CHAPTER FIVE

LIFE & HEALTH

INSURANCE POLICIES

1
 LIFE INSURANCE
• Life insurance is a contract between
an insurance policy holder and an
insurer where the insurer promises
to pay a designated beneficiary a
sum of money in exchange for a
premium, upon the death of an
insured person (often the policy
holder).
2
 Purpose of life
FinancialInsurance
protection: To provide dependents
of the insured with Financial protection.
Financial compensation.
To support family income of the insured
To cover personal loans and other
debts.
The family of the insured and the
creditors will then be protected from loss of
money.
To accumulate an educational fund
3

It will be used to pay tuition fees for

 Considerations in life insurance covering
death
of theininsured
1.Benefits determined advance
2.The amount of money required to pay
the death benefits are to be collected in
advance
3.Each insured in the group must be charged
an appropriate premium.
4. The probability of claim increases with
the passage of time
In be
5.may some cases the insured & policy 4
 BASIC TYPES OF
LIFE INSURANCE CONTRACTS
1.W hole Life Insurance
 Straight Life
 Limited –pay
 Single- pay
2. Term Insurance
 Level Term Insurance
- Convertible
- Non-convertible
 Renewable Term
 Decreasing Term
3. Endowment Insurance 5
 1. W H OLE LIFE
IN SURANCE
 It is a type of life insurance contract that provides
insurance coverage for the life of the insured.
 Sum assured is payable only upon death of the
insured.
 When the policy holder dies, the face value of the
policy, known as a death benefit, is paid to the
person or persons named in the life insurance policy
(the beneficiary or beneficiaries).
 Whole Life Insurance contracts are classified as:
1.Straight Life
2. Limited- pay &
3. Single-pay 6
1. Straight Life Insurance (Ordinary Life
Insurance).
– Premiums are to be paid at regular interval until the
death of the insured or until the age of 100 year
– If the owner still alive at age 100, the face
amount of insurance is paid to the policy owner at that
time.
2. Limited-Pay Life Insurance
– Premiums are paid for a definite period of time, which
is determined in advance.
– That is for 10, 15, 20, 25, 30 years or up to age 65.
– After the expiration of the specified time, the policy is
said to be paid-up
– Premiums are higher than straight Life Insurance
because premium is paid for a limited period of time.
3. Single Payment Life Insurance
7
– Here
time of purchase
premium of the whole
payment lifein one lump- sum at the
is made
 2. TERM INSURANCE
Provides compensation (death benefit) to the
beneficiary if the insured person dies within the
stated period mentioned in the policy.

If the insured survives beyond the specified time

limit in the policy, the policy will expire and there
will not be any payment made by the insurer.

Term policy gives only temporary protection and

there is no saving element involved.
8
Term contracts can be classified as:
1)Level Term Policy
– Provides a constant sum assured throughout the term of
the policy.
– For example, under a 15-year term policy of Birr 30,000,
the amount of payment to the insured will be Birr 30,000
if the insured dies at any time during the policy period.
– It can be convertible or nonconvertible.
2) Renewable Term Policy
– It can be renewed upon expiration
3) Decreasing Term Policy
– The amount of claims to be paid to the insured decreases
periodically
– The amount of death benefit decreases because the chance
of death increase with the age 9
3. ENDOWMENT INSURANCE
– Under this policy, payment is made if the insured
dies within the specified period; and if he survives
to the end of endowment period the amount is
paid to the policy owner at that time.
– The period of this policy is shorter than that for
Whole Life Insurance, and hence the premiums are
higher for the same age level.
– The shorter the endowment period, the higher the
premium.
10
ENDOWMENT ANNUITY
– This is a policy that provides retirement income to
the holder.
– It also incorporates protection during the term of
the policy up to the age of retirement.
– Monthly income of Birr 10 for each Birr 1,000 of
the face amount for the remaining life of the
holder, after maturity, with the guarantee that 120
monthly payments be made even if the holder dies
within that period; or
– Instead of monthly payment, a single cash payment
equal to the maturity proceeds, or a combination
of paid-up Whole Life insurance and cash payment.
11
 Term Insurance Endowment Insurance

 Provides only protection• Provide

for the term specified in protection along with
the policy document. inv’t opportunity.

 They offer just the • They offer death as well

death benefits. as maturity benefits.

• The premium charged • The premiums payable

by term insurance for endowment plans
plans is much less than are more expensive
the endowment plans. than term plans

12
 PREMIUM DETEMINATION
Types of premiums:
Net Premium
– This is a premium rate determined on the
basis of mortality rate and interest rate only.
– It does not include the operating costs charged
by the insurer.
– Net premium provides the insurer only with the amount
of money required to pay death claims.
Net Single Premium (NSP): It is PV of future death benefits.
– The total net premiums of an insurance policy are to be
paid as a single sum at the beginning of the contract.
N et Level Premium
– This is a premium charge that does not change from
year
to year throughout the term of the policy. 13
Gross Premium

– When a portion of the insurer’s costs

all of
running the business are added to the Net
Premium, the resultant premium is called the
Gross Premium.
– The addition of the insurer’s costs of doing
business to the Net Premium is called Loading.
– These costs include operating expenses,
commissions, advertisement expenses etc.
14
 Net Single Premium
• The (NSP)
net single premium (NSP) is defined as
the present value of the future death benefit.

