LIFE INSURANCE IN INDIA EMERGING PERSPECTIVE

INTRODUCTION

Life Insurance in India was nationalised by incorporating Life Insurance

Corporation (LIC) in 1956. All private life insurance companies at that time were
taken over by LIC.

In 1993 the Government of Republic of India appointed RN Malhotra Committee

to lay down a road map for privatisation of the life insurance sector.

While the committee submitted its report in 1994, it took another six years before
the enabling legislation was passed in the year 2000, legislation amending the
Insurance Act of 1938 and legislating the Insurance Regulatory and Development
Authority Act of 2000. The same year that the newly appointed insurance
regulator - Insurance Regulatory and Development Authority IRDA -- started
issuing licenses to private life insurers.

LIST OF LIFE INSURERS (AS OF SEPT, 2006)

Apart from Life Insurance Corporation, the public sector life insurer, there are 14
other private sector life insurers, most of them joint ventures between Indian
groups and global insurance giants.

LIFE INSURER IN PUBLIC SECTOR

1. Life Insurance Corporation of India

LIFE INSURERS IN PRIVATE SECTOR

1. Bajaj Allianz Life

PRANAV,SURAT 1

1. Tata AIG Life

2. ICICI Prudential Life Insurance
3. HDFC Standard Life
4. Birla Sunlife
5. SBI Life Insurance
6. Kotak Mahindra Old Mutual Life Insurance
7. Aviva Life Insurance
 8. Reliance Life Insurance Company Limited - Formerly known as AMP
Sanmar LIC
9. Metlife India Life Insurance
10. ING Vysya Life Insurance
11. Max Newyork Life Insurance
12. Sahara Life Insurance - Now they are not into business
13. Shriram Life Insurance
14. Bharti AXA Life Insurance Co Ltd

Indian Insurance Industry Overview

All life insurance companies in India have to comply with the strict regulations
laid out by Insurance Regulatory and Development Authority of India (IRDA).
Therefore there is no risk in going in for private insurance players. In terms of
being rated for financial strength like international players, only ICICI Prudential
is rated by Fitch India at National Insurer Financial Strength Rating of AAA(Ind)
with stable outlook indicating the highest claims paying ability rating.

Life Insurance Corporation of India (LIC), the state owned behemoth, remains by
far the largest player in the market. Among the private sector players, ICICI
Prudential Life Insurance(JV between ICICI Bank and Prudential PLC)is the
largest followed by Bajaj Allianz Life Insurance Company Limited (JV between
Bajaj Group and Allianz). The private companies are coming out with better
products which are more beneficial to the customer. Among such products are
the ULIPs or the Unit Linked Investment Plans which offer both life cover as well
as scope for savings or investment options as the customer desires.Further, these
type of plans are subject to a minimum lock-in period of three years to prevent
misuse of the significant tax benefits offered to such plans under the Income Tax
Act. Hence, comparison of such products with mutual funds would be
erroneous.

Legal frameworks
At the legal and regulatory levels, Booz Allen's review identified a wide
variability in the maturity of the frameworks that govern regional insurance
markets. Until recently, almost all MENA countries had outdated insurance laws
and regulations; some countries had no insurance law at all. Over the past few
years, many countries have initiated serious efforts to upgrade their regulatory
frameworks, as evidenced by the enactment of new laws. They have
strengthened the independence and supervisory capabilities of regulatory
entities in line with the core principles of the International Association of
Insurance Supervisors (IAIS); they have also issued sector guidance notes
covering, for example, governance, market conduct, and risk management.

That said, there still remains a wide variation in the comprehensiveness and
application of legal frameworks across the region. Accordingly, insurance
regulators in countries with under-developed legal frameworks should seek to
upgrade their legal frameworks and ensure that they reflect international best
practices, such as the principles of the IAIS. In addition, policymakers should
seek to establish a specialized insurance judicial authority to resolve insurance
disputes in countries where such an authority does not exist. Finally, in countries
where there is a rapidly growing demand for takaful (Sharia-compliant)
insurance, the legal framework should also promulgate adequate legislation to
address this form of insurance.

Regulatory bodies and processes

The comprehensiveness and effectiveness of regulatory processes, especially

supervisory processes, varies considerably across the region. Countries such as
Bahrain and Jordan, which have well-developed regulatory frameworks, are
either applying or developing risk-based supervision processes that comply with
the standards of international bodies such as IAIS. Other countries, such as
Qatar, Kuwait, and the United Arab Emirates, have less-developed supervisory
processes that are more administrative in orientation.

'In parallel with upgrading legal frameworks, policymakers in the region should
seek to empower their insurance regulatory bodies. The empowerment of the
regulatory body should be constituted in the legal framework, which should
address the body's legal form, ensure its independence, vest appropriate
authorities, and clarify any overlapping responsibilities with other governmental
entities,' said Maher Hammoud, Senior Associate, Booz Allen Hamilton.

In addition, regulators should seek to enhance their capabilities, especially in the

area of supervision (including staff and IT). In upgrading supervisory
capabilities, regulators should take into account the guidelines set out as part of
the IAIS core principles.

Nature of competition

The insurance markets of the Middle East are generally competitive, and
although there is significant involvement of the private sector in the insurance
industry, this is offset to some extent by a high degree of market fragmentation.
In particular, many markets of the MENA region are characterized by a large
number of small players when measured by capital employed.
There are a number of ramifications of the current low levels of capitalization. At
an overall industry level, this results either in insurance being placed directly
outside of the region through international brokers or in the practice of fronting,
whereby local insurers retain a small portion of the risk and transfer the
remaining risk to their international reinsurance partners.

'As a consequence of the lack of capacity, risk-management and actuarial

capabilities in the region remain underdeveloped, resulting in a disproportionate
reliance on international reinsurers to assess the risks and provide appropriate
pricing guidelines,' Mr. Vayanos said.

Booz Allen suggests that regulators should seek to further raise the competitive
bar through higher capital requirements and the introduction of governance and
risk-management requirements. In highly fragmented markets, regulators should
investigate the option of increasing capital requirements to stimulate market
consolidation and increase the level of risk-retention capacity. This in turn would
result in larger local companies with the resources to invest in capabilities, and
would also reduce the level of fronting.

