UNIVERSITY OF SARAJEVO

SCHOOL OF ECONOMICS AND BUSINESS IN SARAJEVO

LIFE INSURANCE

RESEARCH PAPER

Subject/Course: Insurance in Economics

Professor: Jasmina Selimović, PhD

Student: Guven Čolaković

Index number: 71230

Study: Financial Management

Sarajevo, April 1, 2015

Content

Introduction

About Life Insurance

Risks in Life Insurance

Types Of Life Insurance

Technical Basics Of Insurance

Significance And Role Of Life Insurance

The offer of life insurance products in the market of Bosnia and Herzegovina

Conclusion

References

Introduction„It is really strange that people insure their homes, furniture, cars, boats and other things, and are

reluctant to ensure your life, which is certainly the most valuable of all, at the same time

there is a greater danger of losing it. " (Benjamin Franklin)

In describing the way of life, it is common to use words such as dynamic and unpredictable. In contrast to our way of life is one of the basic human needs - the need for security and stability.

Restful sleep and safety of anyone trying to achieve in their own way.

Way you hereby present a life insurance policy - one of the most attractive investment in the world, because through it you invest in the safety of their own future and the future of your loved ones, and accumulate funds invested.

Money paid in life insurance is legal instruments maximum protection and therefore life insurance policy after the expiry of the insurance period, guarantees the payment of the sum insured plus the imputed income.

No one wants to think about death or disability, but the reality is that the family may need financial support in a situation where you would not be there to take care of that. Would financial security of families was preserved in the event of your untimely death? Do the kids can go to college? You took a loan for an apartment, car, cash loan? Your income allows the family a normal life? What will happen if your family is left without your income?

With life insurance policies can be quiet on these issues. Life insurance provides your income and represents additional income when the time comes to retire. If someone depends on you financially, it is almost certain that your life insurance needs.

In this research paper we will try to emphasize everything related to life insurance and try to make it closer to the reader.

About Life Insurance

(Definition and basic characteristics)

„Life insurance is a contract between an insured (insurance policy holder) and an insurer or assurer,

where the insurer promises to pay a designated beneficiary a sum of money (the "benefits") in exchange

for a premium, upon the death of the insured person. Depending on the contract, other events such

as terminal illness or critical illness may also trigger payment. The policy holder typically pays a

premium, either regularly or as a lump sum. Other expenses (such as funeral expenses) are also

sometimes included in the benefits1“

The main specific of life insurance is that insurance is a combination of the insured risk and

savings2. This insurance applies to all policies on which termination or duration of life of one or

more persons (the insured) comes to the payment of the amount insured by the insurer. So, life

insurance is a contract under which the insurer, as opposed to paying premiums, is obliged to pay

the insured or a person designated by him a certain sum or annuity in case of endowment certain

time or in case of death of the insured.

Life insurance the simplest can be defined as a contract under which the insurer undertakes to

according to collected premiums of the insured, the insured person to pay a certain sum or

annuity in case of death or in the event of his survival. For life insurance we can say that it is a

specific type of insurance because it is a security risk of death and consequently was the most

common form of insurance worldwide.

Sum insured is an essential element of the life insurance contract, as only the amount of sum

insured can determine the amount of premium3. Such as already mentioned above, the sum

insured in the insurance of persons represents an upper bound obligations of insurers. If the

insured event occurs the insurer is obliged to pay the sum insured under those conditions under

which it was agreed regardless of the amount of damage that has occurred since the sum insured

is determined regardless of how much it will damage. Therefore occurrence of the insured event

the insured person becomes entitled to payment of the insured sum and is not obliged to prove

1 F.C. Oviatt (-) "Economic Place of Life Insurance and Its Relation to Society" "Sage Publications , Inc." p.1852 George E. Rejda (2008) "Principles of risk management and insurance" Person/Addison wesley p.1383 Marović, B., Avdalović, V.: Osiguranje i upravljanje rizikon, Birografika, Subotica, 2005. p.58

damages suffered as well as the amount of damage. As this type of insurance does not include a

material interest, it can be concluded in case of death or consequences of an accident third party.

not just the policyholder.

