PCE – Part C Life Insurance
• Revision 01 (25/11/2011)
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CHAPTER 21
LIFE INSURANCE PRELIMINARIES
1
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LIFE INSURANCE PRELIMINARIES
•
Characteristics of Life Insurance Products
•
Basic Principles of Insurance as Applied to Life
Insurance
•
Risk Covered by Life Insurance
2
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CHARACTERISTICS OF LIFE INSURANCE
PRODUCTS
 Long Term Contracts
 Principle of Uberrima Fides
 Aleatory Contracts
3
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CHARACTERISTICS OF LIFE INSURANCE
PRODUCTS
• Insurable Interest
• Payment of a Claim Terminates a Life
Insurance Contract
• The Risk to be Insured Increases with Time
4
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RISKS COVERED BY LIFE INSURANCE POLICIES

Premature Death

Permanent Disability

Temporary Disability

Retirement Benefits

Financial Guarantee
5
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CHAPTER 22
LIFE INSURANCE PRODUCTS
&
FAMILY TAKAFUL BUSINESS
6
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LIFE INSURANCE PRODUCTS
Categories ofLife Insurance Products
Types of Life Policies
Ordinary Life Insurance :
Term, Whole Life (WL)
and
Endowment Insurances
Home Service Insurance
Group Insurance
7
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LIFE INSURANCE PRODUCTS
Other Contracts :
Permanent Health Insurance (PHI),
Dread Disease Covers
and Investment-Linked Policies
Supplementary Benefits (Riders)
Miscellaneous Policies :
Children’s Insurances and Joint-Life Insurance
Family Takaful Business
8
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CATEGORIES OF LIFE INSURANCE
PRODUCTS
Participating Contracts (Par)
Non-participating Contracts (Non-par)
9
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TYPES OF LIFE POLICIES
Ordinary
Home Service
Group Insurance
10
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ORDINARY LIFE INSURANCE
Term Insurance
Whole Life (WL)
Endowment
Annuities
11
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ORDINARY LIFE INSURANCE
Term Insurance
Level Term
Insurance
Renewable and
Convertible
Decreasing Term
Insurance
12
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ORDINARY LIFE INSURANCE
Whole Life (WL)
Ordinary Life Policy
Limited Payment
WL Policy
WL Endowment
Policy
13
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ORDINARY LIFE INSURANCE
Endowment
Anticipated
Endowment Insurance
Uses of
Endowment Insurances
14
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ORDINARY LIFE INSURANCE
Annuities :
Level Life Annuity Contracts
Single Life
Joint Life
Guaranteed Immediate
Last Survivor
Deferred Annuity
Reversionary
Deferred Annuity
15
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HOME SERVICE INSURANCE
Characteristics:
• For the lower income class
• Premium payments at more frequent intervals,
usually weekly & small amount
• Home services representatives collecting the
premium
• Whole life & endowment insurances with low sum
assured are the most popular products
16
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GROUP INSURANCE
Characteristics:
• Insure lives in large groups at low rates for some
purpose. E.g employess of industrial or commercial
establishment or other organization
• A stipulated percentage of all the lives in the group
must be included, to enable a average mortality
experience in accordance with the basis of
calculation
• The group must consist of a minimum number of
lives if medical examination is to be
exempted/waived.