On the governance side, regulators should introduce minimum governance

requirements such as the establishment of internal functions (for example, an
internal audit), the definition of fit and proper criteria for board members and
senior management, the development of policies and procedures manuals, and
the formation of an investment policy subject to review and approval by the
board.

In countries where there is a rapidly growing demand for takaful insurance,

regulators should identify, develop, and disseminate risk-management best
practices that take into account the contractual relationships of Islamic insurance
products.

Skills and training

Across the region, the insurance sector is characterized by a shortage of skills -

particularly product development, underwriting, and actuarial skills. The
absence of skills clearly affects the development of the sector, specifically in the
areas of product innovation, risk assessment, and pricing. This situation is
exacerbated by nationalization requirements in some countries, which extend the
time required to train and equip staff for key positions, and the availability of
highly attractive positions in other areas of the financial services sector.

Cultivating the growth of a pool of skilled local insurance professionals is

paramount to the development of the insurance sector, given the existing acute
shortage of skills. As such, the study proposes that policymakers and regulators
act as catalysts in the development of professional knowledge in three ways:

In general, it is customary to set minimum requirements for insurance

professionals that go beyond general educational attainment and include
specialized insurance qualifications. Regulators can influence the market in
raising the standards of training programs by adopting internationally accredited
programs and selectively approving local programs that meet minimum criteria.

Training programs can be organized by the regulator, the industry itself (such as
associations of insurance companies and the companies themselves), and by the
private sector as the demand for such training increases. In countries where the
demand for takaful products is growing rapidly, regulators need to ensure the
availability of training programs to educate the market on these relatively new
products.
Regulators can require companies to take a more active role in developing the
expertise of their employees by mandating training budgets and staff training
programs.

Market-led Initiatives

Promoting the involvement of industry-wide bodies, whether at a local or

regional level, is a valuable enabler for the development of the market by
providing forums for the harmonization of standards and activities, and for the
sharing of best practices. In particular, policymakers and regulators can play a
valuable role in promoting more active involvement from industry associations,
encouraging the adoption of market standards, fostering the availability of
granular market statistics, generating consumer awareness of insurance, and
raising the profile of the industry to attract new talent.

By way of example, Malaysia has been very successful in raising the awareness
of life insurance. In 2003, a joint initiative, InsuranceInfo, was launched by Bank
Negara (the Central Bank and insurance regulator of Malaysia) and other
industry players. InsuranceInfo covers topics such as standard life insurance,
annuities, investment-linked insurance plans, and child education plans.
InsuranceInfo disseminates this information primarily through its website, as
well as through booklets made available in branches of selected insurance
companies and articles published in major newspapers. This program has
contributed to the development of the life insurance market, which generated
premiums of US$4.8 billion in 2005 - more than three times those in the entire
MENA region.
Insurance has always been a politically sensitive subject in India. Within
less than 10 years of independence, the Indian government nationalized private
insurance companies in 1956 to bring this vital sector under government control
to raise much needed development funds.
Since then, state-owned insurance companies have grown into monoliths,
lumbering and often inefficient but the only alternative. They have been
criticized for their huge bureaucracies, but still have millions of policy holders
as there is no alternative.
Any attempt to even suggest letting private players into this vital sector
has met with resistance and agitation from the powerful insurance employees
unions. The Narasimha Rao government (1991-96) which unleashed liberal
changes in India's rigid economic structure could not handle this political hot
potato. Ironically, it is the coalition government in power today which has
declared its intention of opening up insurance to the private sector. Ironical

General insurance industry grew by 15 per cent in the August led by Anil
Ambani group firm Reliance General Insurance, which recorded the highest
growth of 161 per cent in gross premium as compared to a year ago.

The 12 non-life insurers collected Rs 2,116 crore in premium in August, against

Rs 1,839 crore during the same period in the previous year, according to data
collected by regulator the Insurance Regulatory Development Authority (IRDA).
During the month, market leader New India Assurance's premium collection
witnessed a dip of one per cent to Rs 358 crore as compared to Rs 363 crore a
year ago.

In the private sector, the largest player, ICICI Lombard collected 22 per cent
higher premium at Rs 302 crore.

Private players increased their business to Rs 881 crore in August from Rs 662
crore in the same month last year, the data shows.

With a premium collection of Rs 155 crore in August, against Rs 59 crore a year

ago, Reliance General Insurance became the fastest growing insurer.

In percentage terms, while the public sector could increase their premiums by
just 5 per cent, eight private sector players clocked premium growth of 33 per
cent.

Post-detariffing, the private sector seems to be gaining in market share faster

than their public sector counterpart in the industry.

Market share of private players during the period went up to 42 per cent as
against 58 per cent accounted for by those in the public sector.

Lessons from the insurance sector

Patterns in the insurance sector in India post-liberalisation have so far

contradicted the predictions of those who argued that the opening up would
deliver lower prices and better services for consumers.

DESPITE what people in general are told, there are very few things in the
discipline of economics which are undisputed. Much of what is presented as
"obvious" or "inevitable" often has poor foundations in theory and little
justification in terms of empirical experience. Recent theoretical work indeed
tends to point to the fragility of assumptions that underlie many established
axioms. Truly, economics is at best an inexact science, highly probabilistic, and
ultimately dependent upon intuition or "hunch".

Nevertheless, there are some arguments which are almost universally accepted
(given the ceteris paribus condition, "other things remaining equal"). Thus, one of
the first things that students of economics are taught is that when there are more
producers in the market, competition tends to drive the price down to a level
which is lower than when there are fewer producers.

The same is therefore supposed to be true of markets which were previously

closed to competition, and are opened to new entrants. The expectation is that
when monopolies or oligopolies are forced to confront new players, they will
respond by lowering their prices or improving quality, even if the new entrants
have higher costs to begin with.

This is why supporters of the Insurance Regulatory and Development Authority

Bill, 1999 argued that opening up the sector to more domestic and foreign
competition would ensure much better conditions for consumers. It was argued
that more products (in the form of new types of insurance policies) would be
available and that premium rates would fall as new entrants offered them, and
that the existing nationalised insurance companies would be forced to deal with
the threat and even reality of competition.

But such are the peculiarities of economics in the current context that even this
obvious expectation has been belied. In fact, so far precisely the opposite
tendency has been observed. Several new insurance companies, almost all with
some foreign backing as well, have entered the market over the past six months
in particular. Yet on July 1, a number of nationalised general insurance
companies took measures to raise rates of premium and actually reduce the
number of types of policies on offer.

