BASIC THINGS

TO KNOW

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 Basic Elements in
Life Insurance Premium

Tabular premium rates under the Plan are

arrived at after taking into consideration the
following elements:
• Mortality Rate
• Rate of Interest
• Management Expenses
• Bonus Loading

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 Mortality Rate

• Mortality rate is nothing but probability of

death of insured lives of a particular age
during the year out of Selected Group of
persons.
• These Mortality rates are compiled from the
earlier experience of the lives assured by Life
Insurance Company.

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 Mortality Rate
• Following table gives the expected no. of deaths that occurs within
one year out of 1, 00,000 lives of a given age:
Expected Expected Expected
Age Age Age
Deaths Deaths Deaths
30 134 45 465 60 2014
35 178 50 772 65 3165
40 280 55 1258

The above table shows that if 1,00,000 persons aged 30 are insured,
the insurance company would expect to pay 134 death claims
during the year.
For 1,000 SA, The aggregate amount payable will be Rs-1,34,000,
So required contribution from each one will be Rs-1.34. This is the
Risk Premium payable by each insured.
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 Mortality Rate
• The rate of mortality or chances of death generally
increases, as age increases, therefore higher the age the
larger is the premium.
• If person of age 30 takes policy for Rs-1000 SA for 35 years,
he will pay Rs-1.34. By age 40 his premium will increase to
Rs-2.80 and by age 65 his premium will be Rs-31.65. This
puts heavy burden to the policyholders at higher ages.
• This difficulty is over come by charging same premium
through out the term, known as “Level premium”. This level
Premium is mathematical equivalent of increasing premiums
payable year after year.

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 Mortality Rate
• In the above example the premium from age 30 to age 65
increases from Rs.1.34 to Rs. 31.65.
• The level annual premium of Rs. 10.25 would be sufficient to
cover the risk of persons aged 30 up to age 65.
• It is evident from above example that the level premium
payable up to age 50 is more than the required amount for
claims payable. ( e.g. Total claim amount payable during age 35
will be Rs-1,78,000 (178 x 1000) whereas level premium
collected would have been 10.25 x 100000 i.e. Rs-10,25,000).
• This extra amount collected during early years gets
accumulated with the insurer as a Reserve fund known as “Life
Fund”.

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 Mortality Rate

• This excess amount collected in early years is invested to

earn satisfactory yield of interest and added to the life fund.
• During the later years i.e. from Age 51 to 65, the premiums
to be collected will be less than claims payable in a year and
deficit is made good by drawing upon the Life Fund
available.
• LIC’s total life fund as on 31/03/2018 is Rs.31.27 lac Crores
and it keeps on increasing every year. This indicates
soundness of company to pay claims in future.

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 Rate of Interest
• The accumulated funds collected in early years are to be
invested to secure interest income.
• Such interest income is taken into consideration and level
premium rates are reduced accordingly.
• While investing this fund, security of the capital is very
important and is of primary consideration.
• The insurer cannot loose the capital in any speculative
investment which will ensure his capacity to pay claims at
later stage.
• So insurer assumes a reasonable rate of interest for the term
of the policy, and level premiums are reduced accordingly.

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 Management Expenses
• Insurer incurs various expenses for the
management and selling of policies.
• Since the premium once charged remains constant
throughout the term, so the expense loading has to
done taking into consideration the level of expenses
that are likely to be incurred throughout the term.
• Level premiums are suitably increased assuming the
total expenses for the duration of policy.

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 Bonus Loading

Under with profit policies premium payable are

suitably loaded to entitle policyholders to
share in the surplus of the insurer in form of
Bonus declared periodically.

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 Rebates on Tabular Premium

Following Rebates are given on tabular

premiums:
1. Mode of Payment
2. Large Sum Assured

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 Mode of Payment Rebate
• Tabular Premium rates are given per 1,000/- S.A.
which are applicable for quarterly mode of
premium.
• As premiums are collected in advance, incase of
Half Yearly and Yearly mode, suitable reduction is
allowed taking into consideration the interest
income and lower expenses in premium collection.
• Normally it is 2% on Yearly mode and 1% on Half
Yearly mode.

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 Large Sum Assured Rebate
• A large portion of expenses incurred in connection
of a policy remains same irrespective of sum
assured e.g. cost of policy document, administrative
expenses, dispatch etc.
• That means expenses per 1,000 S.A. are less for
High sum assured policies.
• Hence more reductions are allowed for large sum
assured policies.
• Rate of rebate is different for each plan and is in
terms of amount per 1000 SA.

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 How “Surplus” is Generated
The factors which constitutes the premiums
also contributes towards surplus:
• If the mortality experience of an insurer
improves as a result of effective underwriting
or general improvement in longevity of
community, than claims payable will be less
than anticipated.

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 How “Surplus” is Generated
• If a higher interest income than anticipated is
earned on Life fund as a result of effective
investment policy or general improvement in
the condition of investment market.
• If the operating expenses are kept at a lower
level than anticipated through the effective
management and reduction in expense level.

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 How “Surplus” is Generated
• Then such favorable experiences results in the “Surplus”.
• Such surpluses are determined by periodical investigation
called “Valuation of Assets and Liabilities” of the insurer.
• These are statutory requirements under the LIC Act and
Insurance Act.
• As a result of such investigation 95% of surplus is distributed
among the policyholder in the form of Bonus & Balance 5%
is paid to the Govt. of India.
• Now the Govt. planned to invest their 5% profit in share
market to make more profit

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 Vesting of Bonuses
The bonuses declared will vest under policies which
have been in-force for the full sum assured for a
period of 3 years from the date of commencement
and are on the books of the Corporation either fully
paid-up or in force as on date of valuation.
For death claims condition of 3 years will not be
applicable and bonuses are payable even in case of
death in 1st year.

