LiFe InsUraNcE anD iTs ProDucTs aNd PreMiuM PayMenT

Meaning of Life Insurance
• Life insurance is a contract of insurance upon human life, including
any contract whereby the payment of money is assured on
death(except death by accident only) or the happening of any event
insured by the contract.
• In case of life insurance, the payment is certain. The event insured
against is sure to happen, though the time of its occurrence is
uncertain. Life insurance contract are contingent contract whereas
non life insurance is contract of indemnity.
• Life insurance is also known as life assurance where the insurer in
consideration of a certain premium either in lumpsum or periodical
payment, agrees to pay the assured or the person for whose benefits
the policy is taken, an agreed sum of money on death of the insured
or on the expiry of specified period of time, whichever is earlier.

Factors on Which Life Insurance is
Dependent
• The life insurance contract is dependent mostly on
the variable of Demographic factors like:
 Age
Life Cycle Stage
Income
Gender
Religion, Race and Nationality

Advantages of Life Insurance
• Supplement your retirement age
• Life insurance is not an investment
• Tax Advantage
• Advantage of Term Insurance
• Flexibility in Coverage
• Safety from government regulation
• Provides financial security

Disadvantages Of Life Insurance
• Used as an Investment Products
• Buying life insurance when individuals have no need
• Buying life insurance products having low returns
• Buying Expensive Policies

Functions of Life Insurance
Corporation(LIC)
• To mobilizes Savings
• To provide Finances
• To make Investment
• Deployment of Funds in Money Market Instruments
• Investment in Small and Medium scale Industries
• Assistance to corporate sector
• Resources support to financial Institutions

LIFE INSURANCE PRODUCTS
Life
Insurance
Products
Endowment
Insurance
Life
Annuity
Unit Linked
Insurance
Policy(ULIP)
Pension
Funds
Money
Back Policy
Term Insurance
Whole Life
Insurance

TERM INSURANCE
• Term Insurance policy is the oldest and pure and basic form
of insurance policy. It is the insurance policy where the
entire premium paid goes towards covering the risks of
death during a certain period of time. Here the insurer
makes the payment only if the life assured dies within the
term of the policy.
• The sum assured is payable only in the event of death
during the term. In case of survival, the contract comes to
an end at the end of term.

Features of Term Insurance
• Valid only for a particular period of time.
• Relatively inexpensive compared to others
• Provision for renewability.
• Convertible( Convertible from term insurance to
permanent/whole life insurance.
• Premiums are not fixed

Advantages of Term Insurance
• Useful for those who need extra protection for a
short duration.
• Indemnifying loss to business due to the death of
key person responsible for running the business.
• A person having low income can provide for
meeting family obligations at low cost

Disadvantages of Term Insurance
• It covers only for the limited period of time
• Deteriorating health can cause the insured to pay
the higher premium
• Premium rates are guaranteed only until the end of
the term.

WHOLE LIFE INSURANCE
• Whole life insurance policies are intended to provide life
insurance protection over one’s life time. It is a long term
insurance plan where the premium is payable by insured till
the time he is alive and the sum assured is payable only to the
beneficiary on death of insured. The payment of sum assured
is certain while the time of sum assured payment is uncertain.
• Types of Whole life insurance
I Participating Polices: Where the insured are entitled to
share of the profit made by insurance company, whereby the
cash value of policy can go up, with announcement of bonus
or dividend
II Non Participating Policies: Where the insured have same
benefit throughout the life of policy.

Features of Whole Life Insurance
• Provide insurance coverage for whole life
• Premium are fixed throughout the years
• The death benefit is guaranteed(Knows how much
policy will pay upon claim)
• Perfect for those who think long term
• Has an opportunity to earn dividends
• The insured can surrender the policy at any time in
future if he/she unable to pay the premium amount on
time

Advantages of Whole Life Insurance
• Provides economic security
• Helps discharge the liability after the death
• Premium rates are lower
• Permanent life time insurance coverage
• Stable premium throughout the year

Disadvantages Of Whole Life Insurance
• More expensive than other policies
• Less flexible than universal life insurance
• Option for Surrender Period

ENDOWMENT INSURANCE
• The endowment policy is mix of term insurance and pure
endowment policies. It stipulates that a specified sum assured
would be paid if the life assured dies within the term selected
or survives that term. The death benefit is paid by term
insurance and the survival benefit by the pure endowment.
• Endowment policies assures the benefits under the policy will
be paid on the death of the life insured during the selected
term or on his survival to end of the term.
• The assured benefits are payable either on the date of
maturity or on death of life insured whichever is earlier.

