CHAPTER FIVE

LIFE AND HEALTH INSURANCE

5. LIFE INSURANCE
• Life insurance is an insurance coverage that provides a monetary
benefit to a insured family or other designated beneficiary
• Life insurance policies often allow the option of having the
proceeds paid to the beneficiary either in a lump sum cash
payment or in an annuity.

1
5.1. Underwriting life insurance
• Underwriting is the process through which an insurance
company evaluates the risk of a potential client, and set
premiums and coverage specific to the individual.
• Life insurance underwriting consists of both medical as well as
non-medical underwriting.
• Medical -referring to the use of medical or health status
information in the evaluation of an applicant for coverage

2
In underwriting process,
 health information may be used in making two related decisions:

i. Whether to offer or deny coverage; and

ii. What premium rate to set for the policy.
• The use of medical underwriting may be restricted bylaw in
certain insurance markets.
• Where allowed, the criteria used should be objective, clearly
related to the likely cost of providing coverage, practical to
administer, consistent with applicable law, and designed to
protect the long-term viability of the insurance system.
3
To conduct medical underwriting, an insurer asks people who
apply for coverage about pre-existing medical conditions.
5. 1.1. Factors considered in life insurance underwriting
 in life insurance underwriting the factors that are considered or
examined are those that influence morality of the insured
himself/herself.
 These include age, sex, current physical condition, personal
medical history ,family medical history ,occupation, habits,
marital status and the like

4
a. Age:
 The likelihood of death or illness generally increases with an
increase in age. People develop physical problems as their age
increases.
b. Sex:
 Empirical studies indicate that women generally live longer than
men. This may influence the underwriter to charge a lower premium
payments for women for a given age level as their counterparts, men.
c. Current Physical Condition:
 This refers to the proposed insured’s current physical and health
condition regarding pulse rate, heart condition, blood pressure,
lungs, nervous system, body build, height weight, etc
5
d. Personal Medical History:
 The insured’s past medical history is examined to check for any
previous illness that may possibly reoccur in the future.
e. Family Medical History:
 Here, the medical history for the insured family is examined to
discover any possible hereditary diseased or deficiencies.
f. Occupation:
 Occupation can affect the insured’s chance of suffering accidents of
premature death. Some are hazardous, and increase the risk of death.
 For example a coal miner is much more exposed to risk of premature
death or illness than a manager or an accountant.
6
g. Insurable Interest:
 There should be an insurable interest to be protected by
purchasing life insurance policy.
 The underwriter must make sure that there is an insurable
interest in applying for life insurance cover.
 This involves identifying any relationship between the proposed
insured and named beneficiary.
h. Financial Position:
 The proposed insured’s financial position or his level of
income has become an important factor to consider in life
insurance underwriting. 7
i. Habits:
 Habits such as drug or alcohol consumption and smoking could
lead to accidents by retarding a person’s judgment, reducing
flexibility and damaging his reflex system. .
j. Marital status and number of children
l. Foreign travel (certain foreign travel is risky

8
5.1.2 Sources of Information for Underwriting
• The assessment and evaluation of the risk is based on the
information collected by the underwriter.
• Pertinent information needed for underwriting is obtained from the
following sources:

i. Proposal Form

ii. Medical Report

iii. Attending Physicians Statement

iv. Agent’s/ Salesman’s Report

v. Questionnaires and Interview

vi. Underwriting Manuals

vii. Inspection Report 9

Why Is Underwriting Important?

The main purposes of life insurance underwriting are:

a. To prevent individuals who have a higher than average probability

of loss from obtaining insurance at average rates and

b. To decide whether to offer or deny the coverage and

c. To set the premium rate for the policy

 Diseases that can make an individual uninsurable include serious
conditions such as:
a. Cancer
b. Heart disease
c. Overweight and underweight
d. Diabetes
e. Blood pressure etc 10
5. 1.3. Some unique characteristics of life insurance
a. The event insured against is an eventual certainty
b. There is no possibility of partial loss in life insurance as there is in
the cause of property and liability insurance
c. Life insurance is not a contract of indemnity
d. As legal principle, every contract of insurance must be
supported by an insurable interest, but in life insurance, the
requirement of insurable interest is applied somewhat
differently than in property and liability insurance.

11
5.2. Types of life insurance
The major types of insurance contracts are term, whole-life,
endowment insurance and annuities.
1. Term insurance
1. Term insurance
• A term life insurance policy is a contract that gives life insurance
protection for a limited number of years, the face value of
the policy being payable only if death occurs within a
specified period and nothing being paid if the insured survives.
Term life insurance provides the insured different options. These
are.