A demonstration against the opening up of the insurance sector to private

players. The overall effect of the entry of private companies into the sector is that
consumers, who were supposed to be the main beneficiaries of the change, will
in fact be worse off.

The rates offered for vehicle insurance show this very clearly. Rates of premium
on cars have gone up by around 40 per cent on average. Meanwhile, a category
like third party insurance for two-wheelers, for which the premium rates used to
be quite low, has seen an increase of nearly three times. Some companies even
plan not to provide insurance for this category at all. When questioned about
these increases, insurance officers have pointed to the effect of the new
multinational-assisted entrants into the insurance business, and the much higher
rates they are charging!

In other words, what they are suggesting is that now competition is going to be
based not on prices, as was fondly believed earlier, but on profits. Insurance
companies, not just the private ones but even in the public sector, are anxious to
show profits on all lines of activity. Indeed, the public sector companies are
especially keen to show that they are no less efficient than private players, and
therefore end up using very similar tactics.

What this shows most starkly is that the cross-subsidisation which was
characteristic of the insurance sector earlier, and which indeed is typical of most
public sector service provision, is disappearing. The general insurance
companies have already been instructed to calculate profits on each line of
business separately. Life insurance is likely to follow suit.
The irony is that both the life insurance and general insurance corporations were
already highly profitable in the aggregate. Their cross-subsidies, which were
based on some notions of income and the ability of people to pay, and the need
to provide insurance services to as many people as possible, did not prevent
them from providing large surpluses to government coffers. Now, however,
because they are concerned about showing profit rates or margins which are
comparable to those of the private sector, they are likely to turn more cautious
and more stingy about providing insurance cover to a range of consumers,
simply in order to maintain "competitive" profitability.

What does this mean for consumers? It means the complete opposite of what was
promised when the insurance sector was liberalised. Thus, not only have
premium rates gone up quite sharply, but it may become more difficult to be
eligible for a whole range of policies. So people may actually find it more
difficult or more expensive to take on policies in areas where they really require
it, that is, where they are in fact at risk.

Also, rates of claim settlement in India were earlier the highest in the world, at
more than 90 per cent in life insurance and 70 per cent in general insurance,
compared to around 40 per cent internationally in both categories. These rates
are now likely to fall, as companies try to ensure higher profit margins through
resort to this method as well. This means that in the event of some misfortune,
which may be covered by the policy on paper, the policy-holder would be less
likely than before to get his or her claim settled.

This whole process may appear very paradoxical. But actually it brings out very
clearly why privatisation of certain services, as well as the opening up of this
sector in particular, may be very problematic, and why the concerns of critics at
the time were not misplaced. It should also be noted that this is quite unlike the
privatisation of loss-making concerns in the manufacturing sector, which often
simply reflects the urgent need to restructure and allow the government to move
out of dead-end economic activities.

THERE were many points with respect to insurance sector liberalisation that the
critics had raised. There was the possibility of fraud by, or failure of, private
companies, which would adversely affect those who had sunk their life savings
in such companies. The high incidence of such cases was indeed why the
companies in India had been nationalised in the first place. There was the
potential misuse of the huge pool of savings raised by this sector, which could be
utilised for productive investment, including by the state.

In addition to these very serious worries, there was also the concern that
consumers, who were supposed to be the main beneficiaries, would in fact be
adversely affected. At the time such fears were simply laughed at. But already,
with the recent change in the price structure, there is evidence that such a
tendency of worsening conditions for insurance consumers may not be so far-
fetched.

It is especially sad because it is so unnecessary. It is bad enough that private

sector insurance companies, in their zeal to cut costs and improve profitability
indicators, ignore the basic interests of people and effectively deny important
sections of people insurance cover for different categories. This is, after all, only
to be expected in a business driven entirely by profit. In fact, one of the reasons
for curtailing services and raising costs is the huge increase in advertising costs
which all the companies - private and public - are now engaging in, which makes
the need to generate more revenue even more imperative.

But when public sector companies start behaving in exactly the same way, then it
is worse than pointless. The entire purpose of having public provision of such
services is to ensure that they do not simply behave like other private players.
The meeting of broader social goals can then be achieved by cross-subsidisation,
which is sustainable as long as the entire operation remains profitable. There is
no need for such enterprises to be as profitable as possible using any possible
means, because then the basic objective of using public corporations to provide
public services would not be met.

The tragedy is that when the government itself starts imposing upon such public
companies the pressure of being profitable at all costs, people will end up finding
little to choose between the public and private sectors. It could well be that there
is an implicit agenda in this, eventually to privatise these large and profitable
public sector companies which would anyway behave no differently from
private players.

While this may serve the purpose of those who are ideologically committed to
the destruction of public sector activity independent of context, it can do little to
serve the real interests of the citizens of this country.

Insurance Industry in the year 2000-2001 had 16 new entrants, namely:

Life Insurers:

S.No. Registration Date of Name of the Company

Number Reg.

1 101 23.10.2000 HDFC Standard Life Insurance Company Ltd.

2 104 15.11.2000 Max New York Life Insurance Co. Ltd.

3 105 24.11.2000 ICICI Prudential Life Insurance Company Ltd.

4 107 10.01.2001 Kotak Mahindra Old Mutual Life Insurance Limited

5 109 31.01.2001 Birla Sun Life Insurance Company Ltd.

6 110 12.02.2001 Tata AIG Life Insurance Company Ltd.

7 111 30.03.2001 SBI Life Insurance Company Limited .

8 114 02.08.2001 ING Vysya Life Insurance Company Private Limited

9 116 03.08.2001 Bajaj Allianz Life Insurance Company Limited

10 117 06.08.2001 Metlife India Insurance Company Pvt. Ltd.

11 133 04.09.2007 Future Generali India Life Insurance Company Limited

12 135 19.12.2007 IDBI Fortis Life Insurance Company Ltd.

General Insurers :

S.No. Registration Date of Name of the Company

Number Registration

1 102 23.10.2000 Royal Sundaram Alliance

Insurance Company
Limited

2 103 23.10.2000 Reliance General Insurance

Company Limited.

