Chapter – 1

LIFE & HEALTH INSURANCE

Insurance Definition:

It is a system whereby contributions are received from the insuring public and pool of money

is created from where the claims are paid to a few unfortunate persons who died during the

insurance period.

What Is Life Assurance?

Whereby a policy is issued on the life of the person, it is normally called assurance and where

the policy is issued for any object it is called insurance.

Life Assured:

A person on whose life assurance policy has been issued is called life assured.

Assurance Contract:

This is an agreement between the person proposing for insurance and the life insurer. The

contract is complete when the following three conditions are fulfilled;

Proposal form is submitted.

It is accepted

Premium is paid.

It is not necessary that for completion of the contract any written form of agreement is

required. The contract is complete and enforceable at law immediately the above three

conditions are met.

Mortality Ratios:

Rate of deaths per year of the persons within the same age group are called mortality ratios.

Mortality ratios are basic themes for life insurance. All plans of insurance are based on

mortality ratios.

Mortgagee:

Mortgagee is a person whose property has been mortgaged.

Mortgager:

Mortgager is a person who mortgages the property for advancing a certain amount of loan to

the mortgagee. These terms are used for the persons who are involved in advancing and

receiving loan against the security of a tangible property.

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Life insurance policy is considered as good as a tangible property for the purposes of loan

transactions.

Actuary:

Actuary is a person who calculates the mortality ratios and life insurance premium rates

based on actual experiences of very wide and larger data with total professional background.

Law in Pakistan requires every life insurance company to have an appointed actuary. The

appointed actuary is responsible for submitting certain statistical reports directly to the SECP

(Security Exchange Commission of Pakistan) ¸which is regulatory body to monitor the

solvency of the insurance companies. Unlike any other employee and officer of the company

the services of an appointed actuary can not be terminated without prior intimation of reasons

to the SECP.

Assignments:

When life assured transfers the rights and liabilities under a policy to another person in a

lawful manner it is called assignment.

Subject Matter of Assurance:

Subject matter of assurance is always life of a person for the purpose of life assurance.

Insurable Interest:

Insurable interest means somebody’s pecuniary stake or interest in the subject matter of

insurance. As far as life assurance is concerned, a person has an unlimited insurable interest

in his/her life or in the life of his/her spouse. However, the sum assured which is the amount

of assurance is regulated and determined by the average yearly income of the person on

whose life the policy is being taken.

Proximate Cause:

A cause or happening that sets in motion a chain of events which brings about a result

without intervention of a new and independent cause.

Indemnity:

To place the insured in the same financial status which he or she was enjoying prior to the

happening of the event which causes loss? Normally life insurance contracts are not purely

contracts of indemnity.

Utmost Good Faith:

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Utmost good faith means that both parties to the insurance i.e. insured and insurer are

required to disclose the complete information about the facts which may influence the

decision of each party for entering or issuing the insurance contract.

Each party places a total reliance from the statements made by the other party. The

prospective insured is required by the insurer to answer specific questions put to him/her in

entering to extract material information necessary for the consideration of insurance proposal

by the underwriter. Any concealment of material facts or misstatement shall cause the

contract to be made violable by the insurers.

Proposer:

Proposer is the person who puts forward a proposal for insurance on his/her life or on the life

of another person.

Life Proposed:

Life proposed is a person on whose life the policy is proposed to be issued

Material Information:

Material information means the information about the facts of insurance which may influence

the decision of either party to give or take insurance. For example, if an insurer or any

functionary of insurer gives false information to the prospective insured which induces

him/her to take out the insurance policy, the insured will be entitled to make the contract

void, and claim the refund of amounts paid along with appropriate damages, if any to the tune

the court may deem fit. Similarly, if the prospective insured misstates his/her health or

financial position, the insurer would be entitled to deny any claim whatsoever made under the

policy.

Offer:

When a person fills in a proposal form designed by an insurer and submits that form to the

insurer for underwriting consideration, that form constitutes an offer from he proposer for

insurance.

Counter Offer:

The offer made by the proposer through the proposal form is evaluated and judged by the

insurer’s underwriter’s vis-à-vis its underwriting parameters. If the offer does not fit into

those parameters, the underwriters have two options;

To apply special terms such as increased rate of premium or reduction in sum

assured and term of the policy or both.

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To decline the offer.

In case of underwriters decide to increase the premium or apply other terms that is called

counter offer and if it is accepted by the proposer in writing, the policy is issued on those

modified terms.

Acceptance:

If the original offer falls into the standard parameters of underwriting, the underwriters

accept the proposal as it is, which is called simple acceptance. If the policy is issued after

acceptance of the counter offer then it is called acceptance with loading.

Consideration

Consideration is an insurance term for the amount of premium which the insured has to pay

to the insurer as per agreed terms.

Natural Premium:

The premiums for life assurance are collected and charged according to the age of the life

assured. Higher the age higher the premium. Insurers maintain a pool of fund in which the

insuring public contributes equitably. The younger people have to pay lesser rate of premium

as compared to the older people. With the progress in age of a person year by year, he/she

becomes nearer and nearer to death. The system of natural premiums is very complicated and

as such it is very difficult for the insurers and insuring public alike to receive or pay the

premiums on increased rates every year. To overcome this difficulty the actuaries have

developed, on scientific basis, the system of level premium.

The level premium means that when a person takes out a policy say for 20 years’ term, he/she

will pay the same amount of premium every year which has been calculated on average basis.

Actuarial Principles:

Actuarial principles include the following factors in determining the rate of premium;

Expenses of the office

Margin of profit of the insurance company.

Provision for commission to the insurance agents of the insurance company

The study of trends in the rate of mortality.

The expected investment income of the insurance company.

Economic Principles:

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The life insurance plays a vital but invisible role in the overall economy of a country

especially in the social sector where there is no financial support for the widows and orphans

on the government level.

It reduces the mental tension of an individual caused by the future financial worries like

old-age or well-being of the family.

It ensures for the continued education of the children.

It also reduces financial stress in case the breadwinner of the family has hire-purchased

any property or goods like house, motor car or any household goods.

Legal Principles:

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5

Chapter – 2

LIFE ASSURANCE CONTRACTS

CLASSIFICATIONS

In This Chapter:

Term insurance

Whole life insurance

Endowment insurance

TERM INSURANCE

It is a type of contract in which sum assured is payable only on death of the life assured

within the term of insurance. There is no maturity value and surrender and loan facilities

available.

WHOLE LIFE INSURANCE

In this type of insurance there are two sub-divisions;

Whole life insurance by limited payment of premiums which mean that a specific term is

selected for payment of premiums and after the expiry of that term the premium ceased to be

paid but the sum assured shall be payable on death only.

