.

CHAPTER FIVE

TYPES OF INSURANCE
 5. Types of Insurance
 Insurance can be classified as either private or government
insurance.
I) Private insurance includes:
a) Life insurance: pays death benefits to designated
beneficiaries when the insured dies.
 The benefits pay for funeral expenses, uninsured
medical bills, estate taxes, and other expenses.
 The death proceeds can also provide periodic
income payments to the deceased’s beneficiary.
b)Health Insurance: Medical expense plans pay for
hospital and surgical expenses, physician fees,
prescription drugs, and a wide variety of additional
medical costs.
Private insurance…
c) Property and liability Insurance: It
indemnifies property owners against the loss
or damage of real or personal property
caused by various perils, such as fire,
lightning, windstorm, or tornado.
Liability insurance covers the insured’s
legal liability arising out of property damage
or bodily injury to others; legal defense costs
are also paid.
Property and liability insurance is also called
property and casualty(nonlife) insurance.
Private Insurance….
 In practice, nonlife insurers typically use the term
property and casualty insurance (rather than
property and liability insurance) to describe the
various coverage and operating results.
 Casualty insurance is a broad field of insurance
that covers whatever is not covered by fire,
marine, and life insurance; casualty lines include
auto, liability, burglary and theft, workers
compensation, and health insurance.
 Property and casualty coverage can be grouped
into two major categories personal lines and
commercial lines.
Private insurance…
 To day the major insurance sold is property
and casualty coverage.
 Although there is some overlap, the various
coverage can be grouped into two major
categories personal lines and commercial lines.
 Personal lines: Coverage that insure the
buildings and personal property of individuals and
families or provide them with protection against
legal liability.
 Commercial Lines: It refers to property and
casualty coverage for business firms, nonprofit
organizations, and government agencies.
 II) Government insurance includes:
a)Social insurance programs: are government
insurance programs with certain characteristics that
distinguish them from other government insurance
plans.
 These programs are financed entirely or in large part by
mandatory contributions from employers, employees, or
both, and not primarily by the general revenues of
government.
 The contributions are usually earmarked for special
trust funds; the benefits, in turn, are paid from these
funds.
 In addition, the right to receive benefits is ordinarily
derived from or linked to the recipient’s past
contributions or coverage under the program
Government insurance…
Major social insurance programs are:
 Social Security (Old-Age, Survivors, and
Disability) Insurance
 Medicare
 Unemployment insurance(short-term
involuntary unemployment)
 Workers compensation
 Compulsory temporary disability insurance
 Government insurance…
b)Other Government Insurance Programs :
 Other government insurance programs exist at
both the federal and state levels.
 However, these programs do not have the
distinguishing characteristics of social insurance
programs.
 Example of federal insurance programs are:
 Employees Retirement System
 The Pension Benefit Guaranty Corporation
 The National Flood Insurance Program
 Others: federal crop insurance, war risk
insurance,
 5.1 Property and liability Insurance

 are designed to provide protection against losses

resulting form damaged to or loss of property and losses
resulting from legal liability
 Property insurance includes:

1. Motor/ automobile insurance

2. Aviation insurance
3. Marine insurance
4. Burglary and House breaking insurance
5. Fire insurance
6. Plate glass insurance
7. Fidelity guarantee insurance
8. Workers’ compensation /employers’ liability/
insurance
5.1.1 Motor/Automobile Insurance

 The objective of automobile insurance is to

indemnify the insured against accidental loss or
physical damage to his auto or legal liability arising
out of auto accidents that cause property damage or
bodily injury to others.
 Most automobile insurance contracts can be divided, in
to two separate contracts:
a. One providing insurance against physical damage to
automobiles and
b. Protecting against potential liability arising out of the
ownership or use of an automobile.
 There are two main types of insurance covers in both
commercial motor and private motor insurance.
a)Comprehensive cover and B) Third party cover
 Types of insurance covers

a) Comprehensive cover: it provides protection

against a wide range of contingencies.
 It includes indemnity:
Insured’s legal liability for death or bodily
injury
Damage caused to the property of third parties
arising out of the insured’s vehicle.
The policy also indemnifies the insured in
respect of all damages to the vehicle caused by
an accidental, external physical means as a result
of collision, overturning, fire, self-ignition,
lighting, explosion, and burglary.
 Comprehensive cover …
The Comprehensive cover policy excludes,
among other things, the following:
Consequential loss sustained by the insured,
Wear and tear/depreciation/ of motor
vehicle,
Mechanical or electrical breakdown of
failure of any part of a motor vehicle,
Death of or injury to members of insured
family or his employees,
Damage to property of the insured or held by
him in trust or in custody.
 b) Third party cover:

