Life insurance laws

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Basic Principles of Life Insurance:

INDEMNITY

A contract of insurance contained in a fire, marine, burglary or any other policy (excepting life assurance

and personal accident and sickness insurance) is a contract of indemnity. This means that the insured, in

case of loss against which the policy has been issued, shall be paid the actual amount of loss not

exceeding the amount of the policy, i.e. he shall be fully indemnified. The object of every contract of

insurance is to place the insured in the same financial position, as nearly as possible, after the loss, as if

he loss had not taken place at all. It would be against public policy to allow an insured to make a profit

out of his loss or damage.

UTMOST GOOD FAITH

Since insurance shifts risk from one party to another, it is essential that there must be utmost good faith

and mutual confidence between the insured and the insurer. In a contract of insurance the insured

knows more about the subject matter of the contract than the insurer. Consequently, he is duty bound

to disclose accurately all material facts and nothing should be withheld or concealed. Any fact is

material, which goes to the root of the contract of insurance and has a bearing on the risk involved. It is

only when the insurer knows the whole truth that he is in a position to judge (a) whether he should

accept the risk and (b) what premium he should charge.

If that were so, the insured might be tempted to bring about the event insured against in order to get

money.

Insurable Interest- A contract of insurance effected without insurable interest is void. It means that

the insured must have an actual pecuniary interest and not a mere anxiety or sentimental interest in the

subject matter of the insurance. The insured must be so situated with regard to the thing insured that

he would have benefit by its existence and loss from its destruction. The owner of a ship run a risk of

losing his ship, the charterer of the ship runs a risk of losing his freight and the owner of the cargo incurs

the risk of losing his goods and profit. So, all these persons have something at stake and all of them have

insurable interest. It is the existence of insurable interest in a contract of insurance, which distinguishes

it from a mere watering agreement.

Causa Proxima- The rule of causa proxima means that the cause of the loss must be proximate or

immediate and not remote. If the proximate cause of the loss is a peril insured against, the insured can


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recover. When a loss has been brought about by two or more causes, the question arises as to which is

the causa proxima, although the result could not have happened without the remote cause. But if the

loss is brought about by any cause attributable to the misconduct of the insured, the insurer is not

liable.

Risk- In a contract of insurance the insurer undertakes to protect the insured from a specified loss and

the insurer receive a premium for running the risk of such loss. Thus, risk must attach to a policy.

Mitigation of Loss- In the event of some mishap to the insured property, the insured must take all

necessary steps to mitigate or minimize the loss, just as any prudent person would do in those

circumstances. If he does not do so, the insurer can avoid the payment of loss attributable to his

negligence. But it must be remembered that though the insured is bound to do his best for his insurer,

he is, not bound to do so at the risk of his life.

Subrogation- The doctrine of subrogation is a corollary to the principle of indemnity and applies only

to fire and marine insurance. According to it, when an insured has received full indemnity in respect of

his loss, all rights and remedies which he has against third person will pass on to the insurer and will be

exercised for his benefit until he (the insurer) recoups the amount he has paid under the policy. It must

be clarified here that the insurer's right of subrogation arises only when he has paid for the loss for

which he is liable under the policy and this right extend only to the rights and remedies available to the

insured in respect of the thing to which the contract of insurance relates.

Contribution- Where there are two or more insurance on one risk, the principle of contribution comes

into play. The aim of contribution is to distribute the actual amount of loss among the different insurers

who are liable for the same risk under different policies in respect of the same subject matter. Any one

insurer may pay to the insured the full amount of the loss covered by the policy and then become

entitled to contribution from his co-insurers in proportion to the amount which each has undertaken to

pay in case of loss of the same subject-matter.

In other words, the right of contribution arises when (I) there are different policies which relate to the

same subject-matter (ii) the policies cover the same peril which caused the loss, and (iii) all the policies

are in force at the time of the loss, and (iv) one of the insurers has paid to the insured more than his

share of the loss.


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UTMOST GOOD FAITH

Since insurance shifts risk from one party to another, it is essential that there must be utmost good faithand mutual confidence between the insured and the insurer. In a contract of insurance the insured







money.













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liable.

Risk- In a contract of insurance the insurer undertakes to protect the insured from a specified loss andthe insurer receive a premium for running the risk of such loss. Thus, risk must attach to a policy.






















share of the loss.


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UTMOST GOOD FAITH









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liable.












be clarified here that the insurer's right of subrogation arises only when he has paid for the loss forwhich he is liable under the policy and this right extend only to the rights and remedies available to the






entitled to contribution from his co-insurers in proportion to the amount which each has undertaken topay in case of loss of the same subject-matter.




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share of the loss.

Read


NITY




exceeding the amount of the policy, i.e. he shall be fully indemnified. The object of every contract ofinsurance is to place the insured in the same financial position, as nearly as possible, after the loss, as if



UTMOST GOOD FAITH









money.







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Causa Proxima- The rule of causa proxima means that the cause of the loss must be proximate orimmediate and not remote. If the proximate cause of the loss is a peril insured against, the insured can




liable.






















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share of the loss.

Read


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and personal accident and sickness insurance) is a contract of indemnity. This means that the insured, incase of loss against which the policy has been issued, shall be paid the actual amount of loss not





UTMOST GOOD FAITH









money.





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liable.




















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same subject-matter (ii) the policies cover the same peril which caused the loss, and (iii) all the policiesare in force at the time of the loss, and (iv) one of the insurers has paid to the insured more than his

share of the loss.

Principles of good faith:

Commercial contract are normally subject to principal of caveat import let the byer beware .it is

assumed that each party to the contract can examine the item or service , which is the

subject matter of the contract can examine the item or service , which is the subject matter of the

contract . Each party can verify the correctness of the statement of the other party. There is no need to

take the statement on trust. Proof can be asked for. the law impose a greater duty on the parties to an

insurance contract then in the case of other commercial contract , to disclose relevant information

.

This duty is one of utmost good faith. It is duty of the proposer to make a full disclosure to the insurer.