3 106 04.12.2000 IFFCO Tokio General

Insurance Co. Ltd

4 108 22.01.2001 TATA AIG General

Insurance Company Ltd.

5 113 02.05.2001 Bajaj Allianz General

Insurance Company
Limited

6 115 03.08.2001 ICICI Lombard General

Insurance Company
Limited.

7 131 03-08-2007 Apollo DKV Insurance

Company Limited

8 132 04-09-2007 Future Generali India

Insurance Company
 Limited

9 134 16-11-2007 Universal Sompo General

Insurance Company Ltd.

Yr: 2001-2002 : ( From 1st Jan 2001 to Dec. 2002)

Insurance Industry in this year, so far has 5new entrants; namely

Life Insurers:

S.No. Registration Date of Name of the Company

Number Reg.

1 121 03.01.2002 AMP Sanmar Life Insurance Company Limited.

2 122 14.05.2002 Aviva Life Insurance Co. India Pvt. Ltd.

General Insurers :

S.No. Registration Date of Name of the Company

Number Registration

1 123 15.07.2002 Cholamandalam General

Insurance Company Ltd.

2. 124 27.08.2002 Export Credit Guarantee

Corporation Ltd.

3. 125 27.08.2002 HDFC-Chubb General

Insurance Co. Ltd.

Yr: 2003-2004 : ( From 1st Jan 2003 till Date)

Insurance Industry in this year, so far has 1new entrants; namely

Life Insurers:

S.No. Registration Date of Name of the Company

Number Reg.

1 127 06.02.2004 Sahara India Insurance Company Ltd.

Yr: 2004-2005 :

Insurance Industry in this year, so far has 1new entrants; namely

Life Insurers:

S.No. Registration Date of Name of the Company

Number Reg.

1 128 17.11.2005 Shriram Life Insurance Company Ltd.

INSURANCE BUSINEES:

Insurance business is divided into four classes :

1) Life Insurance 2) Fire Insurance 3) Marine Insurance and 4) Miscellaneous

Insurance.

Life Insurers transact life insurance business; General Insurers transact the rest.

No composites are permitted as per law.

LEGISLATION (as on 1.4.2000):

Insurance is a federal subject in India. The primary legislation that deals with
insurance business in India is:

Insurance Act, 1938, and Insurance Regulatory & Development Authority Act,
1999.

INSURANCE PRODUCTS (as on 1.4.2000) (for latest information get in touch

with the current insurers – website information of insurers is provided at the
web page for insurers ):

Life Insurance:

Popular Products: Endowment Assurance (Participating), and Money Back

(Participating). More than 80% of the life insurance business is from these
products.

General Insurance:

Fire and Miscellaneous insurance businesses are predominant. Motor Vehicle

insurance is compulsory.

Tariff Advisory Committee (TAC) lays down tariff rates for some of the general
insurance products (please visit website of GIC for details )

2001

New products have been launched by life insurers. These include linked-
products. For details, please visit the websites of life insurers.

INFORMATION

About the insurance industry, the following documents may be helpful:

Malhotra Committee Report (The Report of the Committee on Reforms in the

Insurance Sector);

IRDA's First Annual Report - 2001

CUSTOMER PROTECTION:

Insurance Industry has Ombudsmen in 12 cities. Each Ombudsman is

empowered to redress customer grievances in respect of insurance contracts on
personal lines where the insured amount is less than Rs. 20 lakhs, in accordance
with the Ombudsman Scheme. Addresses can be obtained from the offices of LIC
and other insurers.

Parties to contract

There is a difference between the insured and the policy owner (policy holder),
although the owner and the insured are often the same person. For example, if
Joe buys a policy on his own life, he is both the owner and the insured. But if
Jane, his wife, buys a policy on Joe's life, she is the owner and he is the insured.
The policy owner is the guarantee and he or she will be the person who will pay
for the policy. The insured is a participant in the contract, but not necessarily a
party to it.

The beneficiary receives policy proceeds upon the insured's death. The owner
designates the beneficiary, but the beneficiary is not a party to the policy. The
owner may change the beneficiary unless the policy has an irrevocable
beneficiary designation. With an irrevocable beneficiary, that beneficiary must
agree to any beneficiary changes, policy assignments, or cash value borrowing.

In cases where the policy owner is not the insured (also referred to as the cestui
qui vit or CQV), insurance companies have sought to limit policy purchases to
those with an "insurable interest" in the CQV. For life insurance policies, close
family members and business partners will usually be found to have an
insurable interest. The "insurable interest" requirement usually demonstrates that
the 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 to die. With no insurable interest
requirement, the risk that a purchaser would murder the CQV for insurance
proceeds would be great. In at least one case, an insurance company which sold a
policy to a purchaser with no insurable interest (who later murdered the CQV for
the proceeds), was found liable in court for contributing to the wrongful death of
the victim (Liberty National Life v. Weldon, 267 Ala.171 (1957)).

Contract terms

Special provisions may apply, such as suicide clauses wherein the policy
becomes null if 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 insured on the application is also grounds
for nullification. Most US states specify that the contestability period cannot be
longer than two years; only if the insured dies within this period will the insurer
have a legal right to contest the claim on the basis of misrepresentation and
request additional information before deciding to pay or deny the claim.
The face amount on the policy is the initial amount that the policy will pay at the
death of the insured or when the policy matures, although the actual death
benefit can provide for greater or lesser than the face amount. The policy matures
when the insured dies or reaches a specified age (such as 100 years old).

