CHAPTER FIVE
LIFE AND HEALTH INSURANCE
I. Life Insurance
Life Insurers pay death benefits to
designated beneficiaries when the
insured dies. i.e. loss of income, funeral
expenses, uninsured medical bills, estate
taxes, and other expenses due to death.
• Premature Death:
. - can be
defined as the death of a
family head with outstanding
unfulfilled financial obligations.
Documents and factors Needed for
Policy (contract)
• The Policy documents needed to in
force the insurance contract include
the proposal form, the Policy form, the
Medical Report and any other
supplementary contracts.
.
• Other factors to assess insurability
include: age, sex, physical condition,
medical history, family history,
occupation, habits,
avocation/occupation, financial
position, insurable interest and
moral hazard
Sources of Information for Underwriting
(guarantee)
• The assessment and evaluation of
the risk is based on the
information collected by the
underwriter.
• Pertinent/relevant information
needed for underwriting is
obtained from the following
sources:
.
Proposal Form
Medical Report
Attending Physicians Statement
Agent’s/ Salesman’s Report
Questionnaires and Interview
Underwriting Manuals
Inspection Report
Types of Life Insurance
• Life insurance policies can be
classified as either term insurance
or cash value life insurance
• Term insurance provides temporary
protection, while cash value life
insurance has a savings component
and builds cash values
1. Term Insurance
• Term insurance provides protection only
for a definite period (term) of time.
• If the insured does not die during the
period for which the policy was taken, the
insurance company is not required to pay
anything.
• Protection ends when the term of years
expired.
.
The period of protection is temporary, such as
1, 5, 10, or 20 years
The forms of term insurance can be , straight
term insurance, renewable term
insurance, and convertible term insurance.
Straight term insurance: Is written for a
year or for a specified number of years and
terminates automatically at the end of the
designated period.
.
Most term insurance policies are renewable,
which means that the policy can be renewed
for additional periods without evidence of
insurability
Unless the policy is renewed, the protection
expires at the end of the period
• Most term insurance policies are also
convertible, which means the term policy can
be exchanged for a cash value policy without
evidence of insurability
2. Whole Life Insurance
• In contrast to term insurance, which
provides short term protection, Whole life
insurance is a cash value policy that
provides lifetime protection
• There are two types of whole life insurance:
I. Ordinary life insurance
II. Limited payment life insurance
I. Ordinary Life Insurance
• Ordinary Life insurance provides lifetime
protection to age 100, and the death
claim is a certainty
• If the insured is still alive at age 100, the
face amount of insurance is paid to the
policy owner at that time
• In addition, premiums do not increase
from year to year but remain level
throughout the premium paying period
.
• Ordinary life insurance also has an
investment or saving element called a
cash surrender value
• For example, in many ordinary life
policies, a $100,000 policy issued at
age 20 would have at least $50,000 of
cash value at age 65
II. Limited payment life insurance
• The insurance is permanent, and the
insured has lifetime protection
• The premiums are level, but they are paid
only for a certain period
• Under this insurance scheme, premiums
are paid for a definite period of time, which
is determined in advance. That is for 10,
15, 20, 25 and 30 years or up to age 85.
.
• Higher premium than straight life insurance.
• For example, Shannon, age 35, may purchase
a 20 year limited payment policy in the
amount of $25,000
• After 20 years, the policy is
completely paid up, and no additional
premiums are required even though
the coverage remains in force (valid)
3. Endowment Insurance
• Endowment insurance promises to pay a
stated amount of money to the beneficiary
at once if the insured dies during the life of
the policy called the “endowment period,”
or to the insured himself if he survives to the
end of the endowment period.
This is “You win if you live and you win
if you die” contract.
• For example, if Ato kebede, age 35,
.
purchased a 20 year endowment
policy and died any time within the
20 year period, the face amount
would be paid to his beneficiary
• If he survives to the end of the
period, the face amount is paid to
him
.
• The endowment policy is, in a
sense, a saving plan, which also
gives insurance protection.
Rate Making in Life Insurance
Life insurance rate is determined by three major
determinants:
• Expected mortality rates in the insured population
• Investment income earned by the insurer on
invested premium income
• Expenses incurred in operating an insurance
enterprise and in providing insurance related
services
Mortality table .
• This is a table that shows the number of deaths
per thousand and expectation of life at various
ages
Present value table
• Since the insurance company collect premium
in advance and does not pay claims until the
future date, it has the use of the insured’s
money for some time, and it must be prepared
to pay interest on it
Net single premium
• The net single premium is the amount
the insurer must collect in advance to
meet all the claims arising during the
policy period
The rate maker in life insurance makes
two assumptions in calculating the
necessary premium:
I. All premiums will be collected at the
beginning of the year
.
II. Death claims are not paid until the end of
the year
• Example, Assume that a given insurer wishes
to determine the premium for a one year
term insurance contract with a face amount
of Birr 1,000 for a group of entrants, age 20
• Reference to the table of mortality reveals
that the probability of death at age 20 for a
male is 0.0019
.
• This means that out of 100,000 men living
at the beginning of the year, 190 will die
during the year
• Death claim payable at the end of the
year:
=1,000 X 190= 190,000 Birr
• If the insurer is to guarantee earnings of
3%, Birr 0.9708 must be on hand now in
order to have Birr 1 at the end of the year
.
• Therefore, to find the present value of
Birr 190,000 at the end of one year:
= Birr 190,000X0.9708
=Birr 184,452
• The proportionate share to each entrant:
=184,452/100,000
=1.84 Birr
.
• Alternative way
• NSP= amount of prob. of PV of Br
insurance X death X 1 at 3%
=1,000 X 0.0019X 0.9708
=1.84 Birr
• Example, the net single premium for a
Birr 1,000 term policy of three years
.
= 1,000 X 0.0019 X0.9708 =1.8445
= 1,000 X 0.00191 X0.9425= 1.8001
= 1,000 X 0.00189 X 0.9151 =1.7295
5.3741
Net level premium
• 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
• If premiums are paid annually, the net
single premium must be converted into a
net annual level premium
.
• NALP= NSP/ PVLAD of Birr 1 for the
premium paying period
But, PVLAD of Birr 1 for the
premium paying period could be
calculated as follow
.
.
• The value per entrant can then be
computed:
• Birr 290,787/100,000=Birr 2.91
• Therefore,
NALP= NSP/ PVLAD of Birr 1 for the
premium paying period
NALP= 5.3741/2.91
NALP= 1.8467
HEALTH INSURNCE
• Health insurance may be defined
broadly as the type of insurance that
provides indemnification for
expenditure and loss of income
resulting from loss health
• Health insurance is insurance against
loss by sickness or bodily injury
.
• The loss may be the loss wages caused
by sickness or accident, or it may be
expenses for doctor bills, hospital bills
medicine etc
.
Types of Health Insurance
Disability Income Insurance and
Medical Expense Insurance
• Hospitalization Expense
Contract
• Surgical Expense Contract
• Regular medical Expense
Contract