The implication is that, in the event of failure to disclose materiol facts, the contact can be hold to be

void ab initio in the case of insurance contract, this principal does not apply. Most of the fact relating to

health , habits , personal history , family history etc.The underwrite can ask for a medical report yet

there may be certain aspects , which may not be brought out even by the best medical report.

Insurance Interest:

When someone applies for a life insurance policy, there are several requirements that help prevent

secret policies. They include:

Insurable interest. The person taking out the life insurance policy must have an "insurable interest" in

you. Basically, that means he or she must be at risk of a financial loss if you die. Examples of people with


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an insurable interest in your life include your spouse, blood-related family member or a business

partner.

Medical exam or release of medical information. Most life insurance policies require medical

information about the person whose life is being insured. Unless you sign a release or undergo a medicalexam, your medical information cannot be accessed without your knowledge.

Your signature. Life insurance policies usually require consent via your signature. Most insurance

companies also follow up with paperwork, an e-mail or a phone call.

Technically, it might be possible for someone to successfully commit fraud and take out a secret policy

on your life. But this is extremely unlikely and would involve actions such as someone getting a hold of

all insurance company correspondence and forging your signature.

Some businesses also offer group life insurance where it's possible to take out a policy on your spouse.

But such policies typically do not have substantial payouts and are unlikely to inspire a nefarious

scheme.

each individual has an unlimited insurable interest in his or her own life, and therefore can select

anyone as a beneficiary.

2.parent and child, husband and wife, brother and sister have an insurable interest in each other

because of blood or marriage.

3.creditor-debtor relationships give rise to an insurable interest. The creditor can be the beneficiary for

the amount of the outstanding loan, with the face value decreasing in proportion to the decline in the

outstanding loan amount.

4.business relationships give rise to an insurable interest. An employee may insure the life of an

employer, and an employer may insure the life of an employee.

See alsobenefits of business life and health insurance (key person insurance): key employee (key
http://www.insurance.com/http://www.insurance.com/


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man); partnership life and health insurance.

Insurable interest must exist at the inception of the contract, not necessarily at the time of loss. For

example, because a woman has an insurable interest in the life of her fiance, she purchases an insurance

policy on his life. Even if the relationship is terminated, as long as she continues to pay the premiums

she will be able to collect the death benefit under the policy.

Types of Life Insurance:

Term Insurance Policy

This policy is pure risk cover with the insured amount will be paid only if the policy hold dies in the

period of policy time. The intention of this policy is to protect the policy holders family incase of death.

For example, a person who takes term policy of Rs.500000 for 20 years, if he dies before 20 years thenhis family will get the insured amount. If he survive after 20 years then he will not get any amount from

the insurance company. It is the reason why term policies are very low cost. So, this type of policy is not

suitable for savings or investment.

Whole Life Policy

As the name itself says, the policy holder has to pay the premium for whole life till his death. This policy

doesnt address any other needs of the policy holder. because of these reasons this kind of policy is not

very popular or insurance company not suggesting to take this policy.

Endowment Policy

It is the most popular Life Insurance Plans amoung other types of policies. This polciy combines risk

cover with the savings and investment. If the policy holder dies during the policy time, he will get the

assured amount. Even if he survives he will receive the assured amount. The advantage of this policy is if

the policy holder survives after the completion of policy trnure, he receives assured amount plus

additional benefits like Bonus,etc. from the insurance company. In this kind of policy, policy holder

receices huge amout while completing the tenure.

In addition to the basic policy, insurers offer various benefits such as double endowment and marriage/

education endowment plans. The cost of such a policy is slightly higher but worth its value.

Money Back Policy
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Money Back Policy is to provide money on the occasions when the policy holder needs for his personal

life. The occassions may be marriage, education,etc. Money will be paid back to the policy holder with

the specified duration. If the polciy holder dies before the policy term, the sum assured will be given to

his family. A portion of the sum assured is payable at regular intervals. On survival the remainder of the

sum assured is payable.

Variation of Whole Life Insurance and other types of Life Insurance:

Whole Life Insurance

As the name implies, whole life insurance covers the policyholder for his or her whole life. There is no

fixed end date for the policy, as there is with term life insurance. When the policy holder dies, the face

value of the policy, known as a death benefit, is paid to the person or persons named in the life

insurance policy (the beneficiary or beneficiaries).

The cost of a whole life insurance policy is spread out across many years, so the premium remains the

same. This ensures that older people on a fixed income will not have to cope with rising premiums.

Unlike term life insurance, whole life insurance accrues cash value over time. If you cancel the

policy after a certain amount of time has passed, the insurance company will surrender the cash value to

you. The cash value is scheduled to equal the face value when the policyholder reaches the age of 100. If

you live that long, the insurance company will likely pay the face value to you in a lump sum.

This is not the only way to use the cash value, however. You can also borrow some of the cash value as a

loan. The money has to be paid back, but there is no approval process and no risk of being turned down.

You are your own lender. Some whole life insurance pays dividends, so it can be used to supplement

your retirement income.

Term Insurance

Term Insurance is a no frills life insurance plans and covers you for a term of one or more years. It pays a

death benefit only if you die in that term. Term Insurance generally offers the cheapest form of

insurance. You can renew most Term Insurance policies for one or more terms even if your health

condition has changed. Each time you renew the policy for a new term, premiums may climb higher.

Term policies,cover only the risk during the selected term period. If the policyholder survives the term,

the risk cover comes to an end. A Term plan is a pure risk cover plan and it meet the needs of people


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who are initially unable to pay the larger premium required for a whole life or an endowment assurance

policy, but they hope to be able to pay for such a policy in the near future.

