Insurance

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www.licindia.in
 Insurance
• Economic Perspective – Insurance is a financial
intermediation function by which individuals
exposed to a specified contingency each
contribute to a pool from which covered events
suffered by participating individuals are paid. 
• Individuals purchase the right to collect from the
pool if the insured contingency occurs.
• Insurance is a contingent claim contract on the
pool’s assets.
 Insurance
• Legal Perspective – Insurance is an agreement
(the insurance policy or the insurance
contracts), by which one party, like policy
owner, pays stipulated consideration, called
premium, to the other party called Insurer in
return for which the insurer agrees to pay a
defined amount of money or provide a
defined service if a covered event occurs
during the policy term.
 The Life Insurance Content
• Life insurance is a contract that pledges payment
of an amount to the person assured (or his
nominee) on the happening of the event insured
against.
The contract is valid for payment of the insured
amount during:
• The date of maturity, or
• Specified dates at periodic intervals, or
• Unfortunate death, if it occurs earlier.
 The Life Insurance Content
• The contract also provides for the payment of premium periodically
to the Corporation by the policyholder.
• Life insurance is universally acknowledged to be an institution,
which eliminates 'risk', substituting certainty for uncertainty and
comes to the timely aid of the family in the unfortunate event of
death of the breadwinner.
• By and large, life insurance is partial solution to the problems
caused by death. Life insurance, in short, is concerned with two
hazards that stand across the life-path of every person:
• That of dying prematurely leaving a dependent family to fend for
itself.
• That of living till old age without visible means of support.
 Life Insurance Principles
• In India, Life Insurance Business is defined under Section 2(11)
of Insurance Act 1938, which reads as follows: “life insurance
business” means the business of effecting contracts of
insurance upon human life, including any contract whereby
the payment of money is assured on death or the happening
of any contingency dependent on human life and any contract
which is subject to payment of premium for a term dependent
on human life and shall be deemed to include - the granting of
• disability and double or triple indemnity accident benefits, if
so provided in the contract of insurance
• annuities upon human life;
 LIC Products
• Based on the benefit patterns the traditional
Life Insurance products can be categorized
into the following types:
– Term Insurance
– Whole Life Insurance
– Endowment Insurance
– Annuities
 Term Insurance
• Term Insurance provides for life insurance protection for
the selected term (period of years) only.
• In case the person (whose life is insured) dies during the
term, the benefits are payable under the policy and in case
of his survival till the end of the selected term the policy
normally expires without any benefit becoming payable.
• Term insurance may be regarded as temporary insurance
and is more nearly comparable with "Property & Casualty
insurance" contracts than the other forms of Life
insurance contracts.
 Whole Life Assurance

• As the name suggests, the whole life insurance

policies are intended to provide Life Insurance
protection over one's lifetime.
• The essence of whole life insurance is that it provides
for payment of the assured amount upon the
insured's death regardless of when it occurs.
• Under these policies, the payment of the assured
sum is a certainty in contrast to the term insurance
contracts. Only the time of payment of the assured
sum is an uncertainty.
 Whole Life Assurance

• Whole life policies can be either participating

type or non-participating type.
– Participating type policies are those which are
entitled to a share in the distributable surplus
(profits) of the Life Insurance company, whereby
the cash value of the policy can go up, with the
announcement of bonus / dividend.
– Non-participating policies have the same benefit
throughout the life of the policy.
 Types of whole life policies:
1. Ordinary Whole Life Insurance
2. Limited Payment Whole Life Insurance
3. Convertible Whole Life Insurance
 Endowment Assurance
• These are the most commonly sold policies.
• These policies assure that the benefits under
the policy will be paid on the death of the life
insured during the selected term or on his
survival to the end of the term.
• Hence the assured benefits are payable either
on the date of maturity or on death of the life
insured, if earlier.
 Endowment Assurance
• Endowment policies assist in providing for the
payment of a lump sum amount for a specific
purpose, say, provision for retirement, meeting
the needs of the child etc.
• The money required for the purpose will be
built up whether the person is alive till that
date or not. Like whole life insurance policies,
endowment policies can also be of
participating and non-participating types.
 Annuities
• An annuity is a series of periodic payments.
• An annuity contract is an insurance policy,
under which the annuity provider (insurer)
agrees to pay the purchaser of annuity
(annuitant)a series of regular periodical
payments for a fixed period or during
someone's life time.
 Classification of Annuities
• Annuities can be classified on the basis of  
– The number of lives covered
• Single
• Joint
• The beginning of the payment of annuity
– Immediate annuity
– Deferred annuity
• Method of premium payment
– Single premium
– Regular installment
 What is risk in the context of Life Insurance?

