LIFE INSURANCE

Prof. Sudip Bhattacharya

WHAT IS LIFE INSURANCE ?

An individual runs a Risk of

Premature Death
Living too long
Life Insurance is a product
that offers a solution in
management of both the risks.

Essential Features:
Element of a valid contract
Insurable interest
Utmost good faith
Warranties
Assignment and nomination
Certainty of the event
Premium
Terms of policy

WHAT LIFE INSURANCE DOES ?

Provides
-Continuity of income
-Mandatory savings
- Mortgage protection
- Protection against disabilities
- Childrens education / Marriage
- Retirement fund
-Tax relief
-Liquidity
- PEACE OF MIND

HOW MUCH INSURANCE DO I NEED ?

Life insurance is like buying shares in
yourself How much am I worth
Ask yourself
What part of my present income does
my family need
How many years are left for retirement
What are my cash assets
What are my monetary obligations
What debt am I currently carrying
Do I have a contingency fund
A CAPITAL NEEDS ANALYSIS / LIFE
VALUE would provide the right answer

THE INSURANCE TREND

Then..

Silos of specialization

Banks Insurance MFs

Now..

Banks
InsuranceMFs
Synergy through
convergence

Convergence brings
values of stability,
caution and risk
Management blend
with liquidity and
market related
Performance

PREMIUM

Premium is the Price the

Policy holder pays for the
Benefit that the Life Insurance
product offers
There are 2 parts of the premium
-Risk part
-Savings part

PRODUCT

The insurance products also

have 2 basic parts
- Policy with Pure term cover,
Sum Assured payable only on
death
- Policy with cash accumulation,
it provides saving and security &
the SA is payable either on death
and on maturity

The human life value is defined as:

the present value of the family's share of
the deceased breadwinner's earnings.
This approach crudely measures the
economic value of a human life.

The human life value can be measured by the

following steps:
a.
Estimate the individual's average annual
earnings over his or her productive lifetime.
b. Deduct income taxes, other taxes, life
and health insurance premiums, and the costs
of self-maintenance.

c.

Determine no. of years from the person's

present age to the contemplated age of
retirement.
d.
Using a reasonable discount rate,
determine the present value of the family's
share of earnings for the period determined
in step c.
The use of a lower discount rate in calculating
the human life value will produce a higher
human life value for the individual.

Calculation of Life Value

A person aged 30 has Annual salary 4 lacs

His taxes and premiums come to 1 lac
His personal expenses annually is 1lac
He give for the family 2 lacs
His earning span is 30 years, so the family
requires 60lacs (this is over a period of
30years)
Human Life value= 200000*1-(1/(1+i)^30)/i
i=present bank rate of interest
so at 8% it will be 2lac*11.2578=22,25,780
Must be inflation adjusted to keep present BP

Underwriting
Non Medical General
-Basic Education, cap on limits of
SA
Non Medical Special
- Employees of reputed cos
Professionals
Medical & Special Reports
Financial Underwriting
Acceptance & Communication

 Nomination
Appointee
Policy Document
Clauses
Green Channel or Across the
Counter
Cooling of
Minor & Women Lives

Premiums
Factors Afecting Premiums
- Mortality
- Interest rates & Inflation factors
- Expenses
- Profits

Types of Premiums
Basic
AB Premiums,
Rider Premiums,

Factors afecting Life Insurance

premium

Premium calculation
Mortatlity Table Out of 1lac persons
age30

1st
year

2nd year 3rd year 4th year

1956

326

343

355

370

1999

117

117

120

125

.00120

.00125

Mortality1999 .00117 .00117

 Person Aged 30 wants take a term

assurance of Rs. 1lacs Sum Assured
for 1 year
Premium= SA * Mortality Rate for 1
year from the table
Premium=100000*0.00117=Rs.117(1
999)
Premium=100000*0.00326=Rs.326(1
956)

 Person aged 30 wants to take a term

assurance of Rs.100000 for 4 year
Premium for 1st year=
100000*0.00117=117
2nd year 100000*0.00117=117
3rd year 100000*0.00120=120
4th year 100000*0.00125=125
Uniform
premium=(117+117+120+125)/4=120

 In the same example if it is made

endowment that is Rs.100000 will
be death cover for 4 years and
1lac will be paid on maturity at the
end of 4 years
Term Assurance Premium for 4
years=120
Endowment premium = 100000/4
= 25000
Total premium to be paid
25000+120=25120