Money Back Life Insurance Policy

Money back policies are quite similar to endowment insurance plans where the survival benefits are

payable only at the end of the term period ,plus the added benefit of money back policies is that they

provide for periodic payments of partial survival benefits during the term of the policy so long as the

policy holder is alive. An additional and important feature of money back policies is that in the event of

death at any time during the term of the policy, the death claim comprises full sum assured without

deducting any of the survival benefit amounts.The insurance premium of Money Back Policies are higher

than Term Insurance Policy because in Term Insurance there is no survival benefits after the expiry of

the insurance period. Money Back Policies are good for people who want to Insure their life and alsowant to some return from their investments at a later date. The return from investments in Money Back

Policies would range between 5% to 8% anually depending on the interest rate movements.

Endowment Insurance Policy

Endowment insurance are policies that cover the risk for a specified period and at the end the sum

assured is paid back to the policyholder along with all the bonus accumulated during the term of the

policy. The Endowment insurance policies work in two ways , one they provide life insurance cover and

on the other hand as an vehicle for saving. They are more expensive than Term policies and Whole life

policies. Normally the bonus in calculated on the sum insured but the only draw back is that the bonuses

are not compounded. Endowment insurance plans are best for people who do not have a saving and an

investing habit on a regular basis. Endowment Insurance Plans can be bought for a shorter duration

period.

Whole Life Insurance Policy

A whole life policy continues as long as the policyholder is alive. In whole life insurance plan the risk is

covered for the entire life of the policyholder, that is the reason they are called whole life policies. The

nominee of the beneficiary are paid the policy monies and the bonus only upon the death of the

policyholder. The policyholder is not get any money during his or her own lifetime, that means there is

no survival benefit to the policy holder


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Unit Linked Insurance Policy

A Unit linked insurance plans are a special kind of insurance policies which have a benefit of life

insurance and also serves as an investment tool. In a unit linked insurance plan there are two parts in

the premium a client pays, the first part of the premium goes into covering the life of the policy holderand the second part goes into investments. Almost all insurance companies give their customers a

choice to select the investment mix. They can go for 100% equity funds or 100% debt funds or a mixture

of both. In a unlit linked insurance plan the customers are also given choice to switch from one fund to

another. The returns from the insurance policy is directly related to the performance of the funds. The

only drawback of unit linked insurance plans is its charges for first few years, which varies from 30% to

70% of the premium.

Life Insurance Contract Provisions

Life insurance contract provisions are important in life insurance policies. They are provisions

thatinsurance policies are required to follow. These are regulated by the state. Some of the

following are standard provisions, which are evident in all life insurance policies.

Some of the more common ones are:

1. Grace Period

2. Incontestable Clause

3. Entire Contract Clause

4. Misstatement of Age Clause

5. Suicide Clause

6. War Clause

7. Policy Change Clause

8. Double Indemnity Clause

9. Payer Benefit Clause

The insurance business is mostly done by joint-stock companies everywhere in world. In India before

1956 there were many companies dealing in life insurance matters. On 19th January, 1956 the Life
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insurance business was nationalized by the government.

For this purpose the L.I.C. of India was established. It took over the business of all life insurance

companies then operating in India. Today, it is one of the most important nationalized business in India

and L.I.C. has a very wide network of offices and branches throughout the country.

Definition:

Life insurance is a contract between the insurance company and the insured, under which the insurance

company agrees to pay in consideration of regular payment of premium, a certain amount to the

insured on expiry of a specific period or to the legal heirs of the insured on his death, whichever

happens earlier.

Procedure for life insurance contract:

The following is the procedure to be adopted in taking out a Life Assurance Policy as per the Rules and

Regulations laid down by the L.I.C.

1. Proposal:

Like any other contract, proposal is the first step for entering into a Life Insurance Contract. The L.I.C.

provides printed proposal forms free of cost to the prospects. This form consists of a number of

questions. The proposer has to fill in required information correctly and completely.

Information which is usually asked in the proposal form:

a. Name, address and occupation

b. Date of birth

c. Proposed Insurance scheme or plan

d. Purpose i.e. protection to family, old age provisions, etc.

e. Details of previous insurance, if any

At the bottom of the form the proposer has to give a declaration that the furnished information is

correct, complete and true to the best of his knowledge. He has to put his signature.


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2. Personal statement:

Along with the proposal form one more printed form is issued by the the L.I.C. called the personal

statement. In this form the proposer has to submit his complete medical history and also the health ofhis family.

The acceptance or non-acceptance of the proposal is based on the information submitted by the

proposer in the proposal form and personal statement. The L.I.C. can cancel the contract in the case of

concealment or fact or false and wrong information.

3. Medical examination:

On submission of the proposal and personal statement, the L.I.C. directs the proposed assured to go

through a medical examination. This examination is to be conducted by the approved doctors who are

on the Official Panel of L.I.C. the proposer need not pay any charge for this medical examination. The

doctor then submits his report to the L.I.C.

4. Proof of age:

The proposer has to mention the correct date of birth in the proposal form. The proposer has to submit

some evidence for the age proof like leaving certificate or affidavit of court etc. because age is an

important factor for the fixing the amount of premium.

5. Reviewing stage/scrutiny of Reports:

The L.I.C. officers then fully examine the contents of the proposal form, personal statement, medical

report, agent's remarks and the certificate of proof of age. This scrutiny is done for taking a decision for

acceptance of the proposal.

6. Acceptance of the proposal:

On scrutinizing all the reports and documents, if everything is satisfactory the L.I.C. may accept the

proposal. The L.I.C. then sends intimation to the proposer about the acceptance of the proposal.


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If the reports are completely un-satisfactory the proposal is refused and an intimation about non-

acceptance of the proposal.

7. Payment of premium:

The L.I.C. contract is completed when the first premium is paid by the assured and the L.I.C. issues a

valid receipt for it. The first premium is paid, when the first premium notice is received by the proposer.

When the first premium is paid along with the proposal only, the receipt is issued after its acceptance.

The L.I.C. runs the risk from the date of issue of first premium receipt. After the first premium, the

assured has to pay agreed premiums at agreed intervals.

8. Issue of insurance policy:

Then the written agreement is prepared, this is called as an insurance policy. In this document the

name, address, occupation, age of the proposer, policy number, type amount and term of policy, other

terms and conditions of the insurance contract etc. things are mentioned.

