Chapter Five

life and Health Insurance

 LIFE INSURANCE

 Life insurance is the most appropriate risk management method for

dealing with the exposures of risks that damage human life.

 Life insurance is a financial product that enables you to leave behind

money for your family when you die.

 A human life has economic value to all who depend on the earning
capacity of that life, particularly to two control economic groups: the
family and the employer.
 Cond…
 To the family, the economic value of a human life is most easily
measured by the value of the earning capacity of each of its
members.
 To the employer, the economic value of human life is measured by
the contributions of an employee to the success of the business.
 Every person faces two basic contingencies concerning life;
 dying too soon or living too long
 The four main perils that can destroy wholly or partially, the
economic value of a human life are; premature death, loss of health,
old age and unemployment.
 Cond…
 The first category is physical death. And The second is economic
death.
 A man, who is forced to retire at 58 from his job, unless he has
substitute income, is financially dead.

 Economic death may also occur at early ages if the person becomes

too disabled or ill to work.

 Characteristics of life insurance

 It has the following distinctive characteristics;

 The event insured against is an eventual certainty: No one lives
forever or maintains his economic value.
 It is not the possibility of death itself that we insure against, but the
untimely death.
 The uncertainty surrounding the risk in life insurance is not whether
the individual is going to die, but when death occurs.
 Cond…
 Life insurance is not a contract of indemnity.

 Insurable interest - other insurance contracts require insurable

interest at the time of the loss whereas the requirement of insurable
interest in life insurance is at the time when the contract is
established.
 Cond…
 Life insurance contracts are long-term contracts.
 the question of over insurance is immaterial in life insurance
contracts.
 A person can purchase life insurance for any amount of protection
without limit.
 Persons with legal or economic interest in the
contract
 Life insurance contract may involve the following three persons
with legal or economic interest:
 The insured - is the individual upon whose death the benefit is paid.
 The beneficiary - is the person or organization to whom the benefit is
paid.
 Life insurance contract specifies beneficiaries as primary beneficiary
and contingent beneficiary.
 Cond…
 A primary beneficiary is the one who receives the death benefit if
he/she lives at the time of the insured’s death.
 Contingent beneficiary is the one to whom the death benefit is given
if the primary beneficiary is no longer living at the time of the
insured’s death.
 The contract may describe beneficiaries in order of succession:
primary beneficiary, secondary beneficiary and tertiary beneficiary
and so on.
 Cond…

 The owner - is the one who control the policy. The owner can be a

person or organization in whom the rights of ownership are vested.

 This ownership rights are exercised only before the death of the

insured.

 But upon the death of the insured, ownership right become the

privilege of the beneficiary.

 Types of Life Insurance Contracts

 Generally, life insurance policies can be classified as:

 Whole life insurance (cash-value life insurance)

 Term life insurance

 Endowment insurance
 WHOLE LIFE INSURANCE
 It is a kind of life insurance in which the sum guaranteed is payable
on the death of the insured.
 This policy provides protection to the dependants of the insured
upon the event of his/her death.
 This means the sum promised is payable only upon the death of the
insured.
 Besides this protection, whole life insurance allows for the
accumulation of savings over the life of the insured.
 In essence, the policy encourages saving.
 Cond…
• If the insured person pays premium for two or three years the policy
is said to be acquires cash value.
• After the policy acquires cash value and if the person no longer
wants his/her policy or for some reason cannot continue the
premiums, he/she can ask for the surrender or withdrawal of cash
value.
• In other words, the insured ceases premium payment and receive a
proportion of the premiums already paid less expenses incurred in
issuing and renewing the policy, and less the cost of the life
assurance cover provided during the years it was in force.
 Cond…
• If the insured manages to live until this time (maturity) he/she
receive the face value of the policy and the policy is said to be
matured.
 In some cases, an alternative to the surrender value is the paid-up
policy.
 Cond…
 If the insured decided to stop premium payment but wants to
continue the insurance protection it is said to paid up policy.
 In general, whole life insurance has two most important features:
 Protection - It protects the insured in the case of premature death.
 Saving – premium will accumulate with interest till the date of
maturity of the policy (age 100) the face value of the policy will be
paid to the beneficiary.
 Cond…
 Depending upon the manner of premium payments, whole life
insurance contracts are classified as:
1. Straight life insurance - also called ordinary life insurance. Under this
policy, premiums are paid at regular interval until the death of the
insured or until the achievement of a specified age limit, say 100
years. Such policy gives permanent protection at the lower cost.
2. Limited pay life insurance - under this insurance scheme, premiums
are paid for a definite period of time which is determined in advance.
 After the expiration of the specified time, the policy is said to be paid-
up.
 Cond…
3. Single payment life insurance - here premium payment is made in
one lump sum at the time when whole life insurance contract is
purchased.
 In most cases, insurance buyers do not prefer this type of
arrangement (mode of payment).
 Term Life Insurance