Features of Endowment Insurance
• Suitable for people of all ages and social groups
• The sum assured is payable either on survival to the
term or on death occurring within the term.
• Under this policy the plans with profit and without
profit is available
• Bonus for the full term is payable on death of maturity
or in event of death whichever is earlier
• The premium ceases on death or on expiry of term
whichever is earlier.

Advantages of Endowment Insurance
• Provides life insurance protection together with
large savings and investment element
• It has surrender values, paid up values, loan values.
• It is flexible.

Disadvantages of Endowment
Insurance
• Provides protection for specific period.
• The premium payable is higher than the whole life
or term insurance.
• Does not have the renewability option or
convertibility option available in term insurance.

Difference between Whole Life Insurance
and Endowment Insurance
Basis for Difference Whole Life Insurance Endowment Insurance
1. Payment of Sum
Assured
Sum Assured is payable only after
the death of Insured/Assured
Sum Assured is payable either on
death or on the date of maturity
whichever earlier
2. Period A whole life insurance policy is for
longer time period
An endowment insurance policy is
comparatively for a shorter period
3. Object The object is to provide security to
family after the death of assured
The object is to provide security as
well as saving for old age
4. Premium Rates The premium is low as compared to
endowment policies
The premium is higher than the
whole life insurance
5. Suitability The policy is ideally suited to
person having good financial status
and other fixed income sources
The policy is suited to those who
want provision for old age and also
for the family
6. Popularity The whole life policy is not very
popular
This policy is more popular

LIFE ANNUITY
• An Annuity contract is an insurance policy, under which
the annuity provider(Insurer) agrees to pay the
purchaser of annuity (Annuitant) a series of regular
periodical payments for a fixed period or during
someone’s life time. Annuity is a series of periodic
payments.
• It is a periodical level payment made in exchange of the
purchase money for the remainder of lifetime of a
person or for specified period.
• The annuity holder is known as Annuitant.

Features of Annuity
• Two Parties Agreement i.e. Insurer and Annuitant
• Annuitant deposits a lumpsum in one or more
installment
• Payment is made to annuitant as per agreement i.e.
monthly or quarterly or half yearly or yearly
• The insurer pays regular annuities up to the death
of Annuitant.
• Annuity is calculated based on longevity of
Annuitant.

Advantages of Annuities
• Guaranteed rate of return
• Guaranteed Life time Payments
• Tax deferred growth and compounding within the
annuity contract

Disadvantages of Annuities
• Most expensive types of investment available.
• Annuity contracts charge surrender penalties for
early withdrawal.
• They are complex instruments by nature.

TYPES OF ANNUITY
• Immediate Annuity: The payment made by the insurer to the
insured is made within a short period of taking the policy in
which the payment is made as long as the annuitant is alive.
The time period depends on how often the income is to be
paid. Payment at when the annuity is bought immediately.
Payment is made at the end of the period while the purchase
money is in single amount by Annuitant.
• Deferred Annuity: The annuitant starts receiving the annuity
payment after lapse of fixed number of years. Premium may
be paid either as one lumpsum payment or monthly,
quarterly, half yearly or yearly during the deferment period.
Company promises to pay you a certain amount once you
reach the age specified in the annuity contract

