LIFE INSURANCE PRODUCTS

Introduction- Need for products

“Different people want different benefits and different mixes of benefits .”

Philip Kotler

What is a product ? “ A product is anything that can be

offered to a market for attention, acquisition , use or consumption and that might satisfy a need or want .”

Philip Kotler

IntroductionCompanies may possess variety

product mix

Half of profits of all US Fortune companies came from products that did not exist ten years ago.

Companies introduce new products to tap existing clients and explore new segments

Why is there a need for new products ?Changes in tastes of customersIntense competitionChange in economic/social environmentIncrease in purchasing powerFailure of old products/ recently

launched products - actual product may not have

been properly designed, incorrectly positioned,

poorly advertised, greater competition.

Insurance productsAre described as UNSOUGHT consumer

goods by Kotler.“ There are consumer goods that a

customer does not know or knows about but does not normally think of buying. Classic examples are life insurance.”

Unsought goods require lot of advertising, personal selling and marketing efforts.

Life insurance is seldom bought, always sold .

Life Insurance ProductsAll products require approval of IRDA

before launch, designed by actuaries.Individual (including pension ) and group

products Products may be packaged/ straight-jacketed

(“take it or leave it “) - could work only in monopoly environment

Non-packaged -flexibility –with riders/add-ons - available with competition by private players

One single product cannot suit all customersIndian consumer is curious and demanding

Features of any life insurance productWho can be insured ?What can be the sum assured ?Under what events would SA be

payable ?How/when would the SA be payable ?Term of the policy - minimaxAge at entryPremium payment modesAny additional benefits like riders ?Conditions/exclusions under each policy

Basic elements of life products Life insurance business based on two basic instincts – fear and greedTerm insurance takes care of fear of death Pure endowment fulfills the greed for moneyTI & PE are basic elements in every life

insurance planCalled the basic building blocks in all LI

product design. Every company has different products to suit the need of every customer.

Contd….PE (savings only) seldom issued by

insurance companies as a separate policyTI has always been one of the product

range of each LI companyA TI policy is a contract that provides

life cover for a limited number of years, the face value of the policy being payable only when death occurs and nothing in case of survival

Features of term insuranceCan be issued for a short period of

short, fixed terms.Most important feature is it’s low cost –

high value.Suitable for budget-conscious individuals

who are looking for family protection against financial liabilities like loan, loss of income

Contd…..Employers can cover life of employeesBest form of collateral security against

housing/education loanNo risk coverage beyond specified termConditions/flexibility may vary between

companiesUnsuitable for those interested in

maturity benefits, except premium-back cases

Contd…..May have renewable or convertible

featuresSome with fixed terms of 5-10 years

have built-in automatic renewal feature, whereby at end of each fixed period, automatic renewal takes place. Premium increases with each renewal.

Restrictions may be placed by each company on the number of such renewals/maximum age for such renewals.

Contd….Convertible feature allows policy owner

to have the option to exchange his term policy for a permanent policy, viz Whole life or Endowment policy without having to produce further evidence of insurability.

Good for young people fresh into careers.

Endowment PlansCombination of PE & TI. This plan offers face value plus

accumulated bonuses on maturity & death.May have single or regular premium

paying modesSeveral companies may offer choice of

riders like AB/PDBSuitable when life cover along with medium

term to long term savings needed.

Contd…..Not suitable for those looking for

flexibility to meet future lifestyle changesIncome/occupation may prevent

policyholder from taking this plan.Loans can be taken.PH wants guaranteed MC/DC Interest sensitive product - life insurance

products give low returns & due to inflation, money value gets reduced long –term.

Contd….Insurers try to add additional benefits

like loyalty / guaranteed additions.Allowing periodic returns of a portion of

face value – money back plans - risk , growth, liquidity.

Endowment plans allow people to SAVE, building a corpus for old age.

EI is decreasing TI & increasing investment (saving accumulation ).

Traditional & unit-linked plans offered.

