Definition of life insurance ife insurance i$ a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money (the benefit) in exchange fora premium, upon the death of an insured person (often the policy holder). Depending on the contract, other events such as terminal illness or critical illness can also trigger payment. The policy holder typically pays a premium, either regularly or as one lump sum. Other expenses, such as funeral expenses, can also be included in the benefits.Insurance Vs assurance The specific uses of the terms “insurance” and “assurance” are sometimes confused. In general, in jurisdictions where both terms are used, “insurance” refers to providing coverage for an event that might happen (fire, theft, flood, etc.), while “assurance” is the provision of coverage for an event that is certain to happen. in the United States, both forms of coverage are called “insurance” for reasons of simplicity in companies selling both products. By some definitions, “insurance” is any coverage that determines benefits based on actual losses whereas “assurance” is coverage with predetermined b benefits irrespective of the losses incurred.Features of Life Insurance Contract ° Followings are the features of life insurance contract: Nature of General Contract insurable Interest Utmost Good Faith Warranties Proximate Cause OMPe PP Assignment and Nomination1. Nature of General Contract * Since the life insurance contract is approved by the Bangladesh Contract Act, it must have the following essentialities: * Agreement (offer and acceptance) « Competency of the parties + Free consent of the parties * Legal consideration + Legal objective2. insurable Interest * insurable inferest is the pecuniary interest. The insured must have insurable interest in the life to be insured for a valid contract. insurable interest arises out of the pecuniary relationship that exists between the policy- holder and the life assured so that the former stands to loose by the death of the latter and/or continues to gain by his survival. The loss should be monetary or financial. Mere emotion and expectation do not constitute insurable interest in the life of his friend or father merely because he gets valuable advice’s from \ them.2.1 insurable interest in own’s Life An individual always has an insurable interest in his own life. Its presence is not required to be proved. Bunyon says “Every man is presumed to possess an insurable interest in his estate for the loss of his future gains or savings which might be the result of his premature death” The insurable interest in own life is unlimited because the loss to the insured or his dependents cannot be measured in terms of money and, therefore, no limit can be placed to the amount of insurance that one may take on ones own life. Thus, theoretically, a person can take a policy of any unlimited amount on his own life but in practice no insurer will issue a policy for an amount larger than amount seems suitable to the circumstances and means of the applicant.2.2 insurable interest in other’s life * Life insurance €an be affected on the lives of third parties provided the proposed has insurable interest in the third party. There are two types of insurable interest in others life. First where proof is not required and second, where proof is required. 2.2.1 Proof is not required * There are only two such cases where the presence of insurable interest is legally presumed and therefore need not be proved. * Wife has insurable interest in the life of her husband; It is presumed and decided by Reed vs. Royal Exchange (1795) that wife has an insurable interest in the life of her husband because husband is legally bound to support his wife. The wife will suffer financially if the husband is dead and will beorrue to gain if the husband ts surviving.* Husband has insurable interest in the life of his wife: 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. if the wife is dead, husband has to employ other person to render the domestic services and other financial expenditures will involveat 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.2.2.2 Proof is required * insurable interest has to be proved in the following cases: * Business Relationship: The policyholder may have insurable interest in the life of assured due to business or contractual relationship. In this case, the amount of insurance.depends on the amount of risk involved. Example, a creditor may lose money if the debtor dies before the loan is repaid. The continuance of debtor’s life is financially meaningful to the creditor because the latter will get all his money repaid at the former’s survival.Family Relationship: The insurable interest may arise due to family relationship if pecuniary interest exists between the policyholders and life assured because mere relationship or ties of blood and of affection does not constitute insurable interest. The proposer must have a reasonable expectation of financial benefit from the continuance of the life of the person to be insured or of financial loss from his death. The interest must be based on value and not on mere sentiments.General Rules of insurable Interest in Life Insurance: * Time of Insurable Interest: insurable interest must exist at the time of proposal. Policy, without insurable