Life insurance is an upgrade of the social (compulsory) insurance. In addition to social functions,

life insurance is a source of credit, which is necessary both for the individual and for the

economy. Individual life insurance policy can provide the guarantee necessary to obtain credit,

and the economy is a source of funds can still invest. Within the life insurance premiums are

accumulated having the character of savings, which is long-term, pre-determined and with

already defined in terms purpose. In order to obtain the basic principle, equalization of premiums

(funds) and life insurance obligations under this insurance, it is necessary that the savings part of

the premium together with interest during the insurance period accumulates. These funds form

the so-called, mathematical reserve, which represents the amount of funds needed to fulfill the

future liabilities of insurers (insured amount) less the value of future obligations of policyholders

(savings premiums).

Technique life insurance is based on the theory of probability, the law of large numbers and are

used and the corresponding mathematical and statistical models and actuarial methods. Requires

the full compensation risk, that is completely secure execution of the insurance obligations.

According to the basic principle of insurance mathematics, mathematical expectation of the

present value of all payments net premium is equal to the mathematical expectation of the

present value of payments to the insured sum. However, expectation of payment is not the same

for each year. It increases with the age of the insured because it increases the likelihood of death.

If the insured paid each year life insurance premium equal to the mathematical expectation of

payment in the same year would be considered to pay natural premium. Natural premiums would

normally grow with age and would be sufficient to cover the risk of the current year ie. Total

sum premium you would pay a certain set of people (the insured) would be equal to the payment

of the insured sums insured. In this case there would be no mathematical reserves, ie.

The part of the premium that remains for the payment of the following year of insurance.

However, since it is very difficult in older age when the risk of death higher paying high

premiums is realistic rather than natural premium paying an average premium. The premium

paid by the insured in the first years of insurance is higher than the natural premium, and in

recent years has decreased so that the difference in these years are covered by the mathematical

reserves. Thus the insurer uses only part of the premium paid to cover its obligations in the same

year, and the remainder of saving for next year. Part of the premium that is paid out to

policyholders in the same year the risk premium, and the remaining part of the premium for the

following year's premium savings. Thus the net premium consists of two parts: the risk premium

and savings premiums.

Risk premium for specific year of insurance is equal to the mathematical expectation of payment

during the year. The remaining part of the premium is the premium savings consisting of safety

reserves and mathematical reserves.

Mathematical reserves at time t is defined as the sum of all to that point due net premiums, net of

payments made up to that time (ukamaćene up to that point). As the payments are paid entirely

from the risk premium can be said that the mathematical reserve is equal to the sum to time /

matured net premiums net of the associated risk premium. Therefore, the mathematical reserve is

defined as: the sum of all past due up to that point (and interest-bearing) deposit premium, ie.

The amount that remains when the net premiums refuses risk premium. The problem of

calculating mathematical reserves to the problem of construction of mortality tables, one of the

central problems of life insurance mathematics (Actuarial). Insurers each year are calculated

mathematical reserves in order to invest part of their capital and get a satisfactory return on

invested funds4.

The main task (goal) of insurers is to always have a positive mathematical reserves that could

safely perform its obligations. If the insured wishes to terminate the insurance underwriter will

then have the insured to recover part of the current mathematical reserves relating to his

insurance because the mathematical reserve should be used to cover future risks for insurers

disappeared interruption insurance. This interruption insurance with returnable premium is called

the purchase of insurance. Problem heights purchase insurance comes down essentially to the

problem of calculating mathematical reserves.

4 Emmett J. Vaughan , Therese M. Vaughan (2002) "Fundamentals of Risk and Insurance" John Wiley&Sons p.240

There are some specific types of insurance for which it is necessary to construct specific

mortality tables, calculate premiums and mathematical reserves. Such, for example. Group

insurance (insurance where insurance a person depends on the life and death of several people ie.

A group of people), insurance of people with an increased risk of death due to disease or

performance of a particular profession that is a danger to life.

Risks in Life Insurance

The main risks covered by insurance life are survivorship certain age and death risk. However, in

the course of a life insurance contract affects many risks that need to be computed in the

premium to be paid. Additional risks and uncertainties created by the characteristics of this

type of insurance: long-term contracts and fixed premium payable throughout the life

insurance although the risk increases with age of the insured: the interest rate is determined at

the beginning of the insurance period and is mainly determined by fixed and constant. Any

changes that are happening in the market, fluctuations and fluctuations, negative movements

in market interest rates, competition in the insurance market may affect the investment

portfolio of the insurer.