Whole life insurance where the premium is continues to be paid till death of the assured.

This type of insurance has further sub class whereby the sum assured is payable either on

death or on attaining the age of 85 years.

ENDOWMENT INSURANCE

This is a type of life insurance whereby a specific term is selected and premiums are payable

throughout that term or earlier death. If the life assured survives that term the sum assured

along with accrued bonuses is paid as maturity value. This class of insurance carries

surrender and loan values provided the policy has been enforced for at least two consecutive

years.

CLASSIFICATION OF ENDOWMENT INSURANCE

1. Simple Endowment 2. Anticipated Endowment

3. Joint Life Endowment Assurance 4. Progressive Endowment

5. Children Endowment 6. Single Premium Endowment

7. Family Pension Endowment 8. Optional Maturity Endowment

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9. Mortgage Protection Endowment 10. Personal Pension Endowment

11. Annuities Endowment 12. Unbundled Endowment Insurance

1) Simple Endowment

This class of assurance provides for the benefits to be payable at the end of the term of

assurance. Or earlier death equal to the sum assured plus accrued bonuses.

2) Anticipated Endowment

In this plan the insurance is issued for a term which is usually dividable by three periods i.e.

12 year, 15 years and 18 years. At the end of 1/3rd period and 2/3rd period sum assured is paid

proportionately. Companies give second option whereby the sum assured is paid as 1/4 th at

the end of the first broken term and another 1/4 th at the end of 2nd broken term and remaining

50% of the sum-assured along with accrued bonuses is paid at the end of full term of the

assurance. In case of earlier death the full sum assured along with bonuses is payable. If the

death occurs within the first broken period the full sum assured will be paid. After the 1st

broken period when the assured has already received a portion of the sum assured even then

the full sum assured along with accrued bonuses shall be payable and so will be the case

where second installment had also been received by the assured.

3) Joint Life Endowment Assurance

This type of policy is issued on the join lives of two persons which are usually husband and

wife wherein one sum assured is involved and accordingly one annual premium is payable.

There are two types of covers are available;

Simple

Jeevan Sathi

Simple

In simple joint life assurance the sum assured is payable if both partners survive to the end of

the term of the policy or on earlier death of anyone of the partners to the contract.

Jeevan Sathi

In Jeevan Sathi plan the maturity benefits are similar to joint life simple policy but in case of

death of anyone partner full sum assured without bonuses are paid to the surviving partner.

The subsequent premiums ceased to be paid and the policy continues till maturity date or

earlier death of the second partner whereby sum assured along with accrued bonuses shall

become payable.

4) Progressive Endowment

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In this type of assurance the policy holder is given an option to increase the sum-assured

without giving health requirement after a certain period say five years. However, premium

will increase accordingly.

5) Children Endowment

Child endowment policy can be issued independently on the life of the child or jointly with

the parents.

In child independent policy the premium is paid by the parent and similar is the case with

joint with the parent policy.

The sum assured is payable along with accrued bonuses on completion of term of the policy

that is maturity date or on earlier death of the child. In case of child joint life policy an

annuity also becomes payable at an agreed date of sum assured for the remaining term of the

policy in case of death of the parent.

6) Single Premium Endowment

In this case or plan, policy can be obtained for any number of years by payment of a single

premium at the outset. The sum assured is usually greater than the single premium and is

payable on maturity date or earlier death along with accrued bonuses.

7) Family Pension Endowment

In case of death of the assured, sum assured along with accrued bonuses is paid and a

pension is started at a pre-agreed rate as mentioned in the policy document for the remaining

period of the policy. This rate may range from 10% to 50% of the sum assured. Pension will

be payable annually or in monthly installments if the claimant so wishes.

8) Optional Maturity Endowment

In this type of assurance, the assured is given an option to get an early maturity claim instead

of completing the full term. This option is usually exercisable after the policy has completed

20 years.

9) Mortgage Protection Endowment

When a person avails any amount of loan from any financial institution against the security of

a tangible property he or she is usually required by that financial institution to have a life

insurance policy affected on his or her life for a sum assured equal or at greater than the

amount of loan. That policy has to be assigned to that financial institution. Such a policy is

arranged under Mortgage Protection plan, which has been designed by the insurance

companies for this specific purpose. This plan provides for the sum assured to be reduced

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gradually as the loan amount reduces by payment of loan installments. As the sum insured

reduces so is the case with premium and at the end of the term both amounts are zero.

10) Personal Pension Endowment

Under Personal Pension Endowment policy different insurance companies have their separate

practices. However, there are certain common points. This policy is normally issued for a

period of six years. Total amount of premium for all those six years is received in lump sum

in advance and at the end of sixth years the pension amount starts to be paid to the insured at

the prescribed pre-agreed rate and it continues for the remaining tem of the policy or earlier

death of the insured. In this sort of insurance the insurer do not call for any health

requirements.

11) Annuities Endowment

Annuities plans are also issued by the life insurance companies but annuities processes are

reverse picture of the conventional endowment life insurance. Under annuity policy premium

is received in lump sum at the outset and an annuity payment by an insurance company is

started after an agreed number of years e.g. 10 years. The annuity policy has two

classifications;

Annuity certain

Annuity simple

Annuity certain

Under this plan the annuity payments are continuously to be made for an agreed number of

years e.g. 20 years irrespective of whether the insured is living or not.

Annuity simple

In this case the annuity payments stop immediately after the death of annuitant.

12) Unbundled Endowment Insurance

Unbundled policies are endowment life insurance policies give the insured an option to

increase the sum-assured and of course the premium by an agreed percentage on yearly basis.

This increasing option starts from the third year of the policy. Once an option to increase the

sum assured has been exercised by the insured there is no compulsion on him or her to

continue to increase the sum assured continuously every year. However if the insured does

not exercise the option for 3 consecutive years when he will be barred to increase.

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9

Chapter - 3(A)

Riders or Supplementary Contracts

Accidental Indemnity Benefits (AIB):

This type of supplementary contract provides for the payment of an additional sum assured in

case the death of the insured is caused by an accident. Also insured is indemnify at a

prescribed rate for the expenses which he or she may incur for the treatment of injuries

received by him or her as a result of an accident.

Accidental Death Benefits (ADB):

Under this supplementary contract an additional sum assured is paid in case of death by an

accident. For this contract additional premium will be charged by the Underwriter.

Family Income Benefit Rider (FIBR):

Under this supplementary contract an amount equal to an agreed percentage of the sum

assured becomes payable to the family of the decease insured for the remaining term of the

policy. The percentage may vary between 10 to 50%.