12
A. Decreasing term life insurance:
A decreasing value term life insurance policy provides the
beneficiary with less and lesser proceeds each year while the
policy is in force.
That is, if the death occurs in the first policy years, the
beneficiary receives the face amount. If the death occurs in a
succeeding years, the proceeds will be less.

13
 Age/Sex: 35, male

Year Age Annual premium Death benefit

1 35 100 $ 90,000 $

2 36 100 $ 80,000 $

3 37 100 $ 70,000 $

4 38 100 $ 60,000 $

5 39 100 $ 50,000 $

14
B. A level term policy: pays the same amount of benefits if death
occurs while the policy is in force. And also the premium remains
the same each year.
• A level term insurance policy pays the same amount of benefit if
the death occurs at any point while the policy is enforced.

Age/Sex: 35, male ,smoker

Year Age Annual premium Death benefit

1 35 114 $ 100,000 $

2 36 114 $ 100,000 $

3 37 114 $ 100,000 $

4 38 114 $ 100,000 $

5 39 114 $ 100,000 $
15
C. Renewable term policies: allow the insured to continue the
coverage up to a specified age regardless of the status of
the insured’s health
• Yearly renewable term insurance is issued for a one-year
period, and the policy owner can renew for a successive
one-year periods to same stated age without evidence of
insurability.
• Premiums increase with the increase in age.

D. Convertible term life insurance policies: allow the insured the

option of converting the policy to a whole life policy.

16
2. Endowment insurance
• An endowment insurance policy is life insurance coverage
that pay the face amount of insurance if the insured dies
within a specified period;
• if the insured survives to the end of the endowment period, the
face amount is paid to the policy owner at that time.

17
3. Whole life insurance
• Whole life insurance is a cash value policy that provides
lifetime protection.
 is a type of permanent insurance coverage that provides payment
of the face value upon the death of the insured, whenever
death occur.
There are various forms of whole life insurance.
A. Ordinary life insurance: - It provides lifetime protection with
premiums that are payable for the whole of life.
 If the insured is still alive at 100 years, under the newer standards,
then the face amount of the policy is paid to the insured.
18
B. Limited Payment Whole Life Insurance
 premiums are paid for a definite period of time, which is determined
in advance. That is for 10, 15, 20, 25, 30 years or up to age 65.
 After the expiration of the specified time, the policy is said to be
paid-up, which means that no more premiums are to be paid to keep
the policy is in force until the time of death of the assured at which
time compensation amounting the face value of the initial policy is to
be made to the assureds beneficiary.
 That is, the policy remains in full force for the whole of life but
premiums are payable for a limited number of years only, after
which the policy becomes paid up for its full face amount
19
4. Annuity
• An annuity is a periodic payment that continues for a fixed
period or for the duration of a designated life or lives.
• The person who receives the periodic payments or whose life
governs the duration of payment is known as the annuitant.

20
Annuities may be classified based on the following criteria:

a. Method of premium payment

b. Time when benefits begin
c. Number of annuitants covered
d. Promises purchased
e. Types of benefits
1. Based on premium payments , an annuity can be:
i. Single premium annuity: is an annuity that is purchased with a
single premium payment
ii. Annual premium annuity: is an annuity purchased by a series of
annual pay 21
2. based on Time when benefits begin
i. An immediate annuity
ii. A deferred annuity
i. An immediate annuity is an annuity purchased with a
single premium and the first annuity payment is due from
the date of purchase.
 If the income is paid monthly, the first payment starts one
month from the purchase date or one year from the purchase
date if the income is paid annually.

22
ii. A deferred annuity is an annuity purchased with either a single
premium or periodic premiums.
 The first annuity benefit is made after the passage of more than one
payment interval
3. Number of annuitants covered
• An annuity may be purchased to cover one or more lives. A single-life annuity
covers one live.
 A joint-life annuity covers two lives. With this, contract payments cease at the
death of either annuitant. A joint- and- survivor annuity provides payment
to two annuitants, with the payments continuing for as long as either
annuitant is alive.
 If the payments are reduced by one half (or two-thirds) after the death of one
annuitant, the contract is called a joint-and-one half (or joint-and-two thirds)
survivor annuity. 23
4. Promises purchased
• A straight life annuity is an annuity that pays benefits only during the
lifetime of the annuitant.
• It provides a life time income to the annuity only while he or she is
alive.
• No further payments are made after the annuitant dies.
 A life annuity with guaranteed payments is one that pays a life
income to the annuitant with a certain number of guaranteed
payments.
 If the annuitant dies before receiving the guaranteed number of
payments, the remaining payments are paid to a designated
beneficiary. 24
5. Types of benefits
• Fixed annuity, under this annuity, the periodic payment is a
guaranteed fixed amount.
• In contrast, a variable annuity is an annuity that provides a
lifetime income, but the periodic income payments will vary
depending.