 Calculation with interest @6% the above

example
Term Assurance premium=120
Endowment premium = (25000/(1.06)^1

+ 25000/(1.06)^2

+ 25000/(1.06)^3

+ 25000/
(1.06)^4) / 4
Total Endowment premium =21658
Net Premium=21658+120 = 21778

 Expenses Loading
We arrived at the premium rate for a
person
Aged 30 for 1lac endowment as 21778
Cost of premium expenses=5%
Loading of expense =21778/0.95=22924
Cost of premium including expenses of
premium=22924

 Cost of expenses per policy

Average expenses per policy=Total
Admin cost/No of policies issued
Suppose 40000 policies issued and
administrative cost =200000 Rs.
Average cost per
policy=200000/40000=5

 Calculation of loading for the ex. of

person aged 30 SA 1lac for 4 years
endowment
Premium with interest = 21778
Premium expense is 5%
Admin. Expense per policy is Rs. 5
Premium+ Interest+ expense =
(21778+5)/0.95 = 22929

Expenses loading in premium

First year premium
Renewal premium
Premium Related expenses
Policy Related expenses

Servicing Concepts
Days of Grace
Paid up Value: SA*No of years
premium paid/Total premium
payable
Surrender Value
Loans
Revival
Assignment

Bonus
What is Bonus
Why it arises
Types of Bonus
- Reversionary Bonus
- Guaranteed Additions
- Loyalty Bonus
- Compounded Guarantee
Additions
- Cash Bonus

Insurance Intermediary
Agents
Brokers
Consultants
Surveyors
Corporate Agents

Claims
What is a Claim
Types of Claim
-

Survival Benefit
Maturity Claim
Death Claim
Annuity Claim
Disability Claim

Claim types
Payment of Full SA
Payment of SA in Installments
Payment of Double SA
Payment of partial SA
Payment of Annuity for a specified
period
Payment of Annuity for a specified
period and capital on the
happening of contingent event

Claims Documents required

Claimant Form
Evidence of Burial / Medical reports
Medical Attendant Reports
Police inquest report
Claim investigation report
Policy Document or indemnity

Life Insurance Corporation of India (LIC) was formed in September

1956 by an Act of Parliament, LIC Act 1956 with a contribution of Rs.
50 million.
The then Finance Minister Mr. C. D. Deshmukh while piloting the bill
for nationalization outlined the objectives of LIC thus: To conduct the
business with utmost economy with the spirit of trusteeship; to charge
premium no higher than warranted by strict actuarial considerations;
to invest the funds for obtaining maximum yield for the policy holders
consistent with safety of capital; to render prompt and efficient service
to policy holders thereby making Insurance widely popular.

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32

LIC OF INDIA contd

Presently the LIC has a network of 7 zones; 100 divisions and 2,048
branches, personnel exceed 7 lakhs employees and over 6 lakhs agents.
Vision: A trans-nationally competitive financial conglomerate of
significance to societies and Pride of India.
Mission: To explore and enhance the quality of the life of people through
financial security by providing products and services of aspired
attributes with competitive returns and by rendering resources for
economic development.
Values: Caring and Courtesy, Initiatives and Innovation, Integrity and
Transparency, Quality and Returns, Participation and Relationship, and
Trustworthiness and Reliability
Culture: Agility (quickness), Adaptability, Collaboration, Commitment,
Discipline, Empowerment, Sensitivity, and Excellence.

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33

LIC OF INDIA contd

Objectives
Spread Life Insurance widely and in particular to the rural areas.
Maximise mobilization of peoples savings by making insurancelinked savings adequately attractive.
Deployment of funds to the best of advantage of the investors as
well as the community as whole, keeping in view national priorities
and obligations of attractive return.
Conduct of business at most economy and with the full realisation
that the money belongs to the policyholders.
Act as trustee of the insured public in their individual and collective
capacities.

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34

PRINCIPLES AND INVESTMENT POLICY OF LICs

1.
2.

Security of funds, and

Maximization of return of investment,

Investment Policy
1. Central Govt. marketable securities being not less than

20%

2. Loans to Housing Bank including above (1) being not less than

25%

3. State Govt. securities including Govt. Guaranteed marketable

securities, inclusive of (2) above being not less than

50%

4. Socially oriented sectors including public sector, co-operative sector

house building by policyholders, own house scheme, inclusive of (3)
above not less than
75%
5. Private corporate sector, loans to policyholders for construction and
acquisition of immovable property
25%
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35

INVESTMENT POLICY OF LICs

03/05/15

INVESTMENT POLICY OF LICs

contd

03/05/15

37

Working of insurance

MAJOR PLAYERS

PRIVATE SECTOR COMPANIES

-Several leading private sector companies have entered in the field

of insurance sector, both in life and non-life insurance.
-There are several MNCs, in Joint Venture with Indian private
sector firms, have started operations in a big way.
Private Players in the Life Insurance Business
Regd.
No.