Costs, insurability, and underwriting

The insurer (the life insurance company) calculates the policy prices with an
intent to fund claims to be paid and administrative costs, and to make a profit.
The cost of insurance is determined using mortality tables calculated by
actuaries. Actuaries are professionals who employ actuarial science, which is
based in mathematics (primarily probability and statistics). Mortality tables are
statistically-based tables showing expected annual mortality rates. It is possible
to derive life expectancy estimates from these mortality assumptions. Such
estimates can be important in taxation regulation.[1] [2]

The three main variables in a mortality table have been age, gender, and use of
tobacco. More recently in the US, preferred class specific tables were introduced.
The mortality tables provide a baseline for the cost of insurance. In practice, these
mortality tables are used in conjunction with the health and family history of the
individual applying for a policy in order to determine premiums and
insurability. Mortality tables currently in use by life insurance companies in the
United States are individually modified by each company using pooled industry
experience studies as a starting point. In the 1980s and 90's the SOA 1975-80 Basic
Select & Ultimate tables were the typical reference points, while the 2001 VBT
and 2001 CSO tables were published more recently. The newer tables include
separate mortality tables for smokers and non-smokers and the CSO tables
include separate tables for preferred classes. [3]

Recent US select mortality tables predict that roughly 0.35 in 1,000 non-smoking
males aged 25 will die during the first year of coverage after underwriting.[2]
Mortality approximately doubles for every extra ten years of age so that the
mortality rate in the first year for underwritten non-smoking men is about 2.5 in
1,000 people at age 65.[3] Compare this with the US population male mortality
rates of 1.3 per 1,000 at age 25 and 19.3 at age 65 (without regard to health or
smoking status).[4]

The mortality of underwritten persons rises much more quickly than the general
population. At the 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 of average health, a life insurance company
would have to collect approximately $50 a year from each of a large group to
cover the relatively few expected claims. (0.35 to 0.66 expected deaths in each
year x $100,000 payout per death = $35 per policy). Administrative and sales
commissions need to be accounted for in order for this to make business sense. A
10 year policy for a 25 year old non-smoking male person with preferred medical
history may get offers as low as $90 per year for a $100,000 policy in the
competitive US life insurance market.

The insurance company receives the premiums from the policy owner and
invests them to create a pool of money from which it can pay claims and finance
the insurance company's operations. Contrary to popular belief, the majority of
the money that insurance companies make comes directly from premiums paid,
as money gained through investment of premiums can never, in even the most
ideal market conditions, vest enough money per year to pay out claims.[citation needed]
Rates charged for life insurance increase with the insured's age because,
statistically, people are more likely to die as they get older.

Given that adverse selection can have a negative impact on the insurer's financial
situation, the insurer investigates each proposed insured individual unless the
policy is below a company-established minimum amount, beginning with the
application process. Group Insurance policies are an exception.

This investigation and resulting evaluation of the risk is termed underwriting.

Health and lifestyle questions are asked. Certain responses or information
received may merit further investigation. Life insurance companies in the United
States support the Medical Information Bureau (MIB) [4], which is a clearinghouse
of information on persons who have applied for life insurance with participating
companies in the last seven years. As part of the application, the insurer receives
permission to obtain information from the proposed insured's physicians.[5]

Underwriters will determine the purpose of insurance. The most common is to

protect the owner's family or financial interests in the event of the insured's
demise. Other purposes include estate planning or, in the case of cash-value
contracts, investment for retirement planning. Bank loans or buy-sell provisions
of business agreements are another acceptable purpose.

Life insurance companies are never required by law to underwrite or to provide

coverage to anyone, with the exception of Civil Rights Act compliance
requirements. Insurance companies alone determine insurability, and some
people, for their own health or lifestyle reasons, are deemed uninsurable. The
policy can be declined (turned down) or rated.[citation needed] Rating increases the
premiums to provide for additional risks relative to the particular insured.[citation
needed]

Many companies use four general health categories for those evaluated for a life
insurance policy. These categories are Preferred Best, Preferred, Standard, and
Tobacco.[citation needed] Preferred Best is reserved only for the healthiest individuals in
the general population. This means, for instance, that the proposed insured has
no adverse medical history, is not under medication for any condition, and his
family (immediate and extended) have no history of early cancer, diabetes, or
other conditions.[citation needed] Preferred means that the proposed insured is currently
under medication for a medical condition and has a family history of particular
illnesses.[citation needed] Most people are in the Standard category.[citation needed] Profession,
travel, and lifestyle factor into whether the proposed insured will be granted a
policy, and which category the insured falls. For example, a person who would
otherwise be classified as Preferred Best may be denied a policy if he or she
travels to a high risk country.[citation needed] Underwriting practices can vary from
insurer to insurer which provide for more competitive offers in certain
circumstances.

Life insurance contracts are written on the basis of utmost good faith. That is, the
proposer and the insurer both accept that the other is acting in good faith. This
means that the proposer can assume the contract offers what it represents
without having to fine comb the small print and the insurer assumes the
proposer is being honest when providing details to underwriter.[citation needed]

[edit] 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 form completed, signed (and typically notarized).[citation needed] If the
insured's death is suspicious and the policy amount is large, the insurer may
investigate the circumstances surrounding the death before deciding whether it
has an obligation to pay the claim.

Proceeds from the policy may be paid as a lump sum or as an annuity, which is
paid over time in regular recurring payments for either a specified period or for a
beneficiary's lifetime.[citation needed]

[edit] Insurance vs. assurance

Outside the United States, the specific uses of the terms "insurance" and
"assurance" are sometimes confused. In general, in these jurisdictions "insurance"
refers to providing cover for an event that might happen, while "assurance" is the
provision of cover for an event that is certain to happen. However, in the United
States both forms of coverage are called "insurance".

When a person insures the contents of their home they do so because of events
that might happen (fire, theft, flood, etc.) They hope their home will never be
burglarized, or burn down, but they want to ensure that they are financially
protected if the worst happens. This example of Insurance shows how it is a way
of spending a little money to protect against the risk of having to spend a lot of
money.

When a person insures their life they do so knowing that one day they will die.
Therefore a policy that covers death is assured to make a payment. The policy
offers assurance on death; even if the policy has a prescribed termination date the
policy is still assured to pay on death and therefore is an assurance policy.
Examples include Term Assurance and Whole Life Assurance. An accidental death
policy is not assured to pay on death as the life insured may not die through an
accident, therefore it is an insurance policy.

A policy might also be assured for other reasons. For example an endowment
policy is designed to provide a lump sum on maturity. Under certain types of
policy the lump sum is guaranteed. Therefore, this may also be called an
assurance policy.

The test of whether a policy is assurance or insurance is that with an assurance

policy the insured event will definitely occur (at some point) whereas with an
insurance policy there is a risk the insured event might occur.

With regard to Whole Life policies, the question is not whether the insured event
(in this case death) will occur, but simply when. If the policy has nonforfeiture
values (or cash values) then the policy is assured to pay.

During recent years, the distinction between the two terms has become largely
blurred. This is principally due to many companies offering both types of policy,
and rather than refer to themselves using both insurance and assurance titles,
they instead use just one.

