UNIT FIVE

LIFE AND HEALTH INSURANCE

1.1. UNDERWRITING LIFE INSURANCE

Life Insurance Underwriting is the process of accepting the proposal of the customer based on the guidelines
formulated by the insurance company. The insurance companies codify a set of procedures which must be
followed before accepting any new business. When a new proposal comes to the insurance company its
underwriting department scrutinizes the proposal whether or not it fulfils the criteria laid down by the
company. If they find any lacunae, they ask the agent to get it corrected. It is not that one can get whatever
cover one wants. The issue of policy depends on income of the insured and whether he has the capacity to
pay the premium over the years. Once the underwriters are satisfied that all the conditions have been
fulfilled, they go ahead to accept the premium and issue the policy. Underwriting can be defined as the
decision-making process during which the company decides whether to insure or not and if yes at what rate.

The risk of death is covered under insurance scheme but not under ordinary savings plans. In case of death,
insurance pays full sum assured, which would be several times larger than the total of the premiums paid.
Under ordinary savings plans, only accumulated amount is payable.

1.2. TYPES OF LIFE INSURANCE

There are three types of basic life insurance contract offered by the Ethiopian Insurance Corporation. These
are

1. Whole life Insurance

 Straight life insurance

 Limited-pay life insurance

 Single –payment life insurance

2. Term Insurance
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  Level term insurance policy

 Convertible term insurance policy

 Non-convertible term insurance policy

 Renewable term insurance policy

 Decreasing term insurance

3. Endowment Insurance

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 1. Whole life Insurance

In this kind of life insurance, the sum insured is payable on the death of the life insured whenever it occurs.
Premiums are payable either throughout the life of the insured or can cease at a certain age, often 80 or 85.
This policy provides protection to the dependents of the insured upon the event of his/her death. I.e. the sum
insured is payable only upon the death of the insured. One option is that the insured pays annual premiums
as long as he lives. The second option is that premium payments are made for a specified number of years or
up to a certain age limit, normally up to the age of retirement. Premium payments after retirement are
discontinued because of a decline in the income of the insured. The policy provides permanent
protection to the insured’s dependents in the case of death. Besides this protection, whole life insurance
allows for the accumulation of savings over the life of the insured. In essence, the policy encourages saving.

Whole life policy acquires cash value after two or three years of premium payment. When a person no
longer wants his policy, or for some reason cannot continue the premiums, he can ask for the
surrender value. He ceases payment and receives not a proportion of the sum insured, but a
proportion of the premiums already paid. Not all policies allow a surrender value and surrender within
the first few years of any policy will not normally produce an amount for the policyholder. This is because
surrender value is calculated using the premiums pad, less expense incurred in issuing and renewing the
policy, and less the cost of the life insurance cover provided during the years it was in force. In view of the
level premium system, any surrender value in the early years will below, if any accrues at all.

The practice of life assurance is always changing to keep pace with the demands of modern living.
Many of these changes have involved life insurance companies in issuing policies which are combinations of
different types of contracts. In some of these cases it may well be possible for the surrender value to exceed
the premium paid.

The cash value gradually grows to equal the sum insured upon maturity or at the time the insured attains age
100. If the assured, for some reasons, discontinues premium payments after the policy accumulates cash
value, then the cash value can be used to keep the policy in force under the automatic premium
loan provision. Moreover, the assured can apply for loans when the policy acquires cash value. In
some cases, an alternative to the surrender value is the paid-up policy. The premiums cease and the policy
continues, but on maturity a smaller sum than would originally have been paid will be due to the
policyholder. Depending on the policy and the company concerned, these paid-up policies may or may not
continue to participate in profits.

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In general, whole life insurance has two salient features:

Protection- It protects the insured in the case of premature death. If the insured died prematurely the face
amount is paid to the beneficiary.

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 upon the manner of premium payments, whole life insurance contracts are classified as:

straight life, limited pay and single pay policies.