• The lives assured must be in the regular
employment of the assured employer
17
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OTHER CONTRACTS
Permanent Health Insurance (PHI)
Dread Disease Covers
Investment-Linked Policies
18
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SUPPLEMENTARY BENEFITS (RIDERS)
Accidental Death Benefits
Disability Benefits
Sickness Benefits
19
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MISCELLANEOUS POLICIES
Children’s
Insurance
Joint Life
Insurance
20
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FAMILY TAKAFUL BUSINESS
Types
Benefits
Operation
Participant’s Accounts (PA) and
Participant’s Special Account (PSA)
21
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CHAPTER 23
POLICY CONDITIONS
22
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POLICY CONDITIONS
• Definition of a Policy
•
Privileges and Conditions
– Privileges
– Restrictive Conditions
– Conditions Explaining the Contract
•
Policy Transactions
•
Policy Alterations
23
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DEFINITION OF A POLICY
Contract
• Intangible
• Legally Binding
Policy
• Tangible
• Agreement is in Concrete
Form
Agreement
24
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PRIVILEGES AND CONDITIONS
•
•
•
•
•
Days of Grace
Surrender Value
Policy Loans
Paid-up Policy
Non-forfeiture Conditions
•Automatic Premium Loan
•Paid-up Policy
•Extended Term Assurance
• Reinstatement Condition
25
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PRIVILEGES AND CONDITIONS
• Suicide Clause
• Foreign Travel & Residence
• Occupation & Dangerous
Hobbies
• Incontestability Clause
26
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PRIVILEGES & CONDITIONS
• Admission of Age
• Misrepresentation of Age
•Understated of Age
•Overstated of Age
27
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POLICY TRANSACTIONS
Duplicate Policy
Assignment of a Life Policy
(Absolute and Conditional)
Reassignment
28
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POLICY ALTERATIONS
•
•
•
•
•
•
•
•
•
Address
Name
Mode of Payment
Sum Insured
Beneficiary
Term of Insurance
Policy Altered to Paid-up
Class of Policy
Removal of Extra Premium
29
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CHAPTER 24
PRACTICE OF LIFE INSURANCE:
NEW BUSINESS-SELECTION OF LIVES AND
OTHER ISSUES
AT & D- Center for Learning Excellence
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30
RISK MANAGEMENT PROCESS
Identifying the Risk Factors
Selection of Lives to be Insured
Quantifying Risk
Costing Risk
Monitoring the Insurance Fund
31
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THE RISK FACTORS -MORTALITY
•
•
•
•
•
•
•
•
•
•
Age
Sex
Occupation
Social Status
Ethnicity
Geographical Location
Marital Status
Personal Habits and Family History
Avocation
Foreign Residence
32
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SELECTION OF LIVESTO BE INSURED
•
•
•
•
Financial Underwriting
Medical Underwriting
Non-medical Underwriting
The Role of Agent in the Underwriting Process of
Non-medical Insurance
• Objectives of Selection
–Standard Life
–Sub-standard Life
–Deferred
–Declined
33
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MODES OF ACCEPTINGSUB-STANDARD LIVES
• Classification of Extra Risks:
–Increasing Extra Mortality
–Level Extra Mortality
–Decreasing Extra Mortality
• Treatment of Sub-standard Lives:
–Increasing Premium
–Decreasing Death benefit
–Bonus Adjustment
–Alternative Policy Plan
–Exclusion of a Particular Hazard
34
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TAXATION OF LIFE INSURANCE PREMIUMS
• Objectives:
–To Encourage National Thrift
–Promote Individual Financial Independence
• Total Relief:
–RM6000 (Life Insurance and EPF)
35
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TAXATION OF LIFE INSURANCE PREMIUMS
Taxable / Assessable Income:
Salary, Leave Pay, Commissions,
Bonuses/Dividends, Gratuity,
Fees and Allowances
Income Tax
Rates and Relief:
Subject to Annual Review &
Income Tax Act 1967
Assessment Year:
1 January – 31 December.
Personal
Income Tax Basics
Income for the Year of Assessment
shall be the
Income for the Year Preceding
the Year of Assessment
Allowable Deductions:
EPF, Life Insurance Premiums,
Approved Charity Organization,
Personal Relief,
Dependent
Children/Relatives’ Support
36
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TAXATION OF LIFE INSURANCE PREMIUMS
Chargeable Income
=
Assessable Income
less
Allowable Deductions
37
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Chapter 19
CHAPTER 25
PRACTICE OF LIFE INSURANCE-
NEW BUSINESS-PREMIUM RATING
AT & D- Center for Learning Excellence
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38
QUANTIFYING THE RISK
• Pooling of similar risk
• Law of large numbers
• The past forms a guide to the future
39
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COSTING THE RISK
•
Mortality
•
Expenses
•
Investment returns
•
Tax
•
Other factors
40
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COSTING THE RISK
•
Mortality
Standard Mortality Tables
•
Expenses
Initial
Renewal
Termination
41
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COSTING THE RISK



Investment returns
Taxation
Other factors
Financial costs
Reinsurance costs
Bonus Loading
42
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PREMIUM RATE CALCULATIONS
RISK PREMIUM
Basic cost of death risk
LEVEL PREMIUM
Risk increases with passages of time
NET PREMIUM
Cost of mortality & interest
43
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PREMIUM RATE CALCULATIONS
=
Net premium
PLUS
Loading for expenses
PLUS
Loading for profit &
contingencies
44
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SATISFACTORY PREMIUM RATE STRUCTURE
•
ADEQUATE
•
COMPETITIVE
•
EQUITABLE
•
CONSISTENT
•
PROFITABLE
45
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ADJUSTMENT TO GROSS PREMIUMS IN THE
RATEBOOK
• MODE OF PAYMENT
• ADJUSTMENT OF SUM ASSURED
• HEALTH & OCCUPATIONAL EXTRAS
• FEMALE LIVES
46
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NUMERICAL RATING SYSTEM
Particulars
Percentage extra
Age:30 (basic rating)
+100%
Yields over
Height: 5’4”
+100%
Weight debit
Weight: 210 lbs
Blood pressure: 140/85- normal +0%
Medical history: Nil
+0%
--------Total rating:
+200%
Less basic rating:
- 100%
--------Extra mortality:
+100%
---------
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47
CHAPTER 26
PRACTICE OF LIFE INSURANCEMONITORING THE INSURANCE FUND
AT & D- Center for Learning Excellence
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48
THE PURPOSE OF A VALUATION
• To test insurance company’s solvency
• To determine the amount of surplus
(if any)
• To test the adequacy of existing premium scales
• To determine the company’s operations
• To comply with the statutory requirements
49
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VALUATION OF LIABILITIES
The Present Value Of The Benefit Payable
Plus
The Present Value Of Expenses
Less
The Present Value Of The Future Premiums
Receivable
50
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VALUATION OF ASSETS
METHODS
COST PRICE
BOOK VALUE
MARKET VALUE
E.g. of assets:
Cash
Investment
Shares
Loans
Properties
Furniture
Office Equipments
51
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SURPLUS
Sources of surplus include:
• INTEREST
• MORTALITY
• EXPENSE
• MISCELLANEOUS
52
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METHODS OF DISTRIBUTION SURPLUS
•
•
•
•
•
•
Simple Reversionary Bonus
Compound Reversionary Bonus
Cash Bonus
Maturity Bonus or Terminal Bonus
Interim Bonus
Guaranteed Bonus
53
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CHAPTER 27
PRACTICE OF LIFE INSURANCE
- POLICY DOCUMENTS
AT & D- Center for Learning Excellence
54
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SOURCES OF INFO FOR RISK ASSESSMENT
•
PROPOSAL FORM
•
MEDICAL REPORT
•
ATTENDED PHYSICIAN’S STATEMENT
•
AGENT’S REPORT
•
PREVIOUS RECORDS
55
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THE PROPOSAL FORM
•
Personal particulars
•
Details of insurance
•
Occupation, residence, travel & hazardous
pursuits
•
Personal & family history
•
Declaration & authorization
56
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THE MEDICAL REPORT/SPECIAL EXAMINATIONS
•
Height & Weight
•
Pulse & blood pressure readings
•
Chest & abdomen measurements
•
Condition of the:
•Heart
•Lungs
•Nervous system
•Urine analysis
57
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ATTENDING PHYSICIAN’S STATEMENT
•
Consent of the applicant is required before hand
•
Attending physician is required to give specific
answers to queries related to the treatment
58
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THE AGENT’S REPORT
•
Applicant’s habits
•
Appearance
•
Character
•
Financial status
59
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THE PROPOSAL FORM
•
Personal particulars
•
Details of insurance
•
Occupation, Residence, Travel & hazardous pursuits
•
Personal & Family history
•
Declaration & Authorization
60
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POLICY FORM & STRUCTURE
•
•
•
•
•
•
•
THE HEADING
THE PREAMBLE
THE OPERATIVE CLAUSE
THE PROVISO
THE SCHEDULE
ATTESTATION
CONDITIONS & PRIVILEDGES
61
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ENDORSEMENTS