Generally, the risks to which insurers life encounter are:

• Equity Risk - is associated with the fact that placements insurer can drop value (an unforeseen

increase in interest rates).

• Determining the risk premium5 - is associated with the basic characteristic of life insurance

contracts, ie, long-term life insurance contracts. The premium is fixed throughout the life

insurance and it is necessary to determine the beginning of the period. Determination of the

premium is linked to mortality, interest rates and costs so that when determining premiums

must take into account the risks that are associated with all three factors (mortality may exceed

the expected mortality rate that is determined can not be too high so that in this case can not

sustain in the long run to secure placements, insurance costs may be underestimated).

• Risk adjustment of assets and liabilities6 - refers to maturity. Mathematical reserve is long-

term and represents an obligation of insurers. On the other hand placements and are extremely

long. If it happens some unexpected situations (purchase or poorly estimated mortality) 5 Emmett J. Vaughan , Therese M. Vaughan (2002) "Fundamentals of Risk and Insurance" John Wiley&Sons interpreted from this 6 Emmett J. Vaughan , Therese M. Vaughan (2002) "Fundamentals of Risk and Insurance" John Wiley&Sons interpreted

insurers must sell their investments below their actual value and thus incurs a loss on the assets

side and on the side of the obligation. Because of these situations, there is a tendency of

replacing placements in the long term placements in the short and short term. instead of fixed

interest rates are introduced products with variable interest rates, and thus the variable

premium.

• Unpredictable risks7 - associated with uncertainty, which can happen in the future (changes in

market conditions, changes in laws, etc.)

RISK EXCLUDED FROM LIFE INSURANCE

Under the law of insurance from life insurance excluded are the following risks:

suicide of insured person

intentional murder of insured persons by the user security

occurrence of death of the insured due to war

occurrence of death of the insured person to death by a court preceeding or when

committing the crime with premeditation8

7 Emmett J. Vaughan , Therese M. Vaughan (2002) "Fundamentals of Risk and Insurance" John Wiley&Sons interpreted8 Dr. Jelena Kočović (2006) "Aktuatorske Osnove Formiranja Tarife u Osiguranju lica " Ekonomski fakultet , Beograd p.38

TYPES OF LIFE INSURANCELife insurance can be divided according to a number of criteria. Based on their distinguishing characteristics, it is possible to identify six distinct types of life insurance contracts: (1) term insurance, (2) whole-life, (3) endowment, (4) universal life, (5) variable life policies, and (6) variable universal life. We can divide life insurance products into two classes: those that provide pure life insurance protection, called term insurance, and those that include a savings or investment element, which are called cash value policies.

TERM INSURANCE

As already stated, term insurance provides temporary protection and is typically renewable and concertible without evidence of insurability. Term insurance is appropriate when income is limited, or when there are temporary needs. The premium is increased at each renewal date and is based on insured's attained age. Because term insurance has no cash value, it cannot be used for retirement or savings purposes.

Types of term insurance:

-yearly renewable term

5-,10-,15-,20-,25-, or 30-year term

-term to age 65

-decreasing term

-reentry term

-return of premium tern insurance9

Yearly renewable term insurance is issued for one-year period and can be renew every year up to some stated age. Premiums increase with age at each renewal date. Most yearly renewable term policies are also possible to convert to a cash-value policy with no evidence of insurability.

5-,10-,15-,20-,25-, or 30-year term insurances are also renewable and they increase when the policy is renewed.

A term to age 65 policy provides protection to age 65 and then expires. It can be converted to a permanent plan to insurance, but the decision must be exercised before age 65.

9 Emmett J. Vaughan , Therese M. Vaughan (2002) "Fundamentals of Risk and Insurance" John

Wiley&Sons p.138

Decreasing term insurance provides a death benefit that decreases at a predetermined rate over the life of the policy. Term lengths is between one and 30 years.

Reentry term is a term policy in which renewal premiums are based on lower mortality rate if the insured can periodically demonstrate acceptable evidence of of insurability.