Utmost Good Faith

An insurance contract is known as a contract of 'Uberrimate Fidel' or a contract based on 'utmost good

faith'. It means both the parties must disclose all material facts. Any fact is material which goes to the

root of the contract of insurance and has a bearing on the risk involved. It is only when the insurer

knows the whole truth that he is in a position to judge:- (i) whether he should accept the risk, and (ii)

what premium he should charge. Concealment of any fact will entitle the insurer to deprive the assured

of benefits of the contract. Also,as insurance shifts risk from one party to another, it is essential that

there must be utmost good faith and mutual confidence between the insured and the insurer.

Indemnity

A contract of insurance is a contract of 'indemnity'. It means that the insured, in case of loss against

which the policy has been issued, shall be paid the actual amount of loss not exceeding the amount of

the policy, i.e. he shall be fully indemnified. The object of every contract of insurance is to place the

insured in the same financial position, as nearly as possible, after the loss, as if the loss has not taken

place at all. This is applicable to all types of insurance except life, personal accident and sickness


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insurance. A contract of insurance does not remain a contract of indemnity if a fixed amount is paid by

the insurer to the insured on the happening of the event against, whether he suffers a loss or not. Like,

in case of life insurance, the insurer is liable to pay the sum mentioned in the policy on the death, or

expiry of a certain period.

Insurable interest

It means that the insured must have an actual interest in the subject matter of insurance. A contract of

insurance effected without insurable interest is void. A person is said to have an insurable interest in the

subject matter if he is benefited by its existence and is prejudiced by its destruction. For example:- a

person has insurable interest in the building he owns; employer can insure the lives of his employees

because of his pecuniary interest in them; a businessman has insurable interest in his stock, plant and

machinery, building, etc. So, all these people have something at stake and all of them have insurableinterest. It is the existence of insurable interest in a contract of insurance which distinguishes it from a

mere wagering agreement.

In case of life insurance,insurable interest must be present at the time when the insurance is affected. It

is not necessary that the assured should have insurable interest at the time of maturity also. In case of

fire insurance, insurable interest must be present both at the time of insurance and at the time of loss.

In case of marine insurance, interest must be present at the time of loss. It may or may not be present at

the time of insurance.

Cause Proxima

The rule of 'causa proxima' means that the cause of the loss must be proximate or immediate and not

remote. If the proximate cause of the loss is a peril insured against, the insured can recover. When a loss

has been brought about by two or more causes, the real or the nearest cause shall be the causa

proxima, although the result could not have happened without the remote cause. But, if the loss is

brought about by any cause attributable to the misconduct of the insured, the insurer is liable.

Risk

In a contract of insurance the insurer undertakes to protect the insured from a specified loss and the

insurer receives a premium for running the risk of such loss. Thus, risk must attach to a policy.

Mitigation of loss


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In the event of some mishap to the insured property, the insured must take all necessary steps to

mitigate or minimise the losses, just as any prudent person would do in those of loss attributable to his

negligence . But it must be remembered that though the insured is bound to do his best for his insurer,


Subrogation

The doctrine of subrogation is a corollary to the principle of indemnity and applies only to fire and

marine insurances. According to it, when an insured has received full indemnity in respect of his loss, all

rights and remedies which he has against third person, will pass on to the insurer and will be exercised

for his benefit until he(The insurer) recoups the amount he has paid under the policy. The insurer's right

of subrogation arises only when he has paid for the loss for which he is liable under the policy and this

right extends only to the rights and remedies available to the insured in respect of the thing to which thecontract of insurance relates.

Contribution

when there are two or more insurances on one risk, the principle of contribution comes into play. The

aim of contribution is to distribute the actual amount of loss among the different insurers who are liable

for the same risk under different policies in respect of the same subject matter. Any one insurer may pay

to the insured the full amount of the loss covered by the policy and then become entitled to

contribution from his co-insurers in proportion to the amount which each has undertaken to pay in case

of the loss of the same subject matter. In other words, the right of contribution arises when:-

There are different policies which relate to the same subject matter.

The policies cover the same peril which caused the loss.

All the policies are in force at the time of the loss.

One of the insurers has paid to the insured more than his share of the loss.


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Dividend options, Non forfeiture options in Life Insurance:

Participating life insurance policies, unlikenonparticipating policies, pay dividends. Operating a life

insurance company is much like any other businessthere are uncertainties as to payout, returns, and

operating expenses. Consequently, a life insurer will calculate premium payments to cover the

uncertainties. When the life insurer does better than expected, it returns part of the paid premiums to

the insured. Because the IRS considers life insurance dividends to be a return of part of the premium,

dividends are not taxable. The source of dividends arises because the actual mortality costs were less

than projected; operating expenses were lower than expected; or investment income was greater than

expected.

Since the source of dividends result from actual income minus actual expenses, dividends are not

payable until at least a year has elapsedwhatever is stated in the policyand is usually paid on ananniversary date of the policy.

Dividends can usually be taken in the form of cash, or the insurer can retain the dividends to earn

interest, reduce premiums, or add paid-up additions or term insurance to the policy.

Premium Reductions

If the dividend is taken as a premium reduction, the insurer will send the insured the amount of the

premium, the amount of the dividend, and the net amount due.

Dividend Accumulations

Most policies pay a minimum amount of interest on accumulated dividends, but may pay more if

investments are doing better. The insured can withdraw the money at any time, or it will be added to

the face policy if the insured dies, or the policy is surrendered for its cash value.

The major disadvantage of accumulated dividends is that taxes must be paid on the income every year,

whether withdrawn or notjust like the interest earned on a savings account.

Paid-Up Additions

The insured can also use the dividends to buy small amounts of additional paid-up whole life insurance,

which increases the face value of the policy. The advantage of increasing life insurance this way is that

there is no expense charge for the additional life insurancethus, the premium buys more life insurance


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than if sales charges and other expenses were deducted. The other advantage is that the insured does

not need to prove insurability. Hence, this is a good option for someone in poor health who wants to

increase their life insurance.

