LIFE INSURANCEProf. Sudip Bhattacharya

An individual runs a Risk ofPremature DeathLiving too long

Life Insurance is a product that offers a solution in management of both the risks.

WHAT IS LIFE INSURANCE ?

Essential Features:Element of a valid contractInsurable interestUtmost good faithWarrantiesAssignment and nominationCertainty of the eventPremiumTerms of policy

Provides Continuity of incomeMandatory savings- Mortgage protection- Protection against disabilities- Childrens education / Marriage - Retirement fundTax reliefLiquidity- PEACE OF MINDWHAT LIFE INSURANCE DOES ?

HOW MUCH INSURANCE DO I NEED ?Life insurance is like buying shares in yourself How much am I worthAsk yourselfWhat part of my present income does my family needHow many years are left for retirementWhat are my cash assetsWhat are my monetary obligationsWhat debt am I currently carryingDo I have a contingency fundA CAPITAL NEEDS ANALYSIS / LIFE VALUE would provide the right answer

BanksInsuranceMFsSilos of specializationSynergy through convergenceConvergence brings values of stability,caution and risk Management blend with liquidity and market relatedPerformanceBanksInsuranceMFsThen..Now..THE INSURANCE TREND

PREMIUMPremium is the Price the Policy holder pays for the Benefit that the Life Insurance product offersThere are 2 parts of the premiumRisk partSavings part

PRODUCTThe insurance products also have 2 basic parts Policy with Pure term cover, Sum Assured payable only on death- Policy with cash accumulation, it provides saving and security & the SA is payable either on death and on maturity

The human life value is defined as:

the present value of the family's share of the deceased breadwinner's earnings.

This approach crudely measures the economic value of a human life.

The human life value can be measured by the following steps:

a.Estimate the individual's average annual earnings over his or her productive lifetime.

b. Deduct income taxes, other taxes, life and health insurance premiums, and the costs of self-maintenance.

Determine no. of years from the person's present age to the contemplated age of retirement. d. Using a reasonable discount rate, determine the present value of the family's share of earnings for the period determined in step c. The use of a lower discount rate in calculating the human life value will produce a higher human life value for the individual.

Calculation of Life ValueA person aged 30 has Annual salary 4 lacsHis taxes and premiums come to 1 lacHis personal expenses annually is 1lacHe give for the family 2 lacsHis earning span is 30 years, so the family requires 60lacs (this is over a period of 30years)Human Life value= 200000*1-(1/(1+i)^30)/ii=present bank rate of interest so at 8% it will be 2lac*11.2578=22,25,780Must be inflation adjusted to keep present BP

UnderwritingNon Medical General -Basic Education, cap on limits of SA Non Medical Special - Employees of reputed cosProfessionalsMedical & Special ReportsFinancial UnderwritingAcceptance & Communication

NominationAppointeePolicy DocumentClausesGreen Channel or Across the CounterCooling offMinor & Women Lives

PremiumsFactors Affecting Premiums - Mortality - Interest rates & Inflation factors - Expenses - Profits

Types of PremiumsBasicAB Premiums,Rider Premiums,

Factors affecting Life Insurance premium

Premium calculationMortatlity Table Out of 1lac persons

age301st year2nd year3rd year4th year1956

1999

Mortality1999326

117

.00117343

117

.00117355

120

.00120370

125

.00125

Person Aged 30 wants take a term assurance of Rs. 1lacs Sum Assured for 1 yearPremium= SA * Mortality Rate for 1 year from the tablePremium=100000*0.00117=Rs.117(1999)Premium=100000*0.00326=Rs.326(1956)

Person aged 30 wants to take a term assurance of Rs.100000 for 4 year

Premium for 1st year= 100000*0.00117=1172nd year 100000*0.00117=1173rd year 100000*0.00120=1204th year 100000*0.00125=125

Uniform premium=(117+117+120+125)/4=120

In the same example if it is made endowment that is Rs.100000 will be death cover for 4 years and 1lac will be paid on maturity at the end of 4 yearsTerm Assurance Premium for 4 years=120Endowment premium = 100000/4 = 25000Total premium to be paid 25000+120=25120

Calculation with interest @6% the above exampleTerm Assurance premium=120Endowment premium = (25000/(1.06)^1 + 25000/(1.06)^2 + 25000/(1.06)^3 + 25000/(1.06)^4) / 4Total Endowment premium =21658Net Premium=21658+120 = 21778

