CHAPTER FIVE

LIFE AND HEALTH

INSURANCE

03/29/23 1
 A human life has economic value to all who depend on the
earning capacity of that life, particularly for the two central
economic groups:- the family and the employer.

To the family, the economic value of a human life is measured

by the value of the earning capacity of that specific individual.

To the employer, the economic value of a human life is

measured by the contribution of an employee to the success of
the business firm.

03/29/23 2
There are four main perils (specific cause of a loss) that can destroy,
wholly or partially, the economic value of a human life. These
include:
i. Premature death
ii. Loss of health
iii. Old age, and
iv. Unemployment.
1. Premature Death
Premature death can be defined as the death of a family head with
outstanding unfulfilled financial obligations, such as dependents
to support, children to educate, a mortgagee to be paid off, and
other installment debits.
Premature death can cause serious financial problems to the
surviving family.
If replacement income from other sources is inadequate, or the
accumulated financial assets available to the family are also
inadequate, the surviving family members will be exposed to great
economic/financial insecurity.

03/29/23 3
 Costs of Premature Death
 There are certain costs associated with premature death.
Firstly; The family`s share of the deceased breadwinner’s future
earnings is lost forever.
Second; Additional expenses are incurred because of funeral
expenses, uninsured medical bills, and estate settlement
costs.
Third; Because of insufficient income, some families will
experience a reduction in their standard of living.
Finally; Certain non-economic costs are incurred, such as intense
grief/sorrow, loss of a parental role model, and
counseling and guidance for the children.

03/29/23 4
Economic Justification of Life Insurance
Life insurance can be used to alleviate the financial
consequences of premature death.
The purchase of life insurance is economically justified if the
insured earned income.

If a family head (breadwinner) dies prematurely with dependents

to support and outstanding financial obligations, the surviving
family members are exposed to great economic insecurity.

Life insurance can be used to restore the family’s share of the

deceased breadwinner’s earnings.

03/29/23 5
 DEFINITION OF LIFE INSURANCE:
Life insurance is a contract between the policy owner and
the insurer, where the insurer agrees to pay a sum of money
upon the occurrence of the insured individual's death or
other event, such as terminal illness or critical illness.
In return, the policy owner agrees to pay a stipulated
amount called a premium at regular intervals
(installment) or a total payment at once (lump sums).
As a social and economic device life insurance is a method
by which a group of people may cooperate to improve the
loss resulting from the premature death.

03/29/23 6
 DEFINITION OF LIFE INSURANCE:

There are many different types of life insurance, but the

standard arrangement is: a contract specifying that upon the
death of the person whose life is insured, a stated sum of
money (the policy’s face amount) is paid to the person
mentioned in the policy as the beneficiary.

03/29/23 7
 Some Unique Characteristics of Life Insurance
Life insurance is a risk-pooling plan, an economic device through
which the risk of premature death is transferred from the
individual to the group.
i. The event insured against is an eventual certainty.
No one lives forever, and the insurer`s chance of loss under a life
insurance contract is greater the second year of the contract than it
was the first year. and so on, until the insured eventually dies.
Life insurance is not a contract of indemnity.

ii. There is no possibility of partial loss in life insurance.

In the event that a loss occurs, the company will pay the face
amount of the policy wholly.

03/29/23 8
  Major Types of Life Insurance Contracts
 There are four basic classes of life insurance contracts:
A) Term,
B) whole-life,
C) Endowment, and
D) Annuities.
A)Term Insurance
A term policy in life insurance may be defined as contract that
furnishes life insurance protection for a limited number of
years.
The face value of the policy being payable only if death occurs
during the stipulated/agreed term, and nothing being paid in
case of survival.
It is called term because the coverage is for a limited term.

03/29/23 9
 Term insurance provides temporary protection.
Common types of term life insurance are 1-year term, 5-year
term, 10-year term, 20-year term, and term to age 60 to 65.
Term insurance protects the beneficiary if the insured dies
within the term specified in the policy.
If the insured lives to the end of the term, the policy expires
and no payment is made by the insurer.
Unlike the risk of losing a home or automobile, death is a
certainty.
Term life insurance is similar to property insurance in this
respect. If there is no loss to a home or automobile while a
policy is in force, the insurer makes no payment. This is also
the case with term life insurance.

