Traditional Life Insurance Products

 Chapter 3 of the Course Pack (Types of Life

Insurance)
 Marked pages 38-60
 Features of any life insurance
 Protection only or savings as well (savings
portion means payment during lifetime)
 Under what events is Sum Assured or Death
Benefit (SA/DB) payable
 Term of policy (min/max)
 Age at entry
 Premium payment modes
 Any additional benefits like riders?
 Conditions/exclusions under policy/riders
 Non-Participating (non-par) or participating
(par)
Non-Participating Products (Traditional
regime)

 Non-par products give fixed benefit during

lifetime of policy
 SA loses value due to inflation
 Non-par products have low value for money
due to conservative pricing assumptions
 Participating (Par) Products

 Par products annually determine surplus from

better experience than assumed (particularly
from investment return)
 Vast majority of surplus is redistributed to
policyholders
 Surplus distribution in form of cash, premium
reduction or increase in SA
 Dividends/bonuses each year
 Participating Products
 Company and policyholders effectively act as
partners
 Generally strict laws governing surplus
distribution
 90% typically required by law to policyholders
(Pakistan as well)
 Laws weak in some countries (ME, Africa etc.)
resulting in low distribution
 Western countries distribution is high due to
competition and strong regulators.
 Example
 Premium is assumed to earn say 3%
 It actually earns 10%
 Par products will distribute vast majority
(generally 90%) to policyholder
 In this case, excess for distribution is 90% of 7%
or 6.3%
 Actually paid on accumulated fund
 Types of Bonuses
 2 types of bonuses
 Reversionary bonus is long-term as it reflects
“realized” surplus
 Terminal bonus is generally for 1 year as it is
based on unrealized gain
 Main Types of Life Insurance
Main Types of Life Insurance
 Individual Insurance (purchased directly by

Insured)
 Group Insurance (purchased through some

group arrangement generally employer –

LUMS medical)
 Credit Insurance (purchased by bank etc. on

loan of policyholder)
Types of Life Insurance Plans
A. Pure Insurance (Protection only)
 Term Insurance

B. Insurance plus Savings

 Whole Life plans
 Pure Endowment Plans
 Endowment Plans
 Anticipated Endowment (or Money Bank) Plans
 Unbundled contracts (unit linked, Universal Life,
Variable Life etc.)
 Term Insurance (TI)
 Agreed SA payable on death only
 Term can vary say from 1 year to say 30-40
years
 Important feature of low cost (younger ages)
 Suitable for budget conscious individuals
looking for family protection against loss of
income, or loans.
 Structure Features
 Specified term (1 year onwards)
 SA can be uniform, increasing or decreasing
 Premiums are generally fixed
Advantages and Disadvantages of TI
 Advantages
 Generally low premium (pricing generally
competitive)
 Simple to understand
 Ideal for loans / mortgages etc. (decreasing term
insurance)

 Disadvantages
 Nothing payable on maturity or withdrawal
 No coverage after expiry of policy term
 Potentially escalating premiums (for shorter
terms/durations)
 Loss of value if SA not indexed
 Whole Life Plan (WLP)
 SA/DB payable whenever death occurs
(coverage for whole of life)
 Can be considered TI where Term is “Whole of
Life” with savings portion
 In practice, WLP matures if policyholder
survives till a certain age (generally between
85-100 years)
 Has an implicit savings features or
policyholder gets “Cash Surrender(value)”if he
surrenders the policy.
 Advantages of (WLP)
 Death benefit throughout life (does not expire)
 Surrender benefit (generally after 2 years)
 Savings feature (cash value)
 Loans can be taken against cash value
Disadvantages for (WLP)
 Relatively expensive (particularly non-
par)
 Generally poor return on savings
 Inflexible
 Generally difficult to interpret value
(mixing of savings and protection
portions)
 SA value loss (particularly for non-par
products)
 WLP Typical Design
 SA payable whenever death occurs
 Generally matures between 85-90 years
 Cash value payable on surrender after
2-3 years
 Premium payment generally limited to
60-65 years (income earning period)
Options of lifetime or single premium
 Premiums remain constant during
lifetime
 Endowment Plan
 SA payable in case of death during
term of policy term OR survival to end
of term
 Agreed term of policy (10, 15, 20 years
etc.)
 Cash surrender value also paid in
between
Pros/Cons of Endowment Plan
 Pros
Death benefit
Maturity benefit
Relatively simple benefit structure
Loans available
Pros/Cons of Endowment Plan
 Cons
Relatively Low returns on savings (non-par
version)
Higher premium compared to term
insurance
Provides protection only for specified
period.
 Pure Endowment
 Survival portion of normal Endowment
Plan
 No protection (death) component
 SA paid on maturity only if insured
survives
 Such plans not available in practice
Anticipated Endowment (AE)
 Resembles Endowment except partial
maturity paid earlier
 Say for 21 year plan, 25% of SA paid at
end of 7 and 14 years and 50% on
maturity (in case of survival)
 Heavier savings component
 Death benefit is uniform (does not reduce
by partial maturity payouts).
 Pros/Cons of Anticipated Endowment
(AE)
 Pros
Attraction of early payouts
Suitable if cash required early
Loans available (although lower)