Expenses Loading We arrived at the premium rate for a personAged 30 for 1lac endowment as 21778Cost of premium expenses=5%Loading of expense =21778/0.95=22924

Cost of premium including expenses of premium=22924

Cost of expenses per policy

Average expenses per policy=Total Admin cost/No of policies issuedSuppose 40000 policies issued and administrative cost =200000 Rs. Average cost per policy=200000/40000=5

Calculation of loading for the ex. of person aged 30 SA 1lac for 4 years endowmentPremium with interest = 21778Premium expense is 5%Admin. Expense per policy is Rs. 5 Premium+ Interest+ expense = (21778+5)/0.95 = 22929

Expenses loading in premium

First year premiumRenewal premiumPremium Related expensesPolicy Related expenses

Servicing ConceptsDays of GracePaid up Value: SA*No of years premium paid/Total premium payableSurrender ValueLoansRevivalAssignment

BonusWhat is BonusWhy it arisesTypes of Bonus - Reversionary Bonus - Guaranteed Additions - Loyalty Bonus - Compounded Guarantee Additions - Cash Bonus

Insurance IntermediaryAgentsBrokersConsultantsSurveyorsCorporate Agents

ClaimsWhat is a ClaimTypes of Claim - Survival Benefit - Maturity Claim - Death Claim - Annuity Claim - Disability Claim

Claim typesPayment of Full SAPayment of SA in InstallmentsPayment of Double SAPayment of partial SAPayment of Annuity for a specified periodPayment of Annuity for a specified period and capital on the happening of contingent event

Claims Documents requiredClaimant FormEvidence of Burial / Medical reportsMedical Attendant ReportsPolice inquest reportClaim investigation reportPolicy Document or indemnity

Life Insurance Corporation of India (LIC) was formed in September 1956 by an Act of Parliament, LIC Act 1956 with a contribution of Rs. 50 million. The then Finance Minister Mr. C. D. Deshmukh while piloting the bill for nationalization outlined the objectives of LIC thus: To conduct the business with utmost economy with the spirit of trusteeship; to charge premium no higher than warranted by strict actuarial considerations; to invest the funds for obtaining maximum yield for the policy holders consistent with safety of capital; to render prompt and efficient service to policy holders thereby making Insurance widely popular. **

LIC OF INDIA contdPresently the LIC has a network of 7 zones; 100 divisions and 2,048 branches, personnel exceed 7 lakhs employees and over 6 lakhs agents. Vision: A trans-nationally competitive financial conglomerate of significance to societies and Pride of India. Mission: To explore and enhance the quality of the life of people through financial security by providing products and services of aspired attributes with competitive returns and by rendering resources for economic development. Values: Caring and Courtesy, Initiatives and Innovation, Integrity and Transparency, Quality and Returns, Participation and Relationship, and Trustworthiness and ReliabilityCulture: Agility (quickness), Adaptability, Collaboration, Commitment, Discipline, Empowerment, Sensitivity, and Excellence.

**

LIC OF INDIA contdObjectives Spread Life Insurance widely and in particular to the rural areas.Maximise mobilization of peoples savings by making insurance-linked savings adequately attractive.Deployment of funds to the best of advantage of the investors as well as the community as whole, keeping in view national priorities and obligations of attractive return.Conduct of business at most economy and with the full realisation that the money belongs to the policyholders.Act as trustee of the insured public in their individual and collective capacities.**

PRINCIPLES AND INVESTMENT POLICY OF LICsSecurity of funds, and Maximization of return of investment,

**Investment Policy Central Govt. marketable securities being not less than 20%Loans to Housing Bank including above (1) being not less than 25%State Govt. securities including Govt. Guaranteed marketable securities, inclusive of (2) above being not less than 50%Socially oriented sectors including public sector, co-operative sector house building by policyholders, own house scheme, inclusive of (3) above not less than 75%Private corporate sector, loans to policyholders for construction and acquisition of immovable property 25%

INVESTMENT POLICY OF LICs*

INVESTMENT POLICY OF LICs contd**

Working of insurance

MAJOR PLAYERS

PRIVATE SECTOR COMPANIESSeveral leading private sector companies have entered in the field of insurance sector, both in life and non-life insurance. There are several MNCs, in Joint Venture with Indian private sector firms, have started operations in a big way. **Private Players in the Life Insurance Business