interest, will be wager. It is not essential that the insurable interest must be present at the time of claim. * Services: Except the services of wife, services of other relatives will not essentially form insurable interest. There must be financial relationship between the proposer and the life-assured. In other words, the services performed by the son without dependence of his father, will not constitute insurable interest of the father in the life of his son. Vice-versa is not essential for forming insurable interest. * Insurable Interest must be valuable: In business relationship the value or extent of the insurable must be determined to avoid wager contract of additional insurance. Insurance is limited only up to the amount of insurable interest.insurable interest should be valid: Insurable interest should not be against public policy and it should be recognized by law. Therefore, the consent of life assured Is very essential before the policy can be issued Legal responsibility may be basis of insurable interest: Since the person will suffer financially up to the extent of responsibility, the proposal has insurable interest to that extent. insurable Interest must be’definite: Insurable interest must be present definitely at the time of proposal. Mere expectation of gain or support will not constitute insurable interest. Legal Consequence: Insurable interest must be there to form legal and valid insurance contract. Without insurable interest, it would be null and void.- Utmost Good Faith Life insurance requires that the principle of utmost good fait should be preserved by both the parties. The principle of utmost good faith says that the parties, proposer (insured) and insurer must be of the same mind at the time of contract because only then the risk may be correctly ascertained. They must make full and true disclosure of the facts material to the risk. Vlaterial facts: in life insurance material facts are age, income, occupation, health, habits, residence, family history and plar of insurance. Material facts are determined not on the basis of opinion, therefore, the proposer should disclose not only those matters which the proposer may feel are material but all facts which are material. duty of both parties: it is not only the proposer but the insurer aiso who is responsible to disclose all the material facts whic are going to influence the decision of the proposer.Full and True Disclosure: Utmost good faith says that there sHould be full and true disclosure of all the material facts. Full and true means that there should be no concealment, misrepresentation, half disclosure and fraud of the subject matter to be insured. Legal Consequence: in the absence of utmost good faith the contract will be avoidable at the option of the person who suffered loss due to non- disclosure. The intentional non-disclosure amounts to fraud and the unintentional non- disciosure is voidable at the option of the party not at fault.. Warranties In an insurance pojicy, a warranty is 2 promise. The definition of warrant) in an insurance is dn agreement between the two parties (the insured and tHe insurer} that must be carried out with full responsibility by the insured. A warrenty is 2 promise (assurance) that must be met by the insured in regards to the risks to: Do or not de something. A fact that is deemed to exist or not to exist. Warranties are an integral part of the contract, i.e., these are the basis of the contract between the proposer and insurer and if any statement, whether matenai or non-material, is untrue, the contract shall be null and void and the premium paid by him may be forfeited by the insurer. The policy issued will contain that the proposal and personal statement shall form part of the Policy and be the basis of the contract. 4.1 Breach of Warranty if there ts breach of warranty, the insurer is not bound to perform his part of the contract uniess he chooses to ignore the breach. The effect of 3 breach of warrenty is to render the contract voidable at the option of the other party provided there is no element of fraud. in case of freudulent representation or promise, the contract will be Void ab initio.5. Proximate Cause - The-efficient or effective cause which causes the loss is called proximate cause. It is the real and actual cause of loss. If the cause of loss (peril) is insured, the insurer will pay; otherwise the insurer will not compensate. ¢ In life insurance the doctrine of Causa Proxima (Proximate Cause) is not applicable because the insurer is bound to pay the amount of insurance whatever may be the reason of death. It may be natural or unnatural.6. Assignment and Nomination Assignment — 1Indexed Universal Life Insurance indexed universal life insurance is a variation of universal life insurance with certain key characteristics. First, there is a minimum interest rate guarantee, which is usually lower than the minimum interest rate guarantee on a regular universal life policy. Second, additional interest may be credited to the policy based on the investment gains of a specific stock market index, such as the S & P 500 Index. Third, there is a formula for determining the amount of enhanced (additional) interest credited to the policy; the formula usually places a cap on the maximum upper limit of additional