 Cons
Generally quite expensive
Generally SA is low (due to policy being of
“savings” type)
 Summary
 Various combinations of protection and savings
 Extremes of Term Insurance and Pure
Endowment
 In developing countries, Endowment and AE are
very common (particularly AE) due to attraction
of early payouts
 Relatively low sales of Term Insurance inspite of
need (due to low intermediary commission)
 Popularity is picking up in developing countries
as on line channels become more popular (Covid
19 impact)
 Term much more popular in developed
countries
 What is an annuity?
 An annuity is an amount of money paid to
someone at some regular intervals.
 An agreement or contract for one person or
organization to pay another (the annuitant) a
stream or series of payments (annuity
payments).
 What is a Life annuity?
 Payment dependent on survival
 Risk Covered
 Living long
 Types of Life annuity products
 There are several dimensions to classify life
annuity products.
A. According to how they financed
(Premium Mode)

 Single premium
 Regular premium (generally annual)
 “Deferred” or “accumulation period” for
regular Premium
 Generally single premium starts immediately.
B. Frequency of payment
 annual
 quarterly
 monthly
C. Beginning of Benefits
 Immediate pay-out
 Deferred (accumulation)
D. According to the nature of the payout
commitment

 Fixed term or certain: e.g. 10 years

 Life : payout last for the life time of the
annuitant
 Life with guaranteed payout period of say 10
years
 Joint : payout lasts for the later of the two
(same or reduced amount)
E. Other feature(s)
 People covered
 Single
 Joint survivor
 Fixed (uniform or increasing) or flexible
 Summary
Life Annuity Product can vary by
following factors
1. Single or regular premium
2. Payment frequency
3. Immediate or deferred
4. Payment stream commitment fixed (life,
guaranteed period, joint)
5. Uniform or increasing
 Example of a Product
 20 year deferred
 Monthly payments
 Paid for life of annuitant with 5 year guarantee
 Increasing by 5% per year
 Premiums paid annually in advance for 20
years
Adverse selection in Annuities
 Generally heathier lives purchase annuities
 Have reasonably less mortality than people
purchasing insurance
 Underwriting not feasible as it leads to
charging more for healthier lives
 Different mortality table generally used
 Unusual product in UK/South Africa of giving
discounts on unhealthy lives
 Gave rise to ethical questions.
 Riders
 Useful benefit additions
 Cost low
 Careful about exclusions
 Generally very profitable to Company as well
Typical Riders attached to Life Insurance
Policy

 Riders are add ons to Basic Policy

 Accidental Death Benefit rider
 SA is increased (generally doubled) in case of death
on account of accident
 Waiver of Premium rider
 Premium is waived for remainder of term in case
insured becomes permanently disabled or is unable
to work
Typical Riders attached to Life Insurance
Policy
 Accidental Medical Rider
 Reimbursement of medical expenses upto specified
limit in case of hospitalization on account of accident

 Critical Illness rider

 Specified amount paid in case insured detected with
specified major medical disorder or requires
treatment (heart attack, cancer, heart by pass,
permanent disability etc.)
 Covid-19 rider
 Some companies now offering medical expense
reimbursement in case the insured is infected with
Covid-19.
 Typical Exclusions in Life Insurance
Policy

 Exclusions are conditions in which claim is not

payable
 Typical Basic Life Insurance Policy Exclusions
 Suicide
 Criminal activities (homicide, terrorism etc.)
 Life threatening pre-existing medical conditions
 Event of War??
 Not to be called in question after 2 years
(except criminal activities way)
 Reputation Risk
 Exclusions in Accidental
Death Riders

 Generally more exclusions than basic life

insurance policy
 Suicide
 Criminal activity
 Life threatening pre-existing medical conditions
 Event of war
 Consumption of alcohol or drugs
 Taking part in racing or hazardous activity