03/29/23 10
  Types of Term Life Insurance
 Insurers sell several types of term life insurance policies
including the following:
i) Decreasing term life insurance :
 A decreasing term policy provides the beneficiary with less
proceeds each year the policy is in force.
 It is a form of term insurance where the face amount
gradually declines each year. However, the premium is level
throughout the period. That is,
 if death occurs in the first policy year, the beneficiary
receives the total face amount.
 If death occurs in a succeeding year, the proceeds will be less.
 In a decreasing term policy, the premiums remain the same
each year but purchase less insurance protection.
 That is, the amount of death benefit decreases because the
chance of death increases with age. .

03/29/23 11
 ii) Increasing term life insurance :
An increasing term policy provides proceeds that increase each
year.
If death occurs in the first year, the insurer pays the face amount
of the policy.
for example, $20,000. In twentieth year, perhaps $35,000 would
be paid to the beneficiary.
Such policies are attractive in an inflationary economy to
compensate the lost purchasing power of money and also the
increased financial obligations of the family.

03/29/23 12
 For example, if you purchase a policy worth $250,000 with a 5
percent increasing term, your policy death benefit will be worth
$312,500 after five years.
 Alternatively, you may purchase an increasing term life policy for
20 years. In the first five years, it offers $100,000, then $250,000
for years six to 10, then $500,000 for years 11 to 15 and finally
tops out at $1 million during the last five years.
 The incremental increase will stop after the maximum limit is
reached but your policy will remain in effect.
iii. Level term life insurance :
 A level term policy pays the same amount of benefits if death
occurs while the policy is in force.

03/29/23 13
 Level term life insurance is where the premiums and
amount of cover stay the same during a policy term,
regardless of when the insured person passes away. In
other words, the amount of cover is 'level'.

 level term life insurance is often best suited to

protecting a repayment mortgage. Whereas a
decreasing term life insurance is ideal for protecting a
repayment mortgage as the sum assured can reduce in line
with your remaining mortgage balance.

03/29/23 14
iv. Renewable term life insurance :
Renewable term policies allow the insured to continue the coverage up
to specified age regardless of the status of the insured’s health or other
relevant factors including occupation.
If, for example, a five-year term policy is not renewable, an insurer
could end the insurance at the end of any five–year period.
Coverage could not be ended by the insurer if the policy were
renewable.
Although renewable term polices cost more, the guaranteed renewal
feature is worthwhile for many people because it transfers the risk of
becoming uninsurable to the insurance company.
It should be understood each time a term insurance policy is renewed,
the premium increases because the insured will be older.
If a policy is “renewable,” that means it continues in force for an
additional term or terms, up to a specified age, even if the health of the
insured (or other factors) would cause him or her to be rejected if he
or03/29/23
she applied for a new life insurance policy. 15
v. Convertible term life insurance:
Convertible term polices allow the insured the option of converting
the policy to a whole life policy.
This privilege can be valuable if the term insurance is about to
expire and the insured wishes to continue the coverage on a
permanent basis.
When the insured makes the conversion the premium increases.
The biggest benefit of convertible insurance policies is that
policyholders don't have to undergo medical underwriting again to
switch to permanent. 
Renewable term allows you to extend your current term life
coverage. Convertible term gives you the option to convert your
term life coverage to permanent or whole life coverage at any
point during your term or before you turn 70, whichever comes
first. In both cases, you don't have to reapply for insurance.
03/29/23 16
 Uses of Term Insurance
 Term insurance is appropriate in these three situations:
i. First, If the amount of income that can be spent on life
insurance is limited, term insurance can be effectively used.
ii. Second, Term insurance is appropriate if the need for
protection is temporary. For example, decreasing term
insurance can be effectively used to pay off the mortgage if
the family head dies prematurely.
iii. Finally, Term insurance can be used to guarantee future
insurability.
 A person may desire large amounts of permanent
insurance, but may be financially unable to purchase the
needed protection today.