Money back plansFeatures of risk , growth & liquidityPeriodical cash outflow to PHNo loan granted under this planSuitable for those who need periodic cash

flow to meet expenses, investmentsPremium higher than regular endowment

plan

Whole Life plans Provides protection throughout lifePayment on death is certainty in contrast

to TI.An excellent way to give person’s family

financial protection throughout life and help them after his death.

An estate planning tool, tax-free returnsOngoing & future family expenses

Types of whole life plansOrdinary whole life - plain vanilla policies. Insured pays premium lifelong depending

on his survival/death Certain maximum age fixed, treating as

maturity claim if survival occurs.Convertible whole life -option to convert

into endowment after, say, 5 years. Helpful to people who need higher insurance , but temporarily cannot afford endowment plan

Children’s PlansParent or guardian is proposerRisk on life of child begins after child attains a

specified age.If age at commencement is 6 and specified

age is 15, the gap of 9 years is deferrment period.

Date at which risk begins is deferred date.No insurance cover during deferrment period

– if child dies, the premiums are refunded.Risk begins automatically on deferred date

without any medical test.

Contd……When risk commences , premium is low . Title automatically passes to child on attaining 18

.Process called vesting.After vesting, policy becomes a contract between

insurer and insured person.Vesting cannot be less than 18.Can be market-linked and traditionalBenefits for the child like premium waiver and

payment of instalment claim in case of death of proposer – useful for continuing education/expenses

Rural insuranceSeveral companies have primarily

microinsurance term plans with refund of premia on survival.

Microinsurance (life) is protection of poor, rural people and their families against 3 Ds.

Microinsurance also deals with health and general insurance for the rural consumer

UNIT-LINKED INSURANCE PLANSCombination of insurance & investment of choicePH gets benefits from markets without

keeping track of market movements or monitoring his investment portfolio

Ulips balance risk & return, investing premia in a variety of funds – debt/equity/balanced

Amount invested is expressed in units.Based on fund value, value of units vary.Value of plan directly linked to value of fund.On death, prior to maturity, PH paid SA or value

of units whichever is greater

UNITSUnit prices calculated regularly for

each fundUP = Total market value of assets plus

current assets less current provisions / Total number of units on issue

Unit account can be enhanced by top-up premium

Switches from funds are allowedFull value of unit account paid on

maturity.

InvestmentsChoice of fundsSwitch units between fundsRedirect investments to other fundsVary premiums by making additional top-

upsInsurance desired must be specified

from the beginningSA to be selected after considering

various charges ; larger SA , more premium goes for insurance & less for investment

NAVNAV is the total value of the asset in the fund

minus expenses paid/payable divided by number of units issued.

Issue value of a unit usually 10/-NAV of a fund is indicator of value of the fund.PH can find out value of his policy.Insurer has to exhibit all charges – Contribution related charges – to cover running

expenses of policy - commission/policy charges- one-time or regular depending on mode

ChargesFund management fees - costs of

buying/ selling various instruments for funds

Mortality charges – risk cover – paid once or recurring

Rider charges – critical illness/ABSwitching charges - some companies

may give free switches/yearAdministration charges – IT costs,

operational costa, levied flat with option of increase yearly

FLOW -CHART OF A ULIP

Contribution

Contribution Related Charge deducted

Less 20%20,000 - 4000= 16,000

Mortality & Rider Charge deducted

16,000 – 750 = 15,250For the age 30 – mortality at 1.50/-per thousand

20,000/-

Life Protection

500,000

The Client invests resultant in chosen funds

15,250/- invested in debt fund at a NAV of 16/-

Invests in Funds debt/

equity or balanced

Units Allocated

953.125 units allocated

Fund Charges deducted

Represented as NAV

NAV of debt fund 16/- per unit

SUMMING UP ULIP provides Life protection Investment Flexibility Transparency Rider options Liquidity Tax planning HENCE , ULIPs act as a one-stop solution

THANK YOU