Guaranteed Insurability Rider (GIR):

This supplementary contract provides for the insured to avail a further insurance within given

number of years say 10 years without any health requirements.

Hospital and Surgical Rider (H & SR):

This type of contract ensures that in case the life insured has to be admitted into the hospital

for treatment of any disease for which he is suffering or for any surgical procedure the

insurance company will pay the relevant expenses that is room rent and treatment cost at a

rate of sum assured which is usually pre-agreed.

Refund of Premium Rider (RP)

In case of death of insured the premium received by the insurer up to the date of death are

also refunded along with the claim amount.

Term Insurance Rider (TIR):

In case of death double of the sum assured is paid even death occurs by any cause.

Waiver of Premium Rider (WPR):

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Under this supplementary contract if a person is incapacitated on his or her livelihood as a

result of any disease or accident. Further premiums under his or her policy are waived and

policy continues till maturity date or earlier death.

Important note:

All the supplementary contracts have no maturity value, loan value or surrender value.

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11

Chapter – 3 (B)

Life Assurance Contracts

There are two parties in life assurance contract;

The Proposer

The Insured

The Proposer

The Proposer (Applicant) who subsequently becomes the insured if the proposal is accepted

by the insurer Proposer can’t’ always be the life insured.

The Insured

The Proposer and the life proposed is not always the same person. For example a policy is

being taken out by a parent on the life his/her child, the parent will be the Proposer and the

child life proposed.

This process starts with the completion of the proposal form containing a number of

questions designed to have complete information about the health condition and financial

status of propose.

PROPOSAL FORM

The proposal form consists of 3 important portions as under;

A. Personal statement: This contains the information about the;

Name

Father’s Name

Date of birth

Disease the proposer may have suffered,

Details of accidents, if any

Treatment details,

Vaccination details

Employment details

Land ownership

Family history with ages of family members, if any

Family member died with dates and cause of death and other details etc.

B. Declaration: Declaration is signed by the proposer to the effect that the statements

made by him/her are true to every effect and he/she has not concealed any material

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information while answering the relevant questions. The proposer also declares that if

any concealment is found after issuance of the policy, the insurer may make the contract

void and forfeit the premiums paid by the proposer. The proposer also authorizes the

insurer to contact any doctor or hospital from where he may have taken the treatment

and obtain the treatment record.

AGENT’S REPORT

The agent is said to be the 1st Underwriter of the consumer. He has to report to the insurer

about his knowledge of the proposer’s health, his monthly income and the value of his assets

and agent also reports the period for which proposer is known to him.

After the proposal form, there are 3 steps:

Offer

Acceptance

Consideration

Counter offer

A. Offer: The proposal/applicant form constitutes an offer for getting insurance from the

insurer by the proposer.

B. Acceptance: When the insurance company/insurer receives a complete proposal form

duly signed and witnessed, it is examined by its underwriter. If the offer falls within

underwriting parameters it will be accepted and then it is called acceptance.

C. Consideration: After acceptance the proposer has to pay be premium as calculated by

the underwriter and that payment of premium is called consideration.

D. Counter offer: If that proposal does not fall in the parameter of underwriting, the

underwriter will make a counter offer to the Proposer.

This counter offer is made in writing by the insurer to the proposer. The proposer may accept

this counter offer or may not. If he accepts he will sign this counter offer as a token of his

acceptance and pay the premium i.e. consideration to complete the contract. In both situations

after payment of consideration the contract will be completed.

Acceptance on ordinary rates/terms

The simple process of the acceptance of offer is called acceptance on ordinary rates/terms.

Acceptance with loading

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When the insurer issues the contract after the acceptance of counter offer, it is called

acceptance with loading.

Decline

In declined cases the underwriter finds extraordinary abnormalities in the life proposed health

conditions or in his/her occupation or financial status. Therefore, he will decline the offer

treating it as uninsurable. However, certain insurance companies in the world including

Pakistan insure such declined lives on special terms under their non-decline nature schemes.

One such scheme for example is that if the insured person dies within the 1st year of insurance

no claim what so ever is payable and if insured dies within 2nd year of the policy the 2nd year

premium will only be refunded. However, if death occurs due to an accident during these two

years the full claim will be payable whether the death occurs by accident or true sickness,

meaning thereby that both the deaths whether through accident or material cause shall be

covered. The insured will have to pay an extra premium every year.

TYPES OF PREMIUMS

A. Natural Premium

Life insurance companies basically charge the premium at a rate as applicable to different

ages as the age of person increases so the chances of his death increase accordingly. The

older people have to pay the premium at the rate greater than the younger people. This system

is called the system of payment of natural premium. Example is;

AGE PREMIUM @ Rs.1000/-

20 years Rs. 19.10

21 years Rs. 19.15

22 years Rs. 19.20

60 years Rs. 45.50

But it is very difficult from the administrative point of view for the insurance companies to

bill and charge the premium on different rates every year. Due to this difficulty the actuaries

on the basis of study and analysis of a large number of world wide data of deaths on v various

ages, developed a system whereby it was made possible for the insurance companies to

charge the same premium from an insured every year throughout the term of the policy. This

system is called level premium. This level premium is actually in average amount per year of

the natural premium throughout the policy term. This means that the insured will have to pay

an extra amount in the early years and a lesser amount in the later years. In this system

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insurance companies develop their reserves in the early years which are used to offset the

claims tendency in later years.

B. EXTRA MORTALITY (EM)

EM +50

EM +100

EM +200

“EM” the lives proposed or under written by the insurer according to their underwriting

principles and parameters. If any proposal does not fit in those parameters especially with

regard to the health condition or on account of occupation, he or she is considered. For

insurance in consideration of payment of an extra premium the reasons for which the extra

premium is charged come within the bracket of extra mortality.

Extra mortality is usually charged under any or both of the following headings:

“ME” Medical Extra (e.g. if he is suffering from hypertension)

“OE” Occupational Extra (e.g. he is a Rickshaw Driver)

C. Medical Extra

If the person is already suffering from any disease, he must have to pay extra premium.

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15

CHAPTER - 4

LIFE INSURANCE PROPOSALS

These fall under two broad categories:

Non-Medical Proposal form

Medical Proposal form

Non-Medical Proposal Form

In non-medical proposal form the underwriters rely entirely on the statements and

information given by the proposer. In other words the contract is issued under utmost good

faith.

Medical Proposal Form

It is almost similar to that of non-medical but except that the questions in the personal

statement are put to the proposer by he doctor appointed by the insurer. The answers are

recorded by the doctor in his/her handwriting. Apart from the physical medical examination

of the proposer the insurers get certain clinical and laboratory test made according to the sum

assured proposed. Except for occupational extra the extra premium is charged in respect of

relevant cases of medical.

