Unit 5 – Concept of Insurance and Risk Management

Chapter 3 – Life Insurance

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  Life Insurance & Analysis of Life Cover
 Assessment & Identification of Risk Exposure
in Life Insurance
 Life Insurance Cover Need Analysis Methods

Agenda
 Types of Life Insurance Policies
 Methods of Premium Payments
 Classification of Life Insurance Policies by
Duration
 Universal Life Policies
 Variable Life Policy (ULIP)
 Types of Riders in Life Insurance

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  Life Insurance Premium & Tax Benefits
 Claim Amount & Benefits in Life Insurance
 Bonus in Life Insurance
 Practice Set – Bonuses in Life Insurance (with

Agenda
Solutions)
 Claim Payable in Life Insurance
 Claim Procedure in Life Insurance
 Calculation of Return on Life Insurance
 Reasons for Claims Rejection in Life Insurance
 Loans & Foreclosure in Life Insurance
 Policy Servicing Provisions in Life Insurance

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 Concept of Life Insurance

Aspect Description

A contract where insurer pays a sum assured to beneficiaries

Definition
upon death or maturity in exchange for premium.

Financial protection, income replacement, debt repayment,

Purpose
wealth creation.

Key Parties Life Assured, Policyholder, Nominee/Beneficiary, Insurer.

Benefit Types Death Benefit, Maturity Benefit, Survival Benefit.

Mortality Cost + Expense Load + Investment Component (for

Premium Components
savings plans).
 Types of Life Insurance

Type Nature Key Features Suitable For

High cover, low premium, no Income replacement, family

Term Insurance Pure protection
maturity benefit protection

Cover till 99/100 years, bonus Estate planning, lifelong

Whole Life Policy Lifetime cover
may accrue protection

Lump sum on maturity or Short/medium-term goals,

Endowment Plan Protection + Savings
death disciplined savings

Money Back Plan Savings + periodic returns Survival benefits at intervals Liquidity needs + insurance

Investment + insurance, NAV- Long-term wealth creation,

ULIP (Unit Linked) Market-linked
based returns market participation

Corpus accumulation, annuity Post-retirement income

Pension / Annuity Retirement planning
payouts security
 Key Terms in Life Insurance

Term Meaning

Sum Assured Guaranteed amount payable on death.

Premium Price paid for availing insurance cover.

Policy Term Duration of policy coverage.

Rider Add-on cover at extra premium (e.g., critical illness).

Surrender Value Amount payable if policy is terminated before maturity.

Grace Period Extra days allowed for premium payment without lapse.
 Life Insurance Riders

Rider Coverage Importance

Accidental Death Benefit Extra sum assured on accidental death Enhances risk cover

Helps meet medical/loss of income

Critical Illness Rider Lump sum on diagnosis of major illness
costs

Future premiums waived if

Waiver of Premium Ensures policy continuity
disability/illness occurs

Income Benefit Rider Regular income to family post death Income replacement
 Factors Influencing Life Cover

Factor Influence

Age Younger individuals require higher tenure and lower cost.

Income Stability Higher income → higher cover needed.

Family Dependence More dependents → larger cover needed.

Liabilities Higher debts → higher cover.

Lifestyle Inflation Cover should adjust for rising expenses.

Investment Returns Discount rate affects PV in cover calculation.

 Evaluation of Life Insurance for Clients

Analysis Area Focus Points

Client Profile Age, income, dependents, risk tolerance.

Coverage Adequacy Whether current life cover meets HLV/needs.

Product Suitability Term for protection; ULIP/endowment for goals.

Policy Performance Bonus rates, NAV performance, surrender value.

Deductions under Sec 80C and exemption under Sec

Tax Efficiency
10(10D).
 Assessment & Identification of Risk Exposure in Life Insurance

Understanding Risk Exposure in Life Insurance Types of Risks Covered by Life Insurance
Aspect Description
Impact on Life Cover
Risk Type Explanation
Decision
Degree to which an
individual is vulnerable to Determines base sum
Risk Exposure Mortality Risk Risk of premature death
financial loss due to assured
death.