 Two parties involved in insurance contract(Insurer and

Insured)
 Any person other than insured and insurer, who may become
linked in some way with the insurance, is regarded as third
party.
 A third party policy only covers the insured’s legal
liability(property damage, death & injury)towards other
people in the event of an accident arising out of the use of
a motor vehicle.
 A third party policy may be extended to include at an
additional premium the policy holder’s vehicle against the
risks of fire and theft as follows:-
 Third party, fire and theft
 Third party and fire
 Third party and theft.
Classification of Automobile Risks

There are various categories of automobile

risks and a distinction is made in
accordance with the use and type of the
vehicles.
The main classifications are as follows:-
a. Private Vehicles:-A motor vehicle used
solely for private (Social, domestic,
pleasure, professional purpose or business
calls of the insured) purposes are classified
as “private vehicles” and are insured under
the “private motor vehicles policy.”
 Classification of Automobile Risks …
The term “private purposes” does not
include use for hiring, racing, and carriage
of goods in connection with any trade or
business.
b. Commercial Vehicles: - A wide range of
vehicles which carry goods and passengers
are classified under this heading and
different rates of premium are applied
depending on their use and type.
5.1.2 Aviation Insurance

 Aviation insurance is an insurance that provides

protection against loss of or damage to the
different types of passenger and cargo planes, and
associated losses.
 Like automobile insurance, aviation insurance
includes both property insurance, on the planes
and liability insurance.
 Types of Aviation Insurance Policies
 The most common types of policies under aviation
insurance are:-
i. Aircraft comprehensive policy
ii. Freight liability policy which includes airmail
liability policy.
i. Aircraft Comprehensive Policy: -
 This policy covers against three types of potential
losses:
a. Accidental damage to the aircraft: where protection
is provided for damage to the aircraft by accidents
except those that are specifically excluded on the
policy,
b. Third party legal liability: where the insurer assumes
the responsibility to indemnify the insured for death of
or bodily injuries to, third parties(excluding
passengers) and ground damage,
c. Legal liability of the insured in respect of death of,
or bodily injuries to, passengers: Passengers’
baggage and personal effects, which are registered, are
also covered by the insurance.
ii)Freight liability policy which includes airmail
liability policy
 In Addition to passengers and crew an aircraft
carries cargo and mail.
 The airline operating the aircraft is liable if the
cargo or mail is lost or damage.
 This policy provision requires the insurer to
indemnify the insured against all sums which
the insured may become legally liable to pay
to the owner of the cargo as a result of loss or
damage or mishandling of the cargo.
 The limit to the amount of indemnity is
generally stated in the freight liability policy.
 5.1.3 Marine Insurance

 It is designed to protect against financial loss resulting

from damage to, or destruction of owned property due
to the perils connected with water transportation
 It is a contract of transport insurance whereby the
insurer (underwriter) undertakes to indemnify the
insured (client) against loss or damage caused by
certain specified perils, termed maritime perils.
 The marine cargo policies of Ethiopian insurance
corporations are internationally accepted, worded and
standardized insurance policies.
 Accordingly, the coverage it affords is to indemnify the
insuring public as per the terms, conditions,
warranties, and exceptions of the policy in respect of
loss of damage resulting from maritime perils:
Marine Insurance …
 Maritime perils are : heavy weather, stranding,
collision, etc. or
 Inland-transit accident: such as collision, overturning
of the carrying conveyance, explosion, fire, theft, non-
delivery of the goods, etc.
 Marine insurance is divided into two classes:

I)Ocean marine insurance and

II) inland marine insurance
i) Ocean marine insurance: It is a contract considered
concerned primarily with water transportation.
 It was the only kind of modern insurance which have
considerable (large) time. Used in larger ships and
more refined instruments of navigation made long
voyages
Ocean Marine Insurance …

