BIBT: Insurance & Risk Management: Chapter 3: (Insurance Policy: Life Insurance)

Insurance Policy

Answer: The insurance policy is a contract policy is a contract (generally a standard form
contract) between the insurer and the insured, known as the policyholder, which determines the
claims which the insurer is legally required to pay. In exchange for an initial payment, known as
the premium, the insurer promises to pay for loss caused by perils covered under the policy
language.

Insurance policy refers to what extend it will covered by the insurance agreement.
𝐴𝑚𝑜𝑢𝑛𝑡 𝑇𝑘.10,000
𝑎 Y (company)

According to Business dictionary, “Insurance policy determines how much of caused to be

recovered from incident”.

Life Insurance

Answer:

Life insurance contract may be defined as the contract, whereby the insurer in consideration of a
premium undertakes to pay certain some of money either on the death of the insured or on the
expiry of a fixed period.

According to J. H. Magee, “Life insurance contract embodies an agreement in which the insurer
undertakes to pay a stipulated sum upon death of insured or at some designated time.”

Life insurance provides financial security to human lives. Life insurance is a legal contract
between the insured and the insurer. The insurer agrees to pay a definite sum of money to the
insured on maturity of contract. The insured agrees to pay uniform premium at fixed intervals till
maturity of contract. The contract matures on the death of insured or expiry of a specified period,
whichever is earlier.

Describe the essential feature/element/condition of life insurance

Life insurance have some elements or feature which are different from another insurance. Some
features of life insurance are as follows

1) Relationship with human life

2) Contract of assurance
3) Nature of general contract
4) Insurable interest
BIBT: Insurance & Risk Management: Chapter 3: (Insurance Policy: Life Insurance)

5) Utmost good faith

6) Warrantees
7) Proximate cause
8) Assignment and nomination
9) Return of premium
10) Unilateral contract.

1) Relationship with human life: The main feature of the life insurance is that there have to a
human life related with the insurance.
2) Contract of assurance: It is another feature of insurance. Because without contract the life
insurance is not occurred.
3) Nature of general contract: The general contract is the agreement and competency of the
parties, legal consideration is the general feature of contract.
4) Insurable interest: Insurable interest is the pecuniary. The insured must have an insurable
interest in the life to be insured for a valid contract.
5) Utmost good faith: The life insurance required the utmost good faith.
6) Warrantees: Warranties are one of the most important features of the life insurance.
7) Proximate cause: Proximate cause is one of most important feature of life insurance. Because
without proximate cause the life insurance is not occurred.
8) Assignment and nomination: The signature of the nomination is required to open a life
insurance. If insurer want to open life insurance the assignment and nomination is required.
9) Return of premium: After a specific time period the specific return of premium is required in
the life insurance.
10) Unilateral contract. Unilateral contract is one of the mot important feature of the lif
insurance.

surrender value

Answer: Surrender value can be as that amount of premium paid which is returned to the
policy-holder at the time of surrendering the policy. Normally no surrender value is paid if the
policy lapses within two or three years of its issue because huge expenditures are involved
during the inception of the policy. So, it is the amount the policyholder will get from the life
insurance company if he decides to exit the policy before maturity.

Example: suppose that A takes out an endowment policy for 15 years for Tk’15,000 and the
premium payable is Tk. 1,200 per annum. He pays premium for three years and then stops;. The
premium paid is 3× Tk’1’200 = Tk. 3,600. The premium payable is 15× Tk. 1,200 = Tk. 18,000.
The ratio between the two is Tk’3,600 / Tk. 18,000 = 1/5. The surrender value of the policy is
1/5 × Tk’15,000 = Tk’3’000’ Surrender value of bonuses, already accrued, are to be added to
this figure’.
BIBT: Insurance & Risk Management: Chapter 3: (Insurance Policy: Life Insurance)

The various kinds of life insurance policies

Life insurance policy can be divided on the basis of

1. On the basis Duration of policy

a. Whole life

i. Limited Whole Life Policy

ii. Single Premium Whole Life Policy:

iii. Convertible Whole Life Policy

b. Term Insurance

i. Straight Term:

ii. Convertible Term:

iii. Renewal Term

c. Endowment policy

i. Pure Endowment policy

ii. Double Endowment Policy

iii. Differed Endowment Policy

iv. Anticipated Endowment Policy:

