Chapter 6

Classification of Policies

Slide prepared by: Abdullah Al Yousuf KhanAssistant Professor - IUBAT6

ChapterMcGraw-Hill/IrwinCopyright 2006 by The McGraw-Hill Companies, Inc. All rights reserved.Classification of PoliciesThe life insurance contract provides elements of protection and investment.Life insurance provides against pre-matured death and a fixed sum at the maturity of the policy. The older the policy, the lesser the element of protection and higher the element of investment and vice versa.

2 Investment

Protection Age of the PolicyPremiumClassification of PoliciesHaving different elements in different policies, the policy-holders are free to choose the best policies according to their requirements.No one policy is the best for all the policy-holders due to variance in;Costs,Elements of investments and protectionsRequirements of the policy-holders, andAvailability of the policy.3Policies can be Divided on the Basis of;Duration of PolicyMethods of Premium PaymentsParticipations of ProfitNumbers of Lives CoveredMethods of Payment of ClaimsNon-conventional Policies4A.Policies According to Duration Whole-lifeTerm InsuranceEndowment InsuranceSurvivorship Policy5Whole Life PoliciesWhole life policies are issued for life. It means that the policy amount will be paid at the death of the life assured.The person whose life assured will not get the money during his/her life time; only the dependents will get the benefit of this policy.Whole life policies cane be effected either by payment of;Single premiumContinuous premiumLimited premium6Limited Payment Whole-Life PoliciesPremium is limited to certain period, although the amount secured under this plan is payable on the death of the policy holder.Premium under this plan is higher than the premium payable under a whole life plan. Since the premiums are payable for a selected period of years or until death if it occurs within this period, the life assured is satisfied to know the amount of maximum premium payable.If the life assured survives the premium paying period, the policy continues in full force, provided all premiums are paid.

7Convertible Whole-Life PoliciesThis is a whole-life policy which gives its holder an option to get it converted at the end of five years, into an endowment policy. If this option is exercised, the policy no longer remains a whole-life policy. If it is not exercised, the policy continues to be a whole-life policy with premiums ceasing at the age of 70..The objective is to provide maximum protection at a minimum cost and at the same time to offer a flexible contract for converting into endowment policy. The premiums is increased if it is exercised.

8Term Insurance PoliciesTerm insurance is far 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. If the life assured survives the period, the insurance comes to an end without any payment. the premiums are paid during the term of the insurance or till the death of the life assured. Term insurance policies are the cheapest policies. No profit is given. 9Term Insurance PoliciesUseful to those; Who needs extra protection for a short durationWho need protection for long duration but unable to purchase for the time-being for low income or ill healthA young businessman to save the business from disaster during the initial stage of the business.Key-mans insurance.A father for his children during the education period.Any person who needs insurance for a shorter period.

10Straight-Term (temporary) InsuranceIssued for two years (also called two-years temporary assurance policy.)The sum assured will be payable only in the event of death of the life assured within two years from the commencement of the policy.A single premium is required. The policies are issued only without profit plan.The policy holder is required to pay the medical fee.The policy is entitled to any surrender value and no loan can be granted.This policy cannot be converted into other plans.

11Renewable Term PoliciesThese policies are renewable at the expiry of term for an additional period without further medical examination; but the premium rate will be increased according to the age attained at the time of renewal.These policies are suitable to those whose health are deteriorating and will be uninsurable at an advanced age. The policy-holder can renew it many times up to the age of 55. 12Convertible Term PolicyThis policy gives an option to convert it into a whole-life or endowment policy.Without having to undergo a fresh medical examination. The option can be exercised any time except the last two years. A new policy is issued after conversion it into either whole-life or endowment policy. The premium rates will be increased according to the age attained. This policy is issued to first class lives. Persons aged over 40 years and those are in hazardous occupation are not eligible to use this option.