Major Types of Ocean Marine Insurance

Coverage:
 The four chief interests policies to be insured in an
ocean voyage are:
a. The vessel, or the hull
b. The cargo
c. The shipping revenue or freight received by the
ship owners and,
d. Legal liability for proved negligence
 If a peril of the sea causes the sinking of a ship in deep
water, one or more of these losses can result.
 However, each of these potential losses can be covered
under various insurance policies.
Major Types of Ocean Marine Insurance Coverage policies:

a) Hull policies: it is policies covering the vessel itself

or hull insurance are written in several different ways.
 The policy may cover the ship only during a given
period of time, usually not to exceed one year.
 The insurance is commonly subject to geographical
limits.
 If the ship is laid up in port for an extended period of
time, the contract may be written at a reduced
premium under the condition that the ships remain in
port.
 The contract may cover a builder’s risk while the
vessel is constructed.
 Major Types of Ocean Marine Insurance Coverage policies…

b) Cargo Policies: It is a contract insuring cargo against

various types of loss may be written to cover loss only
during specified voyage, as in the case of a hull contract,
or on an open basis.
 Under the open contract, there is no termination date,
 Either party may cancel upon giving 30 day’s written notice
to the other; otherwise the insurance is continuous.
 All shipments, both incoming and outgoing, are
automatically covered.
 The shipper reports to the insurer at regular intervals as to
the values shipped or received during the previous period.
 Cargo policies written on a voyage basis cover that single
voyage but open policies usually cover all shipments
made on and after a certain date.
 If an open policy is cancelled, the coverage continues on
Major Types of Ocean Marine Insurance Coverage policies…

c) Freight coverage
 The money paid for the transportation of the goods
(freight), is an insurable interest
 Because in the event that freight charges are not paid,
someone has lost income with which to reimburse
expense incurred in preparation for a voyage.
 The earning of freight by the hull owner is dependent
on the delivery of cargo unless this is altered by
contractual agreements between the parties.
 If a ship sinks, the freight is lost and the vessel owner
loses the expenses incurred plus the expected profit
on the venture.
Freight coverage…
 The carrier’s right to earn freight may be defeated
by the occurrence of losses due to perils ordinarily
insured against in an ocean marine insurance policy
 The hull may be damaged so that it is
uneconomical to complete the voyage, or the cargo
may be destroyed, in which case, of course it
cannot be delivered.
 The owner of cargo has an interest in freight arising
from the obligation to pay transportation charge.
 Freight insurance is normally made a part of the
regular hull or cargo coverage instead of being
written as a separate contract.
d) Legal Liability for proved Negligence

 The hull owner is protected against third-party liability

claims that arise from collision.
 Collision loss to the hull itself is included in the peril
clause as one of the perils of the sea.
 The liability insurance is intended to give protection in
case the ship owner is held liable for negligent
operation of the vessel which is the proximate cause of
damage to certain property of others.
 The vessel owner or agent of that owner who fails to
exercise the proper degree of care in the operation of
the ship may be legally liable for damage to the other
ship and for loss of freight revenues
e) Loss Settlement

 If the cargo is totally destroyed, the insurer must

pay the face value of the policy.
 If the cargo is only partially damaged the
insured and the insurer must agree on the
percentage of damage.
 If they cannot agree, the damaged cargo is to be
sold and the amount received compared, with
what would have been received had the cargo
been in sound condition.
 In either case, the liability of the insurer is
determined by applying the percentage of
damage to the amount of insurance.
 For example

Assume that a cargo insured for 4,000 birr

could have been sold for 6,000 birr in sound
condition but are worth only 4,500 birr in
damaged condition.
Since, the damage is 25 percent; the insurer
must pay 25 percent of 4,000 birr. Note that
if the amount of insurance is less than the
value of the cargo in sound condition, the
amount of the insurance payment is equal to
the amount under a 100 percent coinsurance
clause.
II) Inland Marine Insurance

