VTU MBA Lecture Notes - 1st Sem, 2nd Sem, 3rd Sem and 4th Sem || Visvesvaraya Technological University
Life Insurance
MODULE 5
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Basics of Life Insurance
- Life insurance is a contract wherein death of the insured is compensated by the insurer.
- In exchange for a premium, insurance company compensates a fixed amount called the sum.
- Term insurance covers risk for a fixed term while whole life, universal insurance provides life time coverage.
- Insurer collects premia from a very large number of insureds and pools them into a life fund which is used to pay claims and for investments.
- Insurer must do sound calculations of premia on death claims in order to sustain itself.
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Actuarial science
- Discipline that applies mathematical and statistical methods to assess risk in insurance, finance and other industries and professions is called Actuarial science.
- It includes several disciplines like maths, stat, finance, economics, computer programming.
- Historically actuarial science used models to construct tables and premiums.
- Now-a-days with modern computers it is possible to calculate rates of disability, morbidity, mortality, retirement, survivorship etc.
- Using statistical models it is possible to estimate life span, likelihood of catastrophe, weather-related event, etc.
- They forecast risk and uncertainty and helps a firm assess future probabilities and possibilities.
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Features of life insurance
- Unilateral contract: only one party, the insurer makes an enforceable promise. The company cannot force the insured to pay all the premiums but company has to pay the SA as per contract
- Contract of utmost good faith: both the parties are under special duty to disclose all material facts within their knowledge as well as to refrain from active misrepresentation.
- Conditional contract: this contract has many conditions which need to be fulfilled in order for the contract to be valid
- Aleatory contract (By chance): Payment is made upon happening of contingency. An aleatory contract is one in which the performance of one or both parties is contingent upon the occurrence of a particular event by chance over which neither party has any control.
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- Contract of adhesion: terms are not arrived at by mutual negotiations; they are decided by the insurer. The insured can only accept or reject the policy along with the conditions (contract of adhesion between two parties where the terms and conditions of the contract are set by one of the parties, and the other party has little or no ability to negotiate).
- Contract of guarantee: Life insurance does not offer an indemnity; it is a contingency contract by providing for payment of agreed amount upon happening of an event.
- Standard form of contract: it follows all the essentials of Indian contract act, 1872 for it to be a standard valid contract
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Life insurance document
- Life insurer issues a policy bond upon completion of all forms of scrutinizing proposal application. A typical bond has the following features:
- 1. Preamble: it is a narrative where the insurer and the insured commit themselves to a contract of insurance. Insurer declares that they have received all the necessary information and documents and will extend risk coverage upon terms and conditions as given subsequently.
- 2. Policy schedule: it contains particulars such as policy number, date of commencement of policy, scheme opted, date from which the cover is extended, amount of assurance payable by the insurer, amount of premium payable by the policy holder, mode of payment (monthly, Qtly, Hly, Yrly), name of the person to whom the benefit is payable, type of contingency upon which it is payable, mode by which payable and so on. The bond is dated and signed by a responsible officer of the insuring firm
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- 3. Conditions and privileges: insurer usually extends certain conditions/privileges like extended time to pay premiums, rule of lapsing and re-activation, non-settlement conditions in case of change in habits and risk during course of the policy etc. some conditions and privileges are as follows:
- Nature and proof of age
- Revival of discontinued policy
- Forfeiture in certain events
- Guaranteed surrender value
- Assignment and nominations
- Normal requirements for a claim
- Payment of premiums and grace period
- Non-forfeiture regulations
- Suicide
- Loan
- Accident benefit and other riders
- Grievance redressal officer.
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- 4. Endorsement and clauses: Many a time insurance coverage is issued limiting the insurer's liability for a certain period of time which gets cancelled automatically at the end of the time periods. They are called endorsements and clauses.
Premium calculation
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Regular consideration paid by the insured for getting insurance cover is called the premium.
Premium depends upon
- 1. Age of the life to be assured
- 2. type of plan/scheme chosen
- 3. period/term of insurance
- 4. mode of payment
- 5. Riders chosen
- 6. benefits offered by the insurer
- 7. physical and health condition of the life to be assured
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Presentations (10 marks)
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(Each one evaluated separately)
- Life Insurance Classification-Classification on the Basis –Duration-Premium Payment- Participation in Profit-Number of Persons Assured-Payment of Policy Amount-Money Back Policies-Unit Linked Plans. (4/5 members team)
- Annuities-Need of Annuity Contracts, Annuities V/s Life Insurance, Classification of Annuities (3/4 members team)
Life insurance policies - Types
- On the basis of
- Duration
- Participation in profit – whole life, endowment
- Payment of SA – money back policy
- Unit linked policies
- Annuities
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Rules for presentation
- Contents of the slide is very important. It must effectively reflect the syllabus
- Slides must be brief and to the point. Cut-pasting long passages, that is, is prohibited.
- Presenter must have deep understanding of the subject being presented.
- Use adequate explanations in your own words. Mere reading of the slide tentamounts to bad presentation
- Use right intonation, pause and gesticulation to make your point. Speak in simple English with confidence
- Handle questions professionally
- Submit hard and soft copies of slides for evaluation
- Imitating anchors and putting up TV shows is prohibited. Remember that it is a business presentation and not variety entertainment program or Sentia 2017
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