Life Insurance


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A life insurance is an insurance for human lives. Life insurance may be permanent and term, or individual or group.

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Life Insurance

  1. 1. Polytechnic University of the Philippines College of Accountancy and Finance DEPARTMENT OF BANKING AND FINANCE Sta. Mesa, Manila L I F E I N S U R A N C E GROUP 4 Banaag, Gener John Cabalo, Chloe May Lomboy, Imee Ruth Malate, Gerald Reyes, Jefferson
  2. 2. BBF 4-7N Group IV Page 2
  3. 3. OUTLINED REPORT I. II. III. IV. V. Definition of Life Insurance Parties involved in Life Insurance Services of Life Insurance Life Insurance Terminologies Types of Life Insurance A. According to Nature 1. Permanent a. Whole Life (i) Ordinary (ii) Limited Pay b. Endowment (i) Regular (ii) Limited Pay 2. Temporary or Term Insurance B. According to Coverage 1. Individual Insurance 2. Group Insurance 3. Industrial Insurance 4. Social Insurance 5. Health Insurance C. Annuities VI. Premiums VII. Riders A. Definition of a Rider B. Types of Riders 1. Waiver of Premium 2. Accidental Death Benefit 3. Term Insurance Rider Group IV Page 3
  4. 4. LIFE INSURANCE DEFINED. 1. Life insurance is insurance on human lives and insurance appertaining thereto or connected therewith. (Sec. 179, Insurance Code) 2. A mutual agreement by which a party agrees to pay a given sum on the happening of a particular event contingent on the duration of human life, in consideration of the payment of a smaller sum immediately, or in periodical payments by the other party. (44 C.J.S. 484) 3. It is a contract where by a party, for a consideration called the premium agrees to pay another a certain sum of money in the event of the insured’s death from any cause not excepted in the contract, or upon surviving a specified period of time or otherwise contingent on the continuance or cessation of life. PARTIES INVOLVED. 1. Policyowner. The one who has the power to name and change the beneficiary, to assign the policy, cash it for its surrender value, or use it as a collateral in obtaining a loan; and the obligation to pay the premiums. He is also the one who owns the policy and also the person whose life is insured. 2. Insured. The person whose life is the subject of the policy, also known as the cestui que vie. 3. Beneficiary. The person named to received the life insurance proceeds upon the death of the insured. 4. Insurer. The party who assumes or accepts the risk of loss and undertakes for a consideration to indemnify the insured or to pay him a certail sum on the happening of a specified contingency or event. SERVICES OF LIFE INSURANCE. 1. Actual Death. It represents the so-called “casket death”. 2. Living Death. It represents permanent disability 3. Retirement Death. It represents living beyond the period of earning capacity. Group IV Page 4
  5. 5. PREMATURE DEATH DISABILITY BENEFIT Family Protection Death Benefit Guranteed Savings Cash Values Retirement Income THREATS BASIC SERVICES OF LIFE INSURANCE SERVICE Maturity Benefit OLD AGE LIFE INSURANCE TERMINOLOGIES. 1. Policy. The written contract between the insured and the insurance company. 2. Face Amount. The amount payable to the beneficiary upon the death of the insured or the policyowner or insured upon surviving the protection period in the form of maturity benefit. 3. Premium. Money that must be regularly paid to the insurance company to keep the insurance policy in force. 4. Protection period (Until age 100). Number of years that a proposed insured is covered under the policy contract. 5. Policy Effectivity Date. Date the protection period starts. 6. Paying Period. Number of years insured will pay premiums. 7. Mortality Table. Table shows the average life expectancy. 8. Actuary. Person who sets the premium rates and develop life insurance products. 9. Cash Surrender Value. The amount that an insured, in case of default, after the payment of at least three full annual premiums, is entitled to receive if he surrenders the policy and releases his claims upon it. Group IV Page 5
  6. 6. LIFE INSURANCE CONTRACTS There are FOUR basic classification of life insurance contracts issued by life insurance companies: Whole-life, Endowment, Term and Annuities. For the purpose of simplicity, life insurance contracts are classified into different categories. ACCORDING TO NATURE: Permanent Life Insurance Contracts An umbrella term for life insurance plans that do not expire (unlike term life insurance) and combine a death benefit with a savings portion. This savings portion can build a cash value against which the policy owner can borrow funds, or in some instances, the owner can withdraw the cash value to help meet future goals, such as paying for a child's college education. The two main types of permanent life insurance are whole and endowment life insurance policies. Whole-life Insurance Contracts 