LIFE INSURANCE - A PRODUCT INTRODUCTION CHAPTER 3
CHAPTER 3
LIFE INSURANCE
- A PRODUCT INTRODUCTION
Learning Outcomes
When you have completed this chapter you will be able to
explain how the concept of probabilities has an impact on the
establishment of a usable mortality table and the determination of
a life insurance premium;
discuss the impact of AIDS on future mortality rates;
identify the main expenses that need to be considered when a life
insurance premium is being determined;
explain the purpose of a valuation and briefly describe the two
methods of doing a valuation;
list and briefly describe the possible sources of a surplus when a
valuation is undertaken;
describe how, with profit, policyowners can share in the surplus
established after a valuation;
briefly describe how the owners of linked policies share in the
investment returns of an insurer;
describe, in some detail, how the universal concept works;
discuss the implications of a possible negative review to the owner
of a universal policy;
list and briefly describe the other main types of policies that are
still within the portfolios of most life insurers.
RSK3701 LI Page 57
Ver 31072011
,LIFE INSURANCE - A PRODUCT INTRODUCTION CHAPTER 3
3.1 THE PRINCIPLES OF LIFE INSURANCE
3.1.1 UNDERSTANDING INSURANCE
An insurance policy is the promise by the insurance company to pay the proceeds of a policy
at a definite date or on the occurrence of a specified event, according to the written
conditions stipulated in the policy contract.
The premium is the amount paid to the insurer for the benefits provided under the policy
contract. It is important that one understands certain basic elements and principles involved
in insurance in order to decide on the correct policy needed to solve a particular life
insurance problem.
3.1.2 TYPES OF LIFE INSURANCE
Historians of life insurance record that the earliest policies were issued only for one year.
Later, long term whole life and endowment insurance policies were introduced. Premiums
were since then payable at yearly, half-yearly, quarterly or monthly intervals.
Life insurance policies usually fell into two main classes:
with profit or participating policies; or
without profit or non-participating policies. The only non-profit long term policies that are
still available in South Africa are term insurance policies and special risk policies such
as hospital cash plans.
Term insurance
Term insurance is the simplest type of life insurance policy issued. The period of the policy is
limited to a definite term, usually an agreed number of years, and the sum insured is payable
only if death occurs within that term. In a term contract there is no element of investment,
and the premium theoretically covers only current insurance protection and expenses. These
policies are always issued without profits.
Term insurance, as an independent policy, is no longer widely offered on a level monthly
premium basis in South Africa.
Reasons for this include:
the fear of rising AIDS claims under what is in effect guaranteed life cover;
the low premium generated;
increasing administrative costs which are not easily recovered in inexpensive term
insurance plans;
the increasing popularity of universal life plans; and
the lack of cash values or payouts if the life insured survives.
RSK3701 LI Page 58
Ver 31072011
, LIFE INSURANCE - A PRODUCT INTRODUCTION CHAPTER 3
Decreasing term insurance
This type of contract is a term insurance with a decreasing sum insured and is usually taken
out in connection with loans when the loan is gradually being repaid.
The sum insured is reduced on a fixed scale year by year. It is often used for mortgage bond
cover, so that if a person has borrowed money to buy a house, the amount borrowed will be
repaid if he dies before the borrowed money has been paid back.
Below is an example of a decreasing term insurance policy:
R2 000 000
R1 700 600
R1 300 800
R800 600
R0
0 years 5 years 10 years 15 years 20 years
Credit life insurance
The steadily increasing volume of instalment and credit sales of consumer goods has led to
the introduction of collective (group) policies designed to cover the outstanding debts on the
debtor's death.
Premiums are charged on the basis of decreasing term policies but as the procedure
followed is simplified because individual policies are not issued, slightly lower modified
premiums can be charged.
The policy covers the outstanding debt on the death of any hirer under a stipulated age.
Arrears are not covered. Where premiums are payable quarterly or monthly they are based
on the average outstanding debt in that quarter or month.
Claims are paid to the finance company on production of the agreement and the death
certificate. No evidence of health is required and there is no question of selection either by
the office or against it, as all the contracts of the finance company are included in the life
policy.
A single collective, or group, policy is issued and each quarterly premium is calculated from a
return supplied by the firm.
This form of insurance has also achieved remarkable growth in the covering of motor vehicle
hire purchase deals, often on an individual basis with minimal underwriting. A single premium
is paid, usually by way of an addition to the hire purchase funds being raised and
abbreviated coupon type policies are issued with automatic collateral sessions to the finance
provider.