• Endorsements can be done either at the:
–Time of issue of the policy
–After issue of the policy
62
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ENDORSEMENTS- Time if issue of policy
•
Premium / Frequency of Payment
•
Sum Assured / Mode of Payment
•
Special Benefit
•
Special Restrictions
63
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ENDORSEMENTS- After policy issue
•
Mode of payment
•
Alterations to the form of the contract
•
Imposition / Removal of extra premium
•
Surrender of bonus
64
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CHAPTER 28
PRACTICE OF LIFE INSURANCE- CLAIMS
AT & D- Center for Learning Excellence
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65
CLAIM ARISE
•
On the death of the insured
•
On maturity of the insurance policy
•
Sickness or Disability benefit claims
•
Claims arising under supplementary contracts
66
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DEATH CLAIMS
•
NOTIFICATION OF DEATH
–Policy holder’s name & identity card number
–Policy number
–Address
–Date & cause of death
67
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DEATH CLAIMS
• PROOF OF DEATH
–A death certificate
–A coroner’s report
–An order pronouncing a statutory presumption of death
–Certificate showing death at sea
–Medical certificate by last medical attendant
–A certificate evidencing the death of service personnel
and war death
68
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DEATH CLAIMS
•
PROOF OF AGE
–Birth certificate
–School leaving certificate
–Certified extract from baptism register
–IC by Malaysian Government
–Passport
–Statutory declaration (for the elderly)
69
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DEATH CLAIMS
•
PROOF OF TITLE & SETTLEMENT
–A deed of assignment
–A probate of will obtained from the court
of law
–A letter of administration issued by a
court of law
–For a policy effected under Sec 23 of the
Civil Law act, the money would be
payable to the trustees
70
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MATURITY CLAIMS
• NOTIFICATION TO POLICYHOLDER
–Identity form
–Survival form
–Discharge form
71
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MATURITY CLAIMS
•
PROOF OF CLAIMS
–Proof of age
–Proof of survival
–Completion of discharge voucher
–The policy document
72
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MATURITY CLAIMS
• SETTLEMENT OPTIONS
–By maturity proceeds
–Convert to annuities
–Leave proceeds of maturity as a deposit with insurer at
a pre-determined interest rate
–Draw cash by installments over a number of years
73
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CHAPTER 29
LIFE INSURANCE :
SOME MATHEMATICS
AT & D- Center for Learning Excellence
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74
CALCULATION
•
•
AGE
•
PREMIUM
•
INTEREST
GUARANTEED SURRENDER VALUE
75
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CALCULATION
•
AGE
–Last Birthday
–Next Birthday
–Nearest Birthday
76
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CALCULATION
• PREMIUM
–Age
–Sex
–State of Health
–Type of policy
–Sum assured
–Policy term
–Mode of payment
77
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CALCULATION
•
INTEREST
–Outstanding Premium Charges
–Policy Loan Repayment
78
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CALCULATION
• GUARANTEED SURRENDER VALUE
–Incorporate value table in the schedules
79
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CHAPTER 30
PRACTICE OF INSURANCE
“ETHICS & CODE OF CONDUCT”
AT & D- Center for Learning Excellence
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80
CODE OF ETHICS
•
Rebating
•
Twisting
•
Misrepresentation
•
Attitude towards competition
81
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REBATING
•
The practice of sharing an agent’s commission
with the policyholder may be viewed as
discrimination, and the implication of it clouds
the legality of the contract
82
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TWISTING
•
Persuading a policy holder to discontinue or
lapse a present policy in order to buy a new
policy
83
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MISREPRESENTATION
• Constitute telling something that is NOT TRUE.
This statement holds true both when the agent
is representing the insurer to the prospect and
when the agent is representing the applicant to
the company
84
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ATTITUDE TOWARDS COMPETITION
• Nothing is gained by casting doubt upon any
company, in which a prospect may have
insurance, or underlying motive of any other
salesman who may at the moment be attempting
to sell to the prospect
85
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GUIDELINES ON THE CODE OF CONDUCT
• 7 PRINCIPLES OF THE CODE OF ETHICS &
CONDUCT
•AVOID conflict of interest
•AVOID misuse of position
•PREVENT misuse of information
•ENSURE completeness & accuracy
86
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GUIDELINES ON THE CODE OF CONDUCT
• 7 PRINCIPLES OF THE CODE OF ETHICS &
CONDUCT
•ENSURE confidentiality of communication
•ENSURE fair & equitable treatment
•CONDUCT business with utmost good faith &
integrity
87
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