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 protection may be purchased under either of the two principal types of contracts, the chief difference between the two being the method of payment thereof. One is known as Ordinary; and the other, Limited-pay life policy. Ordinary Life Policy It is one under the terms of which the insured is required to pay a certain fixed premium annually or at a more frequent intervals throughout his entire life and the beneficiary is entitled to receive payment under the policy only after the death of the insured. Many insurance companies consider this policy paid-up when the insured reaches the age of 100. Thus, the ultimate payment of the insurance proceeds is as certain as death itself. Limited-pay Life Policy The only difference between ordinary life policy and Limited-pay life policy, is that, limited-pay is required to pay the premiums during a limited period of years, usually ten, fifteen, or twenty. Group IV Page 6
  7. 7. When the specified number of premium payments have been made, the insurance is fully paid for. Protection period, however, covers throughout his life. Endowment Insurance Contracts Endowment policy is one under the terms of which the insurer binds himself to pay a fixed sum to the insured if he survives for a specified period. Whereas policies payable only in the event of death are taken out chiefly for the benefit of others, endowment policies usually revert to the insured if he survives the endowmnent period. There are two types of endowment contract: Regular, and Limited-pay policies. Regular Endowment Policy Unlike the Ordinary life policy, Regular Endowment policies “protects” the insured for a limited period or age. After such time the insured survives on the endowment period, he will be entitled the full face amount at the end of its term. Limited-pay Endowment Policy It is one under the terms of which the endowment premiums are payable only during a limited period of years, usually shorter than the endowment period. When premium payments have been made, the insurance is fully paid for until the end of its term. When the insured survives, he will be entitles the full face amount. Term Insurance Contracts A term policy may be defined as a contract which 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 term, and nothing being paid in case of survival. Such policies may be issued for a period as short as one year or may be provide protection up to age 65. ACCORDING TO COVERAGE: Individual Insurance Contracts Individual Insurance is issued on the basis of individual application and involves a seperate policycontract for each purchase (Sec. 227) Group IV Page 7
  8. 8. Many individuals and their financial planners consider life insurance as the cornerstone of their financial plan. While the main purpose of life insurance is to help take care of your family in the event of your death, policies can also serve other purposes including: 1. providing funds to pay final expenses 2. creating an inheritance for your heirs 3. making charitable contributions in the event of your death 4. creating a source of tax-deferred savings Example: Sunlife Financial offers 15 products on Individual life Insurance. One of these is: SUN Safer Life - 5 Year Renewable and Convertible Term (NEW) is a 5-year term life insurance product that provides maximum protection at a cost that fits your budget. With its convertibility and automatic renewability features, you can enjoy the benefit of keeping yourself and your loved ones’ future secured for a longer period. Group Life Insurance Contracts A Life insurance plan providing coverage on the lives of a group of people under one master contract/policy. It is a type of insurance coverage offered to a group of people. This coverage will provide a benefit to the beneficiaries if the covered individual dies during the defined covered period. As with other types of group benefits, group term life insurance is generally cheaper than comparable individual policy coverage. For this reason, group term life insurance is often a key component in employee benefit packages. Group IV Page 8
  9. 9. Example: On the other hand, PhilAm Life provides life insurance protection anytime, anywhere and against any cause of death* with Group Yearly Renewable Term (GYRT) Life Insurance: Customizable Benefits With the array of benefits available, you can tailor-fit your plan depending on your needs or budget. Group Classic is also available in US Dollar. With Group Classic, you can now avail of customizable benefits that work hard for your people. * Except for suicide during the first year of coverage Industrial Life Insurance Contracts otherwise called: 1. Burial Policies 2. Small Death Benefit Policies 3. Street Insurance If so, be informed, Industrial life is a small-face-amount policy that was sold to consumers as a way to cover burial expenses. Customers often referred to these types of policies as street, burial or debit insurance. Agents sold these policies door-to-door, collected weekly or monthly premiums and signed a debit card as a receipt of money collected. Group IV Page 9