 It provides protection only for a definite period (term) of time. It is

sometimes called temporary insurance.
 A term life insurance policy is a contract where by the insurer
promises to pay face amount of the policy to a third party (the
beneficiary) if the insured dies within a given period of time specified
in the contract.
 Protection ends when the term of years expires
 Cond…
 Common types of term life insurance are 1 year term, 5 year term, 10
years term, 20 years term, and term to age 60 to 65.
 Term life policies can be single or level premium policy.
 Single premium policy requires the insured to pay premiums at the
time the policy is purchased at lump sum.
 while level premium policy requires the payment of equal amount
of premiums at definite intervals.
 Most term life insurance policies are level premium.
 Cond…
 Insurers provide term life insurance policies in different contract
forms;
 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.
 Convertible term policy - is a term policy that gives the policyholder
the option to convert his term policy into the other types during the
tenure of the term policy.
 Cond…
 The term contract can be converted into whole life or endowment
insurance.
 The following requirements are expected upon conversion.

• There will not be an increase in the sum assured

• The option will have to be exercised within a specified period.
 Cond…
 Nonconvertible term policy - Under this scheme, the term policy
cannot be converted into other forms of life insurance contracts. The
policy terminates upon maturity or the expiry of the term.
 However, it could be renewable.

 Renewable term - is issued for a given period of time and if the

term expires the policy owner can renew for another successive term
to some stated age with evidence of insurability.
 Premiums remain level within a term but increases at each renewal
date.
 Cond…
 Decreasing term insurance - is form of term insurance where the
face amount gradually declines each year. Although the face amount
declines over time, the premium is level (same) throughout the
period.
 Cond…
 Uses of term insurance are:
 term insurance can be effectively used If the amount of income that
can be spent on life insurance is limited
 Term insurance is appropriate if the need for protection is temporary.
 Term insurance can be used to guarantee future insurability.

 Limitations of term insurance are:

 Term insurance premiums increase with age and eventually reach
prohibitive levels.
 Term insurance is inappropriate if you wish to save money for a
specific need.
 Cond…

 ENDOWMENT INSURANCE - is another traditional form of life

insurance.

 It is a kind of term life policy that pays the face amount of insurance

for the beneficiary if the insured dies within a specified period; if the

insured survives to the end of the endowment period, the face

amount is paid to the policy owner at that time.

 The shorter the endowment period is the higher the premium will

be.
 PROVISIONS IN LIFE INSURANCE
 The provisions or conditions of life insurance contract that must be
considered by both contracting parties can be grouped in to two
classes:
1. Standard contract provisions
2. Option provisions
 Cond…
 Standard contract provisions - are provisions which do not require
any decisions by the policy holder.
 Includes the following:
 The grace period provision - normally premiums are paid annually in
advance.
 The grace period provision states a period of time following the
premium due date during which payment of premium will keep the
original coverage in force.
 The grace period in annual premium contract is 31 days.
 Cond…
 If the insured dies during this grace period, the sum guaranteed will
be payable to his beneficiary after subtracting the unpaid premium.
 If the premium remains unpaid after the grace period the policy will
lapses.
 When the policy lapses and if the insured does not pay premium any
longer, the insurer provide options for the policy holder.
 Cond…
 The reinstatement provision - states the conditions under which the
insurer will allow reinstatement of a policy that has been lapsed for
not paying premium.
 Reinstatement provision provides the right to reinstate a policy if
the following conditions are satisfied:
 The policy has not been surrendered its cash value
 Reinstatement must be requested within five years since the policy is
lapsed.
 Cond…

 Overdue premiums must be paid with interest

 The insured person must provide evidence of insurability

 The incontestable provision - according to this provision the insurer

cannot contest payment of policy proceeds if the insured dies after a

period of time stated, by law cannot exceed two years.

 Cond…

 The misstatement of age provision - the effect of age misstatement

provision state an adjustment in the benefit amount, regardless of

when the age misstatement is discovered. Misstatement of age

provision is not affected by the incontestable provision.

 Suicide provision - this provision allows the insurer to deny a death

claim if death results from suicide.

 Cond…

 Option provisions – it provides a set of rights or options from which

the policyholder can choose. Optional provisions offered for the

insured in the life insurance contract includes the following:

 Policy conversion - it is a provision that permit the insured to change

the policy to other type of policy requiring high premium payment

without demonstrating insurability.