Return of premium term insurance returns preimums at the end of the term period, which means the premiums paid for coverage is returned if the insured party survives the policy's term .

WHOLE LIFE INSURANCE

Whole life insurance is a cash-value policy. The strength of a whole life insurance policy is that it provides guaranteed cash values and benefits in return for fixed premiums. A trade-off to consider is that a whole life policy may build cash value at a lower rate than alternative coverage options10.

The whole-life insurance policy was the original type of lifetime policy. It provides protection at a level premium for the entire lifetime of the insured. This lifetime protection is possible because the premium is set at a level that is higher than necessary to fund the cost of death claims during the early years of the policy, and the excess premiums are used to meet the increasing death claims as the insured group grows older.

UNIVERSAL LIFE INSURANCE

Universal life insurance is a variation of whole life insurance. It is a permanent policy providing cash value benefits based on current interest rates. The feature that distinguishes this policy from whole life is that the premiums, cash values and level amount of protection can each be adjusted during the contract term as the insured's needs change11.

VARIABLE LIFE INSURANCE

Variable life insurance is designed to combine the traditional protection and savings features of whole life insurance with the growth potential of investment funds. This policy has two distinct components: the general account and the separate account. The general account is the reserve or liability account of the insurance provider, and is not allocated to the individual policy. The separate account is comprised of various investment funds within the insurance company's portfolio, such as an equity fund, a money market fund, a bond fund, or some combination of these. Because of this underlying investment feature, the value of the cash and death benefit may fluctuate, thus the name "variable life"12.

10 https://www.genworth.com/ , 11 George E. Rejda (2008) "Principles of risk management and insurance" Person/Addison Wesley p.142

12 Emmett J. Vaughan , Therese M. Vaughan (2002) "Fundamentals of Risk and Insurance" John Wiley&Sons

VARIABLE UNIVERSAL LIFE INSURANCE

Variable universal life insurance combines the features of universal life with variable life and gives the consumer the flexibility of adjusting premiums, death benefits and the selection of investment choices. These policies are technically classified as securities. Unfortunately, all the investment risk lies with the policy owner; as a result, the death benefit value may rise or fall depending on the success of the policy's underlying investments. However, policies may provide some type of guarantee that at least a minimum death benefit will be paid to beneficiaries13.

ENDOWMENT INSURANCE POLICIES

Endowment policies carry premiums higher than those on conventional whole life policies and term insurance, but are useful in meeting special lump sum needs such as college expenses or for buying a retirement home. Also called endowment life policy or endowment policy14.

13 www.businessdictionary.com14 www.businessdictionary.com

Technical basics of insurance

Life insurance is based on the principles of the law of large numbers, which is the fundamental

law of the theory of probability and statistics. The essence of this law is that it is. when viewed

large number of cases. I can see it coming in the occurrence of an event is greater. and the

deviations are smaller. If A designated event viewed individually, he presents the case, while in

a large number of observation stations legality. Therefore, the legality manifests itself only in

the bulk of cases, it is not visible in the individual units of which the mass is composed, or acts

of certain groups of these units. Thus. for example. if ten people died certain age five or so. This

does not mean that the probability of death for men and age 50%. It is known that every man

must die, but no one knows when that will be. because the death of a person as uncertain

event. If. however. watching a large group of people, it can be with a high percentage of

accuracy that will determine annually in that group to die a certain number of people.

Therefore, the law of large numbers has importance in ensuring, by eliminating uncertainty

insurers and predicting the occurrence of the insured event. Therefore the weight. ie. Multitude

of insured objects is more likely more accurate determination of future insurance cases, and

thus the calculation of future financial obligations on the basis of which is determined by the

amount of funds needed to cover them.

Primary elements in life insurance ratemaking: (1) Mortality tables, (2) Interest rate, (3) Costs of

implementing insurance.

Mortality Tables

Mortality tables contain a number of indicators of which is the basic leveled probability of

mortality on the basis of which is calculated on all other biometric functions: probability of

survival. trends in the number of living and the number of deaths within a given set, based on

calculated probabilities of death. The main factors of mortality were: age. gender, occupation,

lifestyle, climate and so on. Other characteristics can also be included to distinguish different

risks, such as smoking status, occupation and socio-economic class. There are even actuarial

tables that determine longevity in relation to weight. A mortality table is also known as a "life

table," an "actuarial table" or a "morbidity table."