 In land marine cargo insurance covers shipments

primarily by land or by air.
 Although the trucker, railroad, or airline may be a
common carrier with the extensive liability(balled
liability exposures’), the shipper may still be
interested in cargo insurance because:
a) It is usually more convenient to collect from an
insurer than a carrier,
b) A common carrier is not responsible for perils
such as an act of war, exercise of public
authority, or inherent defects in the cargo.
Inland Marine Insurance…
No one cargo insurance contract exists. Instead,
different insurers may issue different contracts,
and a given insurer will tailor the contract to
the insured’s needs.
A convenient way to classify the contracts is
according to the type of transportation covered.
One or more of the following modes of
transportation may be covered-railroad, motor
truck, or air.
Shipments by mail are covered under separate
first-class mail, parcel port, or registered mil
insurance.
5.1.4 Burglary and House breaking insurance
 Although theft is generally one of the perils
covered under an all risks policy, the contract
usually excludes or limits the amount of
protection on certain types of property, such as
money, that is highly susceptible to theft losses.
 Theft insurance protects a business against
losses by burglary, robbery, or some other form
of theft by persons other than employees.
 Fidelity guarantee insurance or dishonesty
insurance covers losses caused by dishonest
acts of employees.
Burglary and House breaking insurance …
 Burglary is the act of unauthorized entry, with
criminal intentions into any building or residence.
 It is the unlawful taking of property from within
premises closed for business, entry to which has
been obtained by force.
 There must be visible marks of the forcible
entry.
 If a customer hides in a store until after closing
hours, or enters by an unlocked door, steals some
goods, and leaves without having to force a door, or
a window, the definition of burglary is not met
under a burglary policy.
Burglary and House breaking insurance …

 Robbery is unlawful taking of property from another

person by force, by threat of force, or by violence.
 Personal contract is the key to understanding the basic
characteristic of the robbery peril.
 However, if a burglar enters a premise and steals the
wallet of a sleeping night guard, this crime is not one of
robbery because there was no violence or threat thereof.
 The person robbed must be aware of this fact.
 On the other hand, if the thief knocks out or kills the
guard and then robs the guard or the owner, the crime
would be classed as robbery.
 Robbery thus means the forcible taking of property
from a messenger or a custodian.
5.1.5 Fire Insurance
 Fire insurance is designed to indemnify the insured
for loss of, or damage to, buildings and personal
property by fire, lighting, windstorm, hail
explosion, and a vast array of other perils.
 Coverage may be provided for both the direct loss
and indirect loss and/or extra expenses .
 Originally, fire was an insured peril, but the
number of perils insured against has gradually
been expended.
 The standard fire policy indemnify the insured for
“direct loss by fire, lighting and by removal from
premises endangered by the perils insured against.”
Fire Insurance …
 Insurers, however, may offer protection against a very great
number of perils other than fire and lighting though additional
premium payment.
 Not all fires are covered under the fire insurance contract, but
the exclusions are few:
 Fires caused by war
 Fires intentionally set by public authorities, and
 Fires set intentionally by the insured,

Policy format for fire Insurance agreement include:

 Most of the first page of the standard fire policy is a
declarations section in which all information
regarding the contract is mentioned
 The second page describes such matters, as Perils not
included, Insurable and excepted. Property,
Cancellation and requirements in case a loss occur
Types of Policies for Fire insurance
 There are d/t types of fire insurance policies these are :
i. Valued policy: a policy where the value of the property
to be insured against fire and allied perils is determined at
the time the policy is issued.
Under valued policy also referred to as “ordinary fire
insurance policy,” the insurer pays the total value of
damaged property irrespective of the market value of
the property at the time of destruction or loss.
ii. Valuable (Automatic Reporting) Policy: under this
policy the indemnity to be paid by the insurer is to be
determined at the time of the loss or after the loss has
taken place.
This policy is often used for properties where their value
cannot be accurately determined at the inception of the
contract, example, a building in process.
Types of Policies for Fire insurance…
iii) Floating policy: under this policy the insurer covers the
interest of the insured on assets in different locations.
iv) Comprehensive policy: This form of fire insurance
policy gives full protection, not only against the risk of
fire but all related perils such as riot; theft; damage by
vehicles, animals or articles from the air, including
aircraft and the like.
Rating of fire insurance
 The rate of any given policy of protection varies in
relation to the nature of the property, location, type of
perils insured against, the actual cash value of the
property, duration of the policy, and other similar factors
that will have a bearing impact on the risk to be assumed
by the insurer.
 Rating of fire insurance