Risk of illness/disability Consider

Health Risk
To determine adequate affecting earning ability riders/additional cover
Purpose of
life cover and appropriate
Assessment
insurance product.
Inflation, debt burden, Requires inflation-
Financial Risk
Income, dependents, loss of savings adjusted cover
Key Drivers debts, future goals,
Occupation, habits, Affects premium &
lifestyle needs. Lifestyle Risk
stress, environment underwriting terms
 Assessment & Identification of Risk Exposure in Life Insurance

Identification of Financial Needs Risk Mitigation Using Life Insurance Solutions

Inclusion in Cover Risk Mitigation Tool Explanation

Need Category Examples
Calculation
Large coverage,
Death Risk Term Insurance
low cost
Funeral expenses,
Immediate Needs One-time lump sum
medical bills Lump sum/benefit
Critical Illness or
Health/Disability for non-death loss
Disability Rider
Home loan, Must match total of earning power
Liability Coverage
personal loan outstanding Ensures monthly
Family Income Income Benefit
income to
Household PV of expenses × Stability Rider
dependents
Income Provision expenses, school years of
fees dependency Estate legacy and
Whole Life Plan /
Child higher Wealth Continuity retirement income
Added as future Annuity
Future Goals education, security
capital needs
retirement
 Life Insurance Cover Need Analysis Methods

Human Life Value (HLV) Method Income Replacement Method

Component Description Component Description

Economic value of an Ensures dependents continue
Basis individual's future earnings to Basis
receiving income after death.
dependents.
Annual income × Age-based
HLV = Annual Income × Working
Formula (Basic) Approach multiplier (reflecting remaining
Years Remaining
earning horizon).

HLV = (Annual Income – Age 20–30: 15–20×; Age 30–40:

Formula (Refined) Personal Expenses) × PV Factor Typical Multipliers 10–15×; Age 40–50: 8–12×; Age
(discounted) 50–60: 5–8×

Quick estimation where detailed

Primary earning member with Suitable For
Suitable For financial data is unavailable.
stable income.
Sum assured adequate to maintain
Sum assured equal to economic Output
Output lifestyle.
value lost on death.
 Life Insurance Cover Need Analysis Methods

Need-Based (Comprehensive) Method Expense Replacement Method

Calculation
Need Category Examples Component Description
Approach
Medical bills, funeral One-time lump-sum Ensures capital remains intact while
Immediate Needs Basis
expenses amount providing ongoing income.
Home loan, car loan, Add outstanding debt
Liability Coverage
credit card debt value Required Cover = Annual Family
Formula
Requirement ÷ Expected Return Rate
Income Household expenses, PV of future costs ×
Replacement school fees dependency period

Child education, FV of future goals If family needs ₹6,00,000/year and

Future Goals
marriage, retirement adjusted to today Example return = 6%, cover = ₹6,00,000 ÷ 0.06
= ₹1 Cr
Less: Existing Savings, investments, Deduct to avoid over-
Assets pensions, policies insurance
High net-worth clients / wealth
Suitable For
Life Cover Needed = preservation.
Output Total Financial Needs – Permanent income stream without
Existing Resources Output
consuming principal.
 Life Insurance Cover Need Analysis Methods
Capital Retention Method Comparison of Methods

Component Description Method Data Needed Accuracy Best For

Ensures capital remains intact while General economic

Basis HLV Income data Medium
providing ongoing income. value estimation
Quick
Income Low to
Required Cover = Annual Family Income + Age approximate
Replacement Medium
Formula Requirement ÷ Expected Return calculation
Rate Detailed Customized
Need-Based financial High planning
If family needs ₹6,00,000/year and planning inputs scenarios
Example return = 6%, cover = ₹6,00,000 ÷ Lifestyle
Expense Household Medium to
0.06 = ₹1 Cr protection
Replacement expense data High
approach
High net-worth clients / wealth Required
Suitable For
preservation. Capital annual income Long-term wealth
High
Permanent income stream without Retention + expected continuity
Output
consuming principal. return
 Types of Life Insurance Policies
Protection-Oriented Policies Savings + Protection (Traditional Policies)