Date of
Regd.

Name of the
Company

Who Owns it (in percentage)

101

23.10.00 HDFC Standard Life

Standard Life, UK - 18 and HDFC 82

104

15.11.00 Max New York Life

New York Life - 26 and Max India 74

105

24.11.00 ICICI Prudential Life

Prudential, UK - 26 and ICICI Bank 74

107

10.01.01 Om Kotak Mahindra

Old Maruthi, South Africa 26 and Kotak

Mahindra 74

109

31.01.01 Birla Sunlife

Sun Life of Canada26 and Birla Capital 74

110

12.02.01 Tata AIG

AIG, US 26 and Tatas 74

111

30.03.01 SBI Life

Cardif SA, France 26 and State Bank of

India 74

114

02.08.01 ING Vysya

ING, Holland26 and GMR Group, Hyd54

40
and ING Vysya Bank20

03/05/15

CURRENT SCENARIO

contd.

Private Players in the Life Insurance Business

Regd.
No.

Date of
Regd.

Name of the
Company

Who Owns it (in percentage)

116

03.08.01

Allianz Bajaj

Allianz AG, Germany 26 and Bajaj Auto 74

117

06.08.01

Metlife

Metlife, US26, Shapoorji Pallonji30 and J&K

Bank25

121

03.01.02

AMP Sanmar

AMP, Australia26 and Sanmar Group, Chennai

74

122

03.01.02

Aviva

Aviva PLC, UK 26 and Dabur Investments 74

***

***

Reliance Life

***

***

Bharathi AXA

127

06.02.04

Sahara
Insurance

India

128

07.11.05

Shriram
Insurance

Life

MARKET SHARE

CURRENT SCENARIO LIFE

Growing at the rate of 15-20% annually

75% population has no insurance
Adds 7% to countrys GDP
LIC market share come down to 75% and
private insurers increased over 24%
Annuity or pension product have over
33% of market
Unity linked insurance scheme have
monopoly

LIC Products & Plans

Types of Plans
Whole Life Plans:
1. The whole life policy
2. The whole life policy-limited
payments
3. The whole life policy-single premium
4. Jeevan Rekha(closed for sale)
5. Jeevan Anand
6. Jeevan Tarang

Contd.
Endowment Assurance Plans:
1. Endowment assurance policy
2. Endowment assurance policylimited payments
3. Jeevan mitra(double cover and
triple cover endowment plans)
4. Jeevan anand
5. New Janaraksha plan
6. Jeevan sathi(a joint life plan)

Contd.
Term Assurance Plans:
1. Two-year temporary assurance
policy
2. Anmol jeevan-1
3. Amulya jeevan
4. Decreasing term assurance to
cover home loan paymentmortgage redemption

Contd..
Children Plans:
1. Jeevan anurag
2. Komal jeevan
3. CDA endowment(vesting at 18
and at 12)
4. Marriage endowment or
educational annuity plan
5. Jeevan kishore
6. Jeevan chhaya

Plans for handicapped

dependents
Jeevan adhar

Jeevan vishwas

Plans for High Worth individuals

Jeevan shree- 1

Jeevan pramukh

Money Back Plans

The money back policy-20 years
The money back policy-25
yearsJeevan surabhi-15 years: 20
years: 25years
Jeevan rekha (closed for sale)
Bima bachat
Special money back plan for
women : Jeevan bharati

Other special plans

Bima Gold (closed for sale)
New Bima Gold
Bima Nivesh 2005
Jeevan Saral
Jeevan Madhur

Group-insurance Schemes

Group term insurance scheme

Group insurance scheme in lieu of EDLI
Group gratuity scheme
Group superannuation scheme
Voluntary retirement scheme
Group leave encashment scheme
Social security scheme
LALGI scheme
Rural group life insurance scheme(RGLIS)
Integrated rural development programme(IRDP)
Group insurance schemes for students
Group mortgage redemption assurance scheme

Social Security Schemes

Janashree Bima Yogna
Krishi Shramik Samajik Suraksha
Yogna

Shiksha Sahayog Yojana

Pension Plans
Jeevan Nidhi
Jeevan Akshay-V
New Jeevan Dhara-1
New Jeevan Suraksha- 1

Unit Plans
Market Plus

Money Plus