Regd. No.Date of Regd.Name of the CompanyWho Owns it (in percentage)10123.10.00HDFC Standard Life Standard Life, UK - 18 and HDFC 8210415.11.00Max New York Life New York Life - 26 and Max India 7410524.11.00ICICI Prudential LifePrudential, UK - 26 and ICICI Bank 7410710.01.01Om Kotak MahindraOld Maruthi, South Africa 26 and Kotak Mahindra 7410931.01.01Birla Sunlife Sun Life of Canada26 and Birla Capital 7411012.02.01Tata AIG AIG, US 26 and Tatas 7411130.03.01SBI Life Cardif SA, France 26 and State Bank of India 7411402.08.01ING Vysya ING, Holland26 and GMR Group, Hyd54 and ING Vysya Bank20

Private Players in the Life Insurance BusinessCURRENT SCENARIO contd.

Regd. No.Date of Regd.Name of the CompanyWho Owns it (in percentage)11603.08.01Allianz BajajAllianz AG, Germany 26 and Bajaj Auto 7411706.08.01Metlife Metlife, US26, Shapoorji Pallonji30 and J&K Bank2512103.01.02AMP Sanmar AMP, Australia26 and Sanmar Group, Chennai7412203.01.02Aviva Aviva PLC, UK 26 and Dabur Investments 74******Reliance Life******Bharathi AXA12706.02.04Sahara India Insurance 12807.11.05Shriram Life Insurance

MARKET SHARE

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Sales

Sheet1

COMPANYSales

MAX NEW YORK5%

SHIRAM LIFE1%

BAJAJ ALLINZ21%

ICICI PRUDENTIAL28%

RELIANCE4%

SBI LIFE12%

TATA AIG4%

HDFC SLIC9%

BIRLA SUNLIFE5%

ING VYSYA2%

KOTAK MAHINDRA3%

AVIVA4%

MET LIFE2%

CURRENT SCENARIO - LIFEGrowing at the rate of 15-20% annually75% population has no insurance Adds 7% to countrys GDPLIC market share come down to 75% and private insurers increased over 24%Annuity or pension product have over 33% of marketUnity linked insurance scheme have monopoly

LIC Products & Plans

Types of PlansWhole Life Plans: 1. The whole life policy 2. The whole life policy-limited payments 3. The whole life policy-single premium 4. Jeevan Rekha(closed for sale) 5. Jeevan Anand 6. Jeevan Tarang

Contd.Endowment Assurance Plans: 1. Endowment assurance policy 2. Endowment assurance policy-limited payments 3. Jeevan mitra(double cover and triple cover endowment plans) 4. Jeevan anand 5. New Janaraksha plan 6. Jeevan sathi(a joint life plan)

Contd.Term Assurance Plans: 1. Two-year temporary assurance policy 2. Anmol jeevan-1 3. Amulya jeevan 4. Decreasing term assurance to cover home loan payment-mortgage redemption

Contd..Children Plans: 1. Jeevan anurag 2. Komal jeevan 3. CDA endowment(vesting at 18 and at 12) 4. Marriage endowment or educational annuity plan 5. Jeevan kishore 6. Jeevan chhaya

Plans for handicapped dependentsJeevan adhar

Jeevan vishwas

Plans for High Worth individualsJeevan shree- 1

Jeevan pramukh

Money Back PlansThe money back policy-20 yearsThe money back policy-25 yearsJeevan surabhi-15 years: 20 years: 25yearsJeevan rekha (closed for sale)Bima bachatSpecial money back plan for women : Jeevan bharati

Other special plansBima Gold (closed for sale)New Bima GoldBima Nivesh 2005Jeevan SaralJeevan Madhur

Group-insurance SchemesGroup term insurance schemeGroup insurance scheme in lieu of EDLIGroup gratuity schemeGroup superannuation schemeVoluntary retirement schemeGroup leave encashment schemeSocial security schemeLALGI schemeRural group life insurance scheme(RGLIS)Integrated rural development programme(IRDP)Group insurance schemes for studentsGroup mortgage redemption assurance scheme

Social Security SchemesJanashree Bima Yogna

Krishi Shramik Samajik Suraksha Yogna

Shiksha Sahayog Yojana

Pension PlansJeevan Nidhi

Jeevan Akshay-V

New Jeevan Dhara-1

New Jeevan Suraksha- 1

Unit PlansMarket Plus

Money Plus

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