Introduction to Life Insurance Concepts

Introduction to Life Insurance
Overview of Insurance Concepts
-By Vineet Mittal

vmittal5@csc.com
AGENDA
What is Life Insurance ??? Life Insurance In India

Parties In Life Insurance
Insurance Products
Life Insurance policy contract
Group Life Insurance
Riders & Supplemental Benefits
Distributing products
New Business & Underwriting basics
Business cycle in Life Insurance
In-force processing & transactions concepts
Reinsurance
Claims
Tax Laws
Regulations
Evolution of Insurance
•Insurance In India
Insurance in its present form came to India from the United Kingdom in early
19th century.
The Indian Life Assurance companies Act, 1912 was the first statutory
measure of regulation of Insurance business in India.
Life Insurance business was nationalized in the year 1956 and that of General
Insurance (P&C) business in the year 1972.
The Insurance sector is now open since Jan 2001, to private operators.
Insurance : What is it ?
A contract or device for transferring risk from a person, business or organization

to an insurance company that agrees, in exchange for a premium, to pay for
losses through an accumulation of premium.
Insurance has three components
A Transfer Mechanism, in which one party - the insured(person,business,

or an organization whose property, life, or legal liability is covered by an
insurance policy) - transfers the chance of financial loss to another party -
the insurance company, or the insurer.
A Business System, which includes various operations that must be

conducted in a way that generates sufficient income to pay claims and
provide a reasonable profit for its owners.
A Contract , between the insured and insurer that states what potential
costs of loss is transferred to the insurer and expresses the insurer’s
promise to pay for those losses in consideration for a stated premium.
Parties in Life Insurance
Insured - Whose life, health or property is insured
Insurer - The Insurance company
Beneficiary - Who receives the benefit
Underwriter - Who evaluates, accepts or rejects a proposal
Actuary - Who determine cost of insurance etc.
Agent - Who brings in business for insurance Co.
Broker - Who places insurance business with any insurance company
Captive Agent - Who sell and services only for one Insurance company
Claimant - Who make a formal request for claim / benefit
Assignor - Who transfers the rights to other
Assignee - To whom the contractual rights are transferred
Insurance Products
Life Insurance
Non-Traditional Contracts
Traditional Contracts
(ULIPs)
Term Whole Life Endowment Annuity Money-Back

Insurance Products
Term Insurance
Temporary protection for a specified period of time

No cash value
Pays only the death benefit (face amount)
Expires and pays nothing if the insured outlives the insurance period
Usually provides more insurance for less cost
Death benefit patterns
Level
Increasing Term
Decreasing Term
Term Insurance continued….

Convertibility option
Change to a permanent life policy
Can exercise the right at specified intervals
No proof of insurability required to exercise the option
Additional premium is charged
Conversion Privilege
Term Permanent Life

Life Insurance Policy Insurance Policy
 No evidence of insurability required

Term Insurance continued….
Renewable Term option
Start a new period of term insurance when previous term expires

Same face amount as “old” policy
Premiums are based on attained age
No proof of insurability required
Additional premium is charged for this option
Yearly Renewable Term (YRT) Insurance

Renewal Provision
Allows policy owner to renew the policy at the end of

the term of coverage, without providing evidence of
insurability
(1) One-Year Term
Life Insurance
Policy
(2) Life Insurance

Policy
Term Insurance
Rider
Permanent Life Insurance
Primary Distinct Characteristics

Permanent life insurance products offer lifetime coverage
Permanent life insurance products
Provide insurance coverage and contains a saving element, i.e. It builds a cash
value.
Whole Life Insurance
Considered to be “permanent” insurance for the entire life

Level premium is required
Policy Purchased at Age 45
$150,000
Death Benefit
$100,000
$75,000
45 50 60 70 80 90 100 or death
Insured’s Age
Other type of Whole Life Policies
Modified Whole Life Insurance - Modified Premium or Modified Coverage
Joint Whole Life Insurance as first-to-die life insurance
Last Survivor Life Insurance as second-to-die life insurance
Family Policies coverage on the insured’s spouse and children
Monthly Debit Ordinary Policy Monthly premium & small face amount
Pre-Need Funeral Insurance Funeral homes as policy beneficiary

