Unit 5 – Concept of Insurance and Risk Management

Chapter 6 Insurance Mathematics

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  Insurance Mathematics Mortality Table
 Components of Insurance Premium
 Calculation of Risk Premium

Agenda  Calculation of Office Premium

 Calculation of Surrender Value and Paid up Value
 Cost & Benefit Comparisons of Life Insurance Polices

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 Components of Insurance Premium

Component Meaning Purpose Included In

Mortality Charge (Life) / Cost of providing risk cover Protection policies, ULIPs,
To cover expected claims
Morbidity Charge (Health) against death/illness Health

Administrative & operating Covers agent commission,

Expense Loading All policies
expenses admin cost, underwriting

Assumed return on invested Reduces premiums (discounting

Interest / Investment Income Traditional & ULIP plans
premiums future liabilities)

Risk Margin / Contingency Extra charge for uncertainty &

For solvency, regulatory buffer Term, health, long-term plans
Loading adverse deviation

Profit Margin Insurer’s expected profit Ensures viability All policies

Tax & Statutory Levies GST, cesses As per regulations Final premium charged

Adds coverage (CI, ADB, Waiver

Rider Premium Extra cost for optional benefits When rider opted
of Premium)
 Surrender Value & Paid-up Value

Concept Meaning Applies To

Reduced benefit when premiums stop All traditional participating/non-

Paid-up Value
after minimum premiums are paid participating policies

Amount payable when policy is

Surrender Value voluntarily terminated after minimum Traditional policies (not term)
period

Statutory minimum amount insurer must

Guaranteed Surrender Value (GSV) Endowment, Money-back, Whole Life
pay

Special/Non-Guaranteed Surrender Market-linked/bonus-linked surrender

Participating policies
Value (SSV) value
Surrender Value & Paid-up Value
Surrender Value & Paid-up Value
 Surrender Value & Paid-up Value

Feature Paid-up Value Surrender Value

Definition Policy continues with reduced SA Policy ends and amount is paid

Policy Status Still active Terminated

Bonuses Only vested bonus retained Vested bonus may be included

Future Bonus Not added Not applicable

Death Benefit Reduced paid-up SA + accrued bonus No death benefit after surrender

Maturity Benefit Reduced None

Want minimal coverage but stop

Beneficial When Want immediate cash
premiums
Surrender Value & Paid-up Value
Surrender Value & Paid-up Value
 Cost & Benefit Comparisons of Life Insurance Policies

Sum Assured
Policy Type Premium Level Maturity Benefit Risk Coverage Return Potential Suitable For
(SA)

Term Insurance Lowest Highest None Very High None Pure protection

Guaranteed + Conservative
Endowment Plan High Moderate Moderate Low (4–5%)
Bonus savers

Periodic payouts +
Money Back Plan Very High Moderate Moderate Low Liquidity seekers
Maturity

Whole Life Plan High Moderate Paid at death High Low to moderate Legacy planning

High (market- Long-term

ULIP Flexible Moderate–High Fund Value Moderate
linked) investors

Education goal
Child Plan Medium–High Moderate Moderate Low–moderate Child future goals
maturity
 Cost Components Across Policy Types

Cost Component Term Endowment Money Back Whole Life ULIP

High (deducted
Mortality Charges High Medium Medium Medium
monthly)

High (policy admin +

Expense Loading Low Moderate High Moderate
FMC)

Investment
None Guaranteed Guaranteed Limited Market-linked
Component

Surrender Penalties None Moderate High Moderate High (first 5 years)

Rider Costs (CI/ADB) Optional Optional Optional Optional Optional

 Cost–Benefit Numerical Comparison

Feature Term Endowment ULIP

Policy Best Cost Best Benefit Worst Aspect
Annual
₹10,000 ₹40,000 ₹30,000
Premium
✔ Lowest
Term ✔ Highest SA ✘ No maturity
premium
Sum Assured ₹1 crore ₹10 lakh ₹10 lakh
Endowment ✔ Stable ✔ Guaranteed ✘ Low returns
Depends on
Maturity Value None ₹18–20 lakh
market
✔ Periodic
Money Back ✔ Liquidity ✘ Very high cost
Income
Cash Value @ High (if
0 Moderate
10 years markets grow) ✘ No maturity
Whole Life ✔ Lifelong cover ✔ Legacy
benefit

