Contractual Savng 1

CONTRACTUAL
SAVING INSTITUTION
are the financial intermediaries that acquire funds at periodic intervals
on the contractual basis and invest them in such a way that they have
financial instruments maturing when contractual obligation have to be
met. This institution such as insurance companies and pension funds
o They are able to predict their liabilities fairly accurately and thus they
do not have to worry as much as depository institution about losing
fund quickly. As a result, they mainly invest resources in long term
securities such as corporate bond ,stocks and mortgages.
There 3 major categories of contractual saving institution;
 Life insurance companies

 Fire and casualty insurance companies
 Pension fund and Government retirement funds
Life insurance companies
They sell life insurance policies that protect the beneficiaries of a policyholder
against financial hazards that follow the death of insured person. Also it sell
annuities in which an insurance company contact to make annual income
payment to the annuity buyer upon his or her retirement. Insurance company
tend to invest the premium money they receive for a long term so that they are
in a position to meet their liabilities as they arise.
These insurance companies acquire funds through payment of premium by
individual who pay to keep their policies in force. The company will pay a lump
sum of money known as death benefit to your beneficiaries after your death
and the beneficiaries can use the money for whatever purpose they choose.
Having the safety net life insurance can ensure that your family can stay in their
home and pay for the things that you planned for.
There two types of life insurance that is;
 Term life insurance
is the one that provide protection for a certain period. Once the term of
the policy expire, you may be able to renew the coverage in increments
of one year known as guaranteed renewability.
 Permanent life insurance
It provide a life longer coverage, its more expensive than term life
because it can last for the duration of your life and usually built cash
value.
Fire and Casualty Insurance Companies
Also known as property and casualty insurance are types of coverage
that help to protect you and the property that you own. property
insurance helps cover stuff you own like home or cars.
Casualty insurance means that the policy includes liability coverage to
help protect you if you’re found legally responsible for an accident that
causes injuries to another person or damage to another person’s
belongings.
Property and casualty insurance are typically bundle together into one
insurance policy. For example;
 homeowners insurance
 car insurance
 condo insurance
Renters insurance
How does property and casualty insurance
works?
They offer insurance to customers for risks, up to a certain coverage
amount in exchange for insurance premiums. Similar to other insurers,
when property and casualty insurer must determine an insurance
premium the customer will pay by looking at the riskiness of the
customers. An insurer would look at the like hood of the customer
making the claim and the potential amount of the claim when
calculating the amount of insurance premium they should charge.
Roles of this insurance companies
 Provide safety and security; insurance companies provide financial support and reduce
uncertainties in business and human life against particular events such as fire, marine and
accidents.
 Generates financial resources; insurance generate funds by collecting premium and uses them to
invest in government securities and stocks. These funds are gainfully employed in industrial
development of a country for generating more funds and utilized for economic development of a
country
 Life insurance encourage saving; insurance does not only protect against risks and uncertainities,
but also provides an investment channel too.it develop a habit of saving money by paying
premium.
 Medical support; a medical insurance considered essential in managing risk in health. Anyone
can be a victim of critical illness unexpectedly and the medical bills maybe so expensive for the
victim to afford so the insurance companies provide an assistance to the victim in paying the bills.
QUESTIONS
1. Explain the classification of contractual saving institutions
2. Is it possible to cash out prematurely in the insurance companies? Does
it have any unrealized consequences? Explain
3. Since insurance companies invest the money they receive, do they face
any interest rate risks?
4. Is it possible for the insurance companies fail to pay their policyholder?
If its yes how do they overcome such problem

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CONTRACTUAL

 Life insurance companies

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