 The rule of percentages is used in the computation of

the premium rates.
 Example : Assume that a property valued at 80,000 birr
was insured at 60% per one hundred for a protection of
one year, the premium required can be computed as
follows:
Premium = Value of the property *protection rate
100
Premium = 80,000*0.6/100 =480 birr for one year
 Once the premium for one year is determined, it can
extended for any number of years as required by
multiplying the annual rate and the long-term rate that
can be determined by the company as in case of the
mortality rate for different stages of age.
Let the long-term rate that can be determined by the above
example seen as follows
To illustrate let us assume that the long-term rates for
a given insurer are determined as follows
Term Long-term rates
2 years 1.85 times the annual rate
3 years 2.70 times the annual rate
4 years 3.50 times the annual rate
5 years 4.40 times the annual rate

 Further, if we assume that there is an insured who

wants to have an insurance policy for his 20,000 birr
worth at the annual rate of 25 % per one hundred
birr value, we can determine the premium required
for one year or three years policy as follows:
 solution
Premium for one year = Value of the property *protection rate
100
Premium for one year = 20,000*0.25/100 =50 birr
Premium for three years = 50*2.70 =135 birr
 Similarly a house valued at 24,000 birr is insured annually for 80
percent of its value at 36% per one hundred birr, the premium for four
years can be computed as follows:
Premium base (insurable value) = 24,000*0.8/100=19,200 birr
Annual Premium = 19,200*0.36/100=69.12 birr
Premium for four year = 69.12*3.5=241.92 birr
 Settlement of Losses of fire insurance :
 The settlement of loss depends on the type of policy carried or
the agreement made at the inception of the policy between the
insurer and the insured .
 For illustration consider the following cases :
Illustration for Settlement of Losses of fire insurance

 For illustration consider the following cases:

i. Settlement under ordinary fire insurance policy (OFIP) or
standard fire insurance policy. Here the insurer pays the full
amount of the loss up to the face value of the policy.
Example: A house that was valued at Br, 30,000 was insured for
Br. 25,000. If a loss of 20,000 birr 25,000 birr and 30,000 birr
has occurred, the insurer will pay 20,000 birr, 25,000 birr and
25,000 birr respectively.
ii. Settlement of loss form more than one insurer: when the
insured has carried insurance from more than one insurer and a
loss has occurred the different insurers would contribute to
the loss on pro rata basis up to the amount of the face value
of the policy on the amount of the actual loss.
Example: An apartment building was insured under the
following: with insurer ‘A’ for Br. 50,000 and with insurer ’B’
for Br. 30,000. Assuming a loss of Br. 32,000 has occurred, the
two insurers would contribute to the loss as follows:
Solution…
A =50,000*32,000/80,000 =20,000 birr
B =30,000*32,000/80,000 =12,000 birr
Total indemnity for the insured =32,000 birr
iii. Settlement under coinsurance fire policy.
When the policy is carried on the basis of coinsurance
clause the insurer will have the right to make the insured pay
part of the loss if he is underinsured.
Example: Assume that an insured six months ago purchased
Br. 100,000 of insurance on property with an actual cash
value of Br. 150,000. Assume further that the insurance
contract contained an 80 percent coinsurance clause. If the
property is worth 200,000 birr today, the amount the insurer
would pay toward a loss today would be computed as follows:
 Example of Settlement under coinsurance fire policy
 Ifthe loss were Br. 80,000 the insurer would pay Br.
50,000. If the loss were Br. 170,000 the insurer
would pay Br. 100,000 the amount of insurance. The
answer will always be the amount of insurance when
the loss exceeds the required insurance.

 The term coinsurance has d/t meaning in insurance.

In health insurance its cause is simply a straight,
deductible, expressed as a percentage.
 In fire insurance, the coinsurance cause is a device to
make the insured bear a portion of every loss only
when underinsured.
 5.1.6 Plate Glass Insurance

 Plate glass has assumed great significance in

modern architecture, not only as physical
protection against the elements but also because of
its advertising value.
 Use of plate glass in show windows is of great
importance in successful merchandizing, which
explains the plate of glass insurance.
 A comprehensive glass policy provides a place in
the declarations for a detailed description of each
plate of glass, the value of lettering and
ornamentation, the position of the plate in the
building and its size.
Plate Glass Insurance…
 The insuring clause that the insurer agrees to the following:
i. To pay for damage to the glass and its lettering or
ornamentation by breakage of the glass or by chemicals
accidentally or maliciously
ii. To pay for the repair or replacement of farms when
necessary
iii.To pay for the installation of temporary plates or the
boarding up of windows when necessary
iv. To pay for the removal or replacement of any obstructions
made necessary in replacing the glass applied.
 No birr (dollar) amount of liability is stated.
 Unlike fire insurance loss settlement procedures, the practice
of insurance to replace the glass insured under the policy and
to do so immediately after the loss.
 Insurance on the replacement glass continues as before with
 5.1.7 Fidelity Guarantee Insurance