interest credited to the policy; the formula may also place a limit on " the participation rate that applies to the index.Variable Universal Life Insurance * Variable universal life insurance is an important variation of whole life insurance. These policies are often sold as investments or tax shelters. Variable universal life insurance is similar to a universal life policy with two major exceptions: me The policyholder determines how the premiums are invested, which provides considerable investment flexibility. gam The policy does not guarantee a minimum interest rate or minimum cash value. One exception, however, is that the policy may have a fixed-income account, which may guarantee a minimum interest rate on the account value. >Current Assumption Whole Life Insurance * Current assumption whole life insurance (a/so called interest-sensitive whole life) is a nonparticipating whole life policy in which the cash values are based on the insurer’s current mortality, investment, and expense experience. A nonparticipating policy is a policy that does not pay dividends. qOther Types Of Life insurance Modified Lifé Insurance A modified life policy is a whole life policy in which premiums are lower for the first 3 to 5 years and higher thereafter. The initial premium is slightly higher than for term insurance, but considerably lower than for a whole life policy issued at the same age. Preferred Risks Most life insurers sell policies at lower rates to individuals known as preferred risks. These people are individuals whose mortality experience is expected to be lower than average.Joint Life Insurance Joint life insurance (also called a first-to-die policy) is a policy written on the lives of two or more people and is payable at the time of the death of the first person to die. For example, this policy can be used to insure a husband and wife, where each is the beneficiary of the other spouse. Second-to-Die Life Insurance Second-to-die life insurance (also called survivorship life) is a form of life insurance that insures two or more lives and pays the death benefit at the time of the death of the second or last insured.* Group Life Insurance + Group life insurance is an important type of insurance that provides life insurance to members of a group in a single master contract between the insurer and employer, or other group sponsor. Physical examinations are not required, and certificates of insurance are issued as evidence of insurance.Traditional Net Cost Method * From a historical perspective, life insurers previously used the traditional net cost method to illustrate the net cost of life insurance. Under this method, the annual premiums for some time period are added together. Total expected dividends to be received during the same period and the cash value at the end of the period are then subtracted from the total premiums to determine the net cost of life insurance. For example, assume that the annual premium for a $10,000 ordinary life insurance policy issued to a female, age 20, is $132.10 (paid at start of policy period). Accumulated dividends over a 20-year period are $599, and the cash-surrender value at the end of the twentieth year is $2,294 (see Exhibit 13.1). The average cost per year is minus $12.55 (- $1.26 per $1,000).Traditional Net Cost Method Total premiums for 20 years (132.20X20) Subtract accumulated dividends for 20 years Net premiums for 20 years Subtract the cash value at the end of 20 years insurance cost for 20 years Net cost per year (- $251 /20) Net cost per $1,000 per year (- $12.55/10) $2,642 -599 $2,043 -2,294 - $251 - $12.55 - $1.26» The traditional net cost method has several defects and Is misleading. - The most glaring defect is that it does not consider the time value of money. * In addition, the insurance illustration often showed the insurance to be free (to have a negative cost). This ts contrary to common sense, because no insurer can provide free insurance and remain in business.interest-Adjusted Cost Method * The interest-adjusted cost method developed by the National Association of Insurance Commissioners is a more accurate measure of life insurance costs. Under this method, the time value of money is taken into consideration by applying an interest factor to each element of the cost calculation. * There are two principal types of interest-adjusted cost indexes: the surrender cost index and the net payment cost index. 7 * The surrender cost index is useful if you believe that you may surrender the policy at the end of 10 or 20 years, or some other time period. * The net payment cost index is useful if you intend to keep your policy in force, and cash values are of secondary importance to you.Surrender cost index for 20 years, each accumulated at 5% Net premiums for 20 years (interest adjusted) $3,762 Subtract theeash vaiue at the end of 20 years -2,294 insurance cost for a total of 20 year {interest adjusted) $1,468 Amount to which e annually at the beginning $34.719 ft 20 years at 5% Interest-adjusted year ($1,468 /$34.719) $42.28Net Payment cost index lee asl ad insurance cost for 20 years $3,762 Amount tolwhich $1 deposited annually at the beginning $34.719 of each year will accumulate to in 20 years at 5% interest-adjusted cost per year ($3,762 /$34.719) $108.36 5 a