1. Loading

In technical terms the premium charged under extra mortality as medical extra or

occupational extra is called loading. This means that the ordinary rate of premium has been

loaded or increased by the rate applicable to extra mortality.

2. Policy Document

Policy document is an evidence of contract. The policy document is issued after the contract.

It has four parts as under:

Preamble clause: this clause identifies the parties to the contract and sets forth the rights and

liabilities of the parties. It also refers to the fund to which the policy pertains.

Schedule: in schedule all the necessary particulars of the insurance are mentioned. These

particulars include;

Policy number.

Sum assured

Plan of insurance (Table & Term).

Date of commencement of policy or risk.

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Date of maturity.

Name and address of the assured.

Name of guardian (if nominee is minor)

Amount of premium.

Mode of payment (monthly, quarterly, half yearly or annually).

ANF option (Automatic non-forfeiture).

Reference to endorsements, if any.

Terms and conditions

The first term is Grace Period. Different insurance companies have heir own practices but

hey usually allow the grace period of 31 days after the premium has become due. If the

premium is paid within grace period the policy remains in force, otherwise it lapses. In case

death occurs within the grace period and the premium is still unpaid, the insurer will pay the

claim by deducting that outstanding premium from the claim amount.

3. Revival:

A policy can be revived by payment of outstanding premiums and fulfillment of necessary

health requirements. Companies usually place restrictions that a policy remaining lapsed for

more than 5 years shall not be revived.

4. Paid-Up Value

If a policy has been enforced for at least two consecutive years by payment of premium, it

can be made paid-up for a reduced sum-assured. No further premiums will be payable and the

reduced sum assured shall become payable either on maturity or earlier death.

Example is.

Sum assured Rs. 1, 00,000

Term 20 years

Paid premium 3 years

Paid up value = 1, 00, 00 x 3 = 15,00020

5. Surrender Value

The policy shall acquire a surrender value, after it has been enforced by payment of premium

for at least two consecutive years. While calculating the surrender value following payments

are not taken into consideration;

First Year Premium (FYP)

Premium of any supplementary contract.

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6. Loan ValueThe policy holder can obtain a loan against the policy up to an amount equal to the 80% of

surrender value of the policy, which is repayable in easy installments along with an interest as

prescribed by the company from time to time.

7. Automatic Non Forfeiture (ANF):

This class is incorporated in he policy contracts by the insurance companies to comply with

the provisions of section 93 of the Insurance Ordinance, 2000. This has two sub-sections;

APU – Automatic Paid-up. This means that if the policy has run for at least two

consecutive years by payment of premiums and any subsequent premiums have not

been paid and in response to a notice for payment of premium, the policy holder

instead of paying the premium opts to discontinue the policy he can select this option

whereby the policy will be made paid-up for a reduced sum assured.

8. API – Automatic Premium Loan:

If The Policy Holder Selects This Option Then the Policy Will be kept in force by applying

surrender value to the outstanding premiums, till such time the surrender value is exhausted.

Once he surrender value is exhausted the policy is treated as having been automatically

surrendered and as such carry no claims value whatsoever.

9. Evidence Of Age:

This condition states no benefits under this policy what so ever, shall be paid until and unless

the age of the life assured is got admitted on the basis of a valid documentary evidence.

10. Suicide Clause:

If the life assured commits suicide within 13 months of the issuance of the policy, no claims

shall be payable.

11. Currency And Payment Of Premium:

The premiums will be paid under Pakistan currency and at the prescribed offices of the

insurance company.

12. Supplementary Benefits

Any supplementary contracts are attached to this policy and those will be regulated as per

terms and conditions contained in the enclosed relevant documents.

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13. Premium Notices:

The policy holder has to pay the premium as and when they fall due. There is no obligation

on the insurance company to issue premium notices. However, the companies do issue

premium notices invariably as a business courtesy.

14. Incontestability Clause:

This clause states that answers to questions and any statement made by the proposer in the

proposal form shall not be contested after two years of the issuance of policy, unless a

fraudulent intension of the assured is proved.

15. Travel, Residence And Occupation:

This policy is free from travel, residence and occupation.

16. Free Look Period:

This condition or privilege has been incorporated in the policy documents by the insurance

companies, as a result of insurance rules issued by the DECP. The rule states that the policy

holder can get the policy cancel and have the refund of premium without any deduction,

except the medical expenses if any, within fourteen days of the issuance thereof.

17. Liquidated Damages:

The Insurance Ordinance, 2000 makes it compulsory to pay the liquidated damages at a rate

5% above the bank rate if the insurance company delays the payment of the claim beyond 90

days of the submission of all the claims requirements by the claimant.

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19

CHAPTER - 5

CLAIMS

Injury Claims

Maturity Claims

Surrender Claims

Death Claims

A. Surrender claims:

When a policy acquires a surrender value the policy holder can get its cash value payment by

surrendering him original policy document. Surrender value or cash value is calculated

according to the surrender value factors developed by the actuaries of the concerned

insurance company. However, while calculating the surrender value following types of

payment are excluded:

Premium for any supplementary contract

Premium for any occupational extra or medical extra

Premium for 1st year

For obtaining the surrender value payments, the policy holder have to apply in writing to the

insurance company and have to sign a pre-receipt discharge voucher which contains the

amount of cash value, bank account number of the policy holder and name and address of the

branch of the bank. The discharge voucher has to be got witnessed.

After completion of these requirements and submission thereof along with the original policy

document, the company makes the payment of the amount of surrender value.

After payment of surrender value no claim what so ever lies against the insurance company.

As per Zakat and Usher Ordinance, 1980, Zakat has to be deducted at prescribed rate from

the surrender value and deposited with the Government treasury. The policy holder who does

not want to get the Zakat deducted will have to submit a Zakat declaration affidavit.

B. Maturity claims

A maturity claim becomes payable after completion of term of the policy. Maturity value is

calculated by adding accrued bonuses to the sum-assured. For obtaining payment of the

maturity value the policyholder has to submit the following documents;

Pre-receipt discharge voucher

Attested copy of NIC

Original policy document

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C. Injury claims

Policies which carry AIB rider are eligible for claims under this heading. If a policy holder

receives accidental injuries, he can claim an indemnity as per schedule given in the

endorsement of AIB contract. This schedule may differ from company to company. However

an example could be as follows;

Loss of both eyes (indemnity is full sum assured)

Loss of one eye and one limb (full sum assured)

Loss of one eye (half of the sum assured will be paid)

Loss of one limb (half of the sum assured will be paid)

Loss of thumb and index finger (1/4th of the sum assured will be paid)

For other in juries by which the insured is totally and temporarily disable to perform any

duties for wage or profit (Rs. 5/- per thousand of sum assured per week)

If the insured is partially disabled, he will receive 1/4th of the weekly disability.