A. Straight life insurance

It is also called ordinary life insurance. Under this policy, premiums are to be paid at regular interval until
the death of the insured or until the achievement of a specified age limit, say 100 years. Such policy gives
permanent protection at the lower cost/

B. Limited pay life insurance

Under this insurance scheme, 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. After the expiration of the specified time,
the policy is said to be paid-up, which means that no more premiums are to be paid to keep the policy in
force until the time of death of the insured at which time compensation amounting the face value of the
initial policy is to be made to the insured’s beneficiary. This policy is desirable when one intends to stop
payment of premiums after reaching a given age level, usually upon retirement, but wants to continue with
the insurance protection till the end of his life. Since premiums are to be paid for a limited period, they are
usually higher than those under the straight life policy. Similarly, the cash values under the limited whole life
insurance are higher than the straight-line policy.

C. Single payment life insurance

Here premium payment is made in one lump sum at the time of purchase of the whole life insurance. In
most cases, insurance buyers do not prefer this type of arrangement (mode of payment).

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 2. Term life insurance

This insurance scheme provides compensation to the beneficiary if the insured dies within the stated period
mentioned in the policy. 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. Term life policy gives temporary
protection and there is no saving element involved. Since the policy is taken for a specified period to deal
with premature death, the cost of this policy is relatively low. It is a form of temporary life insurance.

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This is the simplest and oldest form of insurance and provides for payment of the sum insured on death,
provided death occurs within a specified term. Should the life insured survive to the end of the term then the
cover ceases and no money is payable. Depending on the age of the life insured, this is a very cheap form of
cover and would be suitable, for example, in the case of a young married man with medium to low income
who wants to provide a reasonable sum for his wife in the event of his death.

Term policies do not provide the insured with loans, cash surrender or non-forfeiture options. Insurance
coverage terminates at the end of the period unless it provides an option for conversion into other
insurance schemes. Term life policies can be single or level premium policy. Single premium policy
requires the insured to pay premiums at the time the policy is purchased at lump sum while level premium
requires the payment of equal amount of premiums at definite intervals. Most of the term policies are level
premium. More appropriately, term contracts can be classified as: level term, renewable term or
decreasing term.

A. Level term insurance policy

Level term policy provides a constant sum insured throughout the term of the policy. For example, under a
15-year term policy of birr 30,000, the amount of payment to the insured will be birr 30,000 if the insured
dies at any time during the policy period. Level term policies can be convertible or nonconvertible.

Convertible term policy

Convertible term policy is a term policy that gives the policyholder the option to convert his term
policy into the other types during the tenure of the term policy. No new evidence of insurability is required
upon conversion. If conversion is not made, the policy lapses at the end of the term. The term contract can
be converted into whole life or endowment insurance. Conversion may be effected using either the attained
age at the time of conversion of the term policy or using the date of the initial term policy issued. In the case
of the latter, premiums are calculated retroactively, and the insured would be required to make up the
difference in premiums including interest, through lump-sum payment at the time of conversion. This is
similar to term assurance but includes a clause in the contract which allows the life assured to convert the
policy into an endowment or whole life contract at normal rates, without medical evidence. A young
person can therefore purchase low-cost life cover and convert it into the more expensive types as his career
progresses and he can afford more suitable contracts.

To eliminate anti-selection problem, the following requirements are expected upon conversion. There will
not be an increase in the sum insured. The option will have to be exercised within a specified period.

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 Nonconvertible term policy

Under this scheme, the term policy cannot be converted into other forms of life insurance contracts. The
policy terminates upon maturity. However, it could be renewable.

B. Renewable term policy

This is a term life insurance which can be renewed upon expiration. No new evidence of insurability is
required, but the premium charges are adjusted to reflect the standard premium at the attained age.
Accordingly, yearly renewable term policies require renewal every year. Similarly, a 5-year term
policy may be renewed upon its maturity. In most cases, group policies fail under this category.