2. Policies according to the method of premium payment

a. Single premium policy

b. Level premium policy

3. Policy according to participation of profit

a. Without profit

b. With profit

4. Policy Based on the Number of lives Covered

a. Single life policy

BIBT: Insurance & Risk Management: Chapter 3: (Insurance Policy: Life Insurance)

b. Multiple life policy

i) Joint life policy

ii) Last survivor policy

iii) Group life policy
5. Policy according to the method of payment of claim amount

a. Lump-sum policy

b. Annuity or installment policy

BIBT: Insurance & Risk Management: Chapter 3: (Insurance Policy: Life Insurance)

1. On the basis Duration of policy:

a. Whole life:
This policy is for the lifetime of the insured. The premium is payable regularly till
the insured is alive. The insured amount is payable on the death of insured to the
nominees. This is also known as ordinary life policy. The rate of premium is low for
this policy.

i. Limited Whole Life Policy: The premium is paid for a limited period. The
insured amount is paid to the nominees only after the death of insured

ii. Single Premium Whole Life Policy: The insured pays lump sum premium at
one time. The insured amount is paid to nominees only after the death of
insured.

iii. Convertible Whole Life Policy: The insured has the option to convert the
policy into endowment policy during specified period.

b. Term Insurance:
Term insurance is for a short period of years ranging from 3 months to 7 years. Sum
assured is payable only in the event of death of the life assured occurring during the
period, but the assured survive. Term insurance policies are the cheapest policies.
Term insurance policies are always without profit.

i. Straight Term: Lump sum premium is paid as one installment. Insured sum
is payable if the death occurs within the term policy.

ii. Convertible Term: Option is available to convert it to whole life or

endowment policy. Premium rated change.

iii. Renewal Term: The policy can be renewed after the expiry of fixed term.

c. Endowment policy:
This is for a fixed period of time. The Premium is payable regularly till the maturity
of policy. The insured amount is payable on maturity or the death of the insured
whichever is earlier. This is the most popular type of life insurance. This is also
called ordinary Endowment Policy. The rate of premium is high in this policy.
BIBT: Insurance & Risk Management: Chapter 3: (Insurance Policy: Life Insurance)

i. Pure Endowment policy: This policy is for a fixed period of time. The
insured amount is payable only to the insured is he survives till the
maturity of the policy.

ii. Double Endowment Policy: Double the insured amount is payable if

the insured survives till maturity of the policy. If he dies before maturity
of policy, the nominees get only the insured amount.

iii. Differed Endowment Policy: The insured amount is payable on

maturity of policy even if the insured dies earlier. The premium is not
payable after the death of insured.

iv. Anticipated Endowment Policy: The insured is paid part of insured sum
before the maturity of policy. The balance is paid after the maturity of
policy. If the insured dies before maturity, full insured amount is payable
to nominees without deduction the amount paid before maturity.

2. Policies according to the method of premium payment

a. Single premium policy: In this policy the whole premium is paid at the beginning
of the policy

b. Level premium policy: Under this policy regular and equal premium is paid at a
definite interval.

3. Policy according to participation of profit

a. Without profit: In this case the holder don’t participate in the policy They get only
the sum assured and no bonus is given to them

b. With profit: The holder participate the insurance they get sum assured and bonus
are given to them.

4. Policy Based on the Number of lives Covered

a. Single life policy: Under this policy only one individual is assured. The policy
amount is payable only when the assured event is occurred.
BIBT: Insurance & Risk Management: Chapter 3: (Insurance Policy: Life Insurance)

b. Multiple life policy: In this policy more than one life is assured. It may be

i) Joint life policy: It insures the life of two or more persons. When one of the
insured dies, the insurance amount is paid to the survivor. This policy is useful
for husband and wife. It is also useful for partners in a firm.
ii) Last survivor policy: The policy is payable at the last death. So long as only
one of the insured is alive, no payment is made.
iii) Group Life policy: It insured the life of a group of employees. The employers
pays premium every month. The insured amount is paid when the employee
dies or retires from service. In case of death, the nominees get the insured
amount.