Key Policy Type Description Key Features Suitable For

Policy Type Description Suitable For
Features
Lump sum on Short-to-
Insurance +
Endowment maturity or death; medium-term
Lowest guaranteed
Pure risk Income Policy bonus participation goals +
premium; savings
Term cover, no replacement possible protection
high sum
Insurance maturity for Periodic Regular payouts + Liquidity
assured; fixed Money-Back
benefit breadwinners survival insurance cover needs with
term Policy
benefits continues partial returns

Matches Coverage for Estate

Decreasing Sum assured Whole Life life (generally Bonuses may apply; planning,
reducing Mortgage/loa
Term reduces over Policy up to age wealth transfer tool legacy
liabilities n protection
Insurance time 99/100) protection
(e.g., loans)
Payout for
Increasing Sum assured Protects Long-term Goal-based Planning for
Children’s education/marriage;
Term increases against dependents’ savings for child’s future
Policy may waive premiums
Insurance annually inflation needs children needs
on parent’s death
 Types of Life Insurance Policies
Investment-Linked Policies Retirement / Income Policies

Payout
Policy Type Description Key Features Suitable For Policy Type Description Suitable For
Structure

NAV-based
ULIP (Unit- Long-term Lump sum /
Market-linked returns; Premiums paid Systematic
Linked wealth Deferred periodic deposit;
investment + choice of fund now → pension retirement
Insurance creation with Annuity annuity starts at
insurance options; starts later corpus build-up
Plan) risk appetite retirement
charges apply

Option to Retirement One-time lump

Pension / Accumulate Life-long annuity Retirees
convert to planning for Immediate sum → pension
Retirement retirement or joint-life needing instant
annuity; tax market-aware Annuity starts
ULIP corpus annuity options stable income
considerations investors immediately
 Methods of Premium Payments

Method Description Payment Frequency Notes

Lower total cost; suitable for

Single Premium One-time lump sum payment Paid once at policy inception
investors with surplus funds

Premiums paid throughout Yearly / Half-yearly / Quarterly Common for income earners;
Regular Premium
policy term / Monthly ensures continuity of cover

Premiums paid for a shorter E.g., Pay 10 years for 20-year Useful for retirement planning,
Limited Premium
period than policy term term reduces long-term burden

Premium amount and timing Usually seen in Universal

Flexible Premium As per policy terms
can vary Life-type policies
 Classification of Life Insurance Policies by Duration

Policy Type Duration of Coverage Key Characteristics Suitable For

Fixed term (e.g., 10–40 Pure risk protection; no

Term Policy Income protection
years) maturity benefit

Ensures lifelong cover; Estate planning, legacy

Whole Life Policy Coverage till age 99/100
possible bonuses transfer

Benefit payable on maturity or Savings + protection

Endowment Policy Specific term
death objectives

Term to Whole Life or Conversion without new Future flexibility when income
Convertible Policy
Endowment medical exams rises

Temporary (Short-Term) Short coverage period; low Temporary or interim risk

Usually 1–5 years
Policy cost cover needs
 Universal Life Policies

Aspect Description Variable Life Policy

Flexible-premium, adjustable-benefit
Policy Nature Aspect Description
permanent life insurance
Cash Value Earns interest based on insurer- Permanent life insurance where cash
Accumulation declared rates (not market-linked) Policy Nature
value is invested in market-linked funds

Policyholder can increase/decrease Investment Policyholder selects investment options

Premium Flexibility
premium amounts within limits Component (equity, debt, balanced funds)

Death Benefit Level death benefit or increasing Cash value fluctuates based on market
Cash Value Risk
Options death benefit structure performance
Charges (mortality cost, May be fixed or vary depending on
Death Benefit
policy structure
Transparency administration fee) are shown
Not guaranteed; depends on fund
explicitly Returns
performance
Customers with higher risk appetite and
Individuals needing flexibility in Suitable For
Suitable For long-term horizon
premium payments & cover amount
 ULIPS