Eventually, the insured can convert to a single-premium life insurance policy if the legal reserve of themain policy and the paid-up policies is enough for the coverage desired.

Another possibility is to collect the face value as an endowment. If the legal reserves of the main policy

and the paid-up policies equal the face value of the main policy, then the insured can collect that money

as an endowment.

Term Insurance

The dividend can also be used to buy 1 year term insurance. If the policyholder has borrowed against

the policy, then part of the dividend can be used to buy term insurance equal to the face value of the

policy. If the insured should die before paying back the loan, the beneficiary will still receive the full

value of the policy.

A 2ndoption for term insurance that very few companies offer is yearly, renewable term insurance. For a

young person, a small dividend can greatly increase the death benefit. The amount of term insurance

that can be purchased depends on the amount of the dividend, the age of the insured, and the insurer's

rates.

Nonforfeiture Options

Often, people stop paying premiums on their life insurance policies. For most types of insurance, the

policy terminates after the grace period, but if the policy has cash value, then state law prevents life

insurance companies from simply terminating the contract and keeping the cash value. Insurance

companies can provide 4 different nonforfeiture options:

paying the cash surrender value to the insured;

convert the insurance to term life insurance;

convert to a reduced paid-up insurance policy;

convert it to an annuity.


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If the policyholder does not choose an option, most insurance companies choose the term life insurance

option.

If thecash surrender optionis chosen, then the insured receives the cash value of the policy, which is

taxed as ordinary income. The policy cannot be reinstated.

If the policy is converted intoterm life insurance(akaextended-term option), then it will have the same

face value as the original policy, but the term will be determined by the cash value of the policy the

greater the cash value and the lower the face amount of the policy, the longer the term. A policy

converted to term insurance can be reinstated under the reinstatement provision of the contract.

The cash value can also be used to pay forreduced paid-up insurance. The face value of the paid-up

policy will be commensurate with the amount of the cash value of the policy, but will be less than the

original policy. Under this option, the original policy can also be reinstated under the reinstatement

provision.

Most insurance companies will also allow the insured to buy asingle-premium, immediate annuity,

which pays the policyholder an amount commensurate with the cash value of the policy and the

policyholder's age for the rest of his life. There are 2 advantages to buying an annuity this way: there are

no sales charges or other expenses, and the mortality table used in calculating the annuity payments is

the same mortality table used for calculating life insurance premiums. Because life insurance mortality

tables list shorter life expectancies than the mortality tables used in calculating premiums for annuities,

the annuity payments are larger.

Settlement Options in Life Insurance:

Policy Loans

Life insurance policies with a cash surrender value usually have loan provisions that allow the

policyholder to borrow up to the cash value of the policy. Although the insurance company has the right

to delay paying the loan for up to 6 months, it rarely does so.

The interest rate ranges from 5 to 8%. Unless the interest rate is stipulated to be variable in the

contract, the interest rate never changes regardless of prevailing rates, but most policies issued today

have variable interest rates, which have a maximum ceiling. However, in most cases, the cash value of

the policy that is equal to the loan amount is also earning less interest, so the effective interest rate is


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higher. For instance, if a policyholder borrows $40,000 against a policy that has $100,000 of cash value,

$40,000 of the cash value may be earning 3% while the remaining $60,000 of the cash value may be

earning 5%. So not only is the policyholder paying 5 to 8% interest on the loan, but she is earning 2% less

on the cash value backing the loan.

People often wonder why they have to pay interest on their own money. The reason is that when

insurers calculate what premium to charge, they expect to earn a certain amount of interest on the

money, which helps keep premium costs lower. If the insured takes money out, then that money isn't

earning anything from being invested, so the insurer has to charge interest on the policy loan.

Furthermore, to maintain liquidity to make policy loans, the insurer must invest part of the premiums in

lower yielding, short-term debt. Consequently, the loan interest compensates the insurer for this

opportunity cost.

The main advantages of a policy loan over other loans is that there is no credit check; the interest rate is

usually much lower; the policyholder can pay back the loan according to virtually any repayment

schedule; and, in fact, the policyholder is not even legally obligated to pay back the loan.

However, if death occurs while the loan is outstanding, then the insurance proceeds are reduced by the

amount of the loan outstanding plus interest. If the loan and accumulated interest exceeds the cash

value of the policy, then the policy lapses.

Some insurance policies have anautomatic premium loanprovision. If the insured fails to pay the

premium by the end of the grace period, then the insurer will pay the premium with a policy loan, and

will continue to do so until the cash value of the policy falls below the premium amount, in which case,

the policy will lapse.

Settlement Options

Settlementrefers to the method by which the policy proceeds are paid: a lump-sum cash payment,

interest earned on the face amount and paid periodically, fixed period, fixed amount, and life income.

The policyowner can choose the settlement method, or the beneficiary may be given the right. The

policyowner can also choose to surrender the policy for its cash value before the death of the insured.


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Generally, for alump-sum cash paymentthere may be several weeks or months after the insured's

death before the insurance company pays the claim to the beneficiaries, so interest earned on the face

value during this interim is also paid to the beneficiaries.

Theinterest income optionis usually selected if the insurance proceeds are not needed until sometime

laterto pay for college, perhaps. The insurer retains the money and pays a minimum interest rate on

it, and if the policy is participating, then the interest rate paid may be higher than the contractual

minimum. Interest can be paid monthly, quarterly, semi-annually, or annually.

The contract may provide the beneficiary with withdrawal rights, where part or the entire amount can

be withdrawn, or the beneficiary may have the right to choose another settlement option.

Thefixed-period option(akainstallment time option) pays the beneficiary principal and interest over a

fixed period of time. If the beneficiary dies before receiving all of the payments, then the remaining

payments are sent to the contingent beneficiary, or to the estate of the primary beneficiary, if there is

no contingent beneficiary. The amount of the payments will be commensurate with the face amount of

the policy, the interest earned, and inversely related to the length of the payment periodthe greater

the face amount of the policy and interest earned, and the shorter the payment period, the greater the

amount of each payment.

