Syllabus

Insurance and Annuities

Meaning of Life Insurance

Major type of life Insurance

Size of life Insurance Market

Rate making in Life Insurance

Reserves in Life Insurance

Group life and Health Insurance

 Meaning of Life Insurance
Life Insurance can be defined as a contract between an insurance policy holder and an insurance
company, where the insurer promises to pay a sum of money in exchange for a premium, upon the
death of an insured person or after a set period.
Life insurance covers all causes of death, with one main exception: Suicide
Some of the most common factors affecting life insurance rates.
Age. The younger the age, lower will be the premium.

Sex. Females have a life expectancy that is nearly five years longer than males, according to the
National Center for Health Statistics. This means that men generally pay more for life insurance
than women.

Health. Your health has a major impact on your life insurance rates. The insurer will evaluate your
past and current medical conditions in order to calculate your life expectancy.

Lifestyle. Your driving history , criminal record, and dangerous occupations and hobbies (such as
scuba diving) can all result in higher life insurance rates.
 Type of Life Insurance
Term Insurance
Term insurance has several basic characteristics. First, the period of protection is
temporary, such as 1, 5, 10, 20, or 30 years. Unless the policy is renewed, the protection
expires at the end of the period.

Most term insurance policies are renewable , which means that the policy can be
renewed for additional periods

To minimize adverse selection, many insurers have an age limitation beyond which
renewal is not allowed, such as age 70 or 80.
 Contd…..
Types of Term Insurance A wide variety of term insurance products are sold today. They include
the following:

 Yearly renewable term

 5-, 10-, 15-, 20-, 25-, or 30-year term

 Term to age 65

 Decreasing term

 Reentry term

 Return of premium term insurance

 Contd…..
Types of Term Insurance A wide variety of term insurance products are sold today. They
include the following:

Yearly Renewable Term : This term insurance is issued for a one-year period, and the
policyholder can renew for successive one-year periods to some stated age without
evidence of insurability.
Premiums increase with age at each renewal date

5-, 10-, 15-, 20-, 25-, or 30-year term : Term insurance can also be issued for 5, 10, 15, 20,
25, or 30 years .
The premiums paid during the term period are same, but they increase when the policy
is renewed.
 Contd…..
A term to age 65 :
This policy provides protection to age 65, at which time the policy expires. The policy can
be converted to a permanent plan of insurance, but the decision to convert must be
exercised before age 65.

Decreasing Term :
Decreasing term insurance is a form of term insurance where the face amount gradually
declines each year.
For example, a 20-year decreasing term policy may require premium payments for 17
years.
This method avoids paying a relatively large premium for only a small amount of
insurance near the end of the term period.
 Contd…..
Reentry term :

It is a term insurance policy in which renewal premiums are based on select (lower)
mortality rates if the insured can periodically demonstrate acceptable evidence of
insurability.
Select mortality rates are based on the mortality experience of recently insured lives.
However, to remain on the low-rate schedule, the insured must periodically show that he
or she is in good health and is still insurable.
The rates are substantially increased if the insured cannot provide satisfactory evidence
of insurability.
 Contd…..
Return of premium term insurance :
It is a product that returns the premiums at the end of the term period provided the
insurance is still in force.

Typical periods are 15, 20, 25, or 30 years.

Depending on the insurer, there may be a partial refund if the insurance is not kept in
force to the end of the period.
 Use of Term Insurance
Term insurance is appropriate in three situations.
First, if the amount of income that can be spent on life insurance is limited, term
insurance can be effectively used.

Second, term insurance is appropriate if the need for protection is temporary.

Finally, term insurance can be used to guarantee future insurability.