Quick Suitability Summary

Aspect Description

Client Situation Recommended Policy Type

Life insurance + market-linked
Policy Structure investment via fund units (NAV-
based) Needs high cover, lowest
Term Insurance
cost
Equity, Balanced, Debt funds with
Investment Options
switch facility Wants flexibility in premiums
Universal Life
and benefits
Allocation charges, Fund
Charges management charge, Mortality
Wants long-term market
charge, Policy admin fee Variable Life / ULIP
participation
NAV declared daily; portfolio
Transparency
performance visible Wants guaranteed maturity
Endowment / Money-Back
Minimum 5 years (as per IRDAI benefit
Lock-In Period
norms)
Wants lifetime estate &
Wealth creation + protection with Whole Life Policy
Suitable For legacy planning
market participation
 Life Insurance Premium & Tax Benefits

Section /
Applicable To Tax Benefit Key Conditions
Provision
Premium must not exceed 10% of
Life Insurance Premium (Individual Deduction up to ₹1,50,000 Sum Assured (for policies issued
Sec 80C
& HUF) per year on/after 1 April 2012). For disabled /
disease cases: limit is 15%.
Only applicable if premium is split
Health-related riders (e.g., Critical Deduction for health
Sec 80D and rider is eligible under health
Illness Rider in some cases) insurance portion only
cover rules.
Premium ≤ 10% of SA; if excess,
Sec 10(10D) Maturity / Survival / Death Benefits Maturity amount tax-free maturity may be taxable, but death
benefit is always tax-free.
1/3rd of pension corpus can Remaining annuity payouts are fully
Sec 10(10A) Pension / Annuity Policies
be commuted & is tax-free taxable as income.

On maturity proceeds where 10D TDS @ 5% on income Applicable only when maturity
Sec 192 / TDS
exempt conditions not met portion amount > ₹1,00,000 and taxable.
 Claim Amount & Benefits in Life Insurance

Benefit Type When Payable What is Paid Key Notes

Sum Assured + Bonus (if Paid to nominee; always tax-

Death Benefit On death of Life Assured
participating policy) free under Sec 10(10D).

Sum Assured + Guaranteed Tax-free if premium ≤ 10% SA

Maturity Benefit At end of policy term
Additions/Bonus criterion satisfied.

During policy term (Money- Periodic payouts (e.g., every 5 Remaining SA paid on
Survival Benefit
Back Policies) years) maturity.

Usually lower in early years;

Guaranteed Surrender Value
Surrender Value On early termination tax treatment depends on Sec
or Special Surrender Value
10(10D) conditions.

Loan up to 80–90% of Interest applicable; benefit of

Loan Against Policy During policy term
Surrender Value liquidity.
 Bonus in Life Insurance (Participating Policies)

Bonus Type Meaning When Added Payable When?

Simple Reversionary Bonus Declared per ₹1,000 SA every

Added to policy annually Paid on maturity or death
(SRB) year

Compound Reversionary Bonus calculated on (SA +

Compounds each year Paid on maturity or death
Bonus previous bonuses)

For policies maturing between

Interim Bonus Added temporarily Paid at claim settlement
bonus declaration cycles

One-time final bonus for long-

Final / Terminal Bonus Declared at the end Paid at maturity or death only
term policies

Loyalty Additions Reward for long policy tenure Added in final years Enhances final benefit amount
 Practice Set – Bonuses in Life Insurance (With Solutions)

Q1. A policy has Sum Assured = ₹5,00,000.

Simple Reversionary Bonus = ₹40 per ₹1,000 SA per year.
Policy term = 15 years.
Calculate total SRB. Q3. A participating policy matures after
Solution: 20 years.
Bonus per year = (₹40 × 5,00,000 / 1,000) = ₹20,000 SRB accumulated = ₹2,50,000
Total SRB = ₹20,000 × 15 = ₹3,00,000 Final Bonus declared = 5% of Sum
________________________________________ Assured.
Q2. Sum Assured = ₹2,00,000 Sum Assured = ₹8,00,000.
Compound Reversionary Bonus rate = 3% of (SA + earlier Calculate final maturity payout.
bonuses) annually Solution:
If no previous bonuses existed in the first year, find bonus in: Final Bonus = 5% × ₹8,00,000 = ₹40,000
• Year 1 Total payout = SA + SRB + Final Bonus
• Year 2 = ₹8,00,000 + ₹2,50,000 + ₹40,000
Solution: = ₹10,90,000
Year 1 Bonus = 3% of ₹2,00,000 = ₹6,000
Year 2 Bonus = 3% of (₹2,00,000 + ₹6,000) = 3% of ₹2,06,000
= ₹6,180
 Claim Payable in Life Insurance

