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IBS MUMBAI

Life Insurance and its

Importance in WealthManagement

Name:- Perzaan G Kelawalla

Enrollment No:- 10BSP0697

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Introduction

Life insurance

Is a contract between an insurance policy holder and an insurer, where the insurer promises topay a designated beneficiary a sum of money upon the death of the insured person. Dependingon 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 expensesare also sometimes included in the premium; however, in Australia the predominant form simplyspecifies a lump sum to be paid on the policy holder's death.

The advantage for the policy owner is "peace of mind", in knowing that the death of the insured

person will not result in financial hardship for loved ones.Life policies are legal contracts and theterms of the contract describe the limitations of the insured events. Specific exclusions are oftenwritten into the contract to limit the liability of the insurer; common examples are claims relatingto suicide, fraud, war, riot and civil commotion.

Life-based contracts tend to fall into two major categories:

Protection policiesdesigned to provide a benefit in the event of specified event,typically a lump sum payment. A common form of this design is term insurance.

Investment policieswhere the main objective is to facilitate the growth of capital byregular or single premiums. Common forms (in the US) are whole life, universal life and

variable

Parties to contract

There is a difference between the insured and the policy owner, although the owner and theinsured are often the same person. For example, if Joe buys a policy on his own life, he is boththe owner and the insured. But if Jane, his wife, buys a policy on Joe's life, she is the owner andhe is the insured. The policy owner is the guarantor and he will be the person to pay for thepolicy. The insured is a participant in the contract, but not necessarily a party to it. Also, most

companies allow the payer and owner to be different, e. g. a grandparent paying premiums for apolicy on a child, owned by a grandchild.

The beneficiary receives policy proceeds upon the insured person's death. The owner designatesthe beneficiary, but the beneficiary is not a party to the policy. The owner can change thebeneficiary unless the policy has an irrevocable beneficiary designation. If a policy has anirrevocable beneficiary, any beneficiary changes, policy assignments, or cash value borrowingwould require the agreement of the original beneficiary.

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In cases where the policy owner is not the insured (also referred to as the celui qui vitor CQV),insurance companies have sought to limit policy purchases to those with an insurable interest inthe CQV. For life insurance policies, close family members and business partners will usually befound to have an insurable interest. The insurable interest requirement usually demonstrates thatthe purchaser will actually suffer some kind of loss if the CQV dies. Such a requirement prevents

people from benefiting from the purchase of purely speculative policies on people they expect todie. With no insurable interest requirement, the risk that a purchaser would murder the CQV forinsurance proceeds would be great. In at least one case, an insurance company which sold apolicy to a purchaser with no insurable interest.

Contract terms

Special exclusions may apply, such as suicide clauses, whereby the policy becomes null and voidif the insured commits suicide within a specified time (usually two years after the purchase date;some states provide a statutory one-year suicide clause). Any misrepresentations by the insuredon the application may also be grounds for nullification. Most US states specify a maximum

contestability period, often no more than two years. Only if the insured dies within this periodwill the insurer have a legal right to contest the claim on the basis of misrepresentation andrequest additional information before deciding whether to pay or deny the claim.

The face amount of the policy is the initial amount that the policy will pay at the death of theinsured or when the policy matures, although the actual death benefit can provide for greater orlesser than the face amount. The policy matures when the insured dies or reaches a specified age

Costs, insurability and underwriting

The insurer that is the life insurance company calculates the policy prices with intent to fund

claims to be paid and administrative costs, and to make a profit. The cost of insurance isdetermined using mortality tables calculated by actuaries. Actuaries are professionals whoemploy actuarial science, which is based on mathematics (primarily probability and statistics).Mortality tables are statistically based tables showing expected annual mortality rates. It ispossible to derive life expectancy estimates from these mortality assumptions. Such estimatescan be important in taxation regulation.