5. Policy according to the method of payment of claim amount

i) Lump-sum policy: Lump sum means large amount where the sum assured is
paid in lump sum at the event insured against.

ii) Annuity or installment policy: Under this policy, the policy is payable in
installments.

Differentiate between Endowment Life policy and Term Life policy

Answer: Difference between Endowment life policy and Term Life policy as follows –

Endowment Policy Term Insurance Policy

This policy is for a fixed period of time. Term insurance is for a short period of years
ranging from 3 months to 7 years.
The rate of premium is high in this policy. It has one of the lowest premiums among
insurance plans.
The premium is payable regularly till the The premium is usually payable throughout the
maturity of policy. term of the policy.
The benefit of this policy is if the policy holder Term insurance policies are always without
survives after the completion of policy tenure, profit.
he receives assured amount plus additional
benefits like bonus from the insurance
company.
Considered primarily to provide a living Sum assured is payable only in the event of
benefit, along with life insurance protection. death of the life assured occurring during the
period.
BIBT: Insurance & Risk Management: Chapter 3: (Insurance Policy: Life Insurance)

The important features of surrender value.

Answer: The important features of surrender value are discuss as follows –

1. Surrender terminates the contract.

2. Surrender value is invariably less than the premium paid up to the time of surrender and
the value proportionately increases during the later part of the policy period.
3. Normally, a policy does not acquire any surrender value during the first two years
because of the initial expenses involved.
4. Surrender value is paid in cash at the time of surrender and it is the present value of the
future paid – up value.
5. The system of allowing surrender value has been made possible because of the level

Various forms of payment of surrender value in life insurance?

Answer: The policy holder can get the surrender values in any of the following forms:

1. Cash surrender value:

2. Reduced paid up insurance:
3. Extended term insurance:
4. Automatic premium Loan:
5. Purchase of Annuity:

1. Cash surrender value: The policy holder can get the value of surrender in cash. When the
policyholder gets the cash, the contract comes to an end and the insurer has no further
obligation to pay on that particular policy.
2. Reduced paid up insurance: In this case, the surrender value is not paid immediately, but
the original amount of policy is reduced in certain proportion and the reduced amount is paid
according to the term of policy.
3. Extended term insurance: The net cash value arisen at the time of surrender of a policy can
be used for payment of as single premium for purchase of term insurance, where the sum
assured will be paid only when death of the life assured occurs within the term of the policy.
4. Automatic premium Loan: Under this scheme, the surrender value is used for payment of
future premium. Thus the policy will continue up to the period the surrender value is
adequate enough to meet the amount of further premiums.
5. Purchase of Annuity: The policy holder, with the surrender value, can purchase an annuity.
Thus instead of taking surrender value in cash, the annuity is purchased from the available
surrender value.

The methods of calculating surrender value.

BIBT: Insurance & Risk Management: Chapter 3: (Insurance Policy: Life Insurance)

Answer: There are two bases of calculating surrender values such as –

1. Accumulation Approach
2. Saving Approach

1. Accumulation Approach: Under this approach, surrender value is the accumulation of

overcharges in the net premium, which upon the surrender of the policy is no longer required
to pay the amount of claims, therefore, theoretically he should pay all the accumulated
reserve but if it is allowed, the insurer will be left a very small amount for meeting other
obligations because a huge expenses are involved at the time of surrender.

2. Saving Approach: An insurer is responsible for payment of claims whenever it may arise;
but if a policy is surrendered, the insurer is relieved of its obligation for payment of the
assured sum. He is in a position to return some amounts to the insured. But where he may not
be required to pay the claims, he is not relieved of the responsibility and no surrender value
can be given to the policyholders.

What is net single premium? Write the steps for calculating of net single premium.

Net Single Premium: Net single premium is that premium which is received by the insurer in a
lump sum and is exactly adequate, along with the return earned thereon, to pay the amount of
claim wherever at death or at maturity or even at surrender. It does not provide for expenses of
management and for contingencies.