Most policies do not allow the beneficiary to withdraw a partial amount, but will allow the beneficiary to

withdraw all of the money, if desired.

Thefixed-amount option(akainstallment amount option) pays the beneficiary a fixed amount

periodically until both principal and interest are fully paid.

The fixed-amount option provides greater flexibility in payments than the fixed-period option. The

beneficiary may have the right to increase or decrease the amount of the payments, or to change to a

different settlement option. The beneficiary may also have the right withdraw part or the entire amount

at one time. This settlement option can also be structured so that the payments increase for a specific

time period, such as when the beneficiary is in college.

Life Income Options

Alife income optionis basically a single-premium annuity, providing the beneficiary with lifetime

income. The amount of the payments depends on the amount of the insurance and the expected


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lifetime of the beneficiarythe longer the expected lifetime, the smaller the payments. Thus, in most

cases, this option only makes sense for older beneficiaries.

This option provides variations that are similar to those offered for annuities. All life income options pay

the beneficiary for life. The differences in the following options arise when the beneficiary dies.

Thelife income optionpays the beneficiary regularly as long as she lives, but ends when the beneficiary

dies. Although this option provides for the largest periodic payment amount, a large amount of money

may be forfeited if the beneficiary dies early, because there is no refund of the money and no

guaranteed amount of payment.

Thelife income with period certain optionprovides the beneficiary with a lifetime of income, and a

guaranteed number of payments. If the beneficiary dies before receiving the guaranteed payments,

then the remaining payments will be paid either into her estate or to a contingent beneficiary.

Thelife income with refund optionpays at least the face value of the policy. If the beneficiary dies

before receiving all of the money, then the rest is paid either to her estate or to a contingent

beneficiary.

Joint-and-survivor incomepays a couple as long as either of them is alive. When the 1 stbeneficiary dies,

then the remaining beneficiary either gets the same amount or a reduced amount, depending on the

policy.

Additional Life Insurance benefits:

There may be many benefits of life insurance, some of which you might not even be aware of. There are

some things about life insurance benefits that you may need to know. There are some common

questions regarding how a life insurance benefit may work. Here they are. So how might a life

insurance benefit help my own life?

Life insurance benefits may help ease your beneficiaries financial burdens in more than one way. Onelife insurance benefit may be the potential for peace of mind that you may get with having the

knowledge that your beneficiaries may be protected if you were to pass away. One of the many other

life insurance benefits could the knowledge that your funeral expenses may be helped paid for if you

were to die, because one of the life insurance benefits may be that your beneficiaries may have money

accessible for such expenses.


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So, are there any other possible benefits of life insurance that I might not be aware of?

Maybe, yes. Some of the available life insurance benefits may be the investment component, as well as

the cash value. However, those life insurance benefits are generally not available with term life; you may

need to purchase a whole life or permanent insurance policy to have those additional benefits. So, ifyou want that investment life insurance benefit, you probably should not get a term life policy.

Would I be able to get a loan from the cash value policy?

You may be able to, if that is a life insurance benefit included with that particular policy.

So how might such benefits of life insurance benefit me?

Having the chance for some peace of mind may be one of the benefits of life insurance. You may benefit

from knowing that your beneficiaries may be helped financially in case you were to pass away.

Insurance Pricing:

ts axiomatic to say that insurers pricing strategies must change to reflect the times. Of course, the

insurance industry always suffers through cycles of soft and hard pricing, new entrants and

consolidation, feast and famine. However, the uniqueness of our current economic situation and our

place in the current cycle - cannot simply be shrugged off as just another turn. In this article,

Perr&Knights Patrick Light considers current market conditions and offers up best practices to price in a

way that maximizes customer retentiona key to survival in todays market.

Introduction

These are certainly unprecedented times in the world of insurance and finance. The line for government

bailouts is long and I dont even flinch anymore when I hear about large companies going bankrupt. The

Dow went from a closing high of 14,078 in October, 2007 to a low of 7,552 in November of 2008, down

46%. The unemployment rate was 7.2% at the end of 2008. The market crash and mortgage meltdown

have made it all but impossible for insurers to see any sort of gains from even the most conservative of

investment portfolios. So where do we go from here?

Many are seeing negative growth in property and casualty net written premium for the first time ever in

2008, while our database of publicly available insurance company rate filings says that personal auto

insurance rates are back on the rise. The most interesting part isnt that so many carriers are taking rate


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increases, buthowthey are taking their rate increases. This article will take a look at a composite index

of rate change filings in Illinois, a free market and good indicator of where the market wants to go, and

will provide best practices and strategies for changing rates.

In a shrinking market where rates are on the rise, precise rate changes that minimize dislocation and

maximize retention should be a key strategy for all insurance companies.

My rating plan has more price points than yours

During the last hard market of 2000 2003, the pricing segmentation race in private passenger auto was

well under way. Insurance carriers were adding credit to their pricing models and were increasing the

segmentation in their rating plans such that they were going from thousands of price points to millions.

This enabled them to compete in small market segments with surgical precision. Virtually all of the top

ten writers are using credit in their pricing models today.

In the last hard market, when carriers were focused on growth and gaining market share, this meant

that carriers could price their products to be more competitive in their target markets and less

competitive outside of those targets. Not only that, it meant that they could target market segments as

large or as small as they liked. As the market moves through what will probably be the first period of

negative direct written premium (DWP) growth the need for insurers to take rate will increase.

Navigating these complicated market conditions will be difficult even with millions of price points, but

the segmented pricers will be able to isolate problem parts of their books and increase rates with

minimal rate dislocation.

Defining the years to come will be difficult. Under normal circumstances, at this point, the market would

be hardening up again. The intense price competition in the market would be driving combined ratios

higher and insurers would take rate. As insurers take rate consumers shop and so begins the next cycle

of a growing sellers market.