C. Decreasing term insurance

In a decreasing term insurance, the sum insured decreases periodically. These policies are usually issued to
cover the outstanding claims (debts) of a creditor (debtor) in the event of accidental death of the debtor. The
outstanding claims (debts) diminish periodically as installment payments are made by the debtor at regular
intervals. In its basic form this is a type of decreasing term assurance, with the benefit on death paid out by
installment every month or quarter. It is intended to replace the income which the life assured would have
produced for his family if he or she was still alive.

In each case, under the basic term, decreasing term, convertible term, or family income policy, the benefit is
only paid if the life assured dies within the term of the policy. It should be noted that all these types of
policy can also be coupled with an endowment assurance. This is particularly true of decreasing term
assurance, where the combination can be used in conjunction with a standing mortgage. In this case, the
benefit will be paid on death within the policy period, or the endowment part only on survival to the end of
the period.
This type of policies provides financial protection to the policyholder (creditor) and the family (dependents)
of the debtor. The dependents of the insured are saved from raising funds or selling certain property in order
to pay the outstanding loans.

Premiums for a decreasing term insurance are made in a lump-sum payment at the beginning (single
payment).

3. Endowment insurance

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This policy provides payment if the insured manages to live till the end of the endowment period specified in
the policy, or upon the death at the time during the term of the policy or whichever occurs first. The period
of this policy is shorter than that for whole life insurance, and hence the premiums are higher than for
the same age level. The shorter the endowment period the higher will the premium. The sum assured
is payable in the event of death within a specified period of, say 15, 20, 25

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or 30 years. However, if the life assured survives until the end of this period (until the maturity date) the
sum insured will also be paid. For a given level of cover, the endowment has the highest premium because
the life assurance company is guaranteeing to pay out the sum insured at a given date, or before it if the
person dies. The maturity date is usually no later than the date when the life assured will reach age 65.

The whole life assurance, mentioned earlier, will be slightly cheaper than a long-term endowment because
the average policy will not become a claim by death until a person is in his or her seventies. The company
has the premiums to invest for a longer period and can charge lower premiums. The shorter the term of an
endowment policy, the more expensive per sum assured it becomes, since the company has fewer years in
which to collect premiums.

Those buying houses can use endowment assurance. The assurance policy is taken out for the amount of the
loan, or mortgage if a building society is involved, and written in such a way that the sum assured is
payable to the lender or society. The borrower then pays the interest and the premium. At the end of the term
of the loan, the endowment policy matures and repays the amount borrowed (the capital sum) to the lender.
In the event of the borrower dying prior to the end of the repayment period, the interest to date will
have been paid and the endowment policies will payout to repay the capital sum.

This can be an expensive method of protecting a loan for house purchase, and therefore many building
societies accept modifications involving convertible or decreasing term and endowment combinations,
which are considerably less expensive, but still provide the same security. In addition to the above-indicated
types of life insurance contracts, the following can also be considered.

1.3. PREMIUM DETERMINATION

When speaking of life insurance, one should know that the insured person’s rights and obligations are
generally based on a series of indicators which mainly point out their probability of survival. These
indicators are calculated by the National Commission for Statistics in each country and determine the
insurance premiums quota. The most important role in determining the premium quota is played by the
actuary, also named the life insurance mathematician.

The factors which determine life premiums are the indicators of the mortality tables; the frequency of
payment of the premiums; the types of life insurance policies differing in terms of the covered risk (survival
insurance, death insurance or mixed life insurance) and the way of paying the indemnity by the insurer.

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From the insurer’s point of view, the life premium owed by the insured person is designed as the gross
premium and consists of two elements: the net premium and the supplement or the extra premium.

The net premium serves to create the necessary fund for covering the indemnities or the insurance
indemnities. The determination of the net premium takes into account the probability of risk occurrence and
the intensity or the frequency of its manifestation. The probability of risk occurrence is given by the
indicators of the mortality tables determined by the age of the insured person, in case of survival as well as
in case of death. The intensity of risk manifestation is also given by the premium level, for risks of high
intensity, the premium is also high, and for risks of low intensity, the premium is also low. If the risk has a
variable manifestation during the contract, the premium will be modified in proportion to its intensity. The
supplement or the extra premium covers the insurer’s purchase and management overhead, as well as the
ways of creating benefits. The value of these costs varies in terms of different types of insurance
products and of different ways of dealing with them.