When a policy holder receives disability payment under both the previous headings for 52

weeks continuously and he still disabled the payment will be switched to an annuity which

equals to 10% of the sum assured.

The period during which the annuity is being paid the subsequent premiums under the policy

following due in that period shall be waived and policy will continue as enforced. If the

annuity is paid for 10 years which is the maximum period all the subsequent premiums will

also be waived.

D. Death claims:

Death claims fall under these two sub-divisions;

Early death claims

Non-early death claims

Early Death Claims

Those claims which occur within the incontestability period which are, within two years of

the issue of the policy.

Process

1. When death of a policy holder occurs the claimant under the policy informs the life

insurer of the fact along with proof of death i.e. a copy of the death certificate is attached with

the information letter. This process is called intimation.

2. Immediately on receipt of the intimation of death the claims manager of the insurer

checks the policy status and if it is found enforce, he will issue the claim forms. If the policy

21

is lapsed he would issue a regret letter informing the claimant that nothing is payable under

the policy being lapsed. The claim forms include the following;

Claimant’s statement

Attending doctor’s report

Certificate of identity

Employer’s statement, if the policy holder was employed

The claimant has to get these forms filled in, attested and submitted to the insurer. On receipt

of claims forms duly completed he claims manager will get the case investigated to confirm

as to whether the statements made in the proposal form and the information disclosed thereby

are correct or not. If any concealment or misstatement found with its documentary evidence

like any sort of treatment of a sickness, which was material to disclose in the pre-insurance

period it will be substantiated with the relevant treatment documents which may be in the

shape of written prescriptions of any attending physicians and or hospital admission record.

If he evidence of concealment of pre-insurance ailment is strong the claims manager shall be

constraint to repudiate the claim and inform the claimant accordingly. In case everything goes

all right the claims manager shall accept the claim and issue a re-receipt discharge voucher.

On completion of this pre-receipt discharge voucher the insurer would issue the claims

cheque.

Non-early Death Claims

In non-early death claims he process is almost same as that of early claims except that

investigation is not mandatory and is only carried out in a very few cases where there is a

genuine doubt about any foul play. The employers statement form is also not required under

the non-early death claims.

***********

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CHAPTER - 7

GROUP LIFE INSURANCE

As the name denotes group life insurance caters for the needs of a group of people working

together or having he same kind of profession. It is a sort of term insurance. No surrender,

loan or maturity values are available there under.

Recent trends:

There has been rapid growth in him transaction of group insurance for the last one decade.

About 45% of life insurance business in Pakistan is now been transacted under the group life

portfolio. The insurance companies have evolved new plans and types of group insurance

coverage. A market of group life insurance is very competitive and the insurance companies

have to win the group life insurance business on the basis of their efficient services and

competitive rates. For this purpose they have made and are continuing to make substantial

modifications in heir plans and designs of the policy. Rather the companies have adopted a

flexible approach whereby they could make decisions according to nature of each group

individually.

Basic Principles:

The group insurance contract is between the employer and the insurer for the benefit of the

employees. This means that the parties to the contract are employer and the insurer. The

employee is only the beneficiary. The claim is to be paid by the insured heirs. This is called a

master contract. Although an employee is not the party to the contract, the insurers do issue

certificate of group insurance to individual employee. That certificate is a proof of insurance

on the basis of which he heirs of the deceased employee can claim he sum insured. In group

insurance contracts an element of anti-selection is not there (i.e. person takes insurance by

concealing his illness) because in most of group insurance contracts proposal forms are not

used. The sum insured for each employee or class of employee is always selected by the

employer. The employer is the policyholder not the employee. The premium is always paid

by the policy holder.

Nature of the groups:

Groups can be of various natures some of which are mentioned below;

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Employer: The employer having he authority of hire and fire can affect the

composition of that group frequently. Single employer groups: These groups consist of

employees who were employed by a single employer and their terms and conditions of

the service are controlled and regulated by that

Multiple employer groups: In various cases the employees of different employers

make out a group e.g. some companies may take up a project combined under a

consortium for common purpose e.g. joint venture.

Trade Associations: Association of engineers of the Pakistan or Association of

officers of any institution is the example.

Labor unions: The members of the labor unions can be termed as a group for

insurance purposes.

Affinity groups: The people having the same profession are called affinity

professionals e.g. lawyers, doctors. Affinity groups having the same profession like

doctors, engineers, lawyers, accountants etc.

Debtor/creditor groups: The persons obtaining loans from financial institutions form

the group of this sort.

Size of the group: When the group insurance was started a minimum number of

members of the group were hundred. However as the competition grew this number has

been reduced to 10 now a days. There is no limitation on maximum number of group

membership. The underwriters view the smaller groups with more underwriting attention

and would like to ask for evidence of insurability from each member.

Flow of members:

Those groups in which older members retire and younger members are inducted on a

prescribed basis are called stable groups from the underwriting point of view because the age

distribution is stable. The groups where there are excessive changes are not generally like by

the underwriters. There are certain groups whose job on average is hazardous therefore; such

groups are insured on extra mortality while some groups like workers of coal mines etc. are

not at all insurable.

Risk classification:

Ordinary groups/standard: These groups are insured by charging usual ordinary

premium as applicable to the standard lives.

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Sub-standard groups: The groups are those whose members are involved in

hazardous and risky profession and are accordingly charged with an occupational

extra premium.

Declined groups: The groups which are not insurable fall into this category.

Eligibility of group members:

The members become eligible for group insurance under two separate schemes;

Non-contributory scheme: This means that the premium is being paid by the employer

and the employee do not have to pay anything on that account. In this scheme the

participation of the members must be 100%.

Contributory group insurance scheme: As the name denotes the members of the group

pay the group insurance premium by contribution among themselves. This scheme can

be availed independently or in addition to the non-contributory cover. In contributor

scheme the participation of the member must be not less than 75%.

For both these categories a group member to be covered must be actively at work.

***********

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CHAPTER - 8

PREMIUM AND ADMINISTRATION

The group insurance premium is calculated basically according to a group morbidity (which

shows the rate of injuries in accidents) and mortality but those are not followed strictly

because the experience of each individual group differs as such it is a major factor in

determining the group insurance premium for a particular group. The other factors involved

are the age of the every member of the group and wage of the every member of group. Thus a

group insurance premium is calculated taking into account group mortality/morbidity tables,

past claims experience of that group and average ages and wages of the group. In case of a

new group, the experience of similar groups is considered.

