

When calculating tariffs in life insurance are taken into account three types of costs. These are:
- Acquisition costs, which include costs of obtaining insurance, the costs of commission for
agents of insurance, the cost of issuing policies and the like. These costs are one-time, provided
that the insurance capital in proportion to weigh the insured amount. whereas for insurance
annuities are determined in proportion to the value of the annuity.
- Documentary collection costs, which include all costs incurred in the collection of insurance
premiums and
- The cost of processing and managing the portfolio.

Significance And Role Of Life Insurance

I. Protection - refers to the protection of people and society from the risk,
either
immediate protection - preventive measures (prevention of the causes of
potential adverse put off) and repressive measures (combating damage
caused by harmful event) or
indirect protection - the exercise of damages as a result of an insured
event.
Starting from its first function - immediate protection of people, this
protection today comprises economic and other activities.
Thanks to the possibilities of life insurance man no longer needs to be
helpless fate, it especially bearing in mind the intention of providing other
entities in the event of death. Conclusion of insurance is not just the
responsibility of individuals for their economic activities, but also the
fulfillment of a moral duty.
It was also noted that insurance influences the increase of freedom and
independence of man, especially of fear with regard to the harmful
consequences of their actions which man still can not give up, because they
are useful. Life insurance is also one type of savings is very suitable for the
insured.
II. Financial storage function - is reflected in the form of various
investment prikljupljenog money in some economic sectors, thus improving
the overall economic development of a country.

Life insurance is a specific financial business that is not only interesting for
the insured and the insurer, but is very interesting for the country, because
life insurance means the accumulation of large financial resources over a
long period of time, which as such may be placed on the capital market, or
used for other purposes. Special significance is the fact that life insurance
funds by nature long-term assets. It may be, from the standpoint of the
national economy, rational focus in financing development primarily
infrastructure projects. This is done primarily by buying government
securities, and that the issuance of municipal bonds to finance development
of its environment.
It is also important to note that, because of the long funds, life insurance
largely contributes to the stability of the banking system, given the extent of
long-term deposits given.
III. Socio-social functions - economic protection of people and their
properties that can be be damaged or destroyed by various hazards (risks).
By providing compensation in the event of death, disability, payment of
premium in case of survival, the insurance takes over the social function of
the state. Most important of all is the importance of life insurance has the
security that provides individuals and families.
The insurance industry is also a significant employer everywhere in the
world. In addition, the insurance business is managed by the banks, private
individuals - entrepreneurs, agencies - legal entities, as well as natural
persons who are licensed to engage, and insurance brokerage.
Insurance companies, from the point of discharge, based on taxes and
contributions, represent the quality of the debtor, or - in large amounts they
receive state social funds. The special significance of this fact has at a time

when many people are losing their jobs when the unemployment rate is very
disturbing.

The offer of life insurance products in

the market of Bosnia and Herzegovina
Insurance companies in BiH more or less similar offer life insurance products
that allow the insured through savings invested funds prepare for a time
when there is no longer earned as before, but also to simultaneously provide
yourself and your loved ones from a variety of adverse events that life
brings. For the purpose of this study was isolated offer life insurance
products Unique:
a) Classic-mixed life insurance - Mixed life insurance as the best combination
of savings and capital life insurance is a savings program of capital where
the insured upon expiry of term insurance decides on the sum insured
through lump-sum payments or through rent that can be limited in time or a
lifetime. In addition to savings, mixed life insurance provides financial
protection to the family of the insured in the event of an accident.

b) Comfort-life insurance with coverage of serious illness is intended for all

those who at the time they think about their future, their health and their
loved ones. Due to the stress of their work, especially recommended for
managers, doctors and lawyers. With life insurance in case of death, this
program provides coverage for the case of diseases of ten serious diseases
including: heart attack, bypass surgery, cancer, stroke, kidney failure, organ
transplants, paralysis, vision loss, coma and total permanent disability for
work. Insurance severe disease is the optimal program for those who want
the most pleasurable combination of life insurance, health and long-term
savings.
c) Capital-savings insurance is a life insurance endowment through which the
insured person realizes high-quality and cost-effective form of savings with
the actual profit, and at the same benefits and tax relief. A special feature is
the conclusion of insurance regardless of health status and occupation of the
insured.
d) Junior-life insurance in favor of the Child - Investing in life insurance for the
benefit of the child, which allows the child undisturbed education, buying a
car, going on a journey, the first investment or something like that, and with
all this teach him the values of savings. Junior-insurance for the benefit of the
child is a program in which parents / relatives paid a premium to the child 19
years when a child decides whether he will be collected monies paid once or
in the form of monthly stipends.
e) Term life insurance - This program provides financial protection in the
event of death of the insured where the customer pays the insurance sum.
The benefit of this program is very low premiums as well as opportunities
policy asigned in favor of the bank. Term life insurance is a program that
does not have a savings component.

f) Supplementary Insurance - Supplemental programs are concluded with the

basic program and have no savings character. The program of additional
insurance against accidents provides cover in the event of permanent
disability and compensation for hospitalization. Supplementary insurance
from operations provides protection in the event of surgery due to illness or
accident.16

Conclusion
The very word "insurance" in different languages in addition to their
economic, legal or technical significance is of broad, general understanding
that the term means their safety, trust in something, protection, security,
guaranteeing. The general meaning of the word quite good means to ensure
that it actually consists in providing some security.

16 www.uniqa.ba all data written in this part of article is found ond the site of this
insurance company and considering the similar offer of insurance companies in
country we sorted out these one that are in article.

Insurance no longer serves only the interests of the protection of individuals

who provide care, often, the interests of third parties. The insurance today
can provide almost everything from the existence of nearby in case the
heaviest loss - death or permanent loss of working capacity, and to
compensation for travel and accommodation costs during the rainy days on
vacation. It was also observed that the insurance affects the increase of
freedom and independence of man.
The way in which some types of insurance are organized, particularly in life
insurance, it seems that insurance is a type of savings is very suitable for the
insured person: he can before the occurrence of the insured event to get an
advance sum insured, pawn insurance policy, to demand payment of the
redemption value of the policy, to participate in technical profit insurer
realizes that, and so on. In addition to this, it was concluded insurance is
often a means of obtaining loans for the insured. For a creditor who has not
received other guarantees may be sufficient stocks of insurance of life by the
debtor in his favor and the amount of the loan.
Insurance is important for the whole community and to the economic, social
and other aspects. Prevention has significant meaning in insurance. It also
appears as a function of the insurance industry, and as an element of an
insurance contract.

References

George E. Rejda (2008) "Principles of risk management and insurance" Person/Addison

wesley (136-145;180-182;209-239)

F.C. Oviatt (-) "Economic Place of Life Insurance and Its Relation to Society" "Sage
Publications , Inc." (181-192)

Andrijaevi , S. Petranovi , V. (1999) "Ekonomska Osiguranja" Alfa , Zagreb (166170;222-235)

Emmett J. Vaughan , Therese M. Vaughan (2002) "Fundamentals of Risk and Insurance"

John Wiley&Sons (233-262)

Marovi, B., Avdalovi, V.: Osiguranje i upravljanje rizikon, Birografika, Subotica, 2005.
P(30-78)

www.uniqa.ba

www.businessdictionary.com

https://www.genworth.com/

www.investopedia.com