Life Insurance (LI)

Essential Elements of LI:

✓ Relationship with human life
✓ Contact of assurance
✓ Insurable interest
✓ Fiduciary relationship
✓ Consideration
✓ Conditional contact
✓ Nomination & assignment
Insurable Interest:
1. On ones own life
2.1 Where no proof of insurable interest is needed
✓ On the life of spouse (one in another life)
2.2 Where proof of insurable interest is needed
✓ Family relationships
✓ Business relationship
Scope of Life Insurance:
Personal accident & Sickness Insurance
Accident only policy
Death Sum insured
Loss of two limbs and two eyes Sum insured
Loss of one limb and one eye percentage of sum insured
Permanent total disablement Sum insured
Permanent partial disablement percentage of sum insured

Temporary total disablement percentage of sum insured on weekly

basis
Temporary partial disablement percentage of sum insured on weekly
basis
Accident & specified disease policy
Accident & all sickness policy
Coupon scheme
Group scheme
Permanent contracts
Life insurance (or commonly life assurance, especially in the Commonwealth) is a contract
between an insured (insurance policy holder) and an insurer or assurer, where the insurer
promises to pay a designated beneficiary a sum of money (the "benefits") in exchange for a
premium, upon the death of the insured person or on the expiry of a fixed period. Depending
on the contract, other events such as terminal illness or critical illness may also trigger
payment. The policy holder typically pays a premium, either regularly or as a lump sum. Other
expenses (such as funeral expenses) are also sometimes included in the benefits.

Life policies are legal contracts and the terms of the contract describe the limitations of the
insured events. Specific exclusions are often written into the contract to limit the liability of the
insurer; common examples are claims relating to suicide, fraud, war, riot, and civil commotion.

Life-based contracts tend to fall into two major categories:

• Protection policies – designed to provide a benefit in the event of specified event,

typically a lump sum payment. A common form of this design is term insurance.
• Investment policies – where the main objective is to facilitate the growth of capital
by regular or single premiums. Common forms (in the US) are whole life, universal
life, and variable life policies.

Parties to contract
There is a difference between the insured and the policy owner, although the owner and the
insured are often the same person. For example, if Joe buys a policy on his own life, he is
both the owner and the insured. But if Jane, his wife, buys a policy on Joe's life, she is the
owner and he is the insured. The policy owner is the guarantor and he will be the person to
pay for the policy. The insured is a participant in the contract, but not necessarily a party to it.
Also, most companies allow the payer and owner to be different, e. g. a grandparent paying
premiums for a policy on a child, owned by a grandchild.

Chart of a life insurance

The beneficiary receives policy proceeds upon the insured person's death. The owner
designates the beneficiary, but the beneficiary is not a party to the policy. The owner can
change the beneficiary unless the policy has an irrevocable beneficiary designation. If a policy
has an irrevocable beneficiary, any beneficiary changes, policy assignments, or cash value
borrowing would require the agreement of the original beneficiary.

In cases where the policy owner is not the insured (also referred to as the celui qui vit or
CQV), insurance companies have sought to limit policy purchases to those with an insurable
interest in the CQV. For life insurance policies, close family members and business partners
will usually be found to have an insurable interest. The insurable interest requirement usually
demonstrates that the purchaser will actually suffer some kind of loss if the CQV dies. Such a
requirement prevents people from benefiting from the purchase of purely speculative policies
on people they expect to die. With no insurable interest requirement, the risk that a purchaser
would murder the CQV for insurance proceeds would be great. In at least one case, an
insurance company which sold a policy to a purchaser with no insurable interest (who later
murdered the CQV for the proceeds), was found liable in court for contributing to the wrongful
death of the victim (Liberty National Life v. Weldon, 267 Ala.171 (1957)).