 It indemnifies an employer for any loss suffered

at the hands of dishonest employees.
 It provides guarantee against loss through the
dishonesty or incapacity of individuals who are
trusted with money or other property and who
violate this trust.
 Cashiers and other, who handle money, and other
persons employed in positions of trust, are
frequently required by their employers to provide
security as protection against their personal
dishonesty usually in the form of fidelity
guarantee policy.
 Fidelity Guarantee Insurance t…
 The policy of fidelity indemnifies the employer against losses from
the dishonesty of his employees.
 The employer himself often takes out the policy. He may insure a
number of employees either individually or in a group basis under
a variety of policies.
 Unlike other policies, fidelity guarantee policies specify a time
limit to discover the loss and report it to the insurer after the
resignation, dismissal, retirement, or death of the employee in
question.
 Hence while the insurer undertakes to make the insured’s financial
losses lighter, it is also a requirement that the insured should:
i. Inform the insurer of such fraudulent act immediately upon
discovery
ii. Either obtain admission of fraud or take appropriate legal
action to establish fraud, and
iii. Cooperate with the insurer to bring the defaulter before the
court of law.
Fidelity Guarantee Insurance…
 In addition to the above three, before accepting the risk the
insurer considers employer’s type of establishment,
methods of selecting employees, working conditions,
emoluments and benefits in relation to the responsibility
assigned, supervision and control measures effectiveness.
5.1.8 Workers’ Compensation/Employers’
Liability/Insurance:
 It covers loss of income, medical, and
rehabilitation expenses that result from work
related-accidents and occupational disease.
 Insured workmen always retain the right to
claim damages.
 Employers’ liability claims become much more
common, aided by Trade Unions.
 Workers’ Compensation Insurance…

 If an employee is killed or injured at work as result of an

accident arising from defective premises of equipment than a
court may award damages against the employer.
 Any employer is liable for an employee who suffers accidental
bodily injury or disease while working for him.
 The employee is this entitled to compensation for injuries
that may be temporary or permanent.
 This compensation being unforeseen expenditure, the
employer finds it difficult to compensation such losses
especially when it involves a huge amount.
 An employer may therefore, take out an insurance policy
insuring himself against such claims by his employees.
 The insurance which provided protection for injuries to
employees while at work, and as a result make the
employer liable for the loss, is called workers’
compensation insurance.
 Workers’ Compensation Insurance…
 In addition to buying insurance, the insured (employees)
can lower the loss claims by:
i. Providing a safe place of work to his employees,
ii. Proper plant tolls, machinery and working implements,
&
iii.Hiring competent and sober fellow employees.
5.1.9 Public Liability Insurance
 Public liability insurance was developed with employees’
liability insurance.
 Once, public opinion had accepted the morality of being able
to insure one’s liability, and the availability of such
insurance became known, the business grew rapidly.
 The policy provides compensation for legal liability for
death, injury, or disease to people other than employees
(which should be covered by employers’ liability policy).
 Public Liability Insurance…

 Public liability insurance provides what is popularly

termed “third party cover”.
 It indemnifies the insured in respect of his legal liability
for accidents to members of the public, or for damage to
their property, occurring in circumstances set out in the
policy.
 Under public liability insurance, policies are available
to cover liabilities attaching to:
i. Pedal cyclists,
ii. Private individuals (personal liability): policy is available
to protect private persons form claims arising due to
injury caused by such things as polished floor, a loose
roof tile or by pet animal. Example : A pedestrian, can
incur heavy liabilities by causing a serous road accident.
iii.Product liability: Liability arising out of defects of goods
Public Liability Insurance…
iv. Professional men such as doctors, dentists, solicitors,
and bankers may take out policies to protect
themselves from claims arising out of negligence or
mistake committed in the exercise of their
professional duties.
 It should be noted that this form of cover might
include or be included with other risks.
 For example, a householder’s policy covering loss or
damage to the building and or content can be
extended to cover the personal liability of the owner
and this family towards the public
 Whereas, liability arising from the use of motor
vehicles is always exclude, and must be covered by a
separate motor policy
5.2 Basic Types of Life Insurance