Other Types of Permanent Insurance
Interest sensitive whole life (ISWL)

Premiums or face amount are adjusted at specified intervals based on interest crediting
being less than or greater than anticipated.
Interest rate cannot be reduced below specified minimums and premium cannot be
increased more than specified maximums.
Blended Whole Life/Term

Combination of whole life and term
Dividends or interest on cash value are used to purchase paid-up additions that reduce
or eliminate the term portion
Permanent Life Insurance
A Newer Generation of Permanent Products
Universal Life Insurance
Flexible Flexible Face Unbundled

Premiums Amounts Pricing
Factors
$100,000
LARGER MORE Life
Insurance
1. Mortality
SMALLER
Policy
LESS 2.Charges
Interest
3. Expenses
Universal Life
Brought about by changing financial conditions

Competition for investment dollars
Fluctuating interest rates and inflation
Universal life product advantages

Flexible premiums and payment schedules
Potential increase in policyholder return
Interest rates vary and are usually higher than whole life
Cash value can accumulate tax-deferred
Universal Life Expense/Premium Loads

Front End
Vary by company and by product
Deducted from each premium payment
Cover sales and administrative costs
Remainder of the premium goes into the cash value account
Back End
Also vary by company and by product
Charges taken on withdrawals and surrenders
Universal Life
Monthli-versary Processing
Interest is added to cash value account
Cost of insurance is deducted from cash value account
Current Interest Rate
There is always a guaranteed minimum rate
Excess interest varies
Set by company at specified intervals
Can be tied to market indices
• Death Benefit Options
Option A – Level death benefit (face amount)
Option B – Death benefit increases with accumulated value
Option C – Death benefit increases with return of premium
Variable Universal Life
A Newer Generation of Permanent Products
Premiums
Not required
Amount and frequency can vary
Policy owner can allocate how premiums are allocated to various investment options
Investments
Held in separate accounts (funds)
Affect the cash value and death benefit amounts
Withdrawals
Subject to surrender charges
Reduce cash value and death benefits
Loans
The cash value used as collateral is moved from separate account to general account
which earns
Endowment Life Insurance
Endowment insurance provides a specified benefit amount whether the

insured lives to the end of the term of coverage or dies during that term.
• The maturity date is reached either
At the end of the stated term, OR
When the insured reaches a specified age
Money Back
• Money Back – A plan in which part of the sum assured is paid back to the
policy holder at regular intervals.
ULIPPlans
A part of the premium is invested in the market and a Fund value is
generated, which is the product of NAV and Units at a particular time.
Renewals Benefit Billing is done every month to recover Admin fees
and mortality charges. The proportionate units are deducted from the
fund.
On Maturity Fund Value or Sum Assured whichever is higher, is given.
Annuities
The term Annuity means a contract under which one party - the insurer -
promises to make a series of periodic payments in exchange for a premium or a
series of premiums and provides a series of payments made at specified
intervals
The annuitant receives the series of payments
Premiums are paid in during the accumulation period. After the contract
annuitizes, payments then occur during the payout period.
The beneficiary may receive survivor benefits upon the annuitant’s death
(depending on settlement option)
Immediate vs. deferred
Earnings on accumulations
Fixed annuities earn a specified interest rate
Variable annuities have no guarantees and returns vary with investment performance
Classification of Annuities
Annuities Settlement Options
Life only
Certain period
Life with certain period
Fixed amount
Installment refund
Cash refund
Deposit at interest
Joint survivor
Joint survivor with certain period
Lump sum distribution
Required minimum distribution
Annuities
Qualified annuities
Must be purchased as part of, or in conjunction with, an employer provided
retirement plan or an individual retirement arrangement (such as an Individual
Retirement Annuity or a Simplified Employee Pension Plan)
If certain requirements are satisfied, contributions made to qualified annuities
may be wholly or partially deductible from the taxable income of the individual or
employer making the contributions.
Proceeds cannot be distributed before age 59.5
Minimum distributions must begin at age 70.5
Nonqualified annuities
Contributions are fully taxable
Group Life Insurance – Although group insurance contracts are similar to
individual contracts, they have certain unique characteristics.
Group Life Insurance Characteristics