• The NSP is based on three assumptions:

– Premiums are paid at the beginning of the policy year

– Death claims are paid at the end of the policy year

– The death rate is uniform throughout the year

15
16
17
 Steps to determine Net Single
premium
1. Determine the PV of Birr 8,285,000
PV = FV/(1+i)n
PV = 8 , 2 8 5 , 0 0 0 =
7,531,818.18( 1 . 1 0 )
2.Divide the PV by the number of insured to arrive at
the
NET SINGLE PREMIUM. 7,531,818.18
NSP = 958,000
Every Insured will= have to pay NSP of Birr 7.862 at
Birr 7.862
the beginning of the Term policy. The Insurer will,
then, collect a total of Birr 7,531,818.18 which will
grow to Birr 8,285,000 in one year time at 10%
18
 TERM INSURANCE
With the above example as a background, let us try to
determine the Net Single Premium for a Term policy.
Consider the following information:
 3- Year term policy for Birr 5,000 to be issued at the
beginning of the year.
 Number of policy holders at age 30 is 958,000
 Interest rate is 10%
 Single premium payment at the beginning of
the year.
 Death claims to be paid at the end of the year
in which the incident occurred.
 CSO, 1980 mortality rate.
19
 CSO MORTALITY RATE, MALE, 1980
Year Age Number Number Probability of
Living Dying Dying
1 30 958,000 1,657 0.00173
2 31 956,343 1,702 0.00178
3 32 954,640 1,747 0.00183

Expected death claims

Year Age Number Amount of Expected Death
Dying policy Claim
1 30 1,657 5,000 8,285,000
2 31 1,702 5,000 8,510,000
3 32 1,747 5,000 8,735,000
Total Expected Death Claims =
25,530,000 20
 Present value of Total
1
Yr
claims
2
Death
3
PV Factor
4 = (2*3)
PV of
5
No. of
6
(4/5)
Claims at 10% Claims Insured Annual
Net Prem
1 8,285,000 0.9091 7,531,893.5 958,000 7.862
2 8,510,000 0.8264 7,032,664 958,000 7.341
3 8,735,000 0.7513 6,562,605.5 958,000 6.850
25,530,000 21,127,163 22.053

21
So each Insured must pay in advance the sum of Birr 22.053 for
three years protection. It helps the insurer to meet the expected
death claims that occur in each year

1 2 3 4 = (2 + 3) 5 6= (4 – 5)
Yr Beg Bal Int 10% B.B + Interest Death Claims End Bal
1 21,126,774* 2,112,677.40 23,239,451.40 8,285,000 14,954,451.4
2 14,954,451.4 1,495,445.14 16,449,896.54 8,510,000 7,939,896.54
3 7,939,896.54 793,989.66 8,733,886.20 8,735,000 -1113.80*

22
ACTURIAL NOTATIONS: -
T= time
(years) X = age
Lx = number of
people living
(Dx/Lx)
during age x.= px = probability of dying during age x.
(Lx – Lx +1)==qx
(Lx+1/Lx dx= Probability that an individual at age
)= number ofx.
people dying Survives age x. Single
Formula to determine Net
during age x.
Premium:
S(dx / S(dx 1/ s(dx  T 1/
  
NSP Lx) Lx Lx

 (1 r) (1 r)2 (1 r)T

23
Using this formula the Net Single Premium is computed as
follows
Yea Age Number Living Number dying
r x Lx dx
t
1 30 958,000 1,657
2 31 956,343 1,702
3 32 954,640 1,747

Birr
22.053

24
 N ET LEVEL
PREMaI single
Instead of paying U M premium at the beginning
of the policy, the policyholders want to pay annual
premiums of equal size.
H ere there are two points to consider.
1. Not all the policyholders will pay the annual level
premiums since some of them are expected to die before
the end of the term.
2. The insurer is now collecting limited amount
of
premiums to invest at the beginning of the policy.
Accordingly, the total annual level premiums paid
by a policyholder will be greater than the single
premium paid at the beginning of the policy.
This equal annual premiums paid by a policy-holder
is then called NET LEVEL PREMIUM.
25
 N LP-
EXA M PLE
No. of insured PV of $ 1 PV of $
Yr Age Paying payable 1
premium Beginning of Premium
year
1 30 958,000 1 958,000
2 31 956,343 0.9091 869,411
3 32 954,640 0.8264 788,915
TOTAL

PV

2,616,326

26
The following table shows the amount of Net Level Premiums to
be collected and the expected death claims to be paid each year.
1 2 3 4 =(3 + 7) 5 6 7

Yr Annual Total Prem Beg Bal B.B Invested Death Ending

LP Collected at 10% Claims
Balance
1 8.075 7,735,850 7,735,850 8,509,435 8,285,000 224,435
2 8.075 7,722,470 7,946,905 8,741,596 8,510,000 231,596
3 8.075 7,708,718 7,940,314 8,734,345 8,735,000 -655*

27
 Personal Accident
 It providesPolicy
compensation for death or bodily
injuries caused by violent, accidental, external and
visible means.
 The injuries shall be the direct cause of death, loss
or disablement.
 In the event of death of the insured, the benefit is
to be given to his representative.
 Death or disablement should occur within 12
calendar months from the date of the accident. 28
 Worker’s Compensation Policy
 This policy indemnifies the insured against all sums for which
he is to be liable to pay compensation for any worker who
sustains death or bodily injury by an accident or occupational
diseases arising from his work and during the time of his
work.
 The worker should be employed by the insured, and the
category of work assigned to him and the place of work
should be specified in the Schedule.
 The policy does not provide compensation for death
or
disablement resulting from suicide attempted suicide
or intentional self-injury. 29
 End of
Chapter