RSK3701 LI Page 59
Ver 31072011
CHAPTER 3
LIFE INSURANCE
- A PRODUCT INTRODUCTION
Learning Outcomes
When you have completed this chapter you will be able to
explain how the concept of probabilities has an impact on the
establishment of a usable mortality table and the determination of
a life insurance premium;
discuss the impact of AIDS on future mortality rates;
identify the main expenses that need to be considered when a life
insurance premium is being determined;
explain the purpose of a valuation and briefly describe the two
methods of doing a valuation;
list and briefly describe the possible sources of a surplus when a
valuation is undertaken;
describe how, with profit, policyowners can share in the surplus
established after a valuation;
briefly describe how the owners of linked policies share in the
investment returns of an insurer;
describe, in some detail, how the universal concept works;
discuss the implications of a possible negative review to the owner
of a universal policy;
list and briefly describe the other main types of policies that are
still within the portfolios of most life insurers.
RSK3701 LI Page 57
Ver 31072011
,LIFE INSURANCE - A PRODUCT INTRODUCTION CHAPTER 3
3.1 THE PRINCIPLES OF LIFE INSURANCE
3.1.1 UNDERSTANDING INSURANCE
An insurance policy is the promise by the insurance company to pay the proceeds of a policy
at a definite date or on the occurrence of a specified event, according to the written
conditions stipulated in the policy contract.
The premium is the amount paid to the insurer for the benefits provided under the policy
contract. It is important that one understands certain basic elements and principles involved
in insurance in order to decide on the correct policy needed to solve a particular life
insurance problem.
3.1.2 TYPES OF LIFE INSURANCE
Historians of life insurance record that the earliest policies were issued only for one year.
Later, long term whole life and endowment insurance policies were introduced. Premiums
were since then payable at yearly, half-yearly, quarterly or monthly intervals.
Life insurance policies usually fell into two main classes:
with profit or participating policies; or
without profit or non-participating policies. The only non-profit long term policies that are
still available in South Africa are term insurance policies and special risk policies such
as hospital cash plans.
Term insurance
Term insurance is the simplest type of life insurance policy issued. The period of the policy is
limited to a definite term, usually an agreed number of years, and the sum insured is payable
only if death occurs within that term. In a term contract there is no element of investment,
and the premium theoretically covers only current insurance protection and expenses. These
policies are always issued without profits.
Term insurance, as an independent policy, is no longer widely offered on a level monthly
premium basis in South Africa.
Reasons for this include:
the fear of rising AIDS claims under what is in effect guaranteed life cover;
the low premium generated;
increasing administrative costs which are not easily recovered in inexpensive term
insurance plans;
the increasing popularity of universal life plans; and
the lack of cash values or payouts if the life insured survives.
RSK3701 LI Page 58
Ver 31072011
, LIFE INSURANCE - A PRODUCT INTRODUCTION CHAPTER 3
Decreasing term insurance
This type of contract is a term insurance with a decreasing sum insured and is usually taken
out in connection with loans when the loan is gradually being repaid.
The sum insured is reduced on a fixed scale year by year. It is often used for mortgage bond
cover, so that if a person has borrowed money to buy a house, the amount borrowed will be
repaid if he dies before the borrowed money has been paid back.
Below is an example of a decreasing term insurance policy:
R2 000 000
R1 700 600
R1 300 800
R800 600
R0
0 years 5 years 10 years 15 years 20 years
Credit life insurance
The steadily increasing volume of instalment and credit sales of consumer goods has led to
the introduction of collective (group) policies designed to cover the outstanding debts on the
debtor's death.
Premiums are charged on the basis of decreasing term policies but as the procedure
followed is simplified because individual policies are not issued, slightly lower modified
premiums can be charged.
The policy covers the outstanding debt on the death of any hirer under a stipulated age.
Arrears are not covered. Where premiums are payable quarterly or monthly they are based
on the average outstanding debt in that quarter or month.
Claims are paid to the finance company on production of the agreement and the death
certificate. No evidence of health is required and there is no question of selection either by
the office or against it, as all the contracts of the finance company are included in the life
policy.
A single collective, or group, policy is issued and each quarterly premium is calculated from a
return supplied by the firm.
This form of insurance has also achieved remarkable growth in the covering of motor vehicle
hire purchase deals, often on an individual basis with minimal underwriting. A single premium
is paid, usually by way of an addition to the hire purchase funds being raised and
abbreviated coupon type policies are issued with automatic collateral sessions to the finance
provider.
RSK3701 LI Page 59
Ver 31072011