03/29/23 17
Limitations of Term Insurance
Term insurance has these two major limitations:
 First, term insurance premiums increases with age at an
increasing rate and eventually reach prohibitive levels.
Thus, term insurance is not suitable for individuals who need
large amounts of life insurance beyond age 65 or 70.
 That is why it is advised to purchase a term insurance plan when
you are young.
 Second, term insurance is inappropriate if you wish to save
money for a specific need. Term insurance policies do not
accumulate cash values.
 Under term life insurance there is no offerings of maturity benefit
such as bonuses and more, it only offers death benefits upon the
breadwinner's death.

03/29/23 18
B) Whole Life Insurance
whole life insurance is a cash-value policy that provides lifetime
protection.
oCash value is a savings component typically included in permanent life insurance
policies.
whole life insurance provides for the payment of the face value
upon the death of the insured, regardless of when it may occur.
Whole life insurance policies promises to pay the beneficiary
whenever death occurs.
Whole life policies also promise payment if the insured reaches age
100.
When insurers make a claim payment, they say the policy has
matured.
Because claims are a certainty with whole life policies, the
insurer must collect enough premiums to pay them.
This is one explanation of why whole life insurance premiums
initially are larger than term life insurance premiums.

03/29/23 19
Cash Values
Whole life insurance contracts contain savings elements called
cash values.
The cash values are due to the overpayment of insurance
premiums during the early years.
As a result, the policy owner builds a cash equity in the policy.
The cash values are relative small during the early years, but
increase over time. For example, in a whole life policy, a $50,000
policy issued at age 20 may have additional $25,000 cash value at
age 65.

03/29/23 20
 Types of Whole Life Insurance
 The principal types of whole life insurance policies are:
1. Ordinary life insurance
2. Limited payment life insurance
1) Ordinary life insurance
Ordinary life insurance is a level-premium policy that provides
lifetime protection to age 100.
If the insured is still alive at age 100, the face amount of insurance
is paid to the policy owner at that time.
Premiums do not increase from year to year but remain level
throughout the premium paying period.

03/29/23 21
 Basic Characteristics of Ordinary Life Insurance

 Premiums are level throughout the premium-paying period.

 The excess premiums paid during the early years are accumulated
at compound interest and are then used to supplement the
inadequate premiums paid during the later years of the policy.
 Accumulation of cash-surrender values, which is the amount paid
to a policy owner who surrenders/withdraws the policy.
 The death benefit is guaranteed as long as the guaranteed
premiums are paid.
 The policy includes guaranteed cash values that grow at a
guaranteed rate.

03/29/23 22
 Uses of Ordinary Life Insurance
I. It will continue beyond age 65 or 70.
II. used to save money.
2) Limited Payment Life Insurance
 Limited payment whole life plan entails that the insurance
protection is provided until the death of the insured,
however, the premiums can be paid up to a certain period
of time.
 In a limited payment whole life plan, the premiums are
paid only until a chosen age. This policy is designed for
people who wish to have lifetime coverage, but are not
willing to pay premiums throughout their life. It provides
death benefits and promotes saving.
03/29/23 23
 The most common limited-payment policies are for 10, 20, 25, or
30 years.
An extreme form of limited-payment life insurance is single-
premium whole life insurance, which provides lifetime protection
with a single premium.
A limited-payment policy should be used with care.
It is extremely difficult for a person with a modest income to
insure his or her life adequately with a limited-payment policy.

03/29/23 24
C) Endowments Insurance
Endowment insurance is another traditional form of life insurance.
Endowment Insurance: a form of life insurance that pays the
face value to the insured either at the end of the contract period
or upon the insured's death. This is in contrast to life insurance,
which pays the face value only in the event of the insured's death.
Endowment policy pays the face amount of insurance if the
insured dies within a specified period.
If the insured survives to the end of the endowment/maturity
period, the face amount is paid to the policy owner at that time.
 For example, if Stephanie, age 35, purchased a 20-year
endowment policy and dies any time within the 20-year
period, the face amount is paid to her beneficiary.