The three main variables in a mortality table are commonly age, gender, and use oftobacco, butmore recently in the US, preferred class-specific tables have been introduced. The mortalitytables provide a baseline for the cost of insurance, but in practice these mortality tables are usedin conjunction with the health and family history of the individual applying for a policy to

determine premiums and insurability. Mortality tables currently in use by life insurancecompanies in the United States are individually modified by each company using pooled industryexperience studies as a starting point. In the 1980s and 90s, the SOA 197580 Basic Select &Ultimate tables were the typical reference points, while the 2001 VBT and 2001 CSO tables werepublished more recently. The newer tables include separate mortality tables for smokers and non-smokers, and the CSO tables include separate tables for preferred classes.

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Recent US mortality tables predict that roughly 0.35 in 1,000 non-smoking males aged 25 willdie during the first year of coverage after underwriting. Mortality approximately doubles forevery extra ten years of age, so the mortality rate in the first year for underwritten non-smokingmen is about 2.5 in 1,000 people at age 65. Compare this with the US population male mortalityrates of 1.3 per 1,000 at age 25 and 19.3 at age 65 (without regard to health or smoking status).[7]

The mortality of underwritten persons rises much more quickly than the general population. Atthe end of 10 years the mortality of that 25 year-old, non-smoking male is 0.66/1000/year.Consequently, in a group of one thousand 25-year-old males with a $100,000 policy, all ofaverage health, a life insurance company would have to collect approximately $50 a year fromeach participant to cover the relatively few expected claims. (0.35 to 0.66 expected deaths ineach year x $100,000 payout per death = $35 per policy). Other costs, such as administrative andsales expenses, also need to be considered when setting the premiums. A 10 year policy for a 25-year-old non-smoking male with preferred medical history may get offers as low as $90 per yearfor a $100,000 policy in the competitive US life insurance market.

Most of the revenue received by insurance companies consists of premiums paid by policyholders, with some additional money being made through the investment of some of the cashraised from premiums. Rates charged for life insurance increase with the insurer's age because,statistically, people are more likely to die as they get older. The insurance company willinvestigate the health of and applicant for a policy to assess the likelihood of incurring a claim, inthe same way that a bank would investigate an applicant for a loan to assess the likelihood of adefault. Group Insurance policies are an exception to this. This investigation and resultingevaluation of the risk is termed underwriting. Health and lifestyle questions are asked, withcertain responses or revelations possibly meriting further investigation. Life insurance companiesin the United States support the Medical Information Bureau (MIB), which is a clearing house ofinformation on persons who have applied for life insurance with participating companies in thelast seven years. As part of the application, the insurer often requires the applicant's permissionto obtain information from their physicians.

Underwriters will determine the purpose of insurance; the most common being to protect theowner's family or financial interests in the event of the insured's death. Other purposes includeestate planning or, in the case of cash-value contracts, investment for retirement planning. Bankloans or buy-sell provisions of business agreements are another acceptable purpose.Lifeinsurance companies are never legally required underwrite or to provide coverage to anyone,with the exception ofCivil Rights Act compliance requirements. Insurance companies alonedetermine insurability, and some people, for their own health or lifestyle reasons, are deemeduninsurable. The policy can be declined or rated increasing the premium amount to compensatefor a greater probability of a claim

Many companies separate applicants into four general categories. These categories are preferredbest, preferred, standard, and tobacco. Preferred best is reserved only for the healthiestindividuals in the general population. This may mean, that the proposed insured has no adversemedical history, is not under medication for any condition, and his family (immediate andextended) have no history of early-onset cancer, diabetes, or other conditions. Preferred meansthat the proposed insured is currently under medication for a medical condition and have a

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family history of particular illnesses.Most people are in the standard category. Profession, travelhistory, and lifestyle factor into whether the proposed insured will be granted a policy, and whichcategory the insured falls. For example, a person who would otherwise be classified as preferredbest may be denied a policy if he or she travels to a high risk country. Underwriting practices canvary from insurer to insurer, encouraging competition.