Gone are the hard markets of old when rate increases yielded more consumers shopping, higher

response rates and growth. Gone are the days of bragging about sales records on a weekly basis. The

new hard market is here. It is a world where rates will rise but the market may shrink.

A case study in Illinois

To examine how the market will take shape across the country over the next year, lets take a look at the

private passenger auto insurance market in Illinois. Illinois is an excellent state to study for two main


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reasons: first, the demographics of Illinois in comparison to the demographics of the United States as a

whole illustrates many similarities with respect to age distribution, race, homeownership, education and

number of foreign born residents. In addition to the demographics, Illinois also has an open market for

Private Passenger Auto Insurance. For rate and rule filings, Illinois utilizes a Use and File system which

for all intents and purposes provides open rate competition among market participants with minimal, if

any, interference from the state. Insurers can raise and lower their rates as the market demands. There

is a great deal of market participation and also an extremely low residual market. Since insurers are

allowed to move so freely, they have their latest and greatest product models competing for business.

All in all it is a free market with demographics that mirror the country, making it a good state to use for

illustrative purposes.

The top ten insurers in Illinois are not an exact match to the national top ten but most of the players are

the same. State Farm and Allstate are the top two insurance groups with a bigger lead in their home

state of Illinois than they have nationally. The number three and four groups nationally Progressive

and GEICO are still working their way up the market share chart and currently hold the five and six

slots. Farmers Insurance Group, the national number five is number four in Illinois; and American Family

the national number ten player has the number five slot in Illinois. Nationwide Insurance Group is

the sixth largest writer of PPA insurance in the nation and is the ninth largest in Illinois and Liberty

Mutual the ninth largest national writer is the tenth largest in Illinois. USAA and AIG the number

seven and eight writers in the nation are not in the Illinois top ten, while Country Mutual and

Metropolitan are in the Illinois top ten but not in the national top ten.

The chart on the following page depicts a composite of the top ten insurance groups writing private

passenger auto insurance in Illinois based on 2007 direct written premiums[i]. The top ten make up

73.7% of the market. The top line shows year-over-year direct written premium growth rates for the top

ten groups and the bottom line shows their filed rate changes[ii] weighted by their 2007 DWP.

One of the most difficult, yet important, issues you must decide as an entrepreneur is how much to

charge for your product or service. While there is no one single right way to determine your pricing

strategy, fortunately there are some guidelines that will help you with your decision.

Before we get to the actual pricing models, here are some of the factors that you need to consider:
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Positioning - How are you positioning your product in the market? Is pricing going to be a key part of

that positioning? If you're running a discount store, you're always going to be trying to keep your prices

as low as possible (or at least lower than your competitors). On the other hand, if you're positioning

your product as an exclusive luxury product, a price that's too low may actually hurt your image. The

pricing has to be consistent with the positioning. People really do hold strongly to the idea that you get

what you pay for.

Demand Curve - How will your pricing affect demand? You're going to have to do some basic market

research to find this out, even if it's informal. Get 10 people to answer a simple questionnaire, asking

them, "Would you buy this product/service at X price? Y price? Z price?" For a larger venture, you'll want

to do something more formal, of course -- perhaps hire a market research firm. But even a sole

practitioner can chart a basic curve that says that at X price, X' percentage will buy, at Y price, Y' will buy,

and at Z price Z' will buy.

Cost - Calculate the fixed and variable costs associated with your product or service. How much is the

"cost of goods", i.e., a cost associated with each item sold or service delivered, and how much is "fixed

overhead", i.e., it doesn't change unless your company changes dramatically in size? Remember that

your gross margin (price minus cost of goods) has to amply cover your fixed overhead in order for you to

turn a profit. Many entrepreneurs under-estimate this and it gets them into trouble.

Environmental factors - Are there any legal or other constraints on pricing? For example, in some cities,

towing fees from auto accidents are set at a fixed price by law. Or for doctors, insurance companies and

Medicare will only reimburse a certain price. Also, what possible actions might your competitors take?

Will too low a price from you trigger a price war? Find out what external factors may affect your pricing.

The next step is to determine your pricing objectives. What are you trying to accomplish with your

pricing?

Short-term profit maximization - While this sounds great, it may not actually be the optimal approach

for long-term profits. This approach is common in companies that are bootstrapping, as cash flow is the

overriding consideration. It's also common among smaller companies hoping to attract venture funding


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by demonstrating profitability as soon as possible.

Short-term revenue maximization - This approach seeks to maximize long-term profits by increasing

market share and lowering costs through economy of scale. For a well-funded company, or a newlypublic company, revenues are considered more important than profits in building investor confidence.

Higher revenues at a slim profit, or even a loss, show that the company is building market share and will

likely reach profitability. Amazon.com, for example, posted record-breaking revenues for several years

before ever showing a profit, and its market capitalization reflected the high investor confidence those

revenues generated.

Maximize quantity - There are a couple of possible reasons to choose the strategy. It may be to focus onreducing long-term costs by achieving economies of scale. This approach might be used by a company

well-funded by its founders and other "close" investors. Or it may be to maximize market penetration -

particularly appropriate when you expect to have a lot repeat customers. The plan may be to increase

profits by reducing costs, or to upsell existing customers on higher-profit products down the road.

Maximize profit margin - This strategy is most appropriate when the number of sales is either expected

to be very low or sporadic and unpredictable. Examples include custom jewelry, art, hand-made

automobiles and other luxury items.

Differentiation - At one extreme, being the low-cost leader is a form of differentiation from the

competition. At the other end, a high price signals high quality and/or a high level of service. Some

people really do order lobster just because it's the most expensive thing on the menu.

Survival - In certain situations, such as a price war, market decline or market saturation, you must

temporarily set a price that will cover costs and allow you to continue operations.

Now that we have the information we need and are clear about what we're trying to achieve, we're

ready to take a look at specific pricing methods to help us arrive at our actual numbers.