Elements of Life Insurance Contract

1. General Contract

➢ Agreement (Offer and acceptance)

➢ Competent to make contract
o Majority
o Person of sound mind
o Other disqualification
➢ Free consent
➢ Legal Consideration
➢ Legal object

2. Insurable Interest

3. Utmost Good Faith

➢ Material Facts
➢ Full and True Disclosure
➢ Duty of Both the Parties
➢ Facts need not be disclosed by the insured

4. Principle of Indemnity

➢ To discourse over insurance

➢ To avoid an Anti-social Act
➢ To maintain the premium at Low-level

5. Doctrine of Subrogation

➢ Corollary to the principle of Indemnity

➢ Subrogation is the Substitution
➢ Subrogation only up to the amount of payment
➢ The Subrogation may be applied before payment
➢ Personal Insurance

6. Warranties

7. Proximate Cause
 8. Assignment of Transfer of Interest

9. Return of Premium

➢ By Agreement in the policy

➢ For reasons of Equity
➢ Over-insurance by double insurance

Contract terms

Special exclusions may apply, such as suicide clauses, whereby the policy becomes null and
void if the insured commits suicide within a specified time (usually two years after the
purchase date; some states provide a statutory one-year suicide clause). Any
misrepresentations by the insured on the application may also be grounds for nullification.
Most US states specify a maximum contestability period, often no more than two years. Only
if the insured dies within this period will the insurer have a legal right to contest the claim on
the basis of misrepresentation and request additional information before deciding whether to
pay or deny the claim.

The face amount of the policy is the initial amount that the policy will pay at the death of the
insured or when the policy matures, although the actual death benefit can provide for greater
or lesser than the face amount. The policy matures when the insured dies or reaches a
specified age (such as 100 years old).

Costs, insurability, and underwriting

The insurer (the life insurance company) calculates the policy prices with intent to fund claims
to be paid and administrative costs, and to make a profit. The cost of insurance is determined
using mortality tables calculated by actuaries. Actuaries are professionals who employ
actuarial science, which is based on mathematics (primarily probability and statistics).
Mortality tables are statistically based tables showing expected annual mortality rates. It is
possible to derive life expectancy estimates from these mortality assumptions. Such
estimates can be important in taxation regulation.[9][10]

The three main variables in a mortality table are commonly age, gender, and use of tobacco,
but more recently in the US, preferred class-specific tables have been introduced. The
mortality tables provide a baseline for the cost of insurance, but in practice these mortality
tables are used in conjunction with the health and family history of the individual applying for a
policy to determine premiums and insurability. Mortality tables currently in use by life
insurance companies in the United States are individually modified by each company using
pooled industry experience studies as a starting point. In the 1980s and 1990s, the SOA
1975–80 Basic Select & Ultimate tables were the typical reference points, while the 2001 VBT
and 2001 CSO tables were published more recently. The newer tables include separate
mortality tables for smokers and non-smokers, and the CSO tables include separate tables for
preferred classes.[11]

Recent US mortality tables predict that roughly 0.35 in 1,000 non-smoking males aged 25 will
die during the first year of coverage after underwriting.[12] Mortality approximately doubles for
every extra ten years of age, so the mortality rate in the first year for underwritten non-
smoking men is about 2.5 in 1,000 people at age 65.[13] Compare this with the US population
male mortality rates of 1.3 per 1,000 at age 25 and 19.3 at age 65 (without regard to health or
smoking status).[14]

The mortality of underwritten persons rises much more quickly than the general population. At
the end of 10 years the mortality of that 25 year-old, non-smoking male is 0.66/1000/year.
Consequently, in a group of one thousand 25-year-old males with a $100,000 policy, all of
average health, a life insurance company would have to collect approximately $50 a year
from each participant to cover the relatively few expected claims. (0.35 to 0.66 expected
deaths in each year x $100,000 payout per death = $35 per policy). Other costs, such as
administrative and sales expenses, also need to be considered when setting the premiums. A
10 year policy for a 25-year-old non-smoking male with preferred medical history may get
offers as low as $90 per year for a $100,000 policy in the competitive US life insurance
market.