25
5.2. Premium determination (Rate making)
 Rate making refers to the pricing of insurance
 The process of predicting future losses and future expenses and
allocating these to costs among the various classes of insured is
called rate making.
Life insurance rates are influenced by three major determinants:
a. Expected mortality rates in the insured population
b. Investment income earned by insurer on invested premium
income &
c. Expenses incurred in operating an insurance enterprise and in
providing insurance related services 26
1. Net Single Premium
• When the total net premiums of an insurance policy are to
be paid as a single sum at the beginning of the contract, it is
called the Net Single Premium.
• The net single premium (NSP) can be defined as the present
value of the future death benefit.
• The NSP is based on three basic assumptions:

1. Premiums are paid at the beginning of the policy year,

2. death claims are paid at the end of the policy year, and
3. the death rate is uniform throughout the year

27
2. Net Annual Level Premium
 the policyholder pays the same amount of premium each year
 Most life insurance policies are not purchased with a single
premium because of the large amount of cash required.
 Consumers generally find it more convenient to pay for their
insurance in installment payments.
3. Gross Premium
• The Gross Premium is the amount the policyholder pays to the
insurer to keep the policy in force.
• The gross premium is determined by adding a loading allowance
to the net annual level premium.

28
 In insurance terminology, the addition of the insurer’s costs of
doing business to the Net Premium is called Loading.
 These costs include all operating expenses, commissions,
advertisement expenses, provide a margin for contingencies, and
provide for a contribution to profits.

29
5.3. HEALTH INSURANCE
 Health insurance provides a wide variety of specific individual
health insurance coverage’s.
• Among the varieties, the following are selected to be dealt in this
section
1. Medical expense insurance
2. Disability income insurance
1. Medical expense insurance
 medical expanse provides for the payment of the cost of
medical care that results from sickness and injury.
 Its benefits help to meet the expanses of physical hospital
nursing, surgical expanse, and related services, as well as
medications and supplies.

30
 The benefits may be in the form of reimbursement of actual
expanses up to specified limit of insurance, cash payment or the
direct provision of services.
• Medical expanses insurance is paid under the following specific
coverage’s
1. Hospital insurance
2. Surgical insurance
3. Physicals expanse insurance
4. Major medical insurance
1. Hospital insurance
• Hospital insurance contract is one of the basic health insurance
policies. Hospital insurance pays for medical expenses incurred
while the insured is in a hospital.
• A typical hospital insurance policy provides two basic benefits.
• Daily hospital benefit & a benefit for miscellaneous expanse
31
There are three basic approaches for paying the daily room and
board benefit.
• Indemnity approach: The plan pays the actual costs of the daily
services up to some maximum limit.
• Valued approach: A fixed amount is paid for each day of
hospitalization regardless of the actual cost of the services
provided.
• Service approach: Service benefits rather than cash benefits are
provided to the insured.

32
2. Surgical Expense Insurance
• Individual hospital-surgical plans also insurer coverage for surgical
expanses, such as physicians’ fees associated with covered surgeries
surgical expense insurance can be added to a hospital policy.

3. Physician’s expanse insurance

• Physician’s expanse insurance pays a benefit for non-surgical care
provided by a physician in the hospital, the patient’s home, or in the
doctor’s office.

4. Major medical insurance

• This insurance is also designed to pay a large proportion of the
covered expanses of a catastrophic illness or injury.
33
2. disability-income insurance
 A serious disability can result in a substantial loss of works
earnings
 this insurance provides income payments when the insured is
unable to work because of sickness or injury.
5.4 WORKERS’ COMPENSATION POLICY
This policy indemnifies the insured against all sums for which he is
to be liable to pay compensation for any worker who sustains
death or bodily injury by an accident or occupational diseases
arising from his work and during the time of his work.
34
5.5 PERSONAL ACCIDENT POLICY
 Personal Accident Policy provides compensation for death or
bodily injuries caused by violent, accidental, external and visible
means.
 The injuries shall be the direct cause of death, loss or
disablement.
 In the event of death of the insured, the benefit is to be given to
his representative.
 Personal Accident Policy is issued to individuals or a group of
individuals on named basis.
35
.

THE END

36