The group insurance like other kinds of insurance is regulated by the Insurance Ordinance,

2000 in Pakistan. As compared to individual life insurance the group insurance rates are

cheaper. As we have already seen the group insurance contract is between the employer and

the insurer, as such it is the employer who has the right to choose the amount of sum assured

for each individual member or class of members. The employee can not himself/herself

determine the sum assured.

POLICY PROVISIONS

Group Insurance Certificate: One policy document is issued as an evidence of the

contract of group insurance between the employer and the insurer. However, insurers

do issue group insurance certificate to each individual member of the group. Such a

certificate contains brief particular of the insurance like date of commencement, date

of expiry, sum assured and name of the nominee etc.

Grace period: A grace period to pay the premium is allowed after the due date. The

period differs from insurer to insurer and contract to contract. However, generally 31

days are allowed after the premium has become due.

Nominee: In group life insurance the name of nominee is not mentioned in the policy

document. It is recorded separately in the records of the insurer and stated in the

certificate.

Age admission: Age of each and every member of the group must be declared by the

employer and admitted so by the insurer.

Incontestability: Although group insurance contracts are usually issued for a period

of 1` year, there is a provision to renew them every year in such a case any

26

misstatements made in the proposal form by the employer shall not be contestable in

any court of law unless a ground of fraudulent intention is proved.

Profit commission: Most of the group life insurance contracts contain a provision of

profit commission which means that if that group shows a profit then a percentage of

that profit shall be paid back to the employer by the insurer. Such a percentage varies

from 70% to 90%. However, if the group shows a loss that has to be borne by the

insurer.

Conversion into ordinary life: Some of the group insurance policies contain a

provision and if any group member leaves that group then he has a right to convert

that policy into individual life insurance by paying the difference of premium.

Claims settlement: The claims under group life insurance policy are paid in respect of

deceased/injured (if the accident coverage is obtained) in favor of the employer. It is

the employer who then has to pay that claim to the heirs of the deceased or to the

injured person.

GROUP LIFE INSURANCE PLANS

As we know the group life insurance plans are issued in term of insurance as such all

sorts of plans issued under a group life insurance cover only – the death risk or accidental

injuries risk wherever such cover has been obtained. The following plans are usually

issued in group life insurance;

Yearly renewable plan: This plan is issued for one year initially with a provision that

it will be renewable at the option of the employer or policy holder for every

subsequent year. However the premium will be charged according to the rate arrived

at after taking into account the experience of previous year and the present ages and

wages of the members of the group.

Survivor income plan: Under this plan a yearly income is guaranteed to the survivors

of the deceased employee for a given number of years.

Group permanent plan: Under this plan the insurance companies issue the group

insurance policies for a period as long as the concerned group would like to be

covered. The issuance of this plan is very rare even in the western world. It is not at

all issued in Pakistan.

AIB Rider: This rider can be attached with any of the above plans to provide for an

indemnity for accidental injuries to the group members in addition to the death risk

covered under these plans.

GROUP LIFE INSURANCE PREMIUM

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The factors influencing the group insurance premium rate are as under:

Group mortality and morbidity tables

Past experience of the group or of similar groups

Age of every member of group

Wage/sum assured for every member

Sex of the group members (2 years relaxation is given to females)

Larger group discount. If group is larger than average a premium rate discount is

given

The rate will be calculated afresh every year. For certain typical groups where the

correct number of members is not ascertainable some companies provide a blanket

cover. An example of such group could be the persons getting loan from financial

institutions.

Terms & Conditions

Group Insurance Certificate: The insurer will issue group insurance certificate to

every member of the group.

Grace period: The policy allows a grace period of say 31 days after the premium has

become due. If the claim occurs during that period, it will be paid after deducting the

individual member’s share of the premium of that group.

Nominee/Beneficiary: The name of nominee or beneficiary will be mentioned in the

group insurance certificate instead of the main policy document.

Age under statement: If any member’s age is found to have been under stated the

arrears of the premium will be charged.

Incontestability: The statements made in the proposal form will be incontestable after

the policy has been enforcing for 2 years except where the fraud or fraudulent

intension is proved. The onus of proof shall be on the insurer.

Group participation: All members of the group which have been mentioned in the list

provided by the employer shall be covered under this policy. Any exits on account of

resignations, termination or dismissals etc. shall be communicated to the insurer. Such

cases shall be covered only up to the date of exit. Any new inductions shall also be

reported along with their usual particulars. The premium for exits and inductions shall

be adjusted at the year end.

Conversion: The insurance under this group can be converted into individual life

insurance in certain special circumstances on leaving that individual of the group.

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Settlement option: The claims under this policy shall normally be settled in lump

sum. However, in certain policies an option is given to the nominee to receive the

amount of claim in installments along with the accruing profit

**********

CHAPTER – 9

HEALTH INSURANCE

There are two distinct types of health insurance coverage;

Medical Expense Coverage

Disability Income Coverage

Medical expense coverage provides benefits for the treatment of sickness or injury. Disability

income coverage provides income benefits when the insured is unable to work because of

sickness or injury. The manner in which health insurance benefits – both medical expense

and disability income are provided varies substantially according to the coverage terms

specified by the provider.

MEDICAL EXPENSE COVERAGE

Medical expense coverage is designed to provide benefits to help the insured pay for the costs

of receiving medical treatment for a sickness or an injury. Several types of medical expense

coverage are available.

Hospital-Surgical Expense Coverage:

Hospital-surgical expense coverage provides benefits related directly to hospitalization costs

and associated medical expenses incurred by an insured for treatment of a sickness or an

injury. The specific benefits provided by the hospital-surgical expense coverage are described

in a policy or in another document used to define the terms of the coverage. Hospital-surgical

expense policies usually specify that the insured must be hospitalized before any benefits are

payable, although some such policies provide benefits for certain specified outpatient

charges. These policies also specify benefit amount limits for most covered expenses.

Although the specific benefit amount limits for most covered expenses. Although the specific

benefits available vary from policy to policy and are usually subject to certain limitations and

exclusions, most hospital-surgical expense policies cover;

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1. Hospital charges for room, board and hospital services.

2. Surgeon’s and physician’s fees during a hospital stay.

3. Specified outpatient expenses.

4. Extended care services, such a convalescent or nursing home costs.

Any medical expenses incurred by an insured other than the expenses described in the policy

are not ‘eligible expenses’, and no policy benefits are payable for those expenses.