• No universal definition of risk

• The notion of indeterminate outcome. If we are able to predict the outcome
with certainty then there is no risk. There must be at least two possible
outcomes. For example in Life Assurance either the person survives till the end
of the term for which he took a policy or dies midway through the term.
• At least one of the possible outcomes is undesirable. Taking the earlier example
further no normal person will like to die although the risk is covered by life
insurance.
• Risk is said to exist if there is a possibility of getting an outcome other than the
one desired for.
• It is a combination of circumstances in the external environment over which a
person has very little control.
• The probability is between zero and one.
• The extent of adverse outcome may not be measurable before risk takes place.
 Mortality Tables

• A MORTALITY RATE is the probability that a person

attaining exact age x will die before attaining age x+1, i.e., if
we say that the mortality rate at age 32 is 8.5 per 1,000 it
means that the probability of a person who is now exact
age 32 will die before exact age 33 is.00085.
• Mortality rate is arrived at by using the relative frequency
interpretation of probability based on a posteriori
estimates
• A MORTALITY TABLE is a set of probabilities, one for each
age, giving the probability of dying during the one-year
period following the attainment of each given age.
 Components of Life Insurance Pricing
• There are three primary elements in Life Insurance pricing:
– Mortality
– Interest
– Expenses.
• The first two are used to compute the net premium, which
measures only the cost of claims. The net premium plus an
expense loading is the gross premium, which is the premium
quoted for the contract and the amount the insured pays.
• For participating policies, to the above premium a small extra
loading is added which is called the bonus loading. The
policyholder purchases a right to have a share in the profits of the
insurer by paying this loading or extra premium.
 Components of Life Insurance Pricing
• The mortality table is simply a convenient method
of expressing the probabilities of living or dying at
any given age. It is a tabular expression of the
chance of losing the economic value of the human
life. Since the insurance company assumes the risk
of the individual, and since this risk is based on
life contingencies, it is important that the
company know within reasonable limits how
many people will die at each age.
 What is Underwriting?
• Underwriting is the process of selecting and classifying exposures.
Unless the company selects from among its applicants, the inevitable
result will be adverse to the company.
• When will the Second Law in Dual Application of Law Of Large
numbers be true?
In Dual application Of Law of Large Numbers the larger the sample
more accurate will be the estimate of the probability
• After estimating the Probability, it must be applied to a sufficiently
large number of exposure units to permit the underlying probability to
turn out to be true
• For the second law to be true, the future experience of the group to
which the rates are to be applied should approximate that of the
group on which those rates are based.
 Financial Underwriting

• The purpose of underwriting in Life Insurance is to see that only those

lives, which have almost similar exposure to the risk of death, enter the
pool of Life Insurance and to charge everyone with a premium
commensurate with the risk that he she brings in to the pool.
• While there are elaborate ways to check the physical condition of health of
a person, it is extremely difficult to verify the intention of a person who
proposes a life for insurance protection. One step in this direction is to
ensure that the amount of insurance cover that is provided to the person is
in line with his income/premium paying capacity/ financial loss that the
beneficiaries of insurance would suffer in case of the death of the life
insured.
• This process of checking whether the insurance cover sought for is within a
limit in relation to the income of the life to be assured is called financial
underwriting.
 Life Insurance Vs. Other Savings
• Contract Of Insurance:
A contract of insurance is a contract of utmost good faith, which applies to all forms of
insurance.

At the time of taking a policy, policyholder should ensure that all questions in the
proposal form are correctly answered. Any misrepresentation, non-disclosure or fraud
in any document leading to the acceptance of the risk would render the insurance
contract null and void.
• Protection:
Savings through life insurance guarantee full protection against risk of death of the
saver. Also, in case of demise, life insurance assures payment of the entire amount
assured (with bonuses wherever applicable) whereas in other savings schemes, only
the amount saved (with interest) is payable.
 Life Insurance Vs. Other Savings
• Aid To Thrift:
Life insurance encourages 'thrift'. It allows long-term savings since payments can be made effortlessly
because of the 'easy installment' facility built into the scheme. (Premium payment for insurance is either
monthly, quarterly, half yearly or yearly).
• Liquidity:
In case of insurance, it is easy to acquire loans on the sole security of any policy that has acquired loan
value. Besides, a life insurance policy is also generally accepted as security, even for a commercial loan.

• Tax Relief:
Life Insurance is the best way to enjoy tax deductions on income tax and wealth tax. This is available for
amounts paid by way of premium for life insurance subject to income tax rates in force.
• Money When You Need It:
A policy that has a suitable insurance plan or a combination of different plans can be effectively used to
meet certain monetary needs that may arise from time-to-time.
Children's education, start-in-life or marriage provision or even periodical needs for cash over a stretch of
time can be less stressful with the help of these policies.