03/29/23 25
 Endowment contracts provide death benefits for a specified
period of time, just as term insurance does.
Endowment insurance may be a useful way for some persons to
accumulate a specified sum over a stated period of time whether
they live or die.
The objective may be to pay living expenses during retirement, or
to retire/repay a debt.
D) Annuities
 An annuity can be defined as periodic payment to an individual
that continues for a fixed period or for the duration of a
designated life or lives.
 The insure put some of his/her savings into the annuity, and
the insurance company promises to provide him/her with an
income stream that can last for life.
 The person who receives the periodic payments or whose life
governs the duration of payment is known as the annuitant.
03/29/23 26
 An annuity may be described as the opposite of life
insurance.
 The fundamental purpose of a life annuity is to provide a
lifetime income that cannot be outlived/goes beyond the
death of the insured to an individual/beneficiary.
 An annuity insurance operation transfers funds from
those who die at relatively early age to those who live to
relatively old ages.

03/29/23 27
 Types of Annuities
 Insurers classify annuities using the following five criteria.
i. Method of premium payment:
 If an annuity is purchased with a single-premium payment,
it is called a single-premium annuity.
ii. Time when benefits begin:
 The annuity payments to the annuitant can be made
monthly, quarterly, semiannually, or annually.
 The payments or benefits can start immediately or be
deferred until some later date.
 If the income is paid monthly, the first payment starts one
month from the purchase date, or one year from the
purchase date if the income is paid annually.
03/29/23 28
iii. Promises purchased:
Annuities can also be classified in terms of the
insurer`s promises or obligations under the contract.
A straight life annuity provides a lifetime income to
the annuitant only while he or she is alive.
No further payments are made after the annuitant
dies.
A life annuity with guaranteed payments is one that
pays a life income to the annuitant with a certain
number of guaranteed payments.
If the annuitant dies before receiving the guaranteed
number of payments, the remaining payments are paid
to designated beneficiary.
03/29/23 29
iv. Number of annuitants covered:
An annuity may be purchased to cover one or
more lives. A single-life annuity covers one life.
A joint-life annuity covers two lives. With this
contract, payments terminate at the death of either
annuitant.
A joint-and-survivor annuity provides payment
to two annuitants, with the payments continuing for
as long as either annuitant is alive.
If the payments are reduced by one-half (or two–
thirds) after the death of one annuitant, the contract
is called a joint-and-one-half survivor annuity.
03/29/23 30
v. Type of benefits:
Annuities can also be classified in terms of fixed or
variable benefits.
Under a fixed annuity, the periodic payment is a
guaranteed fixed amount.
During the accumulation period, the premiums are invested
in bonds, mortgages, and other fixed income securities with a
guaranteed return.
A variable annuity is an annuity that provides a lifetime
income, but the periodic income payments will vary
depending on the level of common stock prices.
The fundamental purpose of a variable annuity is to
provide an inflation hedge by maintaining the real purchasing
power of the periodic payments during retirement.

03/29/23 31
Health Insurance
 Health insurance may be defined broadly as the type of
insurance that provides indemnification for expenditures
and loss of income resulting from loss of health.
 The most important individual coverage's include the
following:
a) Medical expense insurance:
 Medical expense insurance provides for the payment of
the costs of medical care that result from sickness and
injury.
 Its benefits help to meet the expenses of physicians,
hospital, nursing, and related services, as well as
medications and supplies.
 Benefits may be in the form of reimbursement of actual
expenses .

03/29/23 32
b) Hospital insurance:
A hospital insurance policy provides indemnification
for necessary hospitalization expenses, such as room
and board while hospitalized, laboratory fees, nursing
care, use of the operating room, and certain medicines
and supplies.
c) Surgical insurance:
which covers physicians` fees associated with
covered surgeries.
The surgical contract provides set allowances for
different surgical procedures performed by licensed
physicians.
03/29/23 33
d) Physician`s expense insurance:
Physician`s expense insurance provides benefits
to cover a physician`s fees for nonsurgical care in a
hospital, home, or doctor`s office.
e) Major medical insurance:
The major medical policy is the contract that is
most appropriate for the large medical expenses
that would be financially disastrous for the
individual.

03/29/23 34
f) Disability income insurance:
Disability income insurance provides periodic
income payments to the insured while he or she is
unable to work as a result of sickness or injury.
Disability income insurance policies are designed as
either short or long term, depending on the period
coverage is provided.
Short-term policies provide a specific number of
weeks of coverage, perhaps 30 weeks, after a brief (for
example, one-week) elimination period.
An elimination period is a period that must elapse
before an insured is eligible to receive insurance
payments.
03/29/23 35
03/29/23 36