Indicators of the mortality tables

For an easy understanding of the mortality table as well as for the planning of scientific rules in order to
determine different calculation elements of the premium, the mortality tables indicators are based on an
international system of symbols as it follows:

 x – age of the insured persons;

 l(x) – survival function indicates how many persons belonging to an assumed generation of

100,000 living persons are still alive when attaining the age of x years;

 p(x) – survival probability expresses the chances of a person attaining the age of x years to
continue to live till the age of x+1 years;
 q(x) – death probability expresses the risk undertaken by a person who has already turned x years,
that of dying before attaining the age of x+1 years;
 d(x) – number of persons supposed to pass away within x and (x+1) years indicates how many
persons of x years old passed away before the age of x+1 years, being determined by the difference
between the number of survivors aged x years (lx) and the number of survivors aged x+1 years
(lx+1);
 E(x) – hope of life at the age of x or life expectancy represents the average number of years left to

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 be lived for a person surviving the age of x;
 Hope of life at birth also named the span of life indicates the average number of years supposed

to be lived by a new born baby.

A common measure is the difference in the life expectancy between male and female. Life expectancy can
be measured from any age, and is often measured from birth, but for assessing the impact of the

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mortality differential between males and females is appropriate to consider life expectancy in middle age.

For the life insurances, these indicators represent the basis for the calculation of the net premiums and
for the elaboration of premium tables. In order to estimate the net premiums, the actuarial science provides
general formulas for the estimation of these indicators, made up of symbols. A real determination of the
premiums involves the subrogation (commutation) of one formula made of symbols with the figures
corresponding to the insured person’s age and to the interest which increase the premium.

The frequency of payment of the premiums

For the estimation of the premium, the payment possibilities are taken into consideration. For the life
insurance, the premium to be paid is cashed once as a unique premium or echeloned premiums.

The unique premium is estimated in order to cover the risk during the whole insured period as the insurer
cashes the total amount afferent to the insurance duration at the beginning of the contract. The cashed
unique premium and the afferent interest resulting from its investment will be used for the payment of the
indemnity. This modality of payment is less used in practice, being applied for long term life insurances.

Insurances involving the payments echeloned premiums are often requested by the insured persons, because
the amount representing the unique premium constitutes an important financial effort.

The way of paying the indemnity and the type of insurance policy

Another factor influencing the amount of the net premium is determined by the payment possibility used for
the insurance indemnity and the type of the insurance policy (survival insurance, death insurance or
mixed life insurance) and it is considered separately for each insured risk. Thus, in practice, there are
the following situations considering the modality of paying the indemnity:

1. The indemnity is completely paid in a certain number of years starting from the contract moment of the
insurance policy (the unique payment of the indemnity).
2. The indemnity is paid in instalments as it follows:

 unlimited immediate annuities – the insured person pays the net premium at the conclusion of the
insurance policy in order to receive the indemnity in instalments (annuities), shortly after the
conclusion of the contract (immediate annuities), during his whole life period, at the beginning or at
the end of the year;

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  limited immediate annuities - the insured person pays the net premium at the
conclusion of the insurance policy in order to receive the indemnity in instalments,
shortly after the conclusion of the contract, for a limited period of time (limited
immediate annuities);
 unlimited delayed annuities - the insured person pays the net premium at the
conclusion of the insurance policy in order to receive the indemnity in instalments
(annuities), after a certain period of time from the conclusion of the insurance policy
(delayed annuities), during his whole life period (delayed life annuities);
 limited delayed annuities - the insurer pays the indemnity in a certain number

of years from the conclusion of the insurance policy (delayed annuities), but for a
limited period of time (limited).
The death insurance relies on the premise that the insurer will pay the beneficiary of the
insurance a certain amount of money at the date of death of the insured person. The
determination of the unique net premium, in the case of death insurances, takes into
consideration the contractual duration of the insurance which may be: undetermined (for life),
a period of several years or a short period of time.