Death proceeds

Upon the insured's death, the insurer requires acceptable proof of death before it pays the claim.The normal minimum proof required is a death certificate, and the insurer's claim formcompleted, signed and typically notarized . If the insured's death is suspicious and the policyamount is large, the insurer may investigate the circumstances surrounding the death beforedeciding whether it has an obligation to pay the claim.Payment from the policy may be as a lumpsum or as an annuity, which is paid in regular installments for either a specified period or for thebeneficiary's lifetime.

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 eventthat might happen fire, theft, flood, etc., while "assurance" is the provision of coverage for anevent 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.

Death proceeds

Upon the insured's death, the insurer requires acceptable proof of death before it pays the claim.

The normal minimum proof required is a death certificate, and the insurer's claim formcompleted, signed and typically notarized If the insured's death is suspicious and the policyamount is large, the insurer may investigate the circumstances surrounding the death beforedeciding whether it has an obligation to pay the claim.

Payment from the policy may be as a lump sum or as an annuity, which is paid in regularinstallments for either a specified period or for the beneficiary's lifetime.

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 eventthat might happen for example fire, theft, flood, etc., while "assurance" is the provision ofcoverage for an event that is certain to happen. In the United States both forms of coverage arecalled "insurance", for reasons of simplicity in companies selling both products.

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Types

Life insurance may be divided into two basic classes: temporary and permanent; or the followingsubclasses: term, universal, whole life and endowment life insurance.

Term insurance

Term assurance provides life insurance coverage for a specified term. The policy does notaccumulate cash value. Term is generally considered "pure" insurance, where the premium buysprotection in the event of death and nothing else.

There are three key factors to be considered in term insurance:

1. Face amount protection or death benefit,2. Premium to be paid cost to the insured, and3. Length of coverage term.

Various insurance companies sell term insurance with many different combinations of thesethree parameters. The face amount can remain constant or decline. The term can be for one ormore years. The premium can remain level or increase. Common types of term insurance includelevel, annual renewable and mortgage insurance.

Level term policy features a premium fixed for a period longer than a year. These terms arecommonly 5, 10, 15, 20, 25, 30 and even 35 years. Level term is often used for long-termplanning and asset management as premiums remain constant year to year, allowing for long-term budgeting. At the end of the term, some policies contain a renewal or conversion option.With guaranteed renewal, the insurance company guarantees it will issue a policy of an equal or

lesser amount without regard to the insurability of the insured and with a premium set for theinsured's age at that time. Some companies however do not guarantee renewal, and require proofof insurability at the time of renewal. Renewal that requires proof of insurability often includes aconversion option that allows the insured to convert the term policy to a permanent one, possiblycompelling the applicant to agree to higher premiums. Renewal and conversion options can bevery important when selecting a policy.

Annual renewable term is a one-year policy, but the insurance company guarantees it will issue apolicy of an equal or lesser amount regardless of the insurability of the applicant, and with apremium set for the applicant's age at that time.Another common type of term insurance ismortgage life insurance, which usually involves a level-premium, declining face value policy.

The face amount is intended to equal the amount of the mortgage on the policy owner's property,such that any outstanding amount on the applicant's mortgage will be paid should the applicantdie.

A policy holder insures his life for a specified term. If he dies before that specified term is upwith the exception of suicide, his estate or named beneficiary receives a payout. If he does notdie before the term is up, he receives nothing. However, in some European countries notablySerbia, insurance policy is such that the policy holder receives the amount he has insured himself

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to, or the amount he has paid to the insurance company in total. Suicide used to be excluded fromall insurance policies. However, after a number of court judgments, many insurers beganawarding payouts in the event of suicide except for cases where it can be demonstrated that theinsured committed suicide solely to access the policy payout. Generally, if an insured personcommits suicide within the first two policy years, the insurer will simply return the premiums

paid as a compromise. After this period, the full death benefit may be paid in the event ofsuicide.