Picture 1.0 2001 Commissioners Standard Ordinary Mortality Table—Male Lives15

Interest Rate

All life insurance policies provide for the payment of the premium before the contract goes into effect, but the benefits will not be paid until some time in the future. Because the insurance company collects the premium in advance and does not pay claims until a future date, it has the use of the insured’s money for some time, and it must be prepared to pay him or her interest on it. Life insurers collect vast sums of money, and since their obligations will not mature until some time in the future, they invest this money and earn interest on it. Because they do earn interest on the funds they collect, they do not need to collect the full amount of future losses from the members of the group. They can collect something

15 Emmett J. Vaughan , Therese M. Vaughan (2002) "Fundamentals of Risk and Insurance" John Wiley&Sons

less than the full amount of the losses, invest it, and then pay the losses out of the total fund of principal and interest. The allowance for interest is made by discounting the future claims to obtain their present value. If we bring the interest into the computation of premiums, the net premium will be something less than would be necessary to charge each insured for his or her cost of the death claims of the group.

Costs of implementing insurance

When calculating tariffs in life insurance are taken into account three types of costs. These are:

- Acquisition costs, which include costs of obtaining insurance, the costs of commission for

agents of insurance, the cost of issuing policies and the like. These costs are one-time, provided

that the insurance capital in proportion to weigh the insured amount. whereas for insurance

annuities are determined in proportion to the value of the annuity.

- Documentary collection costs, which include all costs incurred in the collection of insurance

premiums and

- The cost of processing and managing the portfolio.

Significance And Role Of Life Insurance

I. Protection - refers to the protection of people and society from the risk, either

■ immediate protection - preventive measures (prevention of the causes of potential adverse

put off) and repressive measures (combating damage caused by harmful event) or

■ indirect protection - the exercise of damages as a result of an insured event.

Starting from its first function - immediate protection of people, this protection today

comprises economic and other activities.

Thanks to the possibilities of life insurance man no longer needs to be helpless fate, it especially

bearing in mind the intention of providing other entities in the event of death. Conclusion of

insurance is not just the responsibility of individuals for their economic activities, but also the

fulfillment of a moral duty.

It was also noted that insurance influences the increase of freedom and independence of man,

especially of fear with regard to the harmful consequences of their actions which man still can

not give up, because they are useful. Life insurance is also one type of savings is very suitable

for the insured.

II. Financial storage function - is reflected in the form of various investment prikljupljenog

money in some economic sectors, thus improving the overall economic development of a

country.

Life insurance is a specific financial business that is not only interesting for the insured and the

insurer, but is very interesting for the country, because life insurance means the accumulation

of large financial resources over a long period of time, which as such may be placed on the

capital market, or used for other purposes. Special significance is the fact that life insurance

funds by nature long-term assets. It may be, from the standpoint of the national economy,

rational focus in financing development primarily infrastructure projects. This is done primarily

by buying government securities, and that the issuance of municipal bonds to finance

development of its environment.

It is also important to note that, because of the long funds, life insurance largely contributes to

the stability of the banking system, given the extent of long-term deposits given.

III. Socio-social functions - economic protection of people and their properties that can be be

damaged or destroyed by various hazards (risks).

By providing compensation in the event of death, disability, payment of premium in case of

survival, the insurance takes over the social function of the state. Most important of all is the

importance of life insurance has the security that provides individuals and families.

The insurance industry is also a significant employer everywhere in the world. In addition, the

insurance business is managed by the banks, private individuals - entrepreneurs, agencies -

legal entities, as well as natural persons who are licensed to engage, and insurance brokerage.

Insurance companies, from the point of discharge, based on taxes and contributions, represent

the quality of the debtor, or - in large amounts they receive state social funds. The special

significance of this fact has at a time when many people are losing their jobs when the

unemployment rate is very disturbing.