Group insurance provides coverage for a number of people (rather than only one
person or one family), under a single contract, called a master insurance contract
group.
The parties to a group insurance contract are the insurer and the group
policyholder- the person or organization that decides what type of coverage to
purchase for group members ,negotiates the terms of the contract with the insurer
and purchase the group coverage.
The group policyholder is not granted all ownership rights under the policy. Some
ownership rights are granted to the insured group members. For example, each
insured group member has the right to name the beneficiary who will receive the
benefit payable on that group member death.
Group Life Insurance Characteristics
Group insurance contracts typically are exempt from the insurable interest
requirement. The lawful purpose requirement necessary to form a valid group
insurance contract is met because the group policyholder enters into the contract to
provide a benefit to covered group members.
Insured group members are not the parties to and do not receive copies of the
contract, Instead they receive a certificate of insurance.
Group Life Insurance Characteristics – Premium for group
insurance contract may be paid by the group insured ,or both depending whether
the insurance plan is a :
Group Insurance Underwriting – Like individual underwriting, the goal
to group underwriting is to determine the level of risk a group of people presents
and whether the group’s loss experience will be predictable and acceptable.
However group underwriting focuses on the characteristics of the group rather than
on characteristics of individual insured. The risk characteristics evaluated in group
underwriting include
Reason of group’s existence

Size of the group
Flow if new members in the group
Stability of the group
Required percentage of eligible members who must participate in the
plan
Activities of the group
Riders and Benefits
Riders
Provide additional insurance amounts
Can protect the insured, a specific family member, or all children
Supplemental Benefits
Can apply to the base coverage and/or to a rider
Disability Income
• Provides monthly income if insured is disabled
• Accidental Death / Double Indemnity
Pays an additional amount equal to the death benefit when covered person dies
as the direct and proximate result of an accident
• Accidental Death or Dismemberment
Pays an additional amount equal to the death benefit when covered person dies
as the direct and proximate result of an accident
Pays a lesser amount if insured loses an arm, leg, eye, etc. as specified in the
contract language
Premium Waiver
Pays required insurance premiums on same contract when insured is disabled,
unemployed, or otherwise impaired as specified in the contract.
Alternatively, can pay cost of insurance (mortality) on universal life
Premium Waiver (Payor)
Pays required insurance premiums on same contract when payor dies or is disabled,
unemployed, or otherwise impaired as specified in the contract.
Usually available on juvenile policies
Guaranteed Insurability
Insured can purchase additional insurance at specified future dates without evidence
of insurability
Accelerated Benefit
Reduced face amount
All or part of the death benefit is paid while the insured is still alive
Insured must be terminally ill
Cost of Living Increase

Death benefit increases in response to increases in a cost of living index but
cannot decrease
Life insurance policy contract
Life insurance Policy