Permanent life insurance

Permanent life insurance is life insurance that remains active until the policy matures, unless theowner fails to pay the premium when due. The policy cannot be cancelled by the insurer for anyreason except fraudulent application, and any such cancellation must occur within a period oftime defined by law usually two years. A permanent insurance policy accumulates a cash value,reducing the risk to which the insurance company is exposed, and thus the insurance expenseover time. This means that a policy with a million dollar face value can be relatively expensive to

a 70-year-old. The owner can access the money in the cash value by withdrawing money,borrowing the cash value, or surrendering the policy and receiving the surrender value.

Life Insurance and Wealth Management: A Perfect Combination for the

Ultra-Affluent

Wealth management should not be done in a vacuum. It is part of the clients overall financial

plan. The wealth manager is concerned with the clients goals, including the tax implications.

However, although income taxes are always taken into account, transfer taxesestate, gift, and

generation-skipping taxesare not. The astute wealth manager can add value to the relationship

by being aware of the clients estate plan. It is possible for assets under management to be used

to enhance the overall estate plan by combining them with life insurance. It is done with a

strategy that is legally clean.If done properly, the client will be able to pass on a substantial

amount of wealth, not have any gift taxes, estate taxes, or generation-skipping taxes, and the

client should be very grateful to you for bringing them the concept.

Advantages of Life Insurance related to wealth management

Risk Cover - Life today is full of uncertainties; in this scenario Life Insurance ensuresthat your loved ones continue to enjoy a good quality of life against any unforeseenevent.

Planning for life stage needs - Life Insurance not only provides for financial support inthe event of untimely death but also acts as a long term investment. You can meet yourgoals, be it your children's education, their marriage, building your dream home or

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planning a relaxed retired life, according to your life stage and risk appetite. Traditionallife insurance policies i.e. traditional endowment plans, offer in-built guarantees anddefined maturity benefits through variety of product options such as Money Back,Guaranteed Cash Values, Guaranteed Maturity Values.

Protection against rising health expenses - Life Insurers through riders or stand alonehealth insurance plans offer the benefits of protection against critical diseases andhospitalization expenses. This benefit has assumed critical importance given theincreasing incidence of lifestyle diseases and escalating medical costs.

Builds the habit of thrift - Life Insurance is a long-term contract where as policyholder,you have to pay a fixed amount at a defined periodicity. This builds the habit of long-term savings. Regular savings over a long period ensures that a decent corpus is built tomeet financial needs at various life stages.

Safe and profitable long-term investment - Life Insurance is a highly regulated sector.IRDA, the regulatory body, through various rules and regulations ensures that the safetyof the policyholder's money is the primary responsibility of all stakeholders. LifeInsurance being a long-term savings instrument, also ensures that the life insurers focuson returns over a long-term and do not take risky investment decisions for short termgains.

Assured income through annuities - Life Insurance is one of the best instruments forretirement planning. The money saved during the earning life span is utilized to provide asteady source of income during the retired phase of life.

Protection plus savings over a long term - Since traditional policies are viewed both bythe distributors as well as the customers as a long term commitment; these policies helpthe policyholders meet the dual need of protection and long term wealth creationefficiently.

Growth through dividends - Traditional policies offer an opportunity to participate inthe economic growth without taking the investment risk. The investment income isdistributed among the policyholders through annual announcement of dividends/bonus.

Facility of loans without affecting the policy benefits - Policyholders have the optionof taking loan against the policy. This helps you meet your unplanned life stage needswithout adversely affecting the benefits of the policy they have bought.

Tax Benefits-Insurance plans provide attractive tax-benefits for both at the time of entryand exit under most of the plans.

Mortgage Redemption- Insurance acts as an effective tool to cover mortgages and loanstaken by the policyholders so that, in case.

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Wealth management is indeed very important in Insurance because there are many advantages

towards it for instance tax exception and many more other factors that would help the individual

Wealth management can help an individual determine what's really important to you, then

develop actionable strategies to help you realize your most cherished hopes and defend against

the things that might undo them.