Best Feature Protection Guarantee Returns

✔ Wealth
ULIP ✔ High returns ✘ Market risk
creation
 Case Study 1: Term Plan vs Endowment Plan

Scenario
Criteria Term Plan Endowment Plan
Rahul (age 30, non-smoker)
wants: Annual Premium ₹12,000 ₹2,40,000

 High protection for family

Coverage ₹1 crore ₹25 lakh
 Low premium
Sum Assured Required → Maturity Benefit Nil ₹25 lakh + bonuses
₹1 crore
Policy Term → 30 years Yes (loan/surrender after 3
Liquidity No
yrs)
 Conclusion
Returns No returns 4–6% approx.
 Rahul should choose the
Term Plan for maximum Tax Benefits 80C/10(10D) 80C/10(10D)
protection at minimum
cost Goal Fit Pure risk protection Protection + savings
 Case Study 2: Traditional Endowment vs ULIP

Scenario
Criteria Endowment Plan ULIP
Anjali (age 35) wants:
• Moderate risk
Return Potential 4–6% 8–14% (market-linked)
• Medium-term savings
(20 years) High (fund mgmt, allocation,
• Higher returns than Charges Low
mortality)
traditional plans
Sum Assured → ₹10 lakh Transparency Low High (NAV declared daily)
Premium → ₹1,00,000
yearly Flexibility Low High—switch funds anytime

Risk Low Moderate–High

Conclusion
Anjali should choose ULIP
Liquidity After 3 yrs After 5 yrs
because she wants higher
market-linked growth.
Best For Risk-averse Market-linked wealth creation
 Case Study 3: Whole Life vs Term Insurance

Criteria Term Insurance Whole Life Plan

Scenario
Ramesh (age 40) wants: Coverage Duration Up to age 60–70 Lifetime (age 99/100)
• Lifetime coverage
• Legacy planning for Premium Low (₹15,000/yr) High (₹80,000/yr)
children
Sum Assured → ₹50 lakh
Cash Value No Yes (builds over time)

Conclusion
Maturity Benefit No Yes (if survival to maturity)
For legacy creation,
Whole Life is better; term
is ideal for pure Purpose Income replacement Estate planning
protection.
Suitability Budget-focused buyers Wealth transfer
 Case Study 4: Child Plan (Traditional) vs Child ULIP

Scenario Criteria Child Traditional Plan Child ULIP

Parent wants funding for
child’s higher education in
Returns 4–5% 10–12% (long-term equity)
15 years
Premium → ₹50,000 per
year Risk Very Low Moderate–High
Sum Assured → ₹10 lakh

Conclusion Waiver of Premium Yes Yes

For 15-year long goals,

Child ULIP gives superior
Investment Flexibility No Yes
inflation-adjusted returns.

Goal Suitability Conservative goals Long-term education goals

 Case Study 5: Money-Back Plan vs Endowment Plan

Scenario Criteria Money-Back Endowment

Meera (age 32) wants:

• Periodic payouts for
Survival Benefits Yes (every 5 yrs) No
child’s school fees
• Guaranteed maturity
amount Maturity Benefit
Reduced since some money
Full SA + Bonus
Policy Term → 20 years paid earlier
Sum Assured → ₹10 lakh
Premium Higher Lower
Conclusion
If periodic cash flows
matter → Money-Back. Liquidity High Medium

If long-term savings →
Endowment. Best For Regular payouts Lump-sum goals
 Case Study 6: Term Plan vs Health Insurance Rider vs Separate Health Insurance

Scenario Criteria Money-Back Endowment

Vikas (age 29) wants:

• Life coverage
Survival Benefits Yes (every 5 yrs) No
• Medical protection
Budget → ₹20,000/year
Reduced since some money
Maturity Benefit Full SA + Bonus
Conclusion paid earlier
If periodic cash flows
matter → Money-Back. Premium Higher Lower

If long-term savings →
Endowment. Liquidity High Medium

Best For Regular payouts Lump-sum goals

Unit 5 – Concept of Insurance and Risk Management
Chapter 7 Wealth Planning & Life Insurance

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