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As we said earlier, there is no "one right way" to calculate your pricing. Once you've considered the

various factors involved and determined your objectives for your pricing strategy, now you need some

way to crunch the actual numbers. Here are four ways to calculate prices:

Cost-plus pricing - Set the price at your production cost, including both cost of goods and fixed costs atyour current volume, plus a certain profit margin. For example, your widgets cost $20 in raw materials

and production costs, and at current sales volume (or anticipated initial sales volume), your fixed costs

come to $30 per unit. Your total cost is $50 per unit. You decide that you want to operate at a 20%

markup, so you add $10 (20% x $50) to the cost and come up with a price of $60 per unit. So long as you

have your costs calculated correctly and have accurately predicted your sales volume, you will always be

operating at a profit.

Target return pricing - Set your price to achieve a target return-on-investment (ROI). For example, let's

use the same situation as above, and assume that you have $10,000 invested in the company. Your

expected sales volume is 1,000 units in the first year. You want to recoup all your investment in the first

year, so you need to make $10,000 profit on 1,000 units, or $10 profit per unit, giving you again a price

of $60 per unit.

Value-based pricing - Price your product based on the value it creates for the customer. This is usually

the most profitable form of pricing, if you can achieve it. The most extreme variation on this is "pay for

performance" pricing for services, in which you charge on a variable scale according to the results you

achieve. Let's say that your widget above saves the typical customer $1,000 a year in, say, energy costs.

In that case, $60 seems like a bargain - maybe even too cheap. If your product reliably produced that

kind of cost savings, you could easily charge $200, $300 or more for it, and customers would gladly pay

it, since they would get their money back in a matter of months. However, there is one more major

factor that must be considered.

Psychological pricing - Ultimately, you must take into consideration the consumer's perception of your

price, figuring things like:


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Positioning - If you want to be the "low-cost leader", you must be priced lower than your competition. If

you want to signal high quality, you should probably be priced higher than most of your competition.

Popular price points - There are certain "price points" (specific prices) at which people become muchmore willing to buy a certain type of product. For example, "under $100" is a popular price point.

"Enough under $20 to be under $20 with sales tax" is another popular price point, because it's "one bill"

that people commonly carry. Meals under $5 are still a popular price point, as are entree or snack items

under $1 (notice how many fast-food places have a $0.99 "value menu"). Dropping your price to a

popular price point might mean a lower margin, but more than enough increase in sales to offset it.

Fair pricing - Sometimes it simply doesn't matter what the value of the product is, even if you don't haveany direct competition. There is simply a limit to what consumers perceive as "fair". If it's obvious that

your product only cost $20 to manufacture, even if it delivered $10,000 in value, you'd have a hard time

charging two or three thousand dollars for it -- people would just feel like they were being gouged. A

little market testing will help you determine the maximum price consumers will perceive as fair.

Now, how do you combine all of these calculations to come up with a price? Here are some basic

guidelines:

Your price must be enough higher than costs to cover reasonable variations in sales volume. If your sales

forecast is inaccurate, how far off can you be and still be profitable? Ideally, you want to be able to be

off by a factor of two or more (your sales are half of your forecast) and still be profitable.

You have to make a living. Have you figured salary for yourself in your costs? If not, your profit has to be

enough for you to live on and still have money to reinvest in the company.

Your price should almost never be lower than your costs or higher than what most consumers consider

"fair". This may seem obvious, but many entrepreneurs seem to miss this simple concept, either by

miscalculating costs or by inadequate market research to determine fair pricing. Simply put, if people

won't readily pay enough more than your cost to make you a fair profit, you need to reconsider your


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business model entirely. How can you cut your costs substantially? Or change your product positioning

to justify higher pricing?

Pricing is a tricky business. You're certainly entitled to make a fair profit on your product, and even a

substantial one if you create value for your customers. But remember, something is ultimately worthonly what someone is willing to pay for it.

Rate Making in Life Insurance:

Rate making(akainsurance pricing) is the determination of what rates, or premiums, to charge for

insurance. Arateis the price per unit of insurance for eachexposure unit, which is a unit of liability or

property with similar characteristics. For instance, in property and casualty insurance, the exposure unitis typically equal to $100 of property value, and liability is measured in $1,000 units.

Because an insurance company is a business, it is obvious that the rate charged must cover losses and

expenses, and earn some profit. However, all states have laws that regulate what insurance companies

can charge, and thus, both business and regulatory objectives must be met.

The mainbusiness objectiveis to charge an adequate premium to cover losses, expenses, and allow for

a profit; otherwise the insurance company would not be successful. Thepure premium, which is what is

determined by actuarial studies, consists of that part of the premium that is necessary to pay for losses

and loss related expenses.Loadingis the part of the premium necessary to cover other expenses,

particularly sales expenses, and to allow for a profit. Thegross rateis the pure premium and the loading

per exposure unit and thegross premiumis the premium charged to the insurance applicant, and is

equal to the gross rate multiplied by the number of exposures units to be insured. The ratio of the

loading charge over the gross rate is theexpense ratio.

Gross Rate = Pure Premium + Load

Gross Premium = Gross Rate x Number of Exposure Units

Expense Ratio = Load / Gross Rate
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Otherbusiness objectivesin setting premiums are simplicity in the rate structure, so that it can be more

easily understood by the customer, and sold by the agent; responsiveness to changing conditions and to

actual losses and expenses; and encouraging practices among the insured that will minimize losses.

The mainregulatory objectiveis to protect the customer. A corollary of this is that the insurer must

maintain solvency in order to pay claims. Thus, the 3 main regulatory requirements regarding rates is

that:

they befaircompared to the risk;

premiums must beadequateto maintain insurer solvency; and

premium rates arenot discriminatorythe same rates should be charged for all members of an

underwriting class with a similar risk profile.

Although competition would compel businesses to meet these objectives anyway, the states want to

regulate the industry enough so that fewer insurers would go bankrupt, since many customers depend

on insurance companies to avoid financial calamity.

The main problem that many insurers face in setting fair and adequate premiums is that actual losses

and expenses are not known when the premi

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