13Endowment PoliciesLife insurance policythatpaystheassuredsum(face amount) on a fixed date or upon thedeathof theinsured, whichever comes earlier.Endowmentpoliciescarrypremiumshigher than those on conventional whole life policies andterm insurance, but are useful inmeetingspeciallump sumneedssuch as collegeexpensesor forbuyingaretirementhome.Alsocalledendowment life policy or endowment policy.14Types of Endowment PoliciesPure Endowment PolicyOrdinary Endowment PolicyJoint Life Endowment PolicyDouble Endowment PolicyFixed Term (Marriage) Endowment PolicyEducational Annuity PolicyTriple Benefit Policy;If death occurs within a stipulated periodOn survival on selected termAnticipated Endowment PolicyProgressive Protection Policy with ProfitAnticipated Whole Life policy with Profits

15Pure Endowment PolicyThe sum assured is payable on the life assureds' surviving the endowment term. In the event of his/her death within the term (endowment), premiums may be returned or not. Thus pure endowment policy is opposite to term policy.Because the insured is paid if he/she survives in pure endowment and if he/she dies in the term in term policy. Pure endowment is for the benefit of the policy-holder and term insurance term-policy is for the benefits of others (e.g. dependents). Pure endowment policy has the element of investment, and the term-policy has the element of protection.Pure endowment grants protection against living long while the term-policy grants protection against living too short.

16Ordinary Endowment PolicyThis is the policy which actually represents the life insurance in true sense.It provides an ideal combination of both the family protection and the investment.It is taken out for a specified term of years.The sum assured being payable either on the life-assureds death during the period or on the survival to the end of the period. Premiums are payable throughout the term of the policy or to a limited period or till the prior death of the life assured. This provides solutions to various problems of life whether living too long or too short.Moreover, compulsory savings is possible in this policy.Other advantages are to meet the marriage, education or other family requirements. 17Joint Life Endowment PolicyThis policy covers more than one life under a single policy. Under this plan, the sum assured is payable on the expiry of the term or on the death of the assured-lives during the endowment period. Premium are payable throughout the endowment period or till the prior death of anyone of the lives assured.Premium is calculated with certain modification according to the age of all insured partners.Paid-up and surrender values are payable on the policy.This policy is suitable for partners of a business firm.This policy is also beneficial for couple.

184.Double Endowment PolicyUnder this policy, if the life-assured dies during the endowment period, the basic sum assured is payable and if he survives to the end of the term, double of the sum assured is paid. The term of policy is ranging from 10 to 40 years but no policy is insured to mature at an age of 65 years.This plan is suitable for persons whom, by reason of some physical disability, are not eligible for acceptance at the tabular rates under any of the other classes of insurance.This is also beneficial to those who are confident of living long but would like to have some cover in the event of his early death.

195.Fixed Term (Marriage) Endowment PolicyUnder this policy, the sum-assured is payable only at the end of a stipulated period, but the premiums ceases if death of the policy-holder occurs earlier. In such an event, the policy will remain fully paid until the maturity date but the beneficiary may discount the policy before maturity. This policy is designed to meet the needs of a family man who wants to make available a certain sum for marriage of a female dependents. 206.Educational Annuity PolicyLike marriage endowment policy, this policy is also taken by a father or guardian who undergoes medical examination. The children for whose benefit (education) policy is taken is called beneficiary. The difference is that the sum assured is not payable, but a lump sum is payable, in equal installments over a period of five years. The installments are payable in five years half-yearly.

217.Triple Benefit Policy;This policy is a combination of a whole-life limited payment and a pure endowment with a guaranteed annual bonus payable on death during the endowment term. This policy is granted for fixed terms of 15, 20, or 25 years. Premiums are paid throughout the term or till prior death of the life-assured.The special feature of the plan is that there is a guaranteed and steadily increasing family provision during the selected period along with the old age benefit. The provision for the family does not terminate when the old age benefit is paid at the end of the period and no further premiums are payable thereafter, but a sum equal to the original sum assured still remains to be paid on the death of assured.227.Triple Benefit Policy; BenefitsIf Death occurs within the Stipulated Period; the benefits payable to dependents, in the case, are;The basic sum assuredA guaranteed bonus per annum equal to Rs. 25/- per 1,000/- sum assured for each full years premium paid excluding the first years premium. On survival to the Selected Term; the following amounts are paid at the survival of the life assured at the selected term;The basic sum assured in cash, andActually paid-up whole-life assurance for a like amount payable at death thereafter.

