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

Term Insurance

Unit Linked
Endowment Pension Money Back
Life Annuity Insurance
Insurance Funds Policy
Policy(ULIP)
 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 Sum Assured is payable only after Sum Assured is payable either on
Assured the death of Insured/Assured death or on the date of maturity
whichever earlier
2. Period A whole life insurance policy is for An endowment insurance policy is
longer time period comparatively for a shorter period

3. Object The object is to provide security to The object is to provide security as

family after the death of assured well as saving for old age

4. Premium Rates The premium is low as compared to The premium is higher than the
endowment policies whole life insurance

5. Suitability The policy is ideally suited to The policy is suited to those who
person having good financial status want provision for old age and also
and other fixed income sources for the family

6. Popularity The whole life policy is not very This policy is more popular
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.
Age on last birthday 22
Age on next birthday 23
Age on nearest birthday 22
 Examples of Calculation of Age
• If a person was born 22 years 8 months earlier, then calculate the
next birthday, last birthday and nearest birthday.
Age on next birthday 23
Age on last birthday 22
Age on nearest birthday 23

• If a person is 22 years 5 month and 29 days then calculate the next

birthday, last birthday and nearest birthday.
Age on next birthday 22
Age on last birthday 22
Age on nearest birthday 22
 Examples of Calculation of Age
• 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.
Age on next birthday 21
Age on last birthday 20
Age on nearest birthday 21

• 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.
Age on next birthday 21
Age on last birthday 20
Age on nearest birthday 20
 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

Net Single
Premium

Recurring
Regular Single
Premium Premium

Net Level
Premium
 Modes of Premium Payment
• 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.
 Modes of Premium Payment
• 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.
 Modes of Premium Payment

• 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.
 Modes of Premium Payment

• 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
No of years premium is required to be paid
= 100000 * 6
20
= Rs 30000
 Examples of Calculating Paid Up and
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;
Paid up value = Sum Assured * No of years Premium Paid
No of years premium is required to be paid
= 50000 * 5
50
= Rs 5000
 Examples of Calculating Paid Up and
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
Paid up value = Sum Assured * No of years Premium Paid
No of years premium is required to be paid
= 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
 Examples of Calculating Paid Up and
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
Paid up value = Sum Assured * No of years Premium Paid
No of years premium is required to be paid
= 100000 * 23 = Rs 57500
40

Surrender value= Paid up value(inclusive of bonus)*S.V. Factor

100
= 57500 * 60
100
= 34500

Note: 1 is added in number of installment paid because the installment of 01-04-1990 is also paid
Multiply by 2 Because of half yearly payment
 Examples of Calculating Paid Up and
Surrender Value
For Quarterly Payment,
Number of installment paid = (01-04-2001 to 01-04-1990) *4 + 1 = 45
Total installment to be paid = 20* 4 = 80
Paid up value = Sum Assured * No of years Premium Paid
No of years premium is required to be paid
= 100000 * 45 = Rs 56250
80

Surrender value= Paid up value(inclusive of bonus)*S.V. Factor

100
= 56250 * 60
100
= 33750

Note: 1 is added in number of installment paid because the installment of 01-04-1990 is also paid
Multiply by 4 Because of quarterly payment
 Examples of Calculating Paid Up and
Surrender Value

For Monthly Payment,

Number of installment paid = (01-04-2001 to 01-04-1990) *12 + 1 = 133
Total installment to be paid = 20* 12 = 240
Paid up value = Sum Assured * No of years Premium Paid
No of years premium is required to be paid
= 100000 * 133 = Rs 55416
240

Surrender value= Paid up value(inclusive of bonus)*S.V. Factor

100
= 55416 * 60
100
= 33250

Note: 1 is added in number of installment paid because the installment of 01-04-1990 is also paid
Multiply by 12 Because of monthly payment