 Whole Life Insurance
Whole life insurance :

It is a cash value policy that provides lifetime protection . Theoritically, the beneficiary
gets cash value after the death of the insured.
Whole life insurance (also referred to as permanent life insurance) refers to life insurance
policies that are meant to last until death .
Some new variations of whole life insurance are constantly emerging also.
Various types of whole life policies are availiable which are as follows.
 Whole Life Insurance
a ) Participating Policy : This is an insurance contract that pays dividend to the policyholder.
Dividends are generated from profits of the insurance company that sold the policy .

b) Non- Participating Policy : This Policy does not provide dividends, capital gain, interest
earned by the insurer.

c) Indeterminate Premium Policy : It is like non participating insurance, except that the
premium may vary each year but not exceed the maximum premium agreed upon .

d) Economic Insurance Policy : It is hybrid of Participating and term life insurance, in which a
part of dividends are used to purchase extra term insurance.

e) Single Premium Policy : This policy pays only one premium over insurance period. This type
of policy is better for those who have sufficient money today but no regular income in the
coming days .
 Endowment Life Insurance
It provides maturity benefit to the insured after the maturity of the policy or death
benefits to the beneficiary if insured dies before the maturity period.
In another word, total sum assured is refunded after death or maturity period which
occur earlier .
Different types of endowment are as follows.

A ) Pure endowment : A pure endowment is a type of life insurance policy in which an

insurance company agrees to pay the insured a certain amount of money if the insured is
still alive at the end of a specific time period. 

b) Unit linked Endowment Plan : It is type of investment with the feature of risk
protection. Under this plan, the policyholder has given rights to choose the area of
investment like equity, bond or mutual fund etc.
 Contd….
C ) Double Endowment : Double endowment plan provides the double amount of sum
assured if the life assured survives till the date of maturity.
But it provides, a single sum assured in case of the death of the policyholder during the
policy period .

d) Joint Endowment : The Plan which covers the lives of two people by a single contract
is called joint endowment plan. Husband and wife are allowed to purchase the plan.
Spouse gets the total sum assured in case of death of any one of them during policy
period .
e) Single Payment Endowment : The mode of payment of this endowment plan is
single. Total premium needs to pay at the time of purchase .
f) Anticipated Endowment : The part of the sum assured is paid at certain intervals
during the term of the policy and the balance of the sum assured together with the
accrued bonus at maturity.
 Contd….
f) Child Endowment : This plan is designed for the support in education and livelihood of
the children. In case of premature death of a breadwinner, children get monthly
installment for their education and living expenses till the maturity date or up to specified
age of insured.

g) Pension Plan : This is becoming popular to the corporate sector and individual who are
not entitled to get a pension from government or private sector. The plan provides the
sum assured and bonus or an installment basis rather than a lump sum basis when the
insured reaches specified retirement age or on the earlier exit of members from the plan.
The main aim of this plan is to provide financial protection to the insured at old age.

h) Group Endowment Insurance Plan : This is a plan which covers a certain group of
people under a single contract.
 Some Terminologies

Policy Holder
The policy holder is the one who proposes to purchase the life insurance policy and also
pays the premium. So, if you buy an insurance plan you are the policy holder and your life
is protected.

Life Assured
Life assured is the insured person whose life is covered in the insurance plan. Primarily it
is the breadwinner of the family done to safeguard his family if he/she meets untimely
death.
Life assured may or may not be the policy holder. For instance, a husband buys a life
insurance plan for his wife. As his wife is a homemaker, husband pays the premium, thus
the husband is the policy holder and wife are the life assured.
 Some Terminologies
Sum Assured (Coverage)
The sum assured is the amount of money an insurance company guarantees to pay up on
the maturity of the term or the death of the life assured or on occurrence of any other
insured event during the policy tenure. It does not include the amount of bonus received.

The sum assured is the amount that the insurer agrees to pay on the death of insured
person or occurrence of any insured event.
Nominee
The nominee is the person or legal representative of the policy holder nominated by
policy holder himself, to whom the sum assured and other benefits will be paid by the
insurance company in case of an unfortunate eventuality.

The nominee could be parents, wife, children etc. of the policy holder. The nominee
needs to claim life insurance, if the life assured dies during the policy tenure.
 Some Terminologies
Policy Tenure
The policy tenure is the time period in which the insurance company provides coverage to the life assured. The
policy tenure can be ranged from 1 year to 100 years or whole life depending upon the type of plan, its terms and
conditions and according to the need of the policy holder.
It can also be referred as policy term or policy duration.
The policy tenure decides for how long the company is providing the risk coverage. However, in the case of whole
life insurance plans, the life coverage is till the time life assured is alive.