Most of the revenue received by insurance companies consists of premiums paid by policy
holders, with some additional money being made through the investment of some of the cash
raised from premiums. Rates charged for life insurance increase with the insured's age
because, statistically, people are more likely to die as they get older. The insurance company
will investigate the health of an applicant for a policy to assess the likelihood of incurring a
claim, in the same way that a bank would investigate an applicant for a loan to assess the
likelihood of a default. Group Insurance policies are an exception to this. This investigation
and resulting evaluation of the risk is termed underwriting. Health and lifestyle questions are
asked, with certain responses or revelations possibly meriting further investigation. Life
insurance companies in the United States support the Medical Information Bureau (MIB),[15]
which is a clearing house of information on persons who have applied for life insurance with
participating companies in the last seven years. As part of the application, the insurer often
requires the applicant's permission to obtain information from their physicians.[16]

Underwriters will determine the purpose of insurance; the most common being to protect the
owner's family or financial interests in the event of the insured's death. Other purposes
include estate planning or, in the case of cash-value contracts, investment for retirement
planning. Bank loans or buy-sell provisions of business agreements are another acceptable
purpose.

Life insurance companies are never legally required to underwrite or to provide coverage to
anyone, with the exception of Civil Rights Act compliance requirements. Insurance companies
alone determine insurability, and some people, for their own health or lifestyle reasons, are
deemed uninsurable. The policy can be declined or rated (increasing the premium amount to
compensate for a greater probability of a claim).[citation needed]

Many companies separate applicants into four general categories. These categories are
preferred best, preferred, standard, and tobacco. Preferred best is reserved only for the
healthiest individuals in the general population. This may mean, that the proposed insured
has no adverse medical history, is not under medication for any condition, and his family
(immediate and extended) have no history of early-onset cancer, diabetes, or other
conditions.[17] Preferred means that the proposed insured is currently under medication for a
medical condition and has a family history of particular illnesses. Most people are in the
standard category. People in the tobacco category typically have to pay higher premiums due
to the inherent health problems that smoking tobacco creates. Profession, travel history, and
lifestyle factor into whether the proposed insured will be granted a policy, and which category
the insured falls. For example, a person who would otherwise be classified as preferred best
may be denied a policy if he or she travels to a high risk country.[citation needed]
Underwriting practices can vary from insurer to insurer, encouraging competition.

Death proceeds

Upon the insured's death, the insurer requires acceptable proof of death before it pays the
claim. The normal minimum proof required is a death certificate, and the insurer's claim form
completed, signed, and typically notarized. If the insured's death is suspicious and the policy
amount is large, the insurer may investigate the circumstances surrounding the death before
deciding whether it has an obligation to pay the claim.

Payment from the policy may be as a lump sum or as an annuity, which is paid in regular
installments for either a specified period or for the beneficiary's lifetime.

Insurance vs assurance
The specific uses of the terms "insurance" and "assurance" are sometimes confused. In
general, in jurisdictions where both terms are used, "insurance" refers to providing coverage
for an event that might happen (fire, theft, flood, etc.), while "assurance" is the provision of
coverage for an event that is certain to happen. In the United States both forms of coverage
are called "insurance" for reasons of simplicity in companies selling both products. [citation needed]
By some definitions, "insurance" is any coverage that determines benefits based on actual
losses whereas "assurance" is coverage with predetermined benefits irrespective of the
losses incurred.

Types

Life insurance may be divided into two basic classes: temporary and permanent; or the
following subclasses: term, universal, whole life, and endowment life insurance.

Term insurance

Term assurance provides life insurance coverage for a specified term. The
policy does not accumulate cash value. Term is generally considered "pure"
insurance, where the premium buys protection in the event of death and
nothing else.

There are three key factors to be considered in term insurance:

1. Face amount (protection or death benefit),

2. Premium to be paid (cost to the insured), and
3. Length of coverage (term).

Annual renewable term is a one-year policy, but the insurance company guarantees it will
issue a policy of an equal or lesser amount regardless of the insurability of the applicant, and
with a premium set for the applicant's age at that time.

Level premium term can be purchased in 5, 10, 15, 20, 25, 30 or 35 year terms. The premium
and death benefit stays level during these terms.

Another common type of term insurance is mortgage life insurance, which usually involves a
level-premium, declining face value policy. The face amount is intended to equal the amount
of the mortgage on the policy owner's property, such that any outstanding amount on the
applicant's mortgage will be paid should the applicant die.