A contract, which is a legal agreement between two or more parties
Promises certain performance in exchange for consideration
Policyholder pays premiums (sometimes required, sometimes not)
Insurer is obligated to pay proceeds (required)
Policy content
Constitutes the entire contract
Application if attached
• Application provides information for insurance company to accept the risk and issue the
policy
Face page contains the issue date, issue age, plan amount, premium
provisions, and signatures of company officer(s)
Sometimes includes tables of guaranteed values and other supplemental
information
Names the insured
Names the beneficiary
• Primary or contingent
• Revocable or irrevocable
Restrictions, limitations, and exclusions
Life insurance Policy Contract
Policy provisions may include
Free look
Misrepresentation / Incontestable clause
Legal right to cancel or limit the policy
Contestable period – cannot exceed two years
After expiration of contestable period, insurer cannot cancel except for non-
payment of premiums
Suicide clause
Usually one or two years
Refund premium without interest
Misstatement of age
Adjust future premiums
Change face amount
Policy provisions may include
Grace Period
• Time period in which to pay overdue premiums
• Usually 30-31 days
• If insured dies, insurer pays face amount minus premiums due minus any loans or
withdrawals
Reinstatement
• Can occur for (usually) up to a three year period
• Must pay overdue premiums with interest
• Must repay any loans
• Provide evidence of insurability
Automatic Premium Loan
• Only for cash value products
• Cash value is used to pay premiums
• Policy-owner must give her/his consent
Life insurance policy roles
Insured / annuitant
Joint insured / annuitant
Owner
Regular owner
Custodial owner
Payor
Beneficiary
Primary
Contingent
Assignee
Billing and payment options
Payment frequencies
Annual
Semi-annual
Quarterly
Monthly
Weekly
Biweekly
Billing and payment options
Billing forms
Direct
Electronic forms transfer (EFT)
Preauthorized check (PAC)
Home office
Salary deduction
Government allocation
Discounted premium deposit
Premium depositor fund
Automatic premium loan
Dividends
Agent / Producer Concepts
Agent-one party ,who is authorized to perform certain act for another
party-the principal
Agency contract-a legal document that defines a agent role,
responsibilities , right to act for for the insurer .
Compensation
Distributing products
Distribution system
Personal selling system Direct response system

Introduction totoLife
Introduction Insurance
Life Insurance
Distributing products –Personal Selling
Agency building distribution systems

– agency system
Salaried sales system

Multiple line
Ordinary agency system
Home service system
Location selling system Worksite marketing

Distributing Products –Personal Selling
Career agent- Called as captive agent ,considered as independent contractor rather

than employees of an insurance company.
Agent broker, who can place business with her primary company and with other
insurance company
Multiple line agency system, Offer(s) a variety of insurance and financial services
product to a customer . Commissioned agent and agent broker use this system to
distribute –life and health insurance ,property /casualty insurance .
Home services system, primarily target specified geographic area ,territory .the
policy owner services the home service agents provide includes collecting initial
premium and renewal premium
Salaried sales system, salaried sales representatives are legally considered agents
of the company .this system is primarily used to distribute group insurance
product .
Location selling system, this system offers product information and insurance
application through businesses such as department store ,grocery store .
Worksite marketing, process of distributing products to people at their work place –
a voluntary payroll deduction basis
Introduction totoLife
Introduction Insurance
Life Insurance
Distributing products –Personal Selling
Non agency distribution system
Bank sold insurance

brokerage
Financial planner Producer group Personal producing general agency

Distributing products –Direct Selling
Direct response distribution system-

Direct mail
Print media
Broadcast media
Telemarketing
Internet sales
New Business and Underwriting Concepts
Insurance application ( Proposal)
Becomes part of the insurance contract
Statements and representations are considered to be materially accurate.
Medical vs. non-medical
Guaranteed (jet) issue
Cash with application
Binding and conditional receipts
Business Cycle in Insurance
• Business operations in insurance business
Proposal
Underwriting
Policy Contract /Policy Servicing
Claims / Benefits
Proposal Form
A Proposal form is a mechanism by which the insurers receive information about

risks to be insured.
A proposer (later on called as insured) completes the proposal and submits it to
the insurer.
Based on the proposal form only ( here Utmost Good faith applies)
• The insurer will assess the risk and underwrite the risk.
• It also forms the basis for calculation of Premium.
Content of Proposal Form
Name and address of the proposer, occupation and age.
Past claims and history of insurance covers, particulars of earlier refusals if any,
The period for which insurance is required.
The name of the beneficiary, and relationship with the insured in the case of life
insurance.
Declaration of Insurability, medical history, agents report in the case of life

insurance.
Underwriting
What Underwriting is ?
• Selection of risks, is an insurance function
• Assessing and classifying the degree of risk proposed.
• Quoting the premium rates
Why Underwriting is carried out ?

• Insurers to be financially healthy and ability to pay contractual benefits,
• Measure the level of risk each proposed insured presents
• Charge a premium rate that is adequate to pay policy benefits.
Who perform such functions ?

