The Power of Life

Insurance !

June 2003 Power of Life Insurance

Power of Life Insurance

• For two hours a Insurance Advisor

was struggling to explain the
concept of Life Insurance to a young
couple.

Both the Advisor as well as the

client were getting uncomfortable
by now.

June 2003 Power of Life Insurance

Suddenly the prospects 6 year old daughter
entered the room.

She asked “Daddy, what is this lady selling ?”

He answered “Life Insurance”
She again asked “What is Life Insurance ?”
On this the father turned to this advisor and
said “Well you are the expert, why don’t you
answer this one ?”

June 2003 Power of Life Insurance

 The advisor took a piece of paper and
drew a circle. And said “This is the
place where all the people of the world
live.”

Around this place is a large body of

water we call sea of life.

Its every parent's job to get their

family across the sea of life .

June 2003 Power of Life Insurance

 “Some parents collect a few small
boards, nail them together and start to
row across the sea”.

June 2003 Power of Life Insurance

 However sometimes a big fish jumps
out of the water and pull in daddy or
mommy into the sea.

So mommy or daddy are left alone to

complete the voyage with great
difficulty.

June 2003 Power of Life Insurance

 “But sometimes other parents get
together and build a large boat and
put all their families together to cross
the sea of life.

When the big fish does attack the

surviving parent is not left alone.

There are other parents to help.

Mommies or daddies get across
easily…”
June 2003 Power of Life Insurance
 The advisor then said "the reason why
I'm here is that I am trying to sell tickets
on that big boat !!”

Without hesitation the little girl turned

to her parents and said "mommy &
daddy, you are going to buy a ticket for
us, aren’t you ??”
June 2003 Power of Life Insurance
BASIC PRINCIPLES OF
LIFE INSURANCE
____________________

Economic and Financial

Justification
HUMAN LIFE VALUE
_________________
The Economic Value of
Human Life
 HUMAN LIFE VALUE
That portion of an Individual’s
Anticipated Future Earning
Power
that Presumably will go for
Support of dependents
ECONOMIC VALUE OF HUMAN LIFE

Step 1 Estimate Average

Gross Annual Earnings
(for remaining working years)

Step 2 Deduct Cost of:

Self maintenance,
Income taxes and premiums
_______________________________________
NET FUTURE EARNINGS (for family’s use)
ECONOMIC VALUE OF HUMAN LIFE
Step 3 Determine the No. of Years between
Present age and planned retirement age

Step 4 Select interest rate to discount Future

Earnings to Present Value

Step 5 Multiply Net Future Earnings

by Present Value of Annuity
(PVA) Factor
_______________________________
Economic Value
 ECONOMIC VALUE OF A HUMAN LIFE
(Calculated for Married Man aged 35)
Average Gross Annual Earnings
(Until retirement at Age 60) Rs. 5,00,000

Income Taxes, Premiums and

Cost of Self maintenance Rs. 2,00,000

Net Future Earning’s Rs. 3,00,000

(for familiy’s use)

Present Value of Re. 1 per Year

At 5% Interest for next 30 years
15.37
Economic Value is 3,00,000 X 15.37
Rs.46,11,000
 Economic Value Diminishes with
Age
• PVA Factor at 5% for 20 Years – 14.09
• PVA Factor at 5% for 15 Years – 12.46
• PVA Factor at 5% for 10 Years – 7.72
THE NEEDS APPROACH
___________________
Determining how much
Insurance is required
THE NEEDS APPROACH
___________________
1. Determine the type’s and
amounts of the family’s financial
needs caused by an immediate
death
THE NEEDS APPROACH
___________________
2. Determine the type’s and
amounts of any Resources that
will be available to meet the
family’s needs
in the event of death.
THE NEEDS APPROACH
___________________
3. Purchase additional life
insurance in the amount
adequate to fill the gap
between the family’s financial
needs and resources available
to meet those needs.
 RISK POOLING
____________________
Group Sharing of Losses – where
each member exposed to a common
risk contributes to a common pool to
create a fund from which individual
losses are paid out, if and when they
occur
 ADVERSE SELECTION
____________________
The tendency of those most in
Need of the Insurance
Protection to hang on at all
Costs (by paying high
premiums).
 LEVEL PREMIUM
____________________
 LEVEL PREMIUM
____________________
Risk
Premium Premium

Level Premium

Age (yrs.)
Benefits of Level Premium
____________________

1. Savings Fund for the Insured

2. Investable Assets for the Life
Insurance Company
3. Death Benefit for the Lifetime
of the Insured
4. Other