238.Anticipated Endowment PolicyIn the event of death occurs at any time during the term of the policy, i.e., before the maturity date, full sum assured is payable without any deduction of installments paid earlier. The policy may be issued both under profit or without profit plan.The term may be for 15, 20, or 25 years.249.Progressive Protection Policy with ProfitThis policy is very useful for those who want to provide additional insurance benefits for additional responsibilities. The sum assured increases automatically by half the initial sum assured at the end of five years and again by half the initial sum assured at the end of ten years. No need for additional medical evidence for subsequent increase in the sum assured.After ten years the benefit, under this policy, will be double the initial sum assured, payable on survival at the end of the selected term or on death within the term.

2510.Anticipated Whole Life policy with ProfitsThis policy provides two distinct types of benefits in one policy the benefit of Whole-Life Limited Payment Policy and Anticipated Payments at five yearly intervals. It provides complete long-range insurance protection for the family and in addition helps meet various short-term needs through periodical payments.

2610.Anticipated Whole Life policy with Profits; For a policy with a term of 20 years, 1/8th of the sum assured becomes payable on the life-assureds surviving 5 years, a further 1/8th of the sum assured becomes payable on his surviving 15 years and a final 1/8th of the sum assured becomes payable on his surviving to the end of the term of 20 years.For a policy with term of 25 years, 1/10th of the sum assured becomes payable on the life-assureds surviving 5 years, a further 1/10th of the sum assured becomes payable on his surviving 10 years, a further 1/10th of the sum assured becomes payable on his surviving 20 years and a final 1/10th of the sum assured becomes payable on his surviving to the end of the term of 25 years.2711.New Jana Raksha Policy28

12.Mortgage Redemption Assurance PolicyThis policy meets the requirements of institutions and individual borrowers to ensure that the outstanding loan is automatically extinguished in the event of the borrowers death. The benefits under the plan at any time during the term of the policy would be the amount of outstanding loan at the beginning of the year as envisaged at the beginning of the transaction, and would become payable in the event of the death of the borrower.A schedule showing the amounts of outstanding loans at the beginning of each year would be drawn up at the outset on the basis of predetermined rate of interest. 2913.Children Deferred Endowment AssuranceSometimes a parent or guardian of a child wishes to take an insurance policy on the life of the child under which premium is paid by the proposer during the first few years and by the life-assured (the child) thereafter.Benefits of the policy;Very low premiumHabit of saving money by the childCash value in case of discontinuing the policy to meet specific expenses such as education or marriage.

3014.Children Anticipated Policy with ProfitsThis policy can be taken by parent or legal guardian or any near relative on the life of a child on whose life risk will commence at the age of 18 completed, or 21 years as required by the proposer. The policy will automatically vest in the life of the child at the end of the deferment period and half of the premiums paid during this period will be returned to him in lump sum. 3115.Married Womens Property Act Policy32

16.Survivorships, Reversionary or Contingent Assurance There are two persons in this policy, first a named insured and another named person. The sum-assured is payable if the life-assured dies before the named person (or counter life).Nothing is payable if the counter life (named person) dies first and the contract then ceases.33B.Policies According to Premium Payment Single Premium Policy;In this policy, the whole premium is paid at the beginning of the policy.As compare to the annual premium payable, it is costlier; but as compared to the aggregate of all annual premiums payable, it is much cheaperLevel Premium Policy;Under this policy a regular and equal premiums are paid at a definite interval.The premiums are lesser than the single premiums and is convenient to make payment at a regular period.34C.Policies According to Participation in ProfitsNon-Participating Policies;The policy-holders are not entitled to share the profits of the insurer. The policy holder only get the sum assured and no bonus is given to them.Participating Policies;The policy-holders are entitled to share the profit of the insurer.If there is no profit than the policy-holders will not get any bonus or bear any loss of the insurer as policy-holders are not owners of the business.

35D.Policies According to the Number of Persons InsuredSingle Life policies;The policy is issued on only individual. Policy can be issued on ones own life or somebody elses life.Multiple Life Policies;More than one life is insured. It may be a; Joint Life policy;The policy covers two or more lives and the policy amount is payable on the first death. This is beneficial to the partners of a firm or to a couple.Last Survivorship Policy;The policy amount is payable at the last death. So long if anyone of the insured is alive, no payment will be made.36E.Policies According to the Method of Payment of Policy AmountLump Sum Policies;Where the sum-assured is paid in lump sum at the events insured against.Installment or Annuity Policies;The policy amount is payable in installments. It is beneficial to those whose earnings capacities are reduced to minimum to old age. 37End of Chapter38