Situation Claim Payable Conditions Claim Procedure in Life Insurance

Death during policy Sum Assured + Premiums must be Step Required Action Documents Required
term (in force) Bonuses (if any) paid up to date
1. Intimation of Nominee informs Policy Number, Date &
Claim payable, premium Claim insurer Cause of Death
Death during grace Death occurred
for that period may be
period before policy lapses Claim Form, Original
deducted
2. Submission of Policy Document, Death
Death during lapsed As per insurer checklist
No claim, unless revived Exceptions: paid-up Documents Certificate, KYC of
policy (within revival Nominee
before death value if applicable
period)
Post-Mortem, FIR/Police
Sum Assured + 3. Additional
Policy must be in Based on nature of Report
Maturity Guaranteed Additions + Documents (if
force death (Accident/Unnatural
Bonuses (if applicable) required)
death)
Surrender Value =
4. Verification & Insurer may request
Surrender before Higher of Guaranteed Based on policy Insurer assesses claim
Investigation hospital/medical records
maturity Surrender Value or duration completed
Special Surrender Value 5. Claim
Settlement within 30 If investigation required
Sum Assured (Basic) + Accident must meet Settlement /
Accidental Death days if no investigation → 90 days max
Additional Rider Sum policy-defined Rejection
Rider Activated
Assured criteria
 Calculation of Return on Life Insurance

Calculation of Return on Life Insurance Reasons for Claims Rejection in Life Insurance

Component Included Notes Reason Description

Total amount paid
Premium Paid Yes Material Non-Disclosure / Failure to disclose health,
over policy duration
Misrepresentation lifestyle, income details
Includes bonuses
Maturity / Death
Yes and guaranteed
Benefit Fraud Intentional false statements
additions

Considered Policy Lapsed / Not Premiums not paid; risk cover

Not included in
Tax Benefits separately in after- Revived terminated
direct return
tax evaluation
Suicide clause (typically first 1
General Return Formula - Return (%)=(Total Exclusions Applied year), hazardous activities
Benefits Received−Total Premiums Paid/Total exclusions
Premiums Paid)×100
No Insurable Interest at
For annualized return (Yield to Maturity) → Use IRR Void contract situation
Policy Inception
on cash flows.
 Life Insurance

Loans & Foreclosure in Life Insurance Policy Servicing Provisions

Feature Explanation Service Meaning Notes

Available on policies with Typically 30 days

Additional time to
surrender value (Endowment, Grace Period (15 days for monthly
Loan Eligibility pay premium
ULIP, Whole Life), Not available mode)
on pure Term Plans
Beneficiary for claim U/S 39 of Insurance
Usually up to 80–90% of Nomination
Loan Amount amount Act
Surrender Value Transfer of policy U/S 38 of Insurance
Assignment
Determined by insurer; adjustable rights Act (e.g., for loans)
Interest Rate
periodically
Usually within 2–5
Reinstating a lapsed
If loan + accumulated interest > Revival years with
policy
Foreclosure surrender value → policy is penalty/medical tests
foreclosed and terminated Time to return policy 15 days (online: 30
Free-Look Period
if dissatisfied days) from receipt
Effect on Death Death Benefit = Sum Assured –
Premature Surrender Value
Claim Outstanding Loan Surrender
termination payable (if eligible)
Unit 5 – Concept of Insurance and Risk Management
Chapter 4 – General Insurance

Presented By :

This Content is Copyright Reserved Rights Copyright 2025@PTAIndia