 Converting to a lower premium plan requires the insured

demonstration of insurability.
 Cond…
 The loan provision - permits the policy owner to borrow against the
policy’s cash surrender value.
 Mostly the provision allows the insured to borrow an amount which
will not exceed the cash surrender value on the date the next
premium is due.
 If death occurs while the policy loan is outstanding, the indebtedness
is subtracted from the policy proceeds and the difference is given for
the beneficiary.
 The policy will terminate if the indebtedness exceeds.
 Cond…
 Automatic premium loan provision - It is a provision that goes in to
effect when the premium is unpaid beyond the end of the grace
period and the policy owner provides no other specific notification
for the insurer.
Under this circumstance, the premium is assumed to be paid by
borrowing against the policy’s cash value.
Automatic premium loan provision works only when the policy owner
requests to elect this option on the original application of the policy.
 Cond…
 Non – forfeiture options - In whole life and endowment insurance if
the insured acquires cash value and if the policy owner did not apply
for Automatic premium loan provision and the premium is not due
within the grace period.
 There are three non - forfeiture options for the policy owner:

1. Cash value - if the policy owner prefers to take the Cash Value
(surrender the policy), he will be paid the cash value less any
outstanding indebtedness.
 Once the policy is surrendered, the contract comes to an end.
 Cond…
2. Reduced paid-up insurance - the policy owner may select an option
to continue the policy as a reduced paid up insurance maturing on
the due date. The reduced sum assured is determined on the basis of
the premiums already paid. In short in this option:
 There is no cash payment to the Insured.
 There is no subsequent premium payment by the insured.
 The Sum Assured is Reduced
 The existing indebtedness is cleared.

3. Extended term life insurance - under this option the original policy is
to be converted into a term policy for the initial sum assured.
 Health Insurance
 Health insurance may be defined broadly as the type of insurance
that provides indemnification for expenditures and loss of income
resulting from health damage, sickness or bodily injury.
 The loss can be the loss of wages caused by sickness or accident, or
it may be expenses for doctor bills, hospital bills, and medicine.
 Health insurance policies are broadly classified as:

1. Disability Income Insurance

2. Medical Expense Insurance
 Cond…
 Disability Income Insurance - is a form of health insurance that
provides periodic payment when the insured is unable to work as a
result of illness or injury.
 It pays benefits only in the event of sickness or only in the event of
accidental bodily injury or it may cover both contingencies in one
contract.

 Cond…
 The disability must be one that prevents the insured from carrying on
the usual occupation.
 Most policies continue payment of the benefits for only a specified
maximum number of years, but lifetime benefits are available on
some contracts.
 However, under all loss of income policies, the benefits are
terminated as soon as the disability ends.
 Certain types of accidents are excluded, for example, losses caused
by war, suicide and intentionally inflicted injuries, and injuries while
in military service during wartime.
 Cond…
 Medical Expense Insurance - provides for the payment of the cost of
medical care that results from sickness and injury.
 Its benefits help to meet the expenses of physicians, hospital nursing
related services, as well as medications and supplies.
 Benefits may be in the form of reimbursement of actual expenses,
up to a limit, cash payments or the direct provision of services.
 The medical expense may be paid directly to the provider of the
services or the insured.
 Cond…
 Medical expense insurance is divided into four major classes:

1. Hospitalization Expense Contract

2. Surgical Expense Contract
3. Regular medical Expense Contract
4. Major medical Expense Contract
 Hospitalization Expense Contract - the hospitalization contract is
intended to indemnify the insured for necessary hospitalization
expenses. Hospitalization expense is usually written for a flat daily
amount for a specified number of days such as 30, 120, or 365 days.
 Cond…
 The agreement may set birr allowance for the different items or may
be on a service basis.
 Typical contracts offered by insurance companies, for example may
state that he insured will be indemnified up to X birr per day for
necessary hospitalization.
 In other words, the contract provides costs up to the maximum
benefit per day (say 50 birr, 60 birr, 70 birr etc.,) that will be paid for
the number of days specified, while the insured or an eligible
dependent is in the hospital.
 Cond…
 Like all insurance policies, hospitalization contracts offered by insures
are subject to exclusions.
 The following exclusions are typical of hospitalization contracts:
 Expenses resulting from war or any act of war
 Expenses resulting from self-inflicted injuries
 Expenses payable under worker’s compensation or any occupational
disease
 Expenses incurred while on active duty with the armed forces
 Cond…
 Expenses incurred form purely cosmetic purposes
 Expenses incurred by individuals on an outpatient basis
 Services received in any government hospital not making a charge for
such services.