Permanent life insurance

Permanent life insurance is life insurance that remains active until the policy matures, unless
the owner fails to pay the premium when due. The policy cannot be cancelled by the insurer
for any reason except fraudulent application, and any such cancellation must occur within a
period of time (usually two years) defined by law. A permanent insurance policy accumulates
a cash value, reducing the risk to which the insurance company is exposed, and thus the
insurance expense over time. This means that a policy with a million dollar face value can be
relatively expensive to a 70-year-old. The owner can access the money in the cash value by
withdrawing money, borrowing the cash value, or surrendering the policy and receiving the
surrender value.

The four basic types of permanent insurance are whole life, universal life, limited pay, and
endowment.

Whole life coverage

Whole life insurance provides lifetime death benefit coverage for a level premium in most
cases. Premiums are much higher than term insurance at younger ages, but as term
insurance premiums rise with age at each renewal, the cumulative value of all premiums paid
across a lifetime are roughly equal if policies are maintained until average life expectancy.
Part of the insurance contract stipulates that the policyholder is entitled to a cash value
reserve, which is part of the policy and guaranteed by the company. This cash value can be
accessed at any time through policy loans and are received income tax free. Policy loans are
available until the insured's death. If there are any unpaid loans upon death, the insurer
subtracts the loan amount from the death benefit and pays the remainder to the beneficiary
named in the policy.

While the marketing divisions of some life insurance companies often explain whole life as a
"death benefit with a savings component", this distinction is artificial according to life
insurance actuaries Albert E. Easton and Timothy F. Harris. The net amount at risk is the
amount the insurer must pay to the beneficiary should the insured die before the policy has
accumulated an amount equal to the death benefit. It is the difference between the current
cash value amount and the total death benefit amount. Because of this relationship between
the cash value and death benefit, it may be more accurate to describe the policy as a single,
indivisible product, as no actual separation of the cash value and death benefit is possible.

The advantages of whole life insurance are guaranteed death benefits, guaranteed cash
values, fixed, predictable annual premiums, and mortality and expense charges that will not
reduce the cash value of the policy. The disadvantages of whole life are inflexibility of
premiums and the fact that the internal rate of return in the policy may not be competitive with
other savings alternatives. The death benefit can also be increased through the use of policy
dividends, though these dividends cannot be guaranteed and may be higher or lower than
historical rates over time. According to internal documents from some life insurance
companies, like Mass Mutual, the internal rate of return and dividend payment realized by the
policyholder is often a function of when the policyholder buys the policy and how long that
policy remains in force. Dividends paid on a whole life policy can be utilized in many ways.

The life insurance manual defines policy dividends as a refund of overpayment of premiums.
It is NOT the same as stock dividends.

Universal life coverage

Universal life insurance (UL) is a relatively new insurance product, intended to combine
permanent insurance coverage with greater flexibility in premium payment, along with the
potential for greater growth of cash values. There are several types of universal life insurance
policies which include interest sensitive (also known as "traditional fixed universal life
insurance"), variable universal life (VUL), guaranteed death benefit, and equity indexed
universal life insurance.

A universal life insurance policy includes a cash value. Premiums increase the cash values,
but the cost of insurance (along with any other charges assessed by the insurance company)
reduces cash values.

Universal life insurance addresses the perceived disadvantages of whole life – namely that
premiums and death benefit are fixed. With universal life, both the premiums and death
benefit are flexible. Except with regards to guaranteed death benefit universal life, this
flexibility comes with the disadvantage of reduced guarantees.

Flexible death benefit means the policy owner can choose to decrease the death benefit. The
death benefit could also be increased by the policy owner, but that would typically require the
insured to go through a new underwriting. Another feature of flexible death benefit is the
ability to choose from option A or option B death benefits, and to change those options during
the life of the insured. Option A is often referred to as a level death benefit. Generally
speaking, the death benefit will remain level for the life of the insured and premiums are
expected to be lower than policies with an Option B death benefit. Option B pays the face
amount plus the cash value. If cash values grow over time, so would the death benefit which
is payable to the insured's beneficiaries. If cash values decline, the death benefit would also
decline. Presumably, option B death benefit policies would require higher premiums than
option A policies.