• An insurer’s employee who evaluates risks,
• accepts or declines applications and
• determine the appropriate premium, is known as Underwriter
Underwriter - Who evaluates, accepts or rejects a

proposal
Insurable interest
Risk evaluation accurately
Reasonable amount test
Sources of information
Life insurance Underwriting
Risk Classes
Preferred Class
Standard Class
Substandard Class also called Special or Impaired risk
Declined Class
LIKELIHOOD OF LOSS
Less than Greater than TooUninsurable

Great
Average
Average Average to be Insured
PREFERRED STANDARD SUBSTANDARD DECLINED

CLASS CLASS CLASS CLASS
Life insurance Underwriting
Risk Assessment Factors
Medical Risk Factors
• Build - Person’s body shape including height and weight
• Personal Medical History
• Family Medical History - Hereditary disease
Personal Risk Factors

• Occupation – Like Mining industry
• Tobacco Use
• Alcohol and substance Abuse - Abuse of alcohol or drug
• Moral Hazard - Attempt to conceal or misrepresent information
• Driving History
Financial Risk Factors

• Insurable Interest, proposed beneficiary has an insurable interest in the proposed insured’s life
In-force Processing Concepts
In-force maintenance
Reissues and complex changes
Change mode premium and billing information
Add, cease, or delete riders
Add, cease, or delete supplemental benefits
Add, cease, or delete extra life premiums
Face amount changes
Maintain reinsurance information
Maintain agent/producer information
Maintain name, address, and other personal information
Beneficiary, Primary ,Contingent Beneficiary , No Surviving,
In-force Financial Transactions
Free Look Provisions
Withdrawals
Surrenders
Lapse & reinstatements
Loans and repayments
Premium payments – Mode & Method of Premium Payment
Fund allocations and transfers
Policy transfers – Assignment, Endorsement
Past-dated and future-dated transactions
Policy Dividends - Cash, Premium Reduction, Interest Accumulation& Additional
Term Insurance options
Life Insurance Policy Provisions
Non-forfeiture Benefits :
Available to a policy owner whose policy lapses but still contains a cash value
Non-forfeiture Benefits
Cash Surrender Value

Reduced Paid-up Insurance

Extended Term Insurance

Automatic Non-forfeiture Benefit : Become effective automatically when the insured

has not paid a renewal premium by the end of the grace period and has not
elected another non-forfeiture option
Life Cycle of Insurance Policy
1. Customer applies for an insurance policy.
2. Agent brings application to the Branch.
3. CSE quality checks the application.
4. Application data is entered.
5. Application sent to Head Office for processing.
6. Applications are filed.
7. Files sent to Underwriting deptt for approval
8. Once approved ,policy packs sent for printing and policy issued.
9. Dispatch to branch’s to be further dispatched to customer.
10. Policy remains active and renewals remind the customer at every premium cycle.
11. If customer wants any changes in policy contract, customer service depts. of the
insurance company is contacted.
12. If customer passes away, then nominee registers the claim with insurance
company.
Reinsurance
Buys a Cedes
$1,250,000 $500,000
life policy to reinsurer
from
insurer
INSURER REINSURER
LIFE
INSURANCE
CUSTOMER Retention limit = $750,000 Accepts $500,000
of risk from insurer
Reinsurance
Re - insurance : An insurance of insurance
Why Re-insurance?
• Capacity
Increases the capacity of an insurance company
• Stabilization
Enable the direct insurer to stabilize his loss level
• Confidence
Re-insurer’s backing will provide support, guidance and confidence to the insurer in
expanding its business
• Catastrophe Protection
In the event of any catastrophe it acts as a cushion to protect insurers against the
possibility of financial resources of a direct insurer being seriously strained.
• Spread of Risk
A mechanism by which insurers can spread their losses.
Reinsurance
• Special Terminology in Re-Insurance
Re-insurer : An insurance company which accepts the risks underwritten by