  10. 10. Example: At the turn of the 20th century, Prudential Life of America and other large insurers reaped the bulk of their profits from industrial life insurance, or insurance sold by solicitors house-to-house in poor urban areas. For their insurance, industrial workers paid double what others paid for ordinary life insurance, and due to high lapse rates, as few as 1 in 12 policies reached maturity Social Life Insurance Social insurance is any government-sponsored program with the following four characteristics: the benefits, eligibility requirements and other aspects of the program are defined by statute; explicit provision is made to account for the income and expenses (often through a trust fund); it is funded by taxes or premiums paid by (or on behalf of) participants (although additional sources of funding may be provided as well); and the program serves a defined population, and participation is either compulsory or the program is subsidized heavily enough that most eligible individuals choose to participate. EXAMPLES: and Health Insurance Contracts Health insurance is insurance against the risk of incurring medical expenses among individuals. By estimating the overall risk of health care and health system expenses, among a targeted group, an insurer can develop a routine finance structure, such as a monthly premium or Group IV Page 10
  11. 11. payroll tax, to ensure that money is available to pay for the health care benefits specified in the insurance agreement. The benefit is administered by a central organization such as a government agency, private business, or not-for-profit entity. According to the Health Insurance Association of America, health insurance is defined as "coverage that provides for the payments of benefits as a result of sickness or injury. Includes insurance for losses from accident, medical expense, disability, or accidental death and dismemberment". Types of Health Insurance PhilHealth PhilHealth, the national health insurance program, provides sustainable, affordable and continuing social health insurance for Filipinos of any age at an affordable rate of about $4 per month, as of June 2010. This program ensures hospitalization discounts for contributing members at any accredited hospital in the Philippines. There are three kinds of PhilHealth membership available: employed membership, individually paying membership and lifetime membership. Filipinos who are regularly employed pay less than individually paying (self-employed and freelance) members because employers provide monthly co-payments for their employees, as required by Philippine law. A lifetime member doesn't have to pay the monthly contribution, since this kind of membership requires paying a lump-sum amount to cover the lifetime membership. Private Health Insurance A private or public health insurance in the Philippine setting is a term more popularly used for insuring a person from critical illness and hospitalization. Since a separate health insurance generally works independently from an HMO plan, a basic health insurance policy covers hospital expenses as a supplement to HMO coverage. Group IV Page 11
  12. 12. Private health insurance companies cover health expenses for individuals, families and groups. Plans are either paid in full by freelance or self-employed members or partially paid or acquired for free by regular employees. An individual plan may be upgraded to a family plan to extend coverage to family members. Group insurance is designed for groups of three or more persons. Like with a family plan, it can offer customized coverage with premium discounts. Health Maintenance Organization HMO is the common managed care plan in the Philippines while a health insurance plan works separately for emergency cases and hospitalization. While there are available packages offered by health insurance companies for additional coverage, the affordability of HMO plans are more amenable to Filipinos with average income, especially those who are of considerably healthy age. An HMO plan is usually acquired for free through employment. However, freelancers and nonworking individuals can also avail themselves of individual and family HMO accounts to cover basic medical expenses for preventive and outpatient care, medical treatment and hospitalization. Unlike in the United States, the Philippines only offers HMO plans and not preferred provider organization (PPO) plans. There are also health discount cards offered by specific groups, mostly medical and diagnostics clinics, to also supplement HMO and health insurance coverage. Those who can't afford an HMO plan usually avail of such health discount cards to help them ease the burden of medical