Types of life insurance

Life insurance may be divided into two basic classes – temporary and permanent
or following subclasses - term, universal, whole life, variable, variable universal
and endowment life insurance.

Temporary (Term)

Term life insurance (term assurance in British English) provides for life insurance
coverage for a specified term of years for a specified premium. The policy does
not accumulate cash value. Term is generally considered "pure" insurance, where
the premium buys protection in the event of death and nothing else. (See Theory
of Decreasing Responsibility and buy term and invest the difference.) Term
insurance premiums are typically low because both the insurer and the policy
owner agree that the death of the insured is unlikely during the term of coverage.

The three key factors to be considered in term insurance are: face amount
(protection or death benefit), premium to be paid (cost to the insured), and
length of coverage (term).

Various (U.S.) insurance companies sell term insurance with many different
combinations of these three parameters. The face amount can remain constant or
decline. The term can be for one or more years. The premium can remain level or
increase. A common type of term is called annual renewable term. It is a one year
policy but the insurance company guarantees it will issue a policy of equal or
lesser amount without regard to the insurability of the insured and with a
premium set for the insured's age at that time. Another common type of term
insurance is mortgage insurance, which is usually a level premium, declining
face value policy. The face amount is intended to equal the amount of the
mortgage on the policy owner’s residence so the mortgage will be paid if the
insured dies.

A policy holder insures his life for a specified term. If he dies before that
specified term is up, his estate or named beneficiary(ies) receive(s) a payout. If he
does not die before the term is up, he receives nothing. In the past these policies
would almost always exclude suicide. However, after a number of court
judgments against the industry, payouts do occur on death by suicide
(presumably except for in the unlikely case that it can be shown that the suicide
was just to benefit from the policy). Generally, if an insured person commits
suicide within the first two policy years, the insurer will return the premiums
paid. However, a death benefit will usually be paid if the suicide occurs after the
two year period.

[edit] Permanent

Permanent life insurance is life insurance that remains in force (in-line) until the
policy matures (pays out), unless the owner fails to pay the premium when due
(the policy expires). The policy cannot be canceled by the insurer for any reason
except fraud in the application, and that cancellation must occur within a period
of time defined by law (usually two years). Permanent insurance builds a cash
value that reduces the amount at risk to the insurance company and thus the
insurance expense over time. This means that a policy with a million dollars face
value can be relatively inexpensive to a 70 year old because the actual amount of
insurance purchased is much less than one million dollars. 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.
The three basic types of permanent insurance are whole life, universal life, and
endowment.

[edit] Whole life coverage

Whole life insurance provides for a level premium, and a cash value table
included in the policy guaranteed by the company. The primary advantages of
whole life are guaranteed death benefits, guaranteed cash values, fixed and
known annual premiums, and mortality and expense charges will not reduce the
cash value shown in the policy. The primary disadvantages of whole life are
premium inflexibility, and the internal rate of return in the policy may not be
competitive with other savings alternatives. Riders are available that can allow
one to increase the death benefit by paying additional premium. The death
benefit can also be increased through the use of policy dividends. Dividends
cannot be guaranteed and may be higher or lower than historical rates over time.
Premiums are much higher than term insurance in the short-term, but
cumulative premiums are roughly equal if policies are kept in force until average
life expectancy.

Cash value can be accessed at any time through policy "loans". Since these loans
decrease the death benefit if not paid back, payback is optional. Cash values are
not paid to the beneficiary upon the death of the insured; the beneficiary receives
the death benefit only. If the dividend option: Paid up additions is elected,
dividend cash values will purchase additional death benefit which will increase
the death benefit of the policy to the named beneficiary.

[edit] Universal life coverage

Universal life insurance (UL) is a relatively new insurance product intended to

provide permanent insurance coverage with greater flexibility in premium
payment and the potential for a higher internal rate of return. A universal life
policy includes a cash account. Premiums increase the cash account. Interest is
paid within the policy (credited) on the account at a rate specified by the
company. This rate has a guaranteed minimum but usually is higher than that
minimum. Mortality charges and administrative costs are charged against
(reduce) the cash account. The surrender value of the policy is the amount
remaining in the cash account less applicable surrender charges, if any.

With all life insurance, there are basically two functions that make it work.
There's a mortality function and a cash function. The mortality function would
be the classical notion of pooling risk where the premiums paid by everybody
else would cover the death benefit for the one or two who will die for a given
period of time. The cash function inherent in all life insurance says that if a
person is to reach age 95 to 100 (the age varies depending on state and company),
then the policy matures and endows the face value of the policy.

Actuarially, it is reasoned that out of a group of 1000 people, if even 10 of them

live to age 95, then the mortality function alone will not be able to cover the cash
function. So in order to cover the cash function, a minimum rate of investment
return on the premiums will be required in the event that a policy matures.

Universal life policies guarantee, to some extent, the death proceeds, but not the
cash function - thus the flexible premiums and interest returns. If interest rates
are high, then the dividends help reduce premiums. If interest rates are low, then
the customer would have to pay additional premiums in order to keep the policy
in force. When interest rates are above the minimum required, then the customer
has the flexibility to pay less as investment returns cover the remainder to keep
the policy in force.

The universal life policy addresses the perceived disadvantages of whole life.
Premiums are flexible. The internal rate of return is usually higher because it
moves with the financial markets. Mortality costs and administrative charges are
known. And cash value may be considered more easily attainable because the
owner can discontinue premiums if the cash value allows it. And universal life
has a more flexible death benefit because the owner can select one of two death
benefit options, Option A and Option B.

Option A pays the face amount at death as it's designed to have the cash value
equal the death benefit at age 95. Option B pays the face amount plus the cash
value, as it's designed to increase the net death benefit as cash values accumulate.
Option B does carry with it a caveat. This caveat is that in order for the policy to
keep its tax favored life insurance status, it must stay within a corridor specified
by state and federal laws that prevent abuses such as attaching a million dollars
in cash value to a two dollar insurance policy. The interesting part about this
corridor is that for those people who can make it to age 95-100, this corridor
requirement goes away and your cash value can equal exactly the face amount of
insurance. If this corridor is ever violated, then the universal life policy will be
treated as, and in effect turn into, a Modified Endowment Contract (or more
commonly referred to as a MEC).