BENEFITS:

Hospital charges:

The benefit payable for hospital room and board is typically limited to a maximum benefit

amount per day. Some hospital-surgical expense policies provide a higher maximum benefit

amount per day for room and board charges when he insured must be confined in an intensive

care or a cardiac care unit, since these charges are considerably higher than the charge for

regular daily hospital room and board. In addition, most policies specify a maximum number

of days for which the room and board benefit will be payable during each period of hospital

confinement. A separate hospital expense benefit is payable to cover miscellaneous hospital

charges, such as X-ray and laboratory fees, medicines, and the use of an operating room.

Hospital-surgical expense policies usually specify maximum benefit amount payable for all

such hospital services. This amount is often set at a multiple of the maximum room and board

benefit amount.

Specified outpatient expenses:

Most hospital-surgical expense coverage includes benefits for certain outpatient charges, such

as charges for emergency room treatment of an accidental injury. Generally, the treatment

must be administered within a specified period of time after the accident, usually 48 to 72

hours, in order for the benefit to be payable. Other outpatient charges currently covered by

most hospital-surgical expense policies are those chares incurred for diagnostic tests

performed in an adequately equipped doctor’s office or clinic. These tests include X-rays and

blood tests, among others. The policy usually states the maximum benefit amount that will be

payable for these expenses.

Surgeon’s and physician’s fees:

Hospital-surgical expense policies are one of two methods to describe the amount of a

surgeon’s fee that the policy will cover. The first method is to include a surgical schedule in

the policy. A surgical schedule lists common surgical procedures and describes the maximum

benefit amount the insurer will pay for each procedure; the policy also specifies that the

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insurer reserves the right to determine the maximum benefit payable for surgeon’s fee for any

operation not listed on the schedule. In some cases, each procedure is assigned a specified

number of benefit units, and the policy describes the benefit amount payable for each unit.

The second method used to

Determine the benefit amount payable for surgeon’s benefits is to specify that such benefits

will be based on the ‘reasonable and customary’ or ‘usual and customary’ charges for the

procedure performed that is, the prevailing charges made by surgeons of similar expertise for

a similar procedure in a particular geographic area. Fees for dental and cosmetic surgery

usually are not covered by hospital surgical expense policies unless such surgery is necessary

as the result of an accidental injury or medical impairment.

A separate benefit is payable to cover fees for services provided by an anesthesiologist during

surgery. In addition, some policies cover a physician’s fees for medical services that are not

related to surgical procedures if these fees are incurred while the insured is hospitalized. The

policy specifies the maximum benefit amount payable for each physician’s visit in the

hospital, as well as the maximum number of such visits that will be covered.

Extended-care services:

The extended-care benefit of a hospital-surgical expense policy covers room and board

charges, up to a specified maximum amount, when the insured is confined in an extended-

care facility, such as a nursing or convalescent home. The benefit is designed to encourage

the use of extended-care facilities by patients who need professional care while recovering

from illnesses or surgery but who do not need he full services of a hospital. The insured’s

confinement in an extended-care facility must begin within a specified number of days after a

hospital stay for the same cause in order for the benefit to be payable. The policy specifies the

maximum number of days and the maximum benefit for each day of confinement.

Deductible amounts:

Some hospital-surgical expense policies specify that, before any benefits become payable

under the policy, the insured must pay a portion of the eligible medical expenses incurred.

The portion that the insured must pay before the insurance company will make any benefit

payments is called the deductible amount, commonly shortened to the deductible. The

deductible is applied throughout the life of the policy on the basis of a specified deductible

period. The most commonly specified deductible period is one year, in which case the

deductible is often called a calendar year deductible and applies to any eligible medical

expenses incurred by the insured during any one calendar year.

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Exclusions:

Any medical expenses not described in a hospital=surgical expense policy as eligible medical

expenses are not covered under the policy. Thus, most such policies do not cover medical

expenses incurred through (1) purchasing medicines and drugs, unless those medicines are

given during a hospital stay or while obtaining outpatient surgery, (2)employing private-duty

nurses, and (3) obtaining routine dental treatments, oral surgery, eye examinations, and

corrective lenses, unless such expenses are incurred as the result of an accidental injury. In

addition medical expenses that result from any of the following are usually excluded from

coverage under hospital-surgical expense policies;

1. Cosmetic surgery, unless such corrective surgery is (1) required due to accidental injury,

(2) performed on a newborn to correct a birth defect, or (3) required tgor medical reasons.

2. Treatment for any injury or sickness that occurs while the insured is in military service or

that results from an act of war.

3. Treatment for injuries that arfe intentionally self-inflicted or that are the result of

attempted suicide.

4. Any hospital-surgical procedures for which expenses are paid by other organizations or

which are provided free of charge in government facilities (For example, if the insured is

receiving benefits from workers’ compensation for any occupational injury or illness, the

insured would not be permitted to collect duplicate benefits under a hospital-surgical expense

policy for treatment of the same occupational injury or sickness.)

***********

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CHAPTER – 10

MAJOR MEDICAL COVERAGE

Although the benefit amounts available under hospital-surgical policies are high enough to

cover the medical expenses caused by most illnesses and injuries, these benefit amounts may

be insufficient to cover medical expenses that result from major illnesses or injuries requiring

expensive or long-term care. Major medical coverage was designed to meet the need for

economic protection in such cases.

Coverage:

Major medical coverage, which provides substantial benefits for both hospital expenses and

outpatient expenses, is subject to fewer limitations than in hospital-surgical expense

coverage. Major medical coverage provides benefits for the same types of medical expenses

that are covered by hospital-surgical expense policies. In addition, major medical coverage

provides for expenses that may not be covered under basic hospital-surgical plans, including

the costs incurred for:

Receiving outpatient treatment

Employing private-duty nurses renting or purchasing treatment equipment and

medical supplies

Purchasing prescribed medicines

Types of Major Medical Coverage

Two types of major medical coverage are commonly available:

Supplemental, or superimposed, major medical

Comprehensive major medical, which is also called comprehensive health insurance

Supplemental major medical policy:

It is issued in conjunction with hospital-surgical expense coverage, and is designed to provide

benefit payments for expenses that exceed the benefit levels of the hospital-surgical policy.

Comprehensive major medical policy:

It combines into one policy the coverage provided under hospital-surgical expense policies

and supplemental major medical policies; thus, comprehensive major medical policies

provide complete and substantial medical expense coverage under one policy, and such

policies cover most of the medical expenses an insured may incur.

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Expense participation:

Both comprehensive and supplemental major medical policies usually specify that the insured

must share in the payment of the medical expenses incurred. Sharing in the cost of such

medical expenses is called expense participation. Expense participation encourages an

insured to keep medical expenses to a minimum and, consequently, enables the health

insurance provider to keep the costs of the coverage to a lower level and well. The two

expense participation methods most commonly used are deductibles and coinsurance.