The offer of life insurance products in the market of

Bosnia and Herzegovina

Insurance companies in BiH more or less similar offer life insurance products that allow the

insured through savings invested funds prepare for a time when there is no longer earned as

before, but also to simultaneously provide yourself and your loved ones from a variety of

adverse events that life brings. For the purpose of this study was isolated offer life insurance

products Unique:

a) Classic-mixed life insurance - Mixed life insurance as the best combination of savings and

capital life insurance is a savings program of capital where the insured upon expiry of term

insurance decides on the sum insured through lump-sum payments or through rent that can be

limited in time or a lifetime. In addition to savings, mixed life insurance provides financial

protection to the family of the insured in the event of an accident.

b) Comfort-life insurance with coverage of serious illness is intended for all those who at the

time they think about their future, their health and their loved ones. Due to the stress of their

work, especially recommended for managers, doctors and lawyers. With life insurance in case

of death, this program provides coverage for the case of diseases of ten serious diseases

including: heart attack, bypass surgery, cancer, stroke, kidney failure, organ transplants,

paralysis, vision loss, coma and total permanent disability for work. Insurance severe disease is

the optimal program for those who want the most pleasurable combination of life insurance,

health and long-term savings.

c) Capital-savings insurance is a life insurance endowment through which the insured person

realizes high-quality and cost-effective form of savings with the actual profit, and at the same

benefits and tax relief. A special feature is the conclusion of insurance regardless of health

status and occupation of the insured.

d) Junior-life insurance in favor of the Child - Investing in life insurance for the benefit of the

child, which allows the child undisturbed education, buying a car, going on a journey, the first

investment or something like that, and with all this teach him the values of savings. Junior-

insurance for the benefit of the child is a program in which parents / relatives paid a premium

to the child 19 years when a child decides whether he will be collected monies paid once or in

the form of monthly stipends.

e) Term life insurance - This program provides financial protection in the event of death of the

insured where the customer pays the insurance sum. The benefit of this program is very low

premiums as well as opportunities policy asigned in favor of the bank. Term life insurance is a

program that does not have a savings component.

f) Supplementary Insurance - Supplemental programs are concluded with the basic program

and have no savings character. The program of additional insurance against accidents provides

cover in the event of permanent disability and compensation for hospitalization.

Supplementary insurance from operations provides protection in the event of surgery due to

illness or accident.16

16 www.uniqa.ba – all data written in this part of article is found ond the site of this insurance company and considering the similar offer of insurance companies in country we sorted out these one that are in article.

Conclusion

The very word "insurance" in different languages in addition to their economic, legal or

technical significance is of broad, general understanding that the term means their safety, trust

in something, protection, security, guaranteeing. The general meaning of the word quite good

means to ensure that it actually consists in providing some security.

Insurance no longer serves only the interests of the protection of individuals who provide care,

often, the interests of third parties. The insurance today can provide almost everything from

the existence of nearby in case the heaviest loss - death or permanent loss of working capacity,

and to compensation for travel and accommodation costs during the rainy days on vacation. It

was also observed that the insurance affects the increase of freedom and independence of

man.

The way in which some types of insurance are organized, particularly in life insurance, it seems

that insurance is a type of savings is very suitable for the insured person: he can before the

occurrence of the insured event to get an advance sum insured, pawn insurance policy, to

demand payment of the redemption value of the policy, to participate in technical profit insurer

realizes that, and so on. In addition to this, it was concluded insurance is often a means of

obtaining loans for the insured. For a creditor who has not received other guarantees may be

sufficient stocks of insurance of life by the debtor in his favor and the amount of the loan.

Insurance is important for the whole community and to the economic, social and other aspects.

Prevention has significant meaning in insurance. It also appears as a function of the insurance

industry, and as an element of an insurance contract.

References

George E. Rejda (2008) "Principles of risk management and insurance" Person/Addison wesley (136-145;180-182;209-239)

F.C. Oviatt (-) "Economic Place of Life Insurance and Its Relation to Society" "Sage Publications , Inc." (181-192)

Andrijašević , S. Petranović , V. (1999) "Ekonomska Osiguranja" Alfa , Zagreb (166-170;222-235)

Emmett J. Vaughan , Therese M. Vaughan (2002) "Fundamentals of Risk and Insurance" John Wiley&Sons (233-262)

Marović, B., Avdalović, V.: Osiguranje i upravljanje rizikon, Birografika, Subotica, 2005. P(30-78)

www.uniqa.ba

www.businessdictionary.com

https://www.genworth.com/

www.investopedia.com