Concept of Life Insurance Companies

Definition of Life Insurance Companies

Life Insurance companies are financial intermediaries by virtue of their collecting and investing large amounts of premiums. They offer protection to the investors, provide means for accumulating savings, and channelize fund to governmentm and other sectors of the economy. Generally, they are contractual saving agencies which receive, mostly without fail, steady inflow of funds in the form of premiums. The liabilities of insurance company is long term, for may life policies are held for 20 or 30 years. It indicates that liquidity is not a problems for such contractual saving companies like insurance company, and hence their major activity is in the field of long-term investments. 

Life Insurance policies

Term insurance policy

Term insurance policy is pure life insurance,. This policy is issued for a short period such as from 3 months to 7 years. If the insured dies while the policy is intact, the beneficiary of the policy recieves the death benefits. If the insured does not die within the period, the policy is invalid and has no value. There is no cash value or investment value for a term insurance policy. In addition, the policyholder cannot borrow against the policy. Only protection element in this policy.

The fair premium on term of life insurance policies calculated by using the following equation:

Fair premium (R) = L X P_a

                                 1 + r

Where,

       L    = Policy amount

       P_a   = Probability of dying over the next year

       r     = Annual cost of money

Whole life insurance policy

This policy is also called cash-value or permanent or straight or ordinary or investment life insurance. It is the oldest and most traditional form of insurance. It is issued for the whole life of person, The premiums are payable only once or throughout the life of the assured or for certain period of time, Assured amount becomes payable only on the death of the policy holders to his/her nominee or assignee. The whole life insurance policy requires larger annual premiums than the ordinary whole life policies. 

The present value of benefits on whole life policies is calculated by using following equation:

                         100 - a

PV benefits = L X ∑ m_t  (1+r) ^–t

                                    t = 1

Where,

       L  = Amount of each policy

       a   = Age of policyholders

      m_t  = Mortality rate

       r   = Cost of money

For constant mortality rate, the following equation can be used to calculated the present value of benefits.

PV benefits = L X M_t X PVIFA _r,n

Where,

   PVIFA _{r,n    =  Present value insert factor annuity at r percent annual cost of money for n years}

       L             = Amount of each policy

       m_t            = Mortality rate

       n             = Numbers of year

        r             = Cost of money

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