Limited-pay

Another type of permanent insurance is Limited-pay life insurance, in which all the premiums
are paid over a specified period after which no additional premiums are due to the policy in
force. Common limited pay periods include 10-year, 20-year, and are paid out at the age of 65

Endowments

Main article: Endowment policy

Endowments are policies in which the cumulative cash value of the policy equals the death
benefit at a certain age. The age at which this condition is reached is known as the
endowment age. Endowments are considerably more expensive (in terms of annual
premiums) than either whole life or universal life because the premium paying period is
shortened and the endowment date is earlier.

In the United States, the Technical Corrections Act of 1988 tightened the rules on tax shelters
(creating modified endowments). These follow tax rules in the same manner as annuities and
IRAs.

Endowment insurance is paid out whether the insured lives or dies, after a specific period
(e.g. 15 years) or a specific age (e.g. 65).

Accidental death

Accidental death is a limited life insurance designed to cover the insured should they die due
to an accident. Accidents include anything from an injury and upwards, but do not typically
cover deaths resulting from health problems or suicide. Because they only cover accidents,
these policies are much less expensive than other life insurance policies.

It is also very commonly offered as accidental death and dismemberment insurance (AD&D)
policy. In an AD&D policy, benefits are available not only for accidental death, but also for the
loss of limbs or bodily functions, such as sight and hearing.

Accidental death and AD&D policies very rarely pay a benefit, either because the cause of
death is not covered by the policy, or the coverage is not maintained after the accident until
death occurs. To be aware of what coverage they have, an insured should always review their
policy for what it covers and what it excludes. Often, it does not cover an insured who puts
themselves at risk in activities such as parachuting, flying, professional sports, or involvement
in a war (military or not).

Accidental death benefits can also be added to a standard life insurance policy as a rider. If
this rider is purchased, the policy will generally pay double the face amount if the insured dies
due to an accident. This used to be commonly referred to as a double indemnity policy. In
some cases, insurers may even offer triple indemnity cover.

Related products

Riders are modifications to the insurance policy added at the same time the policy is issued.
These riders change the basic policy to provide some feature desired by the policy owner. A
common rider is accidental death (see above). Another common rider is a premium waiver,
which waives future premiums if the insured becomes disabled.

Joint life insurance is either a term or permanent policy insuring two or more persons with the
proceeds payable on either the first or second death.

Survivorship life is a whole life policy insuring two lives with the proceeds payable on the
second (later) death.

Single premium whole life is a policy with only one premium which is payable at the time the
policy matures.

Modified whole life is a whole life policy featuring smaller premiums for a specified period of
time, after which the premiums increase for the remainder of the policy.

Group life insurance

Group life insurance (also known as wholesale life insurance or institutional life insurance) is
term insurance covering a group of people, usually employees of a company, members of a
union or association, or members of a pension or superannuation fund. Individual proof of
insurability is not normally a consideration in the underwriting. Rather, the underwriter
considers the size, turnover, and financial strength of the group. Contract provisions will
attempt to exclude the possibility of adverse selection. Group life insurance often includes a
provision for a member exiting the group to buy individual coverage.

Senior and preneed products

Insurance companies have in recent years developed products to offer to niche markets, most
notably targeting the senior market to address needs of an aging population. Many
companies offer policies tailored to the needs of senior applicants. These are often low to
moderate face value whole life insurance policies, to allow a senior citizen purchasing
insurance at an older issue age an opportunity to buy affordable insurance. This may also be
marketed as final expense insurance, and an agent or company may suggest that the policy
proceeds could be used for end-of-life expenses.

Preneed life insurance policies are limited premium payment whole life policies that, although
available at almost any age, are usually purchased by older applicants. This type of insurance
is designed to cover specific funeral expenses when the insured person dies, which the
applicant has designated in a preneed funeral goods & services contract with a funeral home.
The policy's death benefit is initially based on the total funeral cost at the time of
prearrangement, and it then typically grows as interest is credited. In exchange for the policy
owner's designation of the funeral home as the primary beneficiary, the funeral home will
typically guarantee that the death benefit proceeds will cover the future cost of the selected
goods & services no matter when death occurs. Excess proceeds may go to either the
insured's estate, a designated beneficiary, or to the funeral home, as set forth in the
prearrangement funeral contract. Purchasers of these policies usually make a single premium
payment equal to the funeral amount at the time of prearrangement, but companies offering
these products also allow premiums to be paid over as much as ten years.