TYPES OF ANNUITY
• Guaranteed Annuity: Annuity payments for at least a certain
number of years, which is called Period certain, irrespective
of whether the annuitant is alive or dead. If the annuitant
survives this period, the annuity payments then continue until
the annuitant’s death and if the annuitant dies before the
expiry of the period certain, the beneficiary is entitled to
collect the remaining payments certain i.e. the amount to
which the annuitant would have been eligible if he had been
alive till period certain.
If the annuitant dies before the specified period, annuity will
continue up to the unexpired period

UNIT LINKED INSURANCE POLICY(ULIP)
• It is one in which the customer is provided with a life
insurance cover and the premium paid is invested in either
debt or equity products or a combination of the two. It
enables the buyer to secure some protection for his family in
the event of his untimely death and at the same time
provides him an opportunity to earn a return on his premium
paid.
• ULIP attempts to fulfill investment needs of an investor with
protection/insurance needs of an insurance seeker. It offer
investors the opportunity to select a product which matches
their risk profile.
• The insured person or his nominees receive an amount that is
higher than the sum assured or the value of unit(Investments)

Features of ULIP
• Provides Capital appreciation
• Discretion to their investment portfolios
• Higher Costs
• Maturity benefit is the Net Assets Value of units.
• Risk charge varies with age
• Tax exempted products

Advantages of ULIP
• Insurance cover+ Savings
• Multiple investment Options
• Flexibility
• Works like SIP
• Transparency

Disadvantages of ULIP
• No Standardization
• Lack of flexibility in life cover
• Overstating the yield
• Early exit options
• Creeping costs
• Not all shows the benchmark return

PENSION FUNDS
• Pension funds is a fund established by an employer to
pay retirement benefits to employees. It is the largest
investment sources in most countries which dominates
the stock market. Pension funds are exempt from
capital gain tax and the earnings on their investment
portfolio are either tax exempt or deferred.
• It is established by private employers, governments, or
unions for the payment of retirement benefit.

Features of Pension Funds
• Risk pooling and higher returns
• Pension funds are of large size
• Pension fund provides a premium on
diversification

Disadvantages of Pension Fund
• No investment Control
• No early Access
• Smaller Potential

Advantage of Pension Funds
• No investment Risk
• Payments for Life

MONEY BACK POLICY
• Money back policy name says itself is the policies that are
structured to provide sums required as anticipated expenses i.e.
Education, Marriages etc over a stipulated period of time.
• By buying such types of policies one can receive income at regular
interval other than the risk cover with good amount of bonus on
the full sum assured
• A portion of the sum assured is payable at regular intervals. On
survival, the remainder of the sum assured is payable. In case of
death, the full sum assured is payable to the insured.
• Under this the premiums can be paid as per the insurance
company’s Policy either quarterly, half yearly or annually
• The premium are payable for the selected time period or till death
which ever is earlier.

Features of Money Back Policy
• Bonus is payable.
• Premium ceases on expiry of term or death whichever
is earlier
• Premium are paid regularly to get survival benefits
• Lumpsum amounts are paid to the life assured at
periodic intervals on survival.
• Total sum insured is paid incase of death of the life
assured with the term irrespective of earlier survival
benefits

Disadvantages Of Money Back Policy
• Long term Commitment
• Maturity values is less compared to Endowment
plans
• Higher premium charges than endowment plan and
term insurance.

Advantages of Money Back Policy
• Helps in Tax Saving.
• Provide guaranteed returns
• Dual benefits of insurance and redemption of
money at regular intervals.

Calculation of Age of the life to be
Assured
• Risk of death is directly proportionate to the age of the
life to be assured. The age at entry into the contract of
insurance becomes the most significant factor to
determine premium.
• Month and days over the completed years of age are
not taken as such, but the age to be taken is round off to
the years in integer as:
Age nearer to the birthday
Age on next birthday
Age on last birthday

Examples of Calculation of Age
• If a person is born on 20th Aug 1980. The policy has
commenced on 10th July 2006. What would be the age on last
birthday, Next birthday, and nearest birthday.
Age on last birthday 25
Age on next birthday 26
Age on nearest birthday 26
If the date of birth is 17th june 1985. The execution date of
policy is 25th june 2007. What would be the age on last
birthday, Next birthday, and nearest birthday.