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 Distribution of Bonuses
Distribution of Bonus is done in two ways:
1. Simple Reversionary Bonus:
• Bonus rate is declared on per thousand sum
assured per annum, and varies as per term of
policy. Higher the term, more will be bonus rate.
Bonus rate changes at 11th, 16th and 21st year.
• Bonus declared every year is not paid
immediately, but will be added to policy and is
payable only on maturity or earlier death.

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 Distribution of Bonuses
For Example :
Bonus declared during first 3 years of policy is:
1st Year: Rs- 48 per 1000
2nd Year : Rs- 50 per 1000
3rd Year : Rs- 52 per 1000
For Rs-1,00,000 SA:
Bonus Addition for 1st year will be
: 48 x 100000/1000 = Rs – 4800
Similarly for 2nd and 3rd year it will be Rs- 5000 and Rs-5200 respectively.
Total Accumulated Bonus after 3 years will be :
4800 + 5000 + 5200 = 15,000

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 Distribution of Bonuses
2. Final Additional Bonus ( FAB):
• Insurer creates the reserve fund under each policy to
meet future unexpected liabilities.
• If the experience is better, then at the time of maturity
such reserve fund is distributed in form of Final additional
bonus.
• It is payable under with profit policies with policy term 15
years and above.
• Higher the term of policy, more will be final additional
bonus.
• FAB rates are also more for Sum Assured 2 lacs and above.

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 Riders

• Accident Benefit Rider

• Accident and Disability Benefit Rider
• Term Assurance Rider
• Premium Waiver Benefit Rider

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 Accident and Disability Benefit Rider
• If the life assured is involved in an accident, leading to either
permanent and total disability or death within 180 days from
the date of accident, the following benefits are payable:
• In case of Death of life assured:
Additional Accident Benefit Sum Assured is payable, over
and above Natural Death Benefits.
• In case of Disability of life assured:
• Accident Benefit Sum Assured will be paid in equal
monthly instalments spread over 10 years.
• Future premiums are waived under the policy to the
extent of accident benefit sum assured.
We must add this Rider by default
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 Accident and Disability Benefit Rider
• Maximum SA :
1 Crore as per plan
• Premiums:
For Regular Premium Policies:
• Rs - 1.00 per 1000 Accident Benefit SA.
• Rs- 1.50 per 1000 Accident Benefit SA, if life assured is
engaged in any police organization other than
paramilitary forces and opts for this cover while engaged
in police duty.
For Single & Limited Payment Policies:
• Rates will be given along with Plan.

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 Illustration of Disability Benefit
• A client has taken policy for 10-Lacs Sum Assured:
• He meet with an Accident & becomes disabled.
• Disability Benefits:
1. Future Premium Liability is completely waived.
2. 10 lacs are divided into 120 monthly installments, i.e.
1000000/120 = Rs. 8333 will be paid to life assured for 10
years.
3. On the date of maturity, Full Maturity Value as per plan
will also be paid.

Very few agents highlight above Disability Benefits.

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 Accident Benefit Rider
• Coverage of only Accident Death not for
disability.
• If the life assured is involved in an accident,
leading to death within 180 days from the date
of accident, the following benefits are payable:
Additional Accident Benefit Sum Assured is
payable, over and above Natural Death
Benefits.

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 Term Assurance Rider
• Term Assurance Rider is nothing but adding additional Term
Insurance SA to basic plan.
• It is available under Basic Plans for SA less than or equal to
SA under the basic plan at inception only.
• Death Benefit:
Additional SA equal to Term Rider SA will be paid over and
above the Death Benefits payable under Basic Plan.
• No additional benefits are payable on maturity.
• Suitable for persons who needs more risk cover, but cannot
afford more premium of basic plan.

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 Premium Waiver Benefit Rider
• Allowed to proposers under Children Plans.
• Can be taken at inception or 5 years before premium paying
term ends.
• DEATH BENEFIT:
In case of death of Proposer, during premium paying term:
 All future premiums payable under Children plan are
waived.
 Child will get all the Benefits Payable under the Plan on
stipulated dates.
• You must suggest this Rider under all Children Plans.

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 Important Terminologies

• Age Nearer/Last Birthday

• Back Dating

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 Age Nearer/Last Birthday
Age of the Proposer at the time of Entry and at the time of
Maturity is determined on the basis of Age Nearer Birthday OR
Age Last Birthday.
• Age Nearer Birthday (NBD):
If on the date of proposal more than 6 months are over since
date of birth of proposer, then his age as per next birth date
will be taken as age nearer birthday.
e.g:
Date of Birth : 10/01/1995
Date of Proposal : 15/07/2015
Age as on 15/07/2015 : 20 years, 6 months and 5 days
Age Nearer Birthday : 21 years.
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 Age Nearer/Last Birthday

• Age Last Birthday (LBD):

Completed age as on date of proposal is considered as age
last Birthday under the proposal.
Under the earlier example age last birthday will be 20 years.

Age at Entry and Age at Maturity is different under all Plans.

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 Back Dating
• Back dating of policy is allowed up to 1st April of the financial
year at the time of inception.
• This will help in reducing the age of proposer.
e.g: Date of Birth : 10/01/1995
Date of Proposal : 15/07/2015
Age NBD as on 15/07/2015 : 21 years.
If Back dated to 09/07/2015:
Age as on 09/07/2015 will be 20 years, 5 months & 29 days.
So age NBD will be 20 years.
• This can also be used to enable proposer pay full annual
premium under other than yearly mode for availing tax
benefits for the financial year.
V - TEAM, LIC , RASIPURAM
THANK YOU

V - TEAM, LIC , RASIPURAM