 Life insurance pays death benefits to designated

beneficiaries when the insured dies.
 The benefits pay for funeral expenses, uninsured
medical bills, estate taxes, and other expenses.
 The death proceeds can also provide periodic income
payments to the deceased’s beneficiary.
 From the generic view point, Life insurance policies can
be classified as either cash value life insurance or term
insurance.
 Term insurance provides temporary protection, while
Cash value life insurance has a savings component
and builds cash values(amount saved).
 Numerous variations and combinations of these two
types of life insurance are available today.
5.2.1 Basic characteristics of life insurance
 Basic Characteristics of life insurance are:
i) It is an exception to principle of indemnity:
Life insurance contract is not a contract of
indemnity but is a valued policy that pays a stated
amount to the beneficiary upon the insured’s death.
The indemnity principle is difficult to apply to life
insurance because the actual cash value rule
(replacement cost less depreciation) is
meaningless in determining the value of a
human life.
ii) In life insurance, the question of an insurable
interest does not arise when a person purchases
life insurance on his or her own life
 Basic characteristics of life insurance…
iii) Life insurance is long term insurance: Example whole life
insurance up to 121 years
iv) The event to be insured is an eventually certainty and
the probability of loss increase from year to year.
v)The question of over insurance is disregarded by insurers:
5.2.2 Types of life insurance
 Different authors classify the life insurance policies in
different types (Term, Whole life, Endowment, annuity,
Permanent, Variable, Group, and Universal) But under
this chapter we deal with the following insurances:
i) Term life insurance and
ii) Whole life insurance
iii) Endowment insurance
iv) Annuity insurance
 I) Term Life Insurance

 It is life insurance that provides compensation

to the beneficiary if the insured dies within the
stated period life mentioned in the policy.
 It is life insurance that provides coverage at a
fixed rate of payment for limited period of time,
the relevant term.
 If the insured survives beyond the specified
time limit in the policy, the policy will expire
and there will be no payment made by the
insurer.
 The premium is increased at each renewal date
and is based on the insured’s attained age
 Term Life Insurance
 Basic characteristics of Term Life insurance:
a) The period of protection is temporary, such as
1, 5,10, or 20 years. Unless the policy is
renewed, the protection expiries at the end of
the period.
b) Most term insurance policies are renewable,
which means that the policy can be renewed for
additional periods without evidence of
insurability.
c) Most term insurance policies are also
convertible, which means the term policy can
be changed for a cash value policy without
Basic characteristics of Term Life insurance …
d) Term insurance policies have no cash value or savings
element,
e) The cost of this policy is relatively low, example premium
f) Term policies do not provide the insured with loans, cash
surrender or non for feature options.
 Use of term life insurance
 Term insurance is appropriate in three situations
i) If the amount of income that can be spent on life insurance
is limited, term insurance can be effectively used.
ii) Term insurance is appropriate if the need for protection is
temporary.
iii) Term insurance can be used to guarantee future
insurability.
 Term life insurance…
 Term insurance has two major limitations;
a. Term insurance premiums increase with age and
eventually reach prohibitive levels,
b. Term insurance is in appropriate if you wish to save
money for a specific need. Term insurance policies do not
accumulate cash values.
 The three types of term life insurance contract are:
i. Straight term insurance is usually short term insurance
contract than others and terminates by the end of insurance
period.
ii.Renewable term insurance contract can be renewed or
extended at the end of term of contract before the expiry
date.
iii.Convertible term insurance is a contract which may be
converted to permanent insurance contract.
 II) Whole life insurance