Steps for Calculation

1. Determine what constitutes a claim (a) death, (b) survival or (c) both.
2. Determine when claims are paid (a) at the beginning, (b) at the end, or (c) during the year.
3. Determine the number of insured.
4. Determine the duration of the policy.
5. Determine the probable number of claims per year.
6. Determine the value of claims per year.
7. Determine the number of years of interest involved and find the present value of a taka.
8. Determine the present value of the claim for each year.
9. Determine the present value of all future claims.
10. Determine the net single premium, (i.e., present value of future claims) divided by
number assumed for buying policy.

The step of premium calculation varies according to the nature of the policy which will be clear
later on. When premium is calculated several questions emerged simultaneously.
BIBT: Insurance & Risk Management: Chapter 3: (Insurance Policy: Life Insurance)

Question: What is mortality table? Draw an imaginary mortality table taking 5 years into
consideration.

Mortality table: Mortality table is a table that shows the rate of deaths occurring in a defined
population during a selected time interval, or survival from birth to any given age. Statistics
included in the mortality table show the probability a person’s death before their next birthday,
based on their age.

‘Mortality table’

Age No. of persons insured No. of Death Present value of Tk. 1.00
@ 5%
35 30,550 4,196 0.952
36 26,354 3,285 0.907
37 23,069 2,562 0.864
38 20,507 1,978 0.823
39 18,529 1,164 0.784

Death-rate data help determine prices paid by people who have recently purchased life insurance.
A mortality table is also known as a “life table,” an “actuarial table” or a “morbidity table.”

Premium/Insurance premium ?

Premium means an amount of money to be paid regularly for an insurance policy

According to PH Collin” Insurance premium means annual payment made by a person or a

company to an insurance company”

According to Samdad Dictionary , “Premium is an installment paid in consideration of a contract

for an insurance.”

So Premium is a installment which is paid by the insurer to the policy holder.

Between level premium annuities and single premium annuities.

Answer: Difference between level premium annuities and single premium annuities discuss as
follows:

Level Premium annuities Single premium annuities

BIBT: Insurance & Risk Management: Chapter 3: (Insurance Policy: Life Insurance)

The net level premium is collected Single premium annuities is charged only once
periodically. in the beginning of the contract.
The level premiums could be paid only by the Single premium will be paid by all the
surviving policy – holders. policy-holders.

Question: What are the various options of bonus? (2010)

1. Cash Bonus
2. Reversionary Bonus
3. Reduction in premium Bonus
4. Accumulation at Interest Bonus
5. Endowment Option:

1. Cash Bonus: Under this plan, the bonus when declared is paid to the assured in cash and the
original sum assured alone is payable at claim. However, the cash bonus can be converted
into other options of bonus.

2. Reversionary Bonus: The bonus is allotted as a uniform percentage addition to the sum
assured. Or sum assured plus existing bonus addition and is payable along with the sum
assured according to the terms of the policy. The former case is known as ‘Simple
Reversionary Bonus’ and the latter is known as ‘Compound Reversionary Bonus’. The
former is simple popular and flexible as every time a bonus is distributed some addition is
made to the policy amount. The compound reversionary becomes more equitable but is hard
to calculate. So, the simple reversionary bonus is practically used today.
3. Reduction in premium Bonus: When the bonus is not added to the assured sum but is
utilized for permanent reduction in the future premium payable, it is called ‘Reduction in
premium Bonus’. As soon as the yearly bonus will be equal to the yearly premiums payable,
the policy becomes paid up and no future premiums are required. After this point, the
additional increase in bonus may be added to the policy amount.

4. Accumulation at Interest Bonus: The bonus on the policy is kept in deposit with the
insurer. The insurer gives a fixed rate of interest on the deposited amount and the insured at
any time can withdraw the accumulated bonus or can use it for payment of future premiums.