another insurer
Ceding Company: The direct insurer, which places re-insurance with a reinsurance
company, is called the ceding Company.
Retention : The amount of risk which an insurer retains for his own account, in
case of re-insurance, is referred as Retention.
Limit : The re-insurer’s acceptance will have a certain maximum amount, which is
called the limit.
Cession : The amount of re-insurance given by the ceding office to the re-insurer,
is called a Cession
Retrocession : Reinsurers may reinsure themselves. The amount of risk they give
away is termed as Retrocession.
Reinsurance
• Types of Re-insurance
Re-Insurance
Proportional Non - Proportional
Excess of Excess of
Quota Share Surplus
Loss Loss Ratio
Reinsurance
Proportional Re-insurance
Quota Share
The ceding office must re-insure such proportion of every risk as stated in the treaty, no
matter how small is the sum assured.
Surplus
The rein surer will accept any surplus risk over the retention of the ceding office. The
treaty would specify the amount of maximum retention as well as the scope of coverage
and exclusion of certain type of risks.
Reinsurance
Non-Proportional Re-insurance
Excess of Loss : The rein surer is involved only when a claim exceeds the amount
of loss retained by the direct office.
Example : let the loss amount be Rs. 1,00,00,000/- and the insurer has three
excess of loss treaties with a net retention of Rs. 1,00,000/- and maximum treaty
limit of Rs. 1,00,00,000/-
Direct office’s retention
the first Rs. 1,00,000/-
First excess of loss treaty
Rs 9,00,000/- in excess of Rs. 1,00,000/-
Second excess of loss treaty
Rs. 40,00,000/- in excess of Rs. 10,00,000/-
Third excess of loss treaty
Rs. 50,00,000/- in excess of Rs. 50,00,000/-
Reinsurance
Non-Proportional Re-insurance ( Cont.)
Excess of Loss Ratio : It does not deal with individual risks or individual events,
but consider the excess of loss ratio of a particular account over one financial
year compared with another.
Example, the average ratio of net claims to net premium income in a company’s
fire account was 60% over a period of years. It might wish to prevent the ratio
going much over 70% in any one year and would arrange re-insurance
accordingly.
Claims Processing Concepts
Claims must be settled quickly both for regulatory reasons and to maintain the
reputation of the insurer and the industry.
Interest is usually paid on the unpaid policy proceeds from the date of death, date
that insurer was notified, or date that death certificate (or other proof) was
supplied to insurer.
Insurer determines the amount of the benefits to be paid
Verify that the loss actually occurred
Is the contract valid and In-force?
Is the loss covered by the base coverage and/or any riders or benefits? Examples are:
For ADB, was the death accidental according to the contract language?
For disability income or premium waiver, is the covered person disabled according to the
contract language?
Was the loss excluded by policy restrictions or exclusions?
General Overview of Tax Laws
Introduction
TAX EQUITY AND FISCAL RESPONSIBILITY ACT (TEFRA)
DEFICIT REDUCTION ACT (DEFRA)
TAX REFORM ACT (TRA)
TECHNICAL AND MISCELLANEOUS REVENUE ACT (TAMRA)
1035 EXCHANGE
Introduction
Insurers issued market linked insurance plans in response to bullish market’s in
late 1980’s.
Emphasis on Investment contracts more on investments than Risk Coverage.
Insurance Policies used to escape tax net.
Tax Laws differentiate Insurance and Investment elements in an Insurance plan.
Tax Laws-TEFRA, DEFRA, TRA &TAMRA.
Tax Equity And Fiscal Responsibility Act of 1982 (TEFRA)
Policy Cash Value cannot be greater than certain percentage of Face Amount.
Percentage varies with age.
TEFRA Corridor is equal to difference between Cash Value and Face Value.
Corridor is equal to minimum amount at risk
Minimum Amount at risk equal to difference between death benefit and cash
value.
Minimum difference between death benefit and cash value must exist
If cash value is reduced beyond a certain limit, the death benefit has to increase
proportionately.
TEFRA bypassed by Insurers who issued policies with big face amounts
DEFRA enacted to protect against such misuse.
Deficit Reduction Act of 1984 (DEFRA)
Imposes two different tests to check the corridor.
A policy has to pass one of the two tests.
The Guideline Premium Test or Corridor test A states that the Guideline Single
Premium should not be more than the Total Guideline Level Premium.
It requires that the net premiums on a policy do not exceed, at any time, the greater
of the GLP single or the GLP level accumulation to date.
Here the net premium = total premiums paid – any withdrawals to date.
A policy is considered disqualified if it fails the guideline test for DEFRA
compliance. The insurer does not allow disqualified policies. If a premium comes
in and causes a policy to be disqualified, it is refunded
DEFRA…..
The Cash Value Test or the Corridor test B states that the cash surrender value
should not be greater than the net single premium required to fund future benefits.
Here the Net Single Premium is the single premium necessary to make the policy
