Chapter 1- Fundamentals of Life Insurance

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Part 1

• Chapter 1- Fundamentals of Life Insurance
• Chapter 2- Legal Aspects of Life Insurance and
  Life Insurance Products
• Chapter 3- Life Insurance Marketing and
  Distribution

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Chapter 1

• Fundamentals of Life Insurance

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Insurance

• Provides financial protection against an
  unexpected loss
• It works on principle of risk sharing

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Life Insurance defined

• Life insurance provides a death benefit in
  return for small periodic payments called premiums

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Insurance history in India
First Insurance company in India set up in 1870
Insurance Act passed in 1912 and amended in 1938
More than 100 insurance companies in India in 1950
Insurance industry nationalized in 1956
IRDA set up and Insurance privatized in 2000
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Human Life Value- HLV

• Concept established by Prof. Solomon Huebner
• It is the capitalized value of an individuals
  earning that supports family, dependants and
  business partners

Prof. S. Huebner Taught Insurance in Wharton
School from 1904 to 1953
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Life Insurance Premium Components

• Mortality (claims to be paid out)
• Expenses
• Allowance for unexpected loss
• Earnings on premium collected

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Key Life Insurance Principles

• Insurable Interest
• Moral Hazard
• Law of Large numbers

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Underwriting

• The method of evaluation and assessment of each
  life insurance application, to determine whether
  the applicant can be insured and, if so, at what
  premium rates

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Underwriting Evaluation Process
Financial Risks
Medical Risks
Accident Risks
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Underwriting Categories
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Chapter 2

• Legal Aspects of Life Insurance
• and Life Insurance Products

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Essential aspects life insurance contract

• Offer and acceptance
• Legal purpose
• Competent parties
• Consideration

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Special Legal Characteristics

• Unilateral nature
• Personal Nature
• Conditional Nature
• Contract of Adhesion

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Life Insurance Products
Term Plans

• Pure Term
• Pure Endowment

Endowment Whole Life Money back
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Pure Term
Policy issued for 10 years
death
Payout to family
Year 1 2 3 4 5
6 7 8 9 10
Insured person survives till end of policy term
No payout
This is a plan to cover the risk of Early Death
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Pure Endowment
No Payout to family
death
Year 1 2 3 4 5
6 7 8 9 10
Pay out only if Insured person survives till end
of policy term
This is a plan to cover the risk of Living too
Long
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Traditional Products

• Term Plan

death
Payout to family
Policy issued for 10 years
Year 1 2 3 4 5
6 7 8
Year 1 2 3 4 5
6 7 8 9 10
Insured person survives till end of policy term
NO PAYOUT
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Endowment is a combination of pure term and pure
endowment for the entire policy duration
death
Payout To family
Policy issued for 10 years
Year 1 2 3 4 5
6 7 8
Endowment would cover the risk of Early Death
also the risk of Living too Long
Year 1 2 3 4 5
6 7 8 9 10
Insured person survives till end of policy term
Payout to policy holder
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Money Back is combination of pure term for the
policy duration and pure endowment for short
periods within the policy term
Policy issued for 20 years with money back at
5th, 10th, 15th 20th yr.
Payout to family in case of death and also Payout
at regular intervals in case insured survives
death
Yr 0 2 4 6
8 12 14
16 18 20
Pure Term Plan from year 1 to year 20
PLUS
Pure Endowment Plan from year 6 to year 10
Pure Endowment Plan from year 1 to year 5
Pure Endowment Plan from year 11 to year 15
payout
payout
payout
payout
Pure Endowment Plan from year 16 to year 20
Yr 0 5
10
15 20
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Unit Linked Insurance Plan

• ULIP is life insurance solution that provides the
  benefits of protection and flexibility in
  investment.
• The investment is denoted as units and is
  represented by the value that it has attained
  called as Net Asset Value (NAV).

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ULIP- A transparent product

• In ULIP the premium components are clearly
  expressed under following categories
• Expenses- The administration and management
  charges deducted from the premium
• Investment- The amount available to invest in a
  fund of clients choice
• Mortality- The mortality charges deducted from
  the premium

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Working of a ULIP Plan
More units are purchased
With balance amount
Mortality Charge
Admin Charge
Premium Related Charge
Less
2nd year Premium
As NAV moves up so as does the Fund Value
Units are purchased
With balance amount
Mortality Charge
Admin Charge
Premium Related Charge
Deduct
1st year Premium
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Chapter 3

• Life Insurance Marketing and Distribution

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Growth of Life Insurance in India post
Liberalization

• Insurance penetration has increased significantly
  after Liberalization and is estimated to grow
  further

Data from India Brand Equity Foundation
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Channels

• Distribution channels
• Agent
• Broker
• Corporate Agent.

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Bancassurance- Indian Opportunity
Banks command almost 40 of household
investments Extensive coverage of bank branches
across rural and urban India
Source RBI Annual Report, Aug 02 All Data for Yr
2000-01