But universal life has its own disadvantages which stem primarily from this
flexibility. The policy lacks the fundamental guarantee that the policy will be in
force unless sufficient premiums have been paid and cash values are not
guaranteed.
Universal life policies are sometimes erroneously referred to as self-sustaining
policies. In the 1980s, when interest rates were high, the cash value accumulated
at a more accelerated rate, and universal life coverage was often sold by agents
as a policy that could be self-paying. Many policies did sustain themselves for a
prolonged period, but the combination of lower interest rates and an increasing
cost of insurance as the insured ages meant that for many policies, the cash
option was diminished or depleted.

Variable universal life Insurance (VUL) is not the same as universal life, even
though they both have cash values attached to them. These differences are in
how the cash accounts are managed; thus having a great effect on how they are
treated for taxation. The cash account within a VUL is held in the insurer's
"separate account" (generally in mutual funds, managed by a fund manager).

Limited-pay

Another type of permanent insurance is Limited-pay life insurance, in which all

the premiums are paid over a specified period after which no additional
premiums are due to keep the policy in force. Common limited pay periods
include 10-year, 20-year, and paid-up at age 65.

Endowments

Endowments are policies in which the cash value built up inside the policy,
equals the death benefit (face amount) at a certain age. The age this commences is
known as the endowment age. Endowments are considerably more expensive (in
terms of annual premiums) than either whole life or universal life because the
premium paying period is shortened and the endowment date is earlier.

In the United States, the Technical Corrections Act of 1988 tightened the rules on
tax shelters (creating modified endowments). These follow tax rules as annuities
and IRAs do.

Endowment Insurance is paid out whether the insured lives or dies, after a
specific period (e.g. 15 years) or a specific age (e.g. 65).

Accidental death

Accidental death is a limited life insurance that is designed to cover the insured
when they pass away due to an accident. Accidents include anything from an
injury, but do not typically cover any deaths resulting from health problems or
suicide. Because they only cover accidents, these policies are much less expensive
than other life insurances.
It is also very commonly offered as "accidental death and dismemberment
insurance", also known as an AD&D policy. In an AD&D policy, benefits are
available not only for accidental death, but also for loss of limbs or bodily
functions such as sight and hearing, etc.

Accidental death and AD&D policies very rarely pay a benefit; either the cause
of death is not covered, or the coverage is not maintained after the accident until
death occurs. To be aware of what coverage they have, an insured should always
review their policy for what it covers and what it excludes. Often, it does not
cover an insured who puts themselves at risk in activities such as: parachuting,
flying an airplane, professional sports, or involvement in a war (military or not).
Also, some insurers will exclude death and injury caused by proximate causes
due to (but not limited to) racing on wheels and mountaineering.

Accidental death benefits can also be added to a standard life insurance policy as
a rider. If this rider is purchased, the policy will generally pay double the face
amount if the insured dies due to an accident. This used to be commonly referred
to as a double indemnity coverage. In some cases, some companies may even
offer a triple indemnity cover.

Related life insurance products

Riders are modifications to the insurance policy added at the same time the
policy is issued. These riders change the basic policy to provide some feature
desired by the policy owner. A common rider is accidental death, which used to
be commonly referred to as "double indemnity", which pays twice the amount of
the policy face value if death results from accidental causes, as if both a full
coverage policy and an accidental death policy were in effect on the insured.
Another common rider is premium waiver, which waives future premiums if the
insured becomes disabled.

Joint life insurance is either a term or permanent policy insuring two or more
lives with the proceeds payable on the first death.

Survivorship life or second-to-die life is a whole life policy insuring two lives
with the proceeds payable on the second (later) death.

Single premium whole life is a policy with only one premium which is payable
at the time the policy is issued.

Modified whole life is a whole life policy that charges smaller premiums for a
specified period of time after which the premiums increase for the remainder of
the policy.
Group life insurance is term insurance covering a group of people, usually
employees of a company or members of a union or association. Individual proof
of insurability is not normally a consideration in the underwriting. Rather, the
underwriter considers the size and turnover of the group, and the financial
strength of the group. Contract provisions will attempt to exclude the possibility
of adverse selection. Group life insurance often has a provision that a member
exiting the group has the right to buy individual insurance coverage.

Senior and preneed products

Insurance companies have in recent years developed products to offer to niche

markets, most notably targeting the senior market to address needs of an aging
population. Many companies offer policies tailored to the needs of senior
applicants. These are often low to moderate face value whole life insurance
policies, to allow a senior citizen purchasing insurance at an older issue age an
opportunity to buy affordable insurance. This may also be marketed as final
expense insurance, and an agent or company may suggest (but not require) that
the policy proceeds could be used for end-of-life expenses.

Preneed (or prepaid) insurance policies are whole life policies that, although
available at any age, are usually offered to older applicants as well. This type of
insurance is designed specifically to cover funeral expenses when the insured
person dies. In many cases, the applicant signs a prefunded funeral arrangement
with a funeral home at the time the policy is applied for. The death proceeds are
then guaranteed to be directed first to the funeral services provider for payment
of services rendered. Most contracts dictate that any excess proceeds will go
either to the insured's estate or a designated beneficiary.

These products are sometimes assigned into a trust at the time of issue, or shortly
after issue. The policies are irrevocably assigned to the trust, and the trust
becomes the owner. Since a whole life policy has a cash value component, and a
loan provision, it may be considered an asset; assigning the policy to a trust
means that it can no longer be considered an asset for that individual. This can
impact an individual's ability to qualify for Medicare or Medicaid.

Investment policies

With-profits policies

Some policies allow the policyholder to participate in the profits of the insurance
company these are with-profits policies. Other policies have no rights to
participate in the profits of the company, these are non-profit policies.
With-profits policies are used as a form of collective investment to achieve
capital growth. Other policies offer a guaranteed return not dependent on the
company's underlying investment performance; these are often referred to as
without-profit policies which may be construed as a misnomer.

Insurance/Investment Bonds

Pensions

Pensions are a form of life assurance. However, whilst basic life assurance,
permanent health insurance and non-pensions annuity business includes an
amount of mortality or morbidity risk for the insurer, for pensions there is a
longevity risk.

