Life Insurance Fundamentals and Principles

This assignment delves into the core aspects of life insurance. It examines the essential elements required for a valid insurance contract, clarifies the concept of insurable interest with real-world examples, and discusses various characteristics of life insurance policies like aleatory nature, unilateral obligations, and conditional stipulations. The assignment also touches upon the valuation of life insurance policies and the contract of adhesion.

Running head: LIFE INSURANCE
Life Insurance
Name of the Student:
Name of the University:
Author Note

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Table of Contents
Answer to Question 1.................................................................................................................3
Answer to Question 2.................................................................................................................3
Answer to Part a.....................................................................................................................3
Answer to Part b.....................................................................................................................4
Answer to Question 3.................................................................................................................4
Answer to Part a.....................................................................................................................4
Answer to Part b.....................................................................................................................4
Answer to Part c.....................................................................................................................4
Answer to Part d.........................................................................................................................5
Answer to part e.....................................................................................................................5
Answer to Question 4.................................................................................................................5
Answer to Part a.....................................................................................................................5
Answer to Part b.....................................................................................................................5
Answer to Question 5.................................................................................................................6
Answer to Part a.....................................................................................................................6
Answer to Part b.....................................................................................................................6
Answer to Question 6.................................................................................................................6
Answer to Part a.....................................................................................................................6
Answer to part b.....................................................................................................................6

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Answer to Question 7.................................................................................................................7
References..................................................................................................................................8

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Answer to Question 1
The issue presented in the question is the calculation of the one year pure term
premium for a life insurance has to carried out. The death benefit provided under each claim
is $614,107. The age of all the people who are insured is, as given, 36. The discount rate for
$1.00 for one year is 0.962.
Therefore, the amount of premium will be:
Number of deaths * amount of claim * present value of $1.00
The number of deaths at the age of 36 as stated by the mortality table is 12,458. The
amount of claim is $614,107 and the present value of $1.00 is 0.962.
Amount of premium to be paid = (12458 * 614107 * 0.962) / total number of insured
= $7,359,824,295 / 701416 = $10,492.81
Answer to Question 2
Answer to Part a
The issues presented in the question is that if all the premiums are paid on January 1st
and all deaths occur on December 31st of the same year then whether or not it will affect the
premium charged. The change in insurance premium charged will be, that the rate of
mortality as revealed by the mortality table will not be applied. This is because as mentioned
in the question all the insured pay their premium and all deaths occur on December 31st.
Therefore, the number of death is 701416. The amount of premium payable will definitely
increase (Norberg, 2014).

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Answer to Part b
Thus, the new amount of premium that has to be paid is (701416 * 614107 * 0.962) /
701416 = $ 590,770.93
Answer to Question 3
Answer to Part a
The premium could be inadequate when the number of death revealed by the
mortality table is less. This means that the number of death is in excess than assumed. This
may happen due to a natural calamity like an epidemic, earthquake or other natural causes.
Now, the premium collected may be in excess to pay the death benefits when the
number of death as predicted by the mortality table is more than the real number.
Answer to Part b
The consequences of the insurer if the aggregated premiums are inadequate to pay the
death benefit are that the insurance company may turn insolvent or may run the risk of
missing out on portfolio management (Arora & Arora, 2014).
Answer to Part c
The options for an insurer, if the aggregated pure premium are more than necessary to
pay the death benefit, are that the insurer or the respective insurance company may add it to
the revenue gained for that particular financial year. The earning may be utilized for further
innovation of the assets or may be used for the payment to the shareholders of the company.
The revenue gained can also be used to attract more investors by revealing such a figure in
the annual reports of the company.

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Answer to Part d
The pure premium collected, though is inadequate will make the insurer profitable
because insurance companies set the levels of premium higher than what should be necessary
by involving actuarial contingencies and by automatically assuming that the claims will be of
much lesser amounts than the high estimates included in the calculations. Another way by
which, the insurance companies gain profit are that they engage the money collected through
premiums in short term investment projects.
Answer to part e
The components that are needed to be added to the pure premium to enable
profitability for the insurer is the sales and administration expenses and the saving
component of the premium that is reinvested for generating further revenue.
Answer to Question 4
Answer to Part a
The age of mortality differs due to the impact of certain factors like the geographical
location or the economic conditions of the area or region of which the mortality rate is being
determined.
Answer to Part b
The mortality of individuals who have been in the current times, checked by an
insurance company and provided life insurance is lower in general than that of individuals
who are of the same age but had been provided insurance a few years ago. The mortality rate
of the recently insured individuals is called the select mortality and of those insured earlier is
called the ultimate mortality.

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Answer to Question 5
Answer to Part a
The five elements that must be present in order to be a contract valid and enforceable
are offer; acceptance; consideration; capacity and intention
Answer to Part b
A contract in order to meet each element requires the participants of the contract to be
sincere and truthful in their efforts. All the elements will be successfully meet, once the
participants of the contract are well aware of the targets they need to meet through the
contract and their individual roles and responsibilities in order to establish the contractual
obligations clearly.
Answer to Question 6
The term insurable interest refers to the interest of an individual to preserve an item or
a person in case of life insurance, as damage or death to such an entity would result in
financial loss or other kind of loss to the person who possesses the entity.
Answer to Part a
Insurable interest is a requirement in all forms of insurance because it is the primary
driver that motivates an individual to enter into a contract, that would protect the life of the
entity that is dearly possessed by the individual (Chakraborty & Sengupta, 2016).
Answer to part b
Sally, as divorced do not have the insurable interest in Bob’s life but as Bob had
transferred the ownership of the insurance policy to Sally , she is still entitled to receive the
death benefit, provided that Bob has not changed the beneficiary as the time period of ten
years or the time period of alimony payment has passed.

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Answer to Question 7
A life insurance policy is aleatory because the insured may make the payment for
premium without sustaining a covered loss.
A life insurance policy is unilateral because it is the contract between two parties.
Between the two parties, one is legally obligated to pay another after the compliance of
certain conditions or events as mentioned in the contract.
A life insurance policy is conditional in the sense that the policy is dependent on a
certain number of conditions, fulfillment of which will lead to financial obligations.
A life insurance policy is valued according to the current mortality rate and other
associated components so that an accurate amount of premium can be arrived at.
A life insurance policy is always a contract of adhesion. This means that the policy
buyer has no right to change any part of the policy or negotiate the terms of the premium. The
policy buyer has to agree to the terms of the contract, as it is. This is what is known as
contract of adhesion (Cummins et al., 2013).

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References
Arora, N., & Arora, P. (2014). Insurance Premium Optimization: Perspective of Insurance
Seeker and Insurance Provider. Journal of Management and Science, 4(1), 43-53.
Chakraborty, J., & Sengupta, P. P. (2016). Indian life insurance market and corporate
performances: A study of selected firms. International Journal of Banking, Risk and
Insurance, 4(1), 26.
Cummins, J. D., Smith, B. D., Vance, R. N., & Vanderhel, J. L. (Eds.). (2013). Risk
classification in life insurance (Vol. 1). Springer Science & Business Media.
Norberg, R. (2014). Life insurance mathematics. John Wiley & Sons, Ltd.