Chapter: 4 - Insurance

Life Insurance:
Life Insurance is a contract between the policy owner and the insurer, where the insurer
agrees to pay a designated beneficiary a sum of money upon the occurrence of the
insured individual's or individual's death or other event, such as terminal illness or critical
illness. In return, the policy owner agrees to pay a stipulated amount at regular intervals
or in lump sums. There may be designs in some countries where bills and death
expenses plus catering for after funeral expenses should be included in policy premium.
In most countries, the predominant form simply specifies a lump sum to be paid on
insured's demise.

As with most insurance policies, life insurance is a contract between the insurer and the
policy owner whereby a benefit is paid to the designated beneficiaries if an insured event
occurs which is covered by the policy.

Life insurance policies are legal contracts and the terms of the contract describe the
limitations of the insured events. Specific exclusions are often written into the contract to
limit the liability of the insurer; for example claims relating to suicide, fraud, war, riot and
civil commotion.

Terminologies in Life Insurance:

 Parties to Contract: There is a difference between the insured and the policy
owner (policy holder), although the owner and the insured are often the same
person. For example: If Ram buys a policy on his own life, he is both the owner
and the insured. But if Sita, his wife buys a policy on Ram's Life, she is the
owner and he is the insured. In cases where the policy owner is not the
insured, insurance companies require some kind of 'insurable interest' to sell
the life insurance policy. For life insurance policies, close family members and
business partners will usually found to have an insurable interest. The
'insurable interest' requirement usually demonstrates that the purchaser
(owner) will actually suffer some kind of loss if 'insured' dies. Such a
requirement prevents people from benefiting from the purchase of purely
speculative policies on people they expect to die.
 Contract Terms: Special provisions may apply, such as suicide clauses
wherein the policy becomes null if the insured commits suicide. Any
misrepresentation by the insured on the application is also grounds for
nullification.
 Costs & Insurability: The insurer (life insurance company) calculates the
policy prices (premium) with intent to fund claims to be paid and administrative
costs, and to make a profit. The cost of insurance is determined by using
mortality tables. The three main variables in a mortality table have been age,
gender and use of tobacco. Many life insurance companies examine different
factors like family history relating to cancer, medication, diabetes etc. for
determining premium.
 Death Proceeds: Upon the insured's death, the insurer requires acceptable
proof of death before it pays the claim. The normal minimum proof required is a
death certificate. If the insured's death is suspicious and the policy amount is
large, the insurer may investigate the circumstances surrounding the death
before deciding whether it has an obligation to pay the claim.
Major Types of Life Insurance:

1. Whole Life Insurance:

Whole life policy is also known as cash value or permanent policies and they combine
an insurance feature with a saving feature. If a person is unable to save without a
'forced' savings plan, whole life insurance may be desirable.
Whole life insurance provides for a level premium, and a cash value table included in
the policy guaranteed by the company. The primary advantages of whole life are
guaranteed death benefits, guaranteed values, fixed and known annual premiums, and
mortality and expense charges will not reduce the cash value shown in the policy. The
primary disadvantages of whole life are premium inflexibility, and the internal rate of
return in the policy may not be competitive with other savings alternatives.
Also, the cash values are generally kept by the insurance company at the time of
death, the death benefit only to the beneficiaries. Dividends can not be guaranteed
and may be higher or lower than historical rates over time.

2. Term Life Insurance:

Term life insurance policy is also known temporary life insurance policy. Term
insurance provides life insurance coverage for a specified term of years in exchange
for a specified premium. The policy does not accumulate cash value. Term is generally
considered 'pure' insurance, where the premium buys protection in the event of death
and nothing else.
A term life insurance is renewed annually at an increasing premium, or issued at an
annual level premium for a certain term such as five years, ten years and so on. The
face value is paid only if death occurs within the stipulated period. It has no recovery
value at the end of the term. To the investor desiring the greatest temporary protection
at the least outlay, the term policy is the best choice.
There are three key factors to be considered in term insurance:
 Face Amount (Protection or death benefit)
 Premium to be paid (cost to the insured),and
 Length of coverage

Various insurance companies sell term insurance with amny different combinations of
these three parameters. The face amount can remain constant or decline. The term can
be for one or more years. The premium can remain stable or change.

3. Universal Life Insurance Policy

Universal life insurance is a relatively new insurance product intended to provide
permanent insurance coverage with greater flexibility in premium payment. The key
element of universal life insurance policy is the flexibility of the premium for the policy
owner. Premium payments for universal policy are at the discretion of the policyholder
because premiums are flexible except that there must be a minimum initial premium to
begin the coverage of insurance.