Maturity Age
Maturity age is the age of the life assured at which the policy terminates. It is similar to policy tenure, but a
different way to say how long a plan will be in force.

Basically, the life insurance company declares the maximum age till which the life coverage will be provided to the
life insured.
For instance, If you are 30 year-old, you opt for a term plan with a maturity age of 65 years. That means the policy
will have coverage till you are 65 years old, which implies the maximum policy tenure for a 30-year-old is 35 years.
 Some Terminologies
Premium
The premium is the amount charged by the insurance company for the policy you have chosen. It
is usually paid on a yearly basis but can be paid by number of ways.
If the policy holder is unable to pay the premium before the due date some amount of fine is
charged and if he does not pay between the grace period given to him/her the policy terminates.
Premium payment term/mode/frequency
life insurance premium can be paid as per policyholder’s convenience which is Yearly, Semi
Annually, Quarterly, Monthly depending upon the plan type
Regular Premium Payment- It can be paid regularly throughout the policy term either monthly,
quarterly, half-yearly or yearly.
Limited Premium Payment- Policy holder can choose to pay the premiums for a limited amount
of time. In this option, He/She do not pay till the end of the end of the policy term, but for a
certain pre-fixed number of years. For example, 10 years, 15 years, 20 years and so on.
Single-Premium Payment- The policy holder can also choose to pay the premium for the entire
duration of the plan as a lump sum in one single go.
Riders
Some Terminologies
Riders are an additional paid-up feature to widen-up the scope of base life insurance policy. Riders
are bought at the time of purchase or on policy anniversary.
There are different types of rider that can be bought along with the base plan. However, number and
type of riders will differ from insurer to insurer.
Plus, the terms and conditions may differ from one insurance policy to another. However, here’s the
list some well known riders offered by life insurance companies.

 Accidental Death Benefit Rider

 Accidental Total and Permanent Disability Benefit Rider

 Critical Illness Cover

 Waiver of premiums
 Some Terminologies
Death Benefit
Death Benefit is a payout to the nominee in case the life assured dies during the policy
tenure.
Actually sum assured and death benefit are not same because the death benefit can be
higher than sum assured.

Survival Maturity Benefit

It is the amount the life insurance company pays when the life assured outlives the policy
tenure.
Survival benefit is paid when the life assured completes the pre-defined number of years
under the policy.
 Some Terminologies
Grace period
It is a length of time after the due date during which the payment should be made
without penalty.
A grace period can be a period of 15 days in case of monthly premium payment mode
and 30 days in case of annual premium payment mode.
If the policy holder does not pay within this period the policy gets terminated.
Surrender value
It is the amount payable to the policy holder when he surrenders the insurance policy
before the maturity date.
But Policyholder must clearly read the terms and conditions whether a plan offers a
surrender value or not.
And if it offers then what is its value because all insurance plans do not have surrender
value.
 Some Terminologies
Paid-up Value
It is the reduced sum assured paid by the insurance company if a policy holder fails to pay
premiums after a certain period. 
Under this option provided by the insurance companies the sum assured is reduced in
portion to the number of premiums paid.

Revival Period
If the policy holder does not pay during the grace period the policy lapses.
 However if the policy holder still wants to continue then the insurance company
provides an option for reactivating the insurance policy within a specific period of time
after the grace period end.
This period is known as revival period. To reinstate the policy approval of the
underwriters are required.
 Some Terminologies
Underwriters
Underwriters are the ones who evaluate risk involved in the policies. The process of risk
evaluation starts before the issuance of the policy and ends with settlement of the claims.
Only with the approval of an underwriter a policy is issued. They analyze the risk of a
future event and also with their approvals claims are paid to the nominee.

Tax Benefits
While calculating taxable income, Life Insurance premium paid by a resident natural
person is deductible.
Where both husband and wife have opted as couple, the insurance paid can be clubbed
to claim for the deduction,
 Some Terminologies
Exclusions
An item or eventuality specifically not covered by the insurance policy is known as
exclusions. Before you buy an insurance policy it is necessary to read the exclusions
carefully.