In practice, the life insurance policy reflects more often a mixed nature, thus, it covers the
survival risk, as well as the death risk. Therefore, the insurer will pay the indemnity to the
insured person, at the termination of the contract if the last one is alive, or the sum will be
paid to the successors, at the date of death of the insured person. So, the unique net premium
owed by the insured person is calculated by summing up the net shares of the premiums
afferent to the two insured risks.

The net and gross premiums for all types of life insurances

As we mentioned before, the net premium differs in accordance with the type on insurance
policy, the insurance period and way of indemnity payment by the insurers.

5.4. WORKER’S COMPENSATION INSURANCE

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The Ethiopian labour law proclamation No. 377/2003 holds an employer liable for death,
bodily injury or illness, befalling employees from circumstances connected with

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their work or at the place of work. This policy protects the insured, employer, from any loss
he might have to suffer as a result of his/her having to meet such liability.

5.5. PERSONAL ACCIDENT INSURANCE

Insurance companies offer policies with accident benefits. In such policies, if the insured gets
a permanent disability due to accident or dies in an accident, the insurer pays double the sum
assured. In such policy, while calculating the premium, an extra amount per thousand per
annum is added to the tabular premium.

Personal Accident Insurance (PAI) provides a benefit if a covered person dies or suffers a
serious injury in an accident. If you are a Benefits-eligible Employee, you can choose to
cover only yourself or yourself and your family. You can enrol at any time. Coverage ranges
from $20,000 to $500,000. Participation is voluntary. You pay the full cost at group rates.

Individuals are eligible for Personal Accident Insurance if they are a:

 Full-time Benefits-eligible Employee

 Part-time Benefits-eligible Employee

Someone can choose from two coverage levels for his/her Personal Accident Insurance:

 Employee Coverage covers himself/herself only.

 Family Coverage covers himself/herself, him/her spouse or Domestic Partner, and

Unmarried Dependent Children are covered as of 14 days after birth and until age

26.Unmarried Dependent Children who are incapable of self-support because of

Naming a Beneficiary

When you enrol in Personal Accident Insurance, you will be asked to designate a
Beneficiary. Your Beneficiary is the person (or institution) you select to receive your
Personal Accident Insurance benefit when you die.

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  You can choose one or more beneficiaries and contingent beneficiaries. If you name
more than one Beneficiary, your death benefit will be shared equally, unless
you specify otherwise.
 If your Beneficiary is a minor, benefits will be paid to the minor’s legal guardian.

 If your Beneficiary dies before you, your benefits will be paid to your estate.

 If you choose family coverage, you are automatically the Beneficiary for the
death benefits of your spouse or Domestic Partner and Dependent Children.

You can change your Beneficiary at any time by contacting the Benefits Office and
completing the forms. The change will take effect on the date you sign the form.

Cost of Coverage

You can select coverage levels, in multiples of $10,000. You pay the full cost of your
Personal Accident Insurance at group rates. How much your coverage costs depends on the
amount and the coverage level you choose.

When Coverage Begins

If you enrol in Personal Accident Insurance within 31 days of your date of hire or of the date
you become benefits-eligible, coverage is effective as of that date. If you enrol in Personal
Accident Insurance after your first 31 days of hire or the date you become benefits-eligible,
your coverage takes effect on the first of the month following the date that you elect
coverage.

Changing Your Coverage

You can increase or decrease your coverage at any time, up to once every six months. Once
you reach age 70, you cannot increase your coverage, but you can decrease the coverage. To
change your coverage, submit an enrolment form to the Benefits Office. Your new coverage
amount will take effect as of the date that you change the coverage.

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When Coverage Ends ; Your coverage ends when:

 You stop working.

 You are no longer a Benefits-eligible Employee.

 You stop paying direct-billed premiums.

 You die.

 The plan ends.

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