expenses. International Health Insurance An international health insurance is designed for individuals, families and groups intending to be covered while outside the Philippines. This type of health insurance plan protects a member for a few months to one year. There are insurance companies that can provide straight coverage for up to three years. International health insurance for Filipinos generally provides two options for coverage: worldwide and worldwide except the United States. Including a U.S. coverage requires a higher premium as the cost of medical expenses in this country is much higher than in other parts of the world. Also, when including preventive services and outpatient care instead of just the basic hospitalization coverage, the premium becomes higher as well. Group IV Page 12
  13. 13. Expatriate Health Insurance Expatriate health insurance is designed for a non-Filipino intending to maintain health insurance coverage while staying in the Philippines. This type of plan insures a legally residing foreigner of his medical expenses in the country. It is generally a renewable type of plan suitable for individuals of all ages, nationalities and occupations. Annuities (Life Insurance) An annuity is an insurance product that pays out income, and can be used as part of a retirement strategy. Annuities are a popular choice for investors who want to receive a steady income stream in retirement. Here's how an annuity works: you make an investment in the annuity, and it then makes payments to you on a future date or series of dates. The income you receive from an annuity can be doled out monthly, quarterly, annually or even in a lump sum payment. The size of your payments is determined by a variety of factors, including the length of your payment period. You can opt to receive payments for the rest of your life, or for a set number of years. How much you receive depends on whether you opt for a guaranteed payout (fixed annuity) or a payout stream determined by the performance of your annuity's underlying investments (variable annuity). While annuities can be useful retirement planning tools, they can also be a lousy investment choice for certain people because of their notoriously high expenses. Financial planners and insurance salesmen will frequently try to steer seniors or other people in various stages toward retirement into annuities. Anyone who considers an annuity should research it thoroughly first, before deciding whether it's an appropriate investment for someone in their situation. Group IV Page 13
  14. 14. Types of Annuities There are two basic types of annuities: deferred and immediate. With a deferred annuity, your money is invested for a period of time until you are ready to begin taking withdrawals, typically in retirement. If you opt for an immediate annuity you begin to receive payments soon after you make your initial investment. For example, you might consider purchasing an immediate annuity as you approach retirement age. The deferred annuity accumulates money while the immediate annuity pays out. Deferred annuities can also be converted into immediate annuities when the owner wants to start collecting payments. Within these two categories, annuities can also be either fixedor variable depending on whether the payout is a fixed sum, tied to the performance of the overall market or group of investments, or a combination of the two. Group IV Page 14
  15. 15. Mathematics for Life Insurances Premiums Some means of scientifically measuring risk is necessary if insurance is to be priced properly. This measurement of risk lies at the foundation of any system of insurance and is made possible through the application of the laws of probability. Three probability laws are used in life and health insurance: • The law of certainty • The law of simple probability • The law compound probability The three laws may be stated as follows: • Certainty may be express by unity, or 1. • Simple probability, or the probability or chance that an event will occur, may be expressed by a fraction, which may take a value from 0 to 1. • Compound probability, or the chance that two independent events will occur, is the product of the separate probabilities that the events, taken separately, will occur. DISTRIBUTION OF LIFE INSURANCE CLAIMS According to the law of large numbers, if the number of insureds is large enough, the actual claims will most likely show only small relative deviation from the expected claims. Using the probability theory, one can calculate the probabilities of various deviations from the expected claims, depending on the number of insureds. Group IV Page 15