It is called as straight life or ordinary life

insurance
It is a life insurance policy which is
guaranteed to remain in force for insured’s
entire lifetime, provided required premium
are paid , or to the maturity date.
The sum assured is payable on the death of
the life assured whenever it occurs.
Premiums are payable either throughout the
life the assured or can cease a certain age,
often 80 or 85. it is much higher than term
 Whole life insurance…
 The Whole life insurance policy provides:
 Protection to the dependents of the insured upon
the event of his/her death.
 Permanent protection to the insured’s dependents
in the case of death
 Allows for accumulation of savings over the life of
the insured (encourages saving).
 Cash surrender: When a person no longer wants
his policy, or for some reason cannot continue the
premiums, he can ask for the surrender value He
/She receives a proportion of a premium already
paid, not the proportion of the sum assured.
 Whole life insurance…
 Whole life insurance has two salient features:
i. Protection- It protects the insured in the case of
premature death. If the insured died prematurely the
face amount is paid to the beneficiary.
ii. Saving – Premium will accumulate with interest till
the date of maturity of the policy (age 100) the face
value of the policy will be paid to the beneficiary.
 Depending on the manner of premium payments,
whole life insurance contracts are classified as:
a) Straight life/ordinary life insurance: Under this
policy, premiums are to be paid at a regular interval
until the death of the insured or until the
achievement of a specified age limit. This policy
pay life insurance
Whole life insurance…

b) Limited pay life insurance :

 Under this insurance policy premiums are paid for
a definite period of time which is determined in
advance. That is for 10,15,20,25, and 30, years or
up to age 85.
 This policy is desirable when one intends to stop
payment of premiums after reaching a given age
level, usually up on retirement, but wants to
continue with the insurance protection till the end
of his life.
The cash values under the limited whole life
insurance are higher than the straight line
policy.
Whole life insurance…

c) Single payment life insurance

 Under this policy the premium payment is made in one
lam sum at the time of purchase of the whole life
insurance.
 In most cases, insurance buyers do not prefer this type
of mode of payment
III) Endowment insurance:
 Endowment insurance is a type of contract in which
case insurance company promises to pay the stated
amount of compensation to beneficiary (3 rd party)
provided that the insured dies with in the specified
period in the contract or
 The insurance company promises to pay the stated
amount of compensation to the insured provided that
 Endowment insurance…

 For example, if Beka, age 35, purchased a 20 year

endowment policy and died any time within the
twenty year period the face amount would be paid
to his beneficiary.
 If he survives to the end of the period, the face
amount is paid to him.
IV)Annuity
 An annuity can be defined as a period
payment that continues for a fixed period or
the duration of a designated life or lives.
 The person who receives the periodic payment
or whose life governs the duration of payment
is known as the annuitant
Annuity…

 An annuity is the opposite of life insurance.

 Life insurance creates an immediate estate and
provides protection against dying too soon before
financial assets can be accumulated.
 In contract, an annuity provides protection against
living too long and exhausting one’s savings while
the individual is still alive.
 Thus the fundamental purpose of an annuity is to
provide a lifetime income that can not be outlived.
 It protects against the loss of income because of
excessive longevity and the exhaustion of savings
 Annuity…

 An annuity insurance operation transfers funds from

those who die at a relatively early age to those who live
relatively old ages.
 That is, some annuitants will live to take out much more
than they paid in premiums.
 Other annuitants will not live long enough to take out as
much as they paid in premiums.
 An insurance company earns interest on all the money in
the pool. Therefore, the annuitant’s payments come
from three sources:
 Liquidation of the original premium payment, or
principal,
 Interest earned on the principal, and
 Funds made available by the relatively early death of
Annuity…

The Annuity insurance Operation

Payment of Interest
premium by earnings
all annuitants

Annuity insurance
pool

Payment only to
living Insureds
Annuity…

Types of annuity
Insurers sell a wide variety of individual
annuities. For sake of convenience and
understanding, the major annuities sold today
can be classified as follows:
a) Fixed annuity: A fixed annuity pays
periodic income payments that are
guaranteed and fixed in amount.
During the accumulation period prior to
retirement, premiums are credited with a fixed
rate of interest.
 Annuity…
b) Variable annuity:
 A variable annuity pays a lifetime income, but the
income payment vary depending on common stock
prices.
 The fundamental purpose of a variable annuity is to
provide an inflation hedge by maintaining the real
purchasing power of the periodic payments during
retirement.
c)Equity indexed annuity:
 An Equity indexed annuity is a fixed, deferred annuity
that allows the annuity owner to participate in the
growth of stock market and also provides down side
protection against the loss of principal and prior interest
earning if the annuity is held to term.
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