If any of the things mentioned under exclusions occurs then the insurance company will
not pay any benefit.
For instance, Suicide is an exclusion in every insurance plan.
Claim Process
In case the assured passes away during the policy tenure, nominee needs to file a claim to
receive the death benefit as mentioned in the policy.
This process is known as claim process
 
 Rate Making in Life Insurance
.
Rate making, or insurance pricing, is the determination of rates charged by insurance
companies. The benefit of rate making is to ensure insurance companies are setting fair
and adequate premiums given the competitive nature.

Rate making , is the determination of what rates, or premiums, to charge for insurance.

The primary purpose of ratemaking is to determine the lowest premium that meets all
the required objectives.

A major part of ratemaking is identifying every characteristic that can reliably predict
future losses, so that lower premiums can be charged to the low risk groups and higher
premiums charged to the higher risk groups.
 Contd…
.
By offering lower premiums to lower risk groups, an insurance company can attract those
individuals to its own insurance, lowering its own losses and expenses, while increasing
the losses and expenses for the remaining insurance companies as they retain more of
the higher risk pools.

This is why insurance companies spend money on actuarial studies with the objective of
identifying every characteristic that reliably predicts future losses.

Rate making for life insurance is much simpler, since there are mortality tables that
tabulate the number of deaths for each age, which includes a population of many people.
Age is the most important factor in determining life expectancy, but there are other well
known factors with a significant effect, such as the sex of the individual and smoking.
 Factors affecting Rate Making Policy
.
a) Mortality and Morbidity rate of Population of that country

b) Return on Investment

c) Underwriting , operating and taxation

d) Rate of Persistency ( Renewal rate of Policy )

e) Personnel Characteristic
 Contd…..
.
a) Mortality Rate Table : Mortality rate table shows the probability of surviving any
particular year of age and remaining life expectancy for people at different ages in
particular country.

b) Morbidity Rate : The morbidity rate is the frequency or proportion with which a
disease appears in population . The rate shows the status of illness of the population
in a particular age. Higher the morbidity rate in economy, higher the risk associated
with the proposer, need to charge extra premium. The cost of insurance is positively
correlated with the mortality and morbidity rate .

c) Return on Investment : During Insurance , insurance holder pays several payment as

premium for so many years. Different factors like current interest rate, current rate of
premium given by insurance company at the end to policy holder also are some of the
crucial factors.
 Contd…..
.
d) Loading Charge : Loading charges include marketing expenses, underwriting expenses,
administrative expenses, and other expenses. While calculating premium rate, future
loading charges need to predict based on the historical data.

e) Persistency Ratio : Persistency ratio is calculated as the percentage of the insurer’s

number of total insurance policies that remain enforced without being lapsed.
Higher Persistency ratio means the company has better financial performance, it reduces
the cost of insurance, and increase the profitability of the company.
Lower Persistency ratio indicates that lapse and surrender ratio is higher, cost of
insurance is increasing and overall cost of insurance also increases .
 Contd…..
e) Personnel characteristic : Besides common factors, personal characteristics of
potential policyholders’ is also major factor while determining the rate of premium.
These factors are health history and current health status, current profession, habit and
hobbies, family health history etc…
 Pricing Life Insurance Product: An
Actuarial Perspective

Pricing an Insurance Product is a complicated process mainly because these are instrument
to manage risk.
Unlike other product, charging certain profit margin over a definitive making cost is not the
approach for determining price of insurance product.
The main reason behind it is the uncertainty of benefit involved with the product.
In order to fully understand how insurance products are priced, it is vital to understand the
nature of insurance product.
In case of death of the policyholder, full sum assured might have to be paid. Having said
that, charging full sum assured considering only the time value of money would be an unjust
as there is a possibility of policyholder living till maturity and no payouts being made.
This is because we cannot for sure tell if the person will die or live when we are pricing the
product but we can approximate for it using probability! This is where things get
complicated as well as interesting.
 Pricing Life Insurance Product: An
Actuarial Perspective

Actuaries make necessary assumption to prudently include these factors while pricing any
insurance product .
Mortality Factor:
Mortality table shows the probability of certain group of people dying in certain
geographical area. Life insurance companies need to analyze their mortality experiences
themselves in order to find the actual mortality of their company versus data published
by Government .
Moreover, company must perform mortality analysis regularly for competitive
positioning of their product price in the market.
 Contd….