5. Endowment Option: Under this option, the bonus is accumulated with a certain rate of
interest and when the accumulated value of the policy becomes equal to the policy amount,
the policy amount is paid in full before maturity. The accumulated value of the policy will
increase with the amount of bonus reserves and interest thereon. Thus, before maturity at any
time the accumulated value of the policy will be equal to the policy amount. In Bangladesh,
BIBT: Insurance & Risk Management: Chapter 3: (Insurance Policy: Life Insurance)

the corporation declares simple reversionary bonus at the interval of one year. The bonus can
also be used for payment of future premiums.

“Husband has insurable interest in the life of his wife.” – discuss.

Answer: It was decided in Griffith vs. Fleming (1909) that the husband has insurable interest in
his wife’s life because of domestic services performed, by the wife is dead, husband has to
employ other person to render the domestic services and other financial expenditures will
involve at her death which are not calculable. The husband is benefited at the survival of his
wife, so it is self-proved that husband has insurable interest in his wife’s life. Since the monetary
loss at her death or monetary gain at his survival cannot be measured, there is unlimited
insurable interest in the life of wife.

How is reserve created and for what is it created?

Insurance Reserve:

Insurance reserves are assets kept by an insurance company, to cover it against future claims and
unforeseen circumstances. Insurance reserves insure that an institution has funds available to
honor its claims and payment premiums.

The reserve is that fund, which together with future premiums and interest, will be sufficient to
pay the future claims. This is called prospective definition because here the future amounts are
considered.

Another definition of the reserve is the retrospective definition under which the reserve is
considered as the accumulation at interest of the difference between the net premium received in
the past and the claims paid out.

According to M. N. Mishra, “The reserve in life insurance is different from the reserve in other
business. It is not an accumulation of profit. In insurance, it is a liability which is to be met by
the insurer at and when it arises.”

Sources of Reserve/how it is created:

1. Premium
2. Accumulated fund

1. Premium: The first and the foremost source of reserve is premium. It should be noted that
reserve is accumulated in level premium plan because the premium is more the actual cost of
insurance in the beginning. In other two methods of premium, reserve cannot be
accumulated.
BIBT: Insurance & Risk Management: Chapter 3: (Insurance Policy: Life Insurance)

2. Accumulated fund: The second source of reserve is interest because the accumulated fund is
no remaining idle, it is invested. While calculating premium it was assumed that the insurer
will earn a certain rate of interest, so to earn at least that much of amount, the accumulated
funds have to be invested. The assumed rate of interest is the source of reserve.

Need for Reserve/for what reserve is created:

The reserve in life insurance is required for the following reasons:

1. To meet the amount of Claims

2. To build up funds
3. Policyholders are benefited

1. To meet the amount of Claims: The reserve is required to meet the mount of claim
whenever the given event takes place. The incurring of this liability does not bother the
insurer at all if in any given period it receives by way of consideration from the policyholders
concerned an amount which is equal to the amount it has to pay during this period. The
insurer must have sufficient amount to meet the claims.
2. To build up funds: Besides being essential for meeting future cost of claims, the reserve is
also useful to build up funds that can be invested for long period to earn at least assumed rate
of return. The invested funds help not only to the insurer to obtain a required amount return
but are also helpful for the economic development of the country. The insurers are in a
position to accumulate a huge fund and, therefore, can contribute a significance amount for
country’s advancement.
3. Policyholders are benefited: The accumulated fund or the reserve belongs to policyholders.
This fund is safety and profitably invested by the insurer who are in a position to do that. The
main purpose of creating reserve is to meet the obligation of payment of claims whenever it
arises.

Question: The policies are freely assignable in case of life insurance – discuss.

First write definition of life insurance

The policy in life insurance can be assigned freely for a legal consideration or love and affection.
The assignment shall be complete and effectual only on the execution of such endorsement either
on the policy itself or by a separate deed.

Notice for this purpose must be given to the insurer who will acknowledge the
assignment. Once the assignment is completed, it cannot be revoked by the assignor because he
ceases to be the owner of the policy unless reassignment is made by the assignee in favor of the
assignor. An assignee may be the owner of the policy both or survival of the life assured, or on
his death according to the terms of transfer.
BIBT: Insurance & Risk Management: Chapter 3: (Insurance Policy: Life Insurance)

The life policies are the only policies which can be assigned whether the assignee has an
insurable interest or not. Life policies are frequently charged, assigned or otherwise dealt with
for they are valuable securities because a fixed sum is certainty paid, in life policies excepting a
few, say pure endowment and temporary policies.