• If a person was born 22 years 8 months earlier, then calculate the
next birthday, last birthday and nearest birthday.
• If a person is 22 years 5 month and 29 days then calculate the next
birthday, last birthday and nearest birthday.

• If a person is born on 1/1/1980 then on 1/08/2000 he is 20 years 7
months and 1 day old then calculate the next birthday, last birthday
and nearest birthday.
• If a person is born on 1/1/1980, then on 11/04/2000 he is 20 years 3
months and 11 days old then calculate the next birthday, last birthday
and nearest birthday.

PREMIUM
• Premium is the price paid for the risk undertaken by the insurer/Insurance
Company.
• Premium can be defined as the selling price f insurance, which is the
compensation paid by the insured party to the insurer in exchange for
covering the risk associated. It is calculated by multiplying the rate by the
number of exposure units bought.
• The premium of insurance policy is decided considering the age of
customer, coverage period and duration of policy.
• Final Premium(Net/Pure) = Contingencies - Rebate/Discounts + Bonuses
Note:
• Rebate/Discounts are deducted while the riders/Benefits/Bonuses are
added while calculating the net premium amount.
• Since Net Premium amount is always in the result of 1000 so we multiply
with the number after 1000 i.e. if Sum Assured is 125000 then we should
ignore the 000 and multiply the Net Premium Amount with remaining 125

Factors considered before charging
insurance in Life Insurance
• The rate of Mortality
• Operational Expenses- Taxes, Selling and
Maintaining the policies
• The benefits promised under the plan
• Expected Yield on the Investment Mix
• Assumption on withdrawals/Lapses
• Covering other Contingencies- Profit margin,
Inflation rate, etc

Modes of Premium Payment
Modes of
Premium
Payment
Recurring
Single
Premium
Net Level
Premium
Regular
Premium
Net
Single
Premium

• Net Single Premium(NSP): Net Single Premium, the name
suggests itself which means the present monetary worth of
the future death benefits. It is the lumpsum premium
amount which is collected at the time of signing the policy.
Net single premium doesn’t include the management
expenses or other contingency costs. It is the present value
of all the claims. It is calculated by dividing the present
value of future claims by number of insured persons
estimated to buy the policy.

• Net Level Premium: The net level premium is paid periodically
in accordance with the terms of the contract. It is the
premium payment made in installment
annually/monthly/Quarterly as per the convenience of the
insured.
• The net level premium is considered to be more suitable than
the net single premium because of the easy payment of
premium in installments.
• The resent value of all net level premiums is also equal to the
sum total of the present values of all future claims.
• The present value of all net level premiums is equal to the net
single premium.

• Single Recurring Premium: Single Recurring
premium is monthly purchase of an investment
linked product(ILP). A single recurring premium
policy is more flexible.
• For single recurring premium policy, each premium
is treated independently of the rest and buys its
own benefits. Neither the timing nor the amount is
determined in advance.

• Regular/ Periodic Premium: Policy owners pay a
periodic premium and insurers pay a stipulated
death benefit if the insured dies within the
coverage period. Premium are lower than for
permanent insurance and the policies have no cash
value.
• The periodic premium denotes a wide range of
premium arrangements which share the common
target of meeting reasonable policy holders wishes.

Payment of Premium
• By cash, cheque, Demand Draft
• Directly through the bank
• Through Net Banking
• Through Electronic Clearing Services’ Bank

Examples of Premium Calculation
1. The tabular premium is Rs. 36.55
Riders are:
Disable Benefit=Rs 25
Rebate for ½ Year mode= 1.5%
Rebate for sum assured= Rs 1
Sum Assured= Rs 25000. Calculate the ½ Yr Net Premium
Premium Calculation
Tabular Premium = Rs 36.55
Less: Rebate = Rs 1
35.55
Less: Yearly Rebate (1.5% of 35.55) = 0.534
35.016
Add: Riders = 25
60.01
Total Net Premium(1/2 Yr) = 60.01 * 25 = 1500 = 750 (Divided by 2 Becoz of ½ Yr Premium)
2
Note: (60.01 * 25 is done because the net premium amount is always in 1000 so multiplied by 25 only
instead of 25000 sum assured)