  16. 16. APPLICATION OF THE LAWS OF PROBABILITIES TO MORTALITY QX =DX/LX x- age l – number of living at age x d – number of dying during the age x q – probability of an individual dying during the age x p – probability of an individual at age x surviving one year UMDERLYING PRICIPLES INTEREST In insurance term it is defined as the price paid for the use of money. FOR ACCUMULATED VALUES: S2 = A(1+i)2 Remember: Every insurance company both life and non-life as well as suretyship, they have their own Commissioners Standard Ordinary mortality table, that’s why you can notice that every insurance company have their own amount of premiums and benefits. Group IV Page 16
  17. 17. Riders Riders are an important and integral part of insurance policies. A policy rider in an insurance policy represents a provision or modification to an existing insurance policy that provides additional coverage to an insurance policy. Riders on the insurance contract provide additional protection against risk. Types of Riders Waiver of premium For an upfront charge, most insurance companies will incorporate a waiver of premium into a policy. The waiver is usually associated with life insurance policies, and requires the policyholder to be disabled for a specified amount of time, such as being incapacitated for six months. To have a waiver of premium, some companies may also place other requirements on the policyholder, such as being healthy and below a certain age. Things you need to know: 1. You must be under age 55 and accepted on standard rates. 2. If you are not in work before the onset of incapacity, your premiums are waived after 26 weeks if you are unable to perform three of the following specified work tasks ever again: • • • • • • Group IV Walking - The ability to walk more than 200 meters on a level service Climbing - the ability to climb up a flight of 12 stairs and down again, using the handrail if needed. Lifting - the ability to pick up an object weighing 2kg at table height and hold for 60 seconds before replacing the object on the table. Bending - the ability to bend or kneel to touch the floor and straighten up again Getting in and out of a car - the ability to get into a standard saloon car, and get out again. Writing - the manual dexterity to write legibly using a pen or pencil, or type using a desktop computer keyboard. Page 17
  18. 18. 3. The insurance company will continue to waive premiums until one of the following occurs: • you're fit to return to work; • your policy ends; or • you no longer fulfill our definition of incapacity. Accidental Death Benefit Sometimes, when you apply for life insurance Legal & General are unable to give you an immediate decision and may need to write to you or your doctor for more information. During this time it's important that you still have some protection so Legal & General provide you with Accidental Death Benefit at no extra cost whilst they process your application. They provide this cover without the need for any underwriting – giving you some peace of mind that you’re covered in case of accidental death. Things you need to know: • The maximum payment would be the amount of cover you applied for (across all applications) or £300,000, whichever is lower. • The cover will start when Legal & General receives a completed application form that you submit online or over the telephone. • Cover will last for 90 days or until Legal & General accept, postpone or decline your application or you notify them that you no longer wish to proceed, whichever is earliest. • Accidental death benefit pays out a cash sum if you die within 90 days of an accident. In this instance our definition of an accident is where a bodily injury is sustained, caused by accidental, violent, external and visible means, which solely and independently of any other cause results in death. • Legal & General don't provide this benefit if you have told them that your application is to replace an existing policy of theirs, as long as you remain covered under the existing policy. • The benefit won't pay out if the cause of death is directly or indirectly caused by any of the following: o self-inflicted injury including intentionally taking your own life or attempting to do so o taking part or attempting to take part in a dangerous sport or pastime o taking part or attempting to take part in an aerial flight other than as a fare paying passenger on a licensed airline Group IV Page 18
  19. 19. o committing, attempting or provoking an assault or criminal offence o war (whether declared or not), riot or civil commotion o taking alcohol or drugs (unless these drugs were prescribed by a registered doctor in the United Kingdom) o accidents that happened before your application Term Insurance Riders It is a type of life insurance policy that provides coverage for a certain period of time, or a specified "term" of years. If the insured dies during the time period specified in the policy and the policy is active - or in force - then a death benefit will be paid. Term insurance is initially much less expensive when compared to permanent life insurance. Unlike most types of permanent insurance, term insurance has no cash value. Group IV Page 19