Discount Factor:
In order to account for the time value of money, discount factor is used while pricing.
Discount Factor is a factor that is most commonly used to find the present value of future
cash flows.
All the probable cash flows like, payment of survival benefit, maturity benefit, death
benefit, etc are discounted in order to price any product.
The discount factor used might not be the actual yield of the company as it is likely to
change from year on year. There is no specific discount rate set which must be used.
Rather it depends upon the actuarial judgment based on the future projection and past
experiences.
 Contd….

Expenses of Company:
Expense of company also directly affects the pricing. The cost incurred in the company is
analyzed which is called expense analysis.
This expense analysis gives company the approximation of the cost relative to the
product.
This cost is used to set assumption for the expense for the product. The assumed expense
is then loaded in the price of the product in order to meet the expense generated from
the product.
So, companies with high management expenses are likely to have more expensive
product than others.
 Contd….

Other Factors:
Above mentioned are just some of the basic factors used to price. More factors like
inflation, tax, cost of capital, etc is used while pricing the product.
Moreover, if the product has any guaranteed benefit like survival benefit or guaranteed
bonus then these benefits are also accounted in the product.
Moreover, even for bonus that is not guaranteed, certain amount is loaded in the price of
the product as future bonus to increase the confidence of maintaining the bonus in with
profit product to the policyholder.
 Underwriting in Life Insurance
Insurance is a means of risk transfer and sharing by pooling risks and funds among a group
of people exposed to similar risks for the benefit of those who suffer a loss as a result of
the risk.
It is a way to manage financial risk. When someone buys insurance, he/she purchases
protection against unexpected financial losses by paying an amount known as a premium.
The premium is the fee the insurer charges for protecting the insured risk and is derived
based on the insured risk profile.
The insurance company pays the insured, or the beneficiary, the insured amount upon the
happening of the insured risk event.
Insurance is considered a financial safety net, helping the insured or their loved ones
recover after something bad happens — such as a loss of life, property, disability, or
disease.
When one purchases insurance, one will receive an insurance policy, which is a legal
contract between him/her and the insurer..
 Contd…..
It deals with the terms and conditions applicable to both parties in relation to risk coverage.
The insured should always go through the policy contract provisions and ensure that they are
appropriate and acceptable to him/her.
Life insurance and non-life insurance are the two broad categories of insurance businesses.

Life insurance means insurance directly related to human life. It provides protection against
financial loss caused by the death, disability, or disease of an insured person.

A life insurance policy is a contract regarding the life of a person under which he/she or his/her
heir, in the event of his/her death, disability, or disease, will be paid a particular amount by the
insurer in case a specified amount known as a premium is paid in installments on the basis of
his/her age.
In the event of the death of the insured, the payable amount shall be paid to his/her beneficiary
designated in the contract.
 Contd…..
If no beneficiary is designated, the amount shall be paid to his/her heir as per applicable
law.
The insured will receive disability and disease related payable benefits. Most of the
popular types of life insurance products provide both saving and investment
opportunities along with risk coverage.

Under these types of policies, a maturity benefit is paid to the insured if the policy
matures during his life.
 Underwriting
Underwriting
Life insurance is a contractual arrangement where the insured transfers his or her risk of
financial loss due to death, disability, or disease to the insurer. The insurer covers such a
risk by charging an appropriate cost, known as a premium.
In other words, life insurance provides protection against financial loss one may suffer due
to death, disability, or disease. Since life insurance deals with risk transfer and acceptance,
there must be some mechanism to appropriately assess and fairly price the risk.
Underwriting is the process of identifying, analyzing, assessing, classifying, and pricing
the risk a life insurance prospect represents. Every prospect who applies for insurance
coverage needs to go through this process.
It helps determine whether an applicant is insurable, what the appropriate coverage is,
and what the applicable cost is.
It's designed to provide the fairest price for a person's risk profile and to select the risks
that are profitable to the company.
 Importance of Underwriting

Since insurance does not fall under the basic needs of human life, buying insurance is
voluntary and depends solely on a person's will and decision.

Therefore, not everyone will buy insurance, and everyone who wants to buy insurance
may not be insurable.

