CHAPTER 5.

Life And Health Insurance

The main concept of this chapter:

5.1. Underwriting life insurance
5.2. Types of life insurance polices
5.3. Premium determination
5.4. Worker’s compensation insurance
5.5. Personal accident insurance

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5.1.Underwriting
• Underwriting refers to the process of selecting,
classifying, and pricing applicants for insurance

• A statement of underwriting policy establishes

policies that are consistent with the company’s
objectives, such as

– Acceptable classes of business

– Amounts of insurance that can be written

• A line underwriter makes daily decisions concerning

the acceptance or rejection of business
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Underwriting

• Important principles of underwriting:

– The primary objective of underwriting is to attain

an underwriting profit

– The second principle is to select prospective

insureds according to the company’s
underwriting standards

– The purpose of underwriting standards is to

reduce adverse selection against the insurer
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 Cont.

• Adverse selection is the tendency of people with a

higher-than-average chance of loss to seek
insurance at standard rates. If not controlled by
underwriting, this will result in higher-than-
expected loss levels.

– Underwriting should also maintain equity among the

policyholders

• One group of policyholders should not unduly

subsidize another group
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Underwriting
• Underwriting starts with the agent in the field

• Information for underwriting comes from:

– The application

– The agent’s report

– An inspection report

– Physical inspection

– A physical examination and attending physician’s

report

– MIB report
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Continues

• After reviewing the information, the

underwriter can:

– Accept the application

– Accept the application subject to

restrictions or modifications

– Reject the application

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5.2. Types of life insurance polices

Cash Value Insurance Term Insurance

• Group Group
 Universal Life Term
• Variable Life
• Whole Life

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 Continues

• Whole life insurance includes both a death

benefit (term insurance) and a savings
component that
– Builds a tax sheltered cash value amount for
the future for the owner of the policy
– Generates periodic cash flow payments over the
life of the policy for the insurance company to
reinvest
– Pays fixed death benefit at death

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Continues

• Term life insurance characteristics

– Temporary, providing death benefits only over a
specified term
– Premiums paid represent insurance only with no
saving component
– Considerably lower cost for the insured than
whole life—able to buy more insurance
protection for any amount of premium
– Term is for those who would rather invest their
savings in other contracts or securities

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Continues
• Variable life insurance
– Whole life with variable cash value amounts
– Cash values invested in equities and will vary
with the investment performance
– Flexible premium option since
• Universal life insurance
– Combines the features of term and whole life
– Variable premiums over time—buys terms and
invests difference in a variety of investments
– Builds a varying cash value based on
contributions and investment performance

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Continues

• Group plans
– Employees of a corporation offered life
insurance or life insurance purchased on life of
employee
– Cash value or term insurance
– Low cost (term) because of its high volume
– Can cover group members and dependents

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5.3. Premium determination
• Income method: a method that determines
how much life insurance is needed based
on the policyholder’s annual income

– For example, 10 times your annual income, so,

using this method, a person with an annual
income of $40,000 would need $400,000 of life
insurance coverage

– Easy, but doesn’t consider individual

circumstances

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Continues
• Budget method (needs method): a method
that determines how much life insurance is
needed based on the household’s expected
future expenses
– Annual living expenses
– Special future expenses
– Debt
– Job marketability of spouse
– Value of existing savings

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Continues
Using the Internet to determine your insurance
coverage
Limitations in estimating need
 Budget method doesn’t consider an
unanticipated major illness or disability
 Family income may not rise
 Weak economic conditions impact income
 Inflation could cause underestimate of needs
 Debt level could increase
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Continues

Distinguishing between needs and dreams

Decide what necessities must be covered for the
household to survive
Consider other preferences such as college
educations for children

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Calculating Annual
Life Insurance Premiums

• Step 1. Look up the age of the insured and the type

of insurance in Table 20-1 (for females subtract 3
years). This gives the premium cost per $1,000.

• Step 2. Divide the amount of coverage by $1,000,

and multiply the answer by the premium cost per
$1,000.

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Calculating Insurance Premiums

• Bob Brady, age 40, wants to purchase a 5 year

$200,000 insurance policy. Determine her annual
premium.
• $200,000 (Coverage) = 200 Step 1
1,000
Term Insurance -- Pays face amount only if you die within the
period of the insurance. The cheapest coverage. Step 2
$200 x $3.52 = $704

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Continues

• Straight Life (Ordinary Life) -- Provides permanent

protection. The insured pays the same premium
each year or until death. Has a built in cash
savings feature.
$200 x $14.54 = $2,908
• Twenty-Payment Life -- Similar to straight life but
insurer pays premiums for only the first 20 years.
• $200 x $18.61 = $3,722

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Continues

• Twenty-Year Endowment -- Most expensive.

Combination of term and cash value. After 20
years your protection ends and you receive the face
value of the policy.
$200 x $33.36 = $6,672
• Universal Life - A whole life insurance plan with
flexible premium schedules and death benefits.
Greater risk to the holder because premiums are
subject to interest rate fluctuations.

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5.4. Worker’s compensation insurance

Workers’ Compensation is a social

insurance program that provides:
 Medical care
 Cash benefits
 Rehabilitation services
Three coverage are provided: workers’
compensation insurance, employers
liability insurance, other-states
insurance

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Objectives and Eligibility Requirements of
Workers’ Compensation

 Provide broad coverage

 Substantial protection
 Provide sufficient medical care/rehab
 Reduction of job related accidents
 Reduce litigation
 Two principal eligibility requirements must
be met

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Workers’ Compensation Benefits
 Unlimited medical care
 Disability-income benefits
 Death benefits
 Rehabilitation services

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5.5. Personal accident insurance

• Know the meaning of Personal Accident

insurance
• Buy the Personal Accident insurance
• Settle the claim under Personal Accident
insurance
• Types of Personal Accident polices
• Know what is not covered under fire
insurance

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MEANING OF PERSONAL ACCIDENT INSURANCE

• The purpose of personal accident

insurance is to pay fixed compensation
for death or disablement resulting from
accidental bodily injury.
The personal accident insurance policy
provides that, if at any time during the
currency of this policy, the insured
(person who has taken the policy)

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 CONTINUES
• shall sustain any bodily injury resulting
solely and directly accident caused by
external violent and visible means,
then the insurance company shall pay to
the insured or his legal personal
representative(s), as the case may be, the
sum or sums set, forth, in the policy, if
resulting in specified contingencies such as
death, permanent disablement etc.
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 CONTINUES
• Bodily injury: Any disease due to accident is
known as bodily injury but does not include
any disease due to natural cause. Mental shock
or grief does not amount to accident unless
and until some physical injury is caused. In
current scenario it is noticed that due to grief
some disablement i.e paralysis is taking place
and the same is covered under this policy.

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 CONTINUES
• Solely & Directly: The bodily injury shall
have been caused solely and directly by
an accident and the bodily injury must
directly and independent of any other
cause result in death or disablement.
• Accident: An accident is an event which
is wholly unexpected not intended or
designed. For eg: Snake biting, Drowning
suicide and unprovoked murder are
covered under this policy.

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 CONTINUES

• Disablement : When a person is

prevented by an accidental bodily injury
from engaging in any occupation or
business he is said to be disabled and his
ability to attend to any occupation or
business is call disablement.

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