Examples of Premium Calculation
2. Find out the tabular premium for the sum assured. Assume the premium Rs 45.60 for 75000 Sum
Assured. Rebate table is as follows:
25000-50000 = Rs 1
50000-100000 = Rs 1.50
100000 Above = Rs 2
1% Rebate for yearly mode. The extra benefit to the policy holder 1.5 Occupational Hazard, Rs 2
Supplementary Benefit. Calculate the net premium for the above set data.
Premium Calculation:
Tabular Premium = Rs 45.60
Less: Rebate = 1.5
Rs 44.10
Less: Yearly Rebate (1% of 44.10) = 0.44
43.66
Add: Riders(1.50 + 2) = 3.50
47.16
Total Annual Premium = 47.16 * 75 = Rs 3537

Surrender Value and Paid up Value
• Paid Up Value: It is the amount to which the sum
assured would be reduced at any time if the
assured requests for rearrangement of his contract
so that the further premium shouldn’t be payable.
• The amount on the paid up policy is payable on the
happening of the event assured against.
• Paid up value = Sum Assured * No of years Premium Paid
No of years premium is required to be paid

Surrender Value and Paid up Value
• Surrender Value: Surrender value is the amount which the
insurer are prepared to receive in discharge of the contract in
case the insured/assured wishes to surrender his policy and
extinguish his claim.
• Surrender is the situation in insurance policy where the
insured is unable to pay the premium amount as determined
by the insured. The surrender values are based on the actual
premium paid and is required to have run the policy for two
or three years before the surrender is done.
• Surrender value= Paid up value(inclusive of bonus)*S.V. Factor
100
Note: Firstly the paid up value is calculated and then the surrender value

Examples of Calculating Paid Up and
Surrender Value
• Suppose sum assured is Rs 100000 for 20 Years on
yearly payment basis on 1.1. 2000 and the due date of
last premium paid is 1.1.2005. Calculate the paid up
value.
Soln;
Since the premium payment made from 1.1. 2000 to
1.1.2005 i.e 6 years.
Paid up value = Sum Assured * No of years Premium Paid
= 100000 * 6
20
= Rs 30000

Surrender Value
• The number of years of premium paid is 5 years, sum
assured is Rs 50000 and number of years of premium
payable i.e. endowment policy period of 50 years. Calculate
the paid up value.
Soln;
= 50000 * 5
50
= Rs 5000

Surrender Value
• A person at the age of 35 yrs takes an insurance policy for a term of 20 years on 01-04-1990
for Rs 100000. The last premium paid is on 01-04-2001. Calculate the paid up value and
surrender value given that the surrender value factor is 60% and mode of payment is yearly,
Half Yearly, quarterly and Monthly.
Soln;
For Yearly,
Number of installment paid = (01-04-2001 to 01-04-1990) + 1 = 12
Total installment to be paid = 20
= 100000 * 12 = Rs 60000
20
Surrender value= Paid up value(inclusive of bonus)*S.V. Factor
100
= 60000 * 60
100
= 36000
Note: 1 is added in number of installment paid because the installment of 01-04-1990 is also paid

Surrender Value
For Half Yearly,
Number of installment paid = (01-04-2001 to 01-04-1990) *2 + 1 = 23
Total installment to be paid = 20* 2 = 40
= 100000 * 23 = Rs 57500
40
100
= 57500 * 60
100
= 34500
Multiply by 2 Because of half yearly payment

Surrender Value
For Quarterly Payment,
= 100000 * 45 = Rs 56250
80
100
= 56250 * 60
100
= 33750
Multiply by 4 Because of quarterly payment

Surrender Value
For Monthly Payment,
= 100000 * 133 = Rs 55416
240
100
= 55416 * 60
100
= 33250
Multiply by 12 Because of monthly payment

LiFe InsUraNcE anD iTs ProDucTs aNd PreMiuM PayMenT

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