‘fully paid up’ at any given time.
TAX REFORM ACT (TRA)
If any contract fails to satisfy the DEFRA conditions, it is no longer considered an
insurance contract. The next law enacted was the Tax Reform Act (TRA) of 1986.
It determines how the taxation of policy proceeds would take place. The two
systems that are followed are:
FIFO - First in, first out - This rule states that the first money that is put into a
contract will be the first money withdrawn and it will not be taxed. Now premiums
constitute the first money put into a policy. So according to the Act as long as the
withdrawal is less than the Cost Basis (total premium paid in), the withdrawal
won’t be taxed. If the withdrawals exceed the cost basis, then they are considered
the income part of the cash value and will be taxed. This is the method followed
for taxing all risk-bearing policies.
LIFO - Last in, first out - This rule states that the last money put into the policy is
the first money to be withdrawn and would be taxed. Interest is the last money
that goes into the policy. Thus, all withdrawals from the policy are taxed until the
cash value of the policy becomes equal to the cost basis. Any further withdrawal
results in drainage of premiums from the policy and that is not taxable. All annuity
policies are taxed in this manner.
TRA……..
The major reason behind this legislation was to protect the annuity policies as it
was found that people tend to withdraw money more from the annuity policies
than from risk- bearing policies.
Technical and Miscellaneous Revenue Act of 1988
(TAMRA)
The last major legislation in this line was the Technical and Miscellaneous
Revenue Act (TAMRA) of 1988. This was enacted when it was found that in order
to provide for FIFO taxation, the insurers had begun to add a life cover to annuity
policies. While a small segment of premium went into providing life cover, a major
segment went toward cash value buildup. The legislation introduced a new test
called the 7-Pay Test. This ensured that a maximum portion of the premium for
the first 7 years goes into providing risk cover.
It also divided life insurance policies into two types - modified endowment
contract and non-modified endowment contract. If funding for a particular
contract exceeds the 7-pay test it would be regarded as modified endowment and
the LIFO method of taxation would apply. Otherwise it would be called a non-
modified endowment and the FIFO method of taxation would apply. Another
feature of TAMRA is the introduction of Grandfathering. The concept of
Grandfathering makes any law effective from the day it is introduced for
legislation, in contrast to the normal process that makes a law effective only from
the day the legislation is passed.
TAMRA…………
This test requires that 7-pay premiums paid don’t exceed at any time the 7-pay
premium accumulated. It is called the 7-Pay Test because it tests for seven years.
Policies issued prior to June 21, 1988 are permanently grandfathered and are not
subject to the 7-pay test unless a material change occurs. Policies issued after
June 21, 1988 are subject to the original 7-pay test for the first seven contract
years. A new 7-pay test period with a new 7-pay premium begins if there is a
material change in the policy, regardless of the issue date.
7-pay premiums paid = Total premiums paid - 1035 exchange premium -
withdrawals.
7-Pay premium accumulated = Sum of the 7-pay premiums to date (a new 7-pay
premium is added on each policy anniversary, so it equals 7-pay premium times
the duration).
Modified Endowment Contract (MEC): A policy is considered an MEC if it fails the
7-pay test for TAMRA compliance. When a policy is an MEC, interest is considered
as withdrawn before the principal (Last In First Out – LIFO principle applied), and
loans become taxable. Distributions can also be subject to an additional penalty.
1035 EXCHANGE
Another concept that is important in the insurance field is 1035 Exchange. Sec.
1035 controls the exchange of policy contracts. A policy owner can move the
accumulation under one policy to another policy (may not be of the same
company). The policies are arranged hierarchically as below:
a. Whole Life
b. Endowment
c. Annuity
Conversion of a policy from one type to another at the same level or any lower
level is not taxable (e.g., if a whole life policy is exchanged for another whole life
policy, an endowment or an annuity one, it is not taxable). But if after exchange if
the policy moves up the hierarchy it becomes taxable (if an annuity is exchanged
for an endowment or a whole life plan, it is taxable). The moneys exchanged are
called rollover money or 1035 moneys.
Regulation of Life Insurance
Why every Insurance business must comply with a host of applicable laws?
Insurance companies protect million of individuals against economic loss
To safeguard the public interest in insurance companies.
Financial health of insurance providers is important to so many people
Insurers occupy a special position of public trust.
Insurance companies employ large numbers of people
The goals of insurance regulation is to ensure that insurance companies