Question: “Life insurance fulfills the needs of a person” – Explain the statement.

Answer: The needs of a person are divided into –

a. Family needs: Death is certain but time is uncertain. So every person is responsible to
provide for the family and for this reason life insurance is better.
b. Old age needs: The life insurance is provide old age fund along with protection of the
family.
c. Re-adjustment needs: The life insurance helps to accumulate adequate funds.
Anticipated endowment policy and guaranteed triple benefit policies are deemed to be a
good substitute for old age needs.
d. The clean-up needs. After death, ritual ceremonies theses requirements get help by the
insurance.
e. Special needs: At the time of reduction in income whether by loss of unemployment,
disability, or death, adjustment in the standard of living of family is required.
❖ Marriage.

❖ Need for education.

❖ Insurance needs for settlement of children.

❖ Clean-up funds.

So, a person can fulfill the needs by purchasing the life insurance policies.

Question: “Insurance eliminates dependency.” Explain.

Answer: At the death of the husband or father, the destruction of family needs no elaboration.
Similarly, at destruction of property and goods, the family would suffer a lot. It brings reduced
standards of living and the suffering may go to any extent of begging from the relatives,
neighbors or friends. The economic independence of the family is reduced or, sometimes, lost
totally. What can be more pitiable condition than this that the wife and children are looking
others more benevolent than the husband and father, in absence of protection against such
dependency. The insurance is here to assist them and provides adequate amount at the time of
sufferings.
BIBT: Insurance & Risk Management: Chapter 3: (Insurance Policy: Life Insurance)

‘Life insurance encourage savings’

Answer: The elements of protection and investment are present only in case of life insurance. In
property insurance, only protection element exists. In most of the life policies elements of saving
predominates. These policies combine the programs of insurance and savings. The saving with
insurance has certain extra advantages-

● Systematic saving is possible because regular premiums are required to be compulsorily

paid. The saving with a bank is voluntary and one can easily omit a month or two and
then abandon the program entirely.
● In insurance the deposited premium cannot be withdrawn easily before the expiry of the
term of the policy. As contrast to this, the saving which can be withdrawn at any moment
will finish within no time.
● The insurance will pay the policy-money irrespective of the premium deposited while in
case of bank-deposit; only the deposited amount along with the interest is paid. The
insurance, thus, provides the wished amount of insurance and the bank provides only the
deposited amount.
● The compulsion or force to premium in insurance is so high that if the policy-holder fails
to pay premiums within the days of grace, he subjects his policy to causation and may get
back only a very nominal portion of the total premiums paid on the policy.

For the preservation of the policy, he has to try his level best to pay the premium. After a certain
period, it would be a part of necessary expenditure of the insured. In absence of such forceful
compulsion elsewhere life insurance is the best media of saving.

Question: Where proof is required and where proof is not required in case of insurable
interest in other life?

There are two cases where the presence of insurable interest is legally presumed and therefore
need not be proof.

1. Wife has insurable interests in the life of her husband

2. Husband has insurable interest in the life of his wife.

Business Relationship

1. A creditor has in the life of his debtor

2. A trustee has an insurable interest
3. Partner has insurable interest in the life of each partner.

Family relationship:
BIBT: Insurance & Risk Management: Chapter 3: (Insurance Policy: Life Insurance)

The insurable interest may arise due to family relationship or blood connection relationship.

The facts that should be disclose and not need to be disclosed in utmost good faith in case of
life insurance:

Fact to be disclosed:

1. Marital facts
2. Duty of both arties
3. Full and true disclosure
4. Extend of the duty
5. Legal consequences
6. Indisputability of policy

Facts need not to be disclosed:

1. Circumstance where diminishing the risk

2. Facts which are known or reasonably should be known
3. Facts which the insurer should infer from the information given
4. Facts which are waived by the insurer
5. Facts of public knowledge.