Risk Chapter 5
Risk Chapter 5
1
LIFE INSURANCE
• Life insurance is a contract between an
insurance policy holder and an insurer
where the insurer promises to pay a
designated beneficiary a sum of money
in exchange for a premium, upon the
death of an insured person (often the
policy holder).
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Purpose of life Insurance
Financial protection: To provide dependents of
the insured with Financial protection.
Financial compensation.
To support family income of the insured
To cover personal loans and other debts.
The family of the insured and the creditors
will then be protected from loss of money.
To accumulate an educational fund
It will be used to pay tuition fees for children
when they join higher education.
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Considerations in life insurance covering death
of the insured
1. Benefits determined in advance
2.The amount of money required to pay the
death benefits are to be collected in advance
3.Each insured in the group must be charged an
appropriate premium.
4.The probability of claim increases with the
passage of time
5.In some cases the insured & policy owner
may be different 4
BASIC TYPES OF
LIFE INSURANCE CONTRACTS
1. Whole Life Insurance
Straight Life
Limited –pay
Single- pay
2. Term Insurance
Level Term Insurance
- Convertible
- Non-convertible
Renewable Term
Decreasing Term
3. Endowment Insurance 5
1. WHOLE LIFE INSURANCE
It is a type of life insurance contract that provides
insurance coverage for the life of the insured.
Sum assured is payable only upon death of the
insured.
When the policy holder dies, the face value of the
policy, known as a death benefit, is paid to the
person or persons named in the life insurance policy
(the beneficiary or beneficiaries).
Whole Life Insurance contracts are classified as:
1. Straight Life
2. Limited- pay &
3. Single-pay Policies 6
1. Straight Life Insurance (Ordinary Life Insurance).
– Premiums are to be paid at regular interval until the death
of the insured or until the age of 100 year
– If the owner still alive at age 100, the face amount of
insurance is paid to the policy owner at that time.
2. Limited-Pay 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
– Premiums are higher than straight Life Insurance because
premium is paid for a limited period of time.
3. Single Payment Life Insurance
– Here premium payment is made in one lump- sum at the
time of purchase of the whole life insurance.
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2. TERM INSURANCE
Provides compensation (death benefit) to the
beneficiary if the insured person dies within the
stated period mentioned in the policy.
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Net Single Premium (NSP)
• The net single premium (NSP) is defined as
the present value of the future death benefit
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Steps to determine Net Single premium
1. Determine the PV of Birr 8,285,000
PV = FV/(1+i)n
PV = 8,285,000 = 7,531,818.18
(1.10)
2.Divide the PV by the number of insured to arrive at the
NET SINGLE PREMIUM.
7,531,818.18
NSP = = Birr 7.862
958,000
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So each Insured must pay in advance the sum of Birr 22.053 for
three years protection. It helps the insurer to meet the expected
death claims that occur in each year
1 2 3 4 = (2 + 3) 5 6= (4 – 5)
Yr Beg Bal Int 10% B.B + Interest Death Claims End Bal
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ACTURIAL NOTATIONS: -
T = time (years)
X = age
Lx = number of people living during age x.
(Lx – Lx +1) = dx = number of people dying during age x.
(Dx/Lx) = px = probability of dying during age x.
(Lx+1/Lx) = qx = Probability that an individual at age x.
Survives age x.
Formula to determine Net Single Premium:
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Using this formula the Net Single Premium is computed as follows
Birr 22.053
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NET LEVEL PREMIUM
Instead of paying a single premium at the beginning of the
policy, the policyholders want to pay annual premiums of
equal size.
Here there are two points to consider.
1.Not all the policyholders will pay the annual level premiums
since some of them are expected to die before the end of the
term.
2.The insurer is now collecting limited amount of premiums to
invest at the beginning of the policy.
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The following table shows the amount of Net Level Premiums to be
collected and the expected death claims to be paid each year.
1 2 3 4 =(3 + 7) 5 6 7
Annual Total Prem Beg Bal B.B Invested Death Ending
Yr LP Collected at 10% Claims Balance
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Personal Accident Policy
It 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.
Death or disablement should occur within 12
calendar months from the date of the accident. 28
Worker’s 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.
The worker should be employed by the insured, and the
category of work assigned to him and the place of work
should be specified in the Schedule.
The policy does not provide compensation for death or
disablement resulting from suicide attempted suicide or
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intentional self-injury