Those who are aware of insurance and concerned about the future of their loved ones in
their absence, or those who are anticipating the happening of a risky event, will most
likely buy insurance.

All the people looking for insurance coverage may not be suitable for providing life
insurance coverage due to their individual risk level. Individuals seeking life insurance do
not face the same level risk.
 Importance of Underwriting
Every individual has a different level of risk based on risk factors such as age, gender,
physical and mental health, lifestyle, habits such as smoking, drug and alcohol use,
hobbies, occupation, residence, financial status, and so on.

These circumstances trigger the need for underwriting, i.e., individual risk assessment,
classification, and appropriate pricing.

Underwriting is a specialized profession, and people doing the underwriting job are
known as underwriters.

Life insurance underwriters are highly skilled and specialized in life insurance
underwriting. The main purposes of life underwriting are:
 Importance of Underwriting
The main purposes of life underwriting are:
 Analyze the risk profile of an individual applying for life insurance coverage.
 Ensure an appropriate premium is charged.
 Maintain fairness among policy holders.
 Determine whether the individual risk is within the acceptable limit of the insurance
 company.
 Remain competitive in the market.
 Protect the company from anti-selection.
 Offer life insurance coverage to as wide a group of individuals as possible.
 Stay within the price assumptions.
 Ensure the profitability and sustainability of the company
 Contd….
Since all individuals applying for life insurance are not alike, they represent different
levels of risk.
Therefore, the purpose of doing underwriting is to analyze the individual‘s risk profile and
charge an appropriate premium based on that risk profile. This will ensure fair treatment
for every individual buying insurance.
Underwriting also determines whether the level of risk represented by an individual is
within the acceptable limit of the company or not. If within an acceptable limit,
underwriting will decide the appropriate premium rate based on the risk level.
The premium rate may be a standard rate that is applicable to the general insured
population if the risk level falls within a specified limit, it may be higher than the standard
rate based on the level of the risk.
Underwriting also takes into account the competitiveness of premium rates to strive in
the market.
 Contd….
Some people who are expecting a peril and are not insurable may try to deceive the company by
applying for life insurance. They may hide the facts about their risk and provide false information to
get the insurance.

This kind of act is known as anti-selection, and underwriting is done to protect the company from
such anti-selection.

Underwriters should be aware of signs of anti-selection and be capable of identifying and stopping
such cases.

While selecting risks for insurance, the underwriters should also be equally careful as to how they
can provide insurance to as many individuals as possible from the group of people who applied for
the insurance.

Underwriting is also responsible for maintaining the loss ratio within the actuarial pricing
assumption.
 Contd….
Standard and professional underwriting practices are necessary to control the payouts in
the form of claims to an optimum level and keep the company profitable, sustainable and
competitive in the market.
However, poor underwriting will directly hit profitability due to high claim payouts, and
hence the sustainability, competitiveness, and reputation of the company may be at
stake.
Underwriting is also necessary to comply with pricing assumptions, company risk
tolerance limits, and ensure the lawfulness of the insurance coverage
 Annuities
For individuals looking to plan for retirement, there are a variety of options.
Annuities are financial products that offer a guaranteed income stream, usually for retirees.

Annuities are one of them.

An annuity is a long-term investment agreement between an insurance company and an

individual in which the individual makes payments in series or in a lump sum.
or
An annuity is a long-term investment agreement between an insurance company and an individual
in which the individual makes payments in series or in a lump sum, in exchange for which he gets
periodic disbursements or income, either immediately or in the future.

Annuities serve the purpose of providing a regular stream of income when an individual is either
faced with unemployment or has retired.
 Type of Annuities
Immediate annuity:
In an immediate annuity, there is very little time difference between the accumulation
phase and the disbursal phase.
The period when the annuity policy holder makes his/ her premium payments is known as
the accumulation phase.
The disbursal phase is when the annuity payouts are being made to the policy holder.
In the case of immediate annuity, the payouts are made out immediately as per the terms
and conditions of the annuity policy.