Deductibles:

The manner in which a deductible is applied in major medical policies depends on whether

the policy is a comprehensive major medical policy or a supplemental major medical policy.

The deductible included in most comprehensive major medical policies functions in the same

manner as does the deductible found in hospital-surgical expense policies; the insured must

pay a specified flat amount before any policy benefits are payable.

Supplemental major medical policies usually include a corridor deductible. The corridor

deductible is an amount that the insured must pay.

Co-insurance:

Most major medical policies require that the insured pay a specified percentage of all the

eligible medical expenses, in excess of the deductible, which he or she incurs as a result of a

sickness or injury. This method of expense participation is called coinsurance, or percentage

participation.

Exclusions:

Although major medical policies provide benefits for several types of medical expenses not

covered by hospital-surgical expense policies, major medical policies do contain some of the

same exclusions that are found in hospital-surgical expense plans. Specifically, major

medical policies contain the same exclusions that are found in hospital-surgical policies

regarding cosmetic surgery, self inflicted injuries, injuries received while in military service

or as the result of war, and treatments received free of charge or for which benefits are paid

by another organization. In addition, major medical coverage usually does not include

benefits for dental treatments and vision care.

Types of coverage:

Hospital Confinement Coverage:

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The coverage provided under hospital confinement policies, which are often called hospital

indemnity policies, consists of a predetermined flat benefit amount for each day an insured is

hospitalized. The amount of the daily benefit is specified in the policy and does not vary

according to the amount of medical expenses the insured incur.

Specified Expense Coverage:

Specified expense coverage is medical expense coverage that provides benefits to reimburse

the insured for expenses incurred by:

Obtaining treatment for an illness that is specified in the policy or Purchasing medical

supplies or treatments that are specified in the policy.

The most commonly offered forms of specified expense coverage include dread disease

coverage, dental expense coverage, prescription drug coverage, and vision coverage.

Dread Disease Coverage:

Dread disease coverage is a type of coverage designed to pay benefits for only those medical

expenses incurred by an insured that has contracted a specified disease. The most commonly

offered type of dread disease coverage is cancer insurance. Such coverage may be purchased

to supplement basic hospital-surgical expense coverage and can serve the same purpose as

supplemental major medical coverage if the insured should incur medical expenses as a result

of contracting the disease named in the policy. However, if the insured incurs medical

expenses for the treatment of any illness other than the one specified, no policy benefit will

be payable.

Dental Expense Coverage:

Hospital-surgical expense coverage and major medical expense coverage do not provide

benefits for expenses incurred by obtaining routine dental work and dental treatments.

Coverage for such expenses can be provided only through dental expense insurance. Dental

expense policies usually provide benefits for routine examinations, preventive work and

dental procedures needed to treat tooth decay and diseases of the teeth and jaw.

Prescription Drug Coverage:

Prescription drug coverage is designed to provide benefits to the insured for the purchase of

prescribed drugs and medicines. Only drugs that cannot be obtained without a prescription

are eligible for coverage under prescription drug plans; over-the-counter medicines, such as

aspirin, are not covered.

Vision Care Coverage:

35

Vision care coverage provides the insured with benefits for expenses incurred obtaining eye

examinations and corrective lenses. Most policies that provide such coverage specify that one

routine examination of the insured per year will be covered. The maximum amount that will

be paid in benefits for eyeglass lenses and for frames is also specified; if the insured

purchases contract lenses instead of eyeglasses, the maximum benefit amount is usually equal

to the amount that would have been paid for lenses and for frames.

Disability Income Coverage:

Disability income coverage provides a specified income benefit when an insured person

becomes unable to work because of an illness or an accidental injury. Disability income

policies provide no medical expense coverage; they are intended to provide protection from

the financial losses that result from a person’s inability to work while disabled. The insured

person’s disability must meet the policy’s definition of total disability in order for the insured

to receive the income benefit.

Definitions of Total Disability:

Each provider of disability income coverage specifies the definition of disability that will be

used to determine whether a covered person is entitled to receive disability income benefits.

Although a complete listing of every definition of total disability that is or has been used

would be impossible to construct, we will describe the definition of disability included in

government programs, as well as the other criteria that a disabled individual must meet in

order to qualify for benefits under government programs.

1. Total Disability; Any Occupational Absence:

At one time, total disability was defined in disability income insurance policies as a disability

that prevented an insured from performing the duties of any occupation. Since a strict

interpretation of this definition would prevent most people from every qualifying for

disability income benefits, most insurers have stopped using this definition.

Total Disability; Current Usual Definition:

The usual definition of total disability included in disability income policies today is more

liberal than the old definition just described; the newer definition discusses disability in two

stages. According to this newer definition, at the start of disability, insureds are considered

totally disabled if their disability prevents them from performing the essential duties of their

regular occupations. However, at the end of a specified period after the disability has begun,

usually two years, insureds are considered totally disabled only if their disabilities prevent

them from working at any occupation for which they are reasonably fitted by education,

36

training, or experience. In addition, this definition of total disability usually specified that

whenever he insured is working in any gainful occupation, the insured is not considered to be

totally disabled.

Total disability; “own previous occupation”

Some companies have further liberalized the definition of total disability included in

disability income policies that are issued to members of certain professional occupations.

According to this definition, an insured is totally disabled if the insured is unable to perform

the essential duties of his/her own previous occupation.

2. Total disability; “income loss”

A type of disability income coverage, often called income protection insurance, has gained

popularity since the late 1970s primarily in the upper income professional market. This

coverage differs from traditional disability income coverage primarily with regard to the

definition of disability included in such policies. The definition of disability included in

income protection policies specifies that an insured is disabled if that person suffers an

income loss caused by the disability.

Disability Income Benefits:

The benefit amounts available through disability income coverage are not intended to fully

replace an individual’s pre-disability earnings. Instead, these income benefit amounts are

limited to amounts that are lower than the individual’s regular earnings when not disabled.

Without restrictions on the income amounts available through disability income coverage, a

disabled insured could receive as much income as he or she received when working, if such

were the situation, as insured who became disabled would have little incentive to return to

work and might prolong the period if disability.

An insurance company carefully limits the maximum amount of the disability income benefit

that a particular applicant can purchase. When determining the maximum amount of

disability income available to an applicant, the insurer considers the applicant’s;

Usual earned income, before taxes. Unearned income, such as dividends and interest, which

will continue during a disability.

Additional sources of income available during a disability, such as disability income benefits

provided through group disability income coverage and government-sponsored disability

income programs.

Current income tax bracket, because the applicant’s usual earned income is reduced by taxes

while disability income benefits from individual policies are not reduced by taxes.

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***********

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