Life Insurance

• Insurance Sector• The Basics of Life Insurance• How life Insurance works• Types of Life Insurance• Taxation

Insurance Sector• Currently, the insurance sector size is estimated at Rs.500 billion. • The chamber (Associated Chambers of Commerce and Industry ) is

expected to poise the business of insurance to reach at Rs.2000 billions in coming 2 years from the present level

• India’s life insurance premium, as a Percentage of GDP is 1.8%

The Basics of Life Insurance

• Life insurance offers a way to replace the loss of income that occurs when someone dies (usually the person who produces the majority of income in a family situation).

• A good life insurance program does more than just replace the loss of income that occurs if you die. It should also provide money to cover the new costs that arise after your death — funeral expenses, taxes, the need for housekeepers and child care, and so on.

• More Importantly Provides• - PEACE OF MIND

• Life insurance, like other forms of insurance, is based on three concepts: – Parties/Pooling: Many exposures into a group– Premiums: Accumulating a fund through contributions (premiums)

from the members of the group.– Paying Out: Paying from this fund for the losses of those who die each

year.

• That is, life insurance involves the group sharing of individual losses.

• To set premium rates, the insurer must be able to calculate the probability of death at various ages among its insured's, based on pooling

How Life Insurance Works

Types Of Life Insurance• Term Life Insurance• Whole Life Insurance• Universal Life Insurance• Variable Life Insurance• First-To-Die Policies :-)• Stranger Originated Life Insurance (STOLI )• Children's Life Insurance• Senior Life Insurance• Mortgage Protection Life Insurance

Term/Pure Life Insurance• Term life insurance—provides protection for a specified period; is

renewable (at increased premiums) and convertible and has a death benefit that is level or decreasing. The policy does not accumulate cash value

– Death benefits: level or decreasing– Cash value: none– Premiums: increase at each renewal– Policy loans: not allowed– Partial withdrawals: not allowed– Surrender charges: none

Whole Life Insurance• Whole life insurance—provides for payment of the face value upon death

regardless of when the death may occur (permanent)

– Death benefits: fixed level– Cash value: guaranteed amounts– Premiums: fixed level– Policy loans: allowed– Partial withdrawals: not allowed– Surrender charges: None

Universal Life Insurance• Universal life - allows the policyholder the flexibility to change the amount

of the premium periodically, discontinue premiums and resume them at a later date without lapsing the policy, and change the amount of death protection

– Death benefits: level or increasing– Cash value: guaranteed minimum cash value plus additional interest

when rates are higher than guaranteed– Premiums: flexible– Policy loans: yes, but the interest credited to the account is reduced– Partial withdrawals: allowed– Surrender charges: yes

Variable Life Insurance• Variable life insurance—provides the opportunity to invest funds in the

stock market

– Death benefits: guaranteed minimum plus increases from investments– Cash value: minimum not guaranteed; depends on investment

performance– Premiums: fixed level– Policy loans: yes– Partial withdrawals: not allowed– Surrender charges: yes

First-To-Die Policies• First-to-die permanent life insurance policies pay cash benefits regardless

of which spouse dies first. Covering both spouses with one policy can be cheaper than buying two policies.

Stranger Originated Life Insurance

• Stranger Originated Life Insurance or STOLI is a life insurance policy that is held or financed by a person who has no relationship to the insured person

• There are laws to discourage or prevent STOLI.

Taxation• There is no taxation on death benefits in life insurance (nor on dividends

in participating policies)• There is no Taxation on the Cash Value over Maturity (which generally

falls at the age 65 or above)

SOME THINGS TO REMEMBER! • Comparison Index Numbers - IRBA (Insurance Regulatory Body Act will

provide Index number (1 to 5)to each company)

• Smaller index numbers generally represent a better buy ( 90% death benefit Vs 10% Cash Value)

General Terms used in Insurance Industry

• Insured• Policy Owner• Cash Value• Raiders• Actuaries• Sum Assured

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