Deferred annuity:
Deferred annuity is the exact opposite of an immediate annuity. In deferred annuity, there is
a significantly long gap between the accumulation phase and the time the policy holder
gets his/her payments annuitized.
Due to a longer accumulation phase, payouts in a deferred annuity scheme start from a
future date and not immediately.
 Type of Annuities
Fixed Annuities
Fixed annuities pay out a fixed amount. It also has a set interest rate that updates regularly
after a predetermined number of years. The changes are made to adjust to the current
rates in the market.
Indexed Annuities
Indexed annuities fall somewhere in the middle in terms of risk and reward. They offer a
guaranteed minimum payment. However, pay-out is also tied to the performance of an
index, ( Share Market or Nepse in context of Nepal )
Variable Annuities
Variable annuities offer the highest potential return of all three types.
However, this type also carries the greatest risk since it is based on the performance of the
annuity’s underlying investment portfolio. 
Payment amounts may be higher if the investment’s value increases. On the other hand, if
the investments’ value decreases, income payments may also be lower.
 Type of Annuities

Joint Life Annuity :

A joint and survivor annuity is an insurance product designed primarily for retired couples
who want a guaranteed monthly income that will continue for as long as either spouse lives.
A joint and survivor annuity has the advantage of providing income if one or both people
live longer than expected.
In single life annuities, regular payments are made until the death of the pension recipient,
and joint and survivor annuities, which continue to make payments to the spouse after the
death of any one.
 Type of Annuities
Longevity Annuities
Longevity insurance provides protection to a pension scheme against the risk that members
live longer than expected.
  It provides lifetime income starting several years in the future, such as from 70s or 80s.
Longevity insurance can be a valuable tool for anyone who wants to ensure that they have
enough money to live on even if they live longer than expected. 

When transferring longevity risk for a given pension plan or insurer, there are two primary
factors to consider.
The first is the current levels of mortality, which are observable but vary substantially
across socioeconomic and health categories.
The second is longevity trend risk, which is the trajectory of the risk and is systematic as it
applies to an aging population.
 Policy Reserve
A policy reserve is the amount of money an insurer is required to maintain that is readily
available to pay claims.
Policy reserve is a sum of money that insurance companies are required to set aside in
order to fulfill future insurance claims and benefits payment obligations.
This is the amount of money a company sets aside today, so that after receipt of future
premiums, less expenses, the company will have the ability to pay future expected or
estimated claims.
These reserves are specifically for events that have not yet happened but that could happen
in future days.
However, policy reserves must be on hand at all times a policy is in force in anticipation of
possible future claims.

Policy reserves are separate from claims reserves also known as loss reserves also.
 Policy Reserve
Policy reserves, also known as legal reserves, are the major liability item of life insurers.
These excess premiums paid during the early years result in the creation of a policy reserve.
Policy reserves are a liability item on the insurer’s balance sheet that must be offset by
assets equal to that amount.

The policy reserves held by the insurer, plus future premiums and investment earnings, will
enable the insurer to pay all policy benefits if the actual experience confirms to the
actuarial assumptions used in calculating the reserve.
 Purpose of Policy Reserve
The policy reserve has two purposes.

First, it is a formal recognition of the insurer’s obligation to pay future claims . The policy
reserve plus future premiums and interest earnings must be sufficient to pay all future
policy benefits.

Second, the reserve is a legal test of the insurer’s solvency. The insurer must hold assets at
least equal to its legal reserves and other liabilities.
This requirement is a legal test of the insurer’s ability to meet its present and future
obligations to policyholders.
As such, policy reserves should not be viewed as a fund. Rather, they are a liability item that
must be offset by assets.
 Types of Reserve
The reserve can be viewed either retrospectively or prospectively.
If we refer to the past experience, the reserve is known as a retrospective reserve.
The retrospective reserve represents the net premiums collected by the insurer for a particular
block of policies, plus interest earnings at an assumed rate, less the assumed death claims paid out.

Thus, the retrospective reserve is the excess of the net premiums accumulated at interest over the
death benefits paid out

The reserve can also be viewed prospectively when we look to the future.
The prospective reserve is the difference between the present value of future benefits and the
present value of future net premiums .

The retrospective and prospective methods are the mathematical equivalent of each other.
Both methods will produce the same level of reserves at the end of any given year if the same set
of actuarial assumptions is used.