Remain solvent - that they are able to meet their obligations and to pay policy benefits/claims
when they come due.
Conduct their business fairly and ethically
IRDA (Regulator)-As per the section 4 of IRDA Act,1999,Insurance Regulatory and

Development Authority (IRDA, which was constituted by an act of parliament).
“Watchdog of Insurance Industry
Protects the interests of the policyholders.
Regulates insurers and intermediaries through licensing training and code of conduct.
Promotes the Development of insurance sector.
Thank You !

Introduction to Life Insurance Concepts

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Introduction to Life Insurance Concepts

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Introduction to Life Insurance

Overview of Insurance Concepts

-By Vineet Mittal

What is Life Insurance ??? Life Insurance In India

A contract or device for transferring risk from a person, business or organization

A Transfer Mechanism, in which one party - the insured(person,business,

A Business System, which includes various operations that must be

Term Whole Life Endowment Annuity Money-Back

Temporary protection for a specified period of time

Term Insurance continued….

Term Permanent Life

 No evidence of insurability required

Start a new period of term insurance when previous term expires

Yearly Renewable Term (YRT) Insurance

Allows policy owner to renew the policy at the end of

(2) Life Insurance

Primary Distinct Characteristics

Considered to be “permanent” insurance for the entire life

Policy Purchased at Age 45

Modified Whole Life Insurance - Modified Premium or Modified Coverage

Joint Whole Life Insurance as first-to-die life insurance

Last Survivor Life Insurance as second-to-die life insurance

Family Policies coverage on the insured’s spouse and children

Pre-Need Funeral Insurance Funeral homes as policy beneficiary

Interest sensitive whole life (ISWL)

Blended Whole Life/Term

Permanent Life Insurance

A Newer Generation of Permanent Products

Universal Life Insurance

Flexible Flexible Face Unbundled

Brought about by changing financial conditions

Universal life product advantages

Universal Life Expense/Premium Loads

Endowment insurance provides a specified benefit amount whether the

Group Life Insurance Characteristics

Reason of group’s existence

Cost of Living Increase

Life insurance Policy

Personal selling system Direct response system

Agency building distribution systems

Salaried sales system

Location selling system Worksite marketing

Career agent- Called as captive agent ,considered as independent contractor rather

Non agency distribution system

Bank sold insurance

Financial planner Producer group Personal producing general agency

Direct response distribution system-

• Business operations in insurance business

Policy Contract /Policy Servicing

A Proposal form is a mechanism by which the insurers receive information about

Name and address of the proposer, occupation and age.

The period for which insurance is required.

Declaration of Insurability, medical history, agents report in the case of life

Why Underwriting is carried out ?

Who perform such functions ?

Underwriter - Who evaluates, accepts or rejects a

Less than Greater than TooUninsurable

PREFERRED STANDARD SUBSTANDARD DECLINED

Personal Risk Factors

Financial Risk Factors

Cash Surrender Value

Reduced Paid-up Insurance