A pension fund will be built up throughout a person's working life. When the
person retires, the pension will become in payment, and at some stage the
pensioner will buy an annuity contract, which will guarantee a certain pay-out
each month until death.

Annuities

An annuity is a contract with an insurance company whereby the purchaser pays

an initial premium or premiums into a tax-deferred account, which pays out a
sum at pre-determined intervals. There are two periods: the accumulation (when
payments are paid into the account) and the annuitization (when the insurance
company pays out). For example, a policy holder may pay £10,000, and in return
receive £150 each month until he dies; or £1,000 for each of 14 years or death
benefits if he dies before the full term of the annuity has elapsed. Tax penalties
and insurance company surrender charges may apply to premature withdrawals
(if indeed these are allowed; in most markets outside the U.S. the policy owner
has no right to end the contract prematurely).

Tax and life insurance

Taxation of life insurance in the United States

Premiums paid by the policy owner are normally not deductible for federal and
state income tax purposes.

Proceeds paid by the insurer upon death of the insured are not includible in
taxable income for federal and state income tax purposes; however, if the
proceeds are included in the "estate" of the deceased, it is likely they will be
subject to federal and state estate and inheritance tax.
Cash value increases within the policy are not subject to income taxes unless
certain events occur. For this reason, insurance policies can be a legal and
legitimate tax shelter wherein savings can increase without taxation until the
owner withdraws the money from the policy. On flexible-premium policies, large
deposits of premium could cause the contract to be considered a "Modified
Endowment Contract" by the IRS, which negates many of the tax advantages
associated with life insurance. The insurance company, in most cases, will inform
the policy owner of this danger before applying their premium.

Tax deferred benefit from a life insurance policy may be offset by its low return
or high cost in some cases. This depends upon the insuring company, type of
policy and other variables (mortality, market return, etc.). Also, other income tax
saving vehicles (i.e. IRA, 401K or Roth IRA) appear to be better alternatives for
value accumulation, at least for more sophisticated investors who can keep track
of multiple financial vehicles. The combination of low-cost term life insurance
and higher return tax-efficient retirement accounts can achieve better
performance, assuming that the insurance itself is only needed for a limited
amount of time.

The tax ramifications of life insurance are complex. The policy owner would be
well advised to carefully consider them. As always, Congress or the state
legislatures can change the tax laws at any time.

Taxation of life assurance in the United Kingdom

Premiums are not usually allowable against income tax or corporation tax,
however qualifying policies issued prior to 14 March 1984 do still attract LAPR
(Life Assurance Premium Relief) at 15% (with the net premium being collected
from the policyholder).

Non-investment life policies do not normally attract either income tax or capital
gains tax on claim. If the policy has as investment element such as an
endowment policy, whole of life policy or an investment bond then the tax
treatment is determined by the qualifying status of the policy.

Qualifying status is determined at the outset of the policy if the contract meets
certain criteria. Essentially, long term contracts (10 years plus) tend to be
qualifying policies and the proceeds are free from income tax and capital gains
tax. Single premium contracts and those run for a short term are subject to
income tax depending upon your marginal rate in the year you make a gain. All
(UK) insurers pay a special rate of corporation tax on the profits from their life
book; this is deemed as meeting the lower rate (20% in 2005-06) liability for
policyholders. Therefore if you are a higher rate taxpayer (40% in 2005-06), or
become one through the transaction, you must pay tax on the gain at the
difference between the higher and the lower rate. This gain may be reduced by
applying a complicated calculation called top-slicing based on the number of
years you have held the policy.

Although this is complicated, the taxation of life assurance based investment

contracts may be beneficial compared to alternative equity based collective
investment schemes (unit trusts, investment trusts and OEICs). One feature
which especially favors investment bonds is the ability to draw 5% of the original
investment amount each policy year without being subject to any taxation on the
amount withdrawn. The withdrawal is deemed by HMRC (Her Majesty's
Revenue and Customs) to be a payment of capital and therefore the tax
calculation is deferred until further encashment above the 5% limit. This is an
especially useful tax planning tool for higher rate taxpayers who expect to
become basic rate taxpayers at some predictable point in the future (e.g.
retirement).

The proceeds of a life policy will be included in the estate for inheritance tax
(IHT) purposes. Policies written in trust may fall outside the estate for IHT
purposes but it's not always that simple. If in doubt you should seek profession
advice from an IFA (Independent Financial Adviser) who is registered with the
government regulator: the Financial Services Authority.

Pension Term Assurance

Although available before April 2006, from this date pension term assurance
became widely available in the UK. Most UK product providers adopted the
name "life insurance with tax relief" for the product. Pension term assurance is
effectively normal term life assurance with tax relief on the premiums. All
premiums are paid net of basic rate tax at 22%, and higher rate tax payers can
gain an extra 18% tax relief via their tax return. Although not suitable for all,
PTA briefly became one of the most common forms of life assurance sold in the
UK until the Chancellor, Gordon Brown, announced the withdrawal of the
scheme in his pre-budget announcement on 6 December 2006. The tax relief
ceased to be available to new policies transacted after 6 December 2006, however,
existing policies have been allowed to continue to enjoy tax relief so far.

History

Insurance began as a way of reducing the risk of traders, as early as 5000 BC in

China and 4500 BC in Babylon. Life insurance dates only to ancient Rome; "burial
clubs" covered the cost of members' funeral expenses and helped survivors
monetarily. Modern life insurance started in late 17th century England, originally
as insurance for traders: merchants, ship owners and underwriters met to discuss
deals at Lloyd's Coffee House, predecessor to the famous Lloyd's of London.

The first insurance company in the United States was formed in Charleston,
South Carolina in 1732, but it provided only fire insurance. The sale of life
insurance in the U.S. began in the late 1760s. The Presbyterian Synods in
Philadelphia and New York created the Corporation for Relief of Poor and
Distressed Widows and Children of Presbyterian Ministers in 1759; Episcopalian
priests organized a similar fund in 1769. Between 1787 and 1837 more than two
dozen life insurance companies were started, but fewer than half a dozen
survived.

Prior to the American Civil War, many insurance companies in the United States
insured the lives of slaves for their owners. In response to bills passed in
California in 2001 and in Illinois in 2003, the companies have been required to
search their records for such policies. New York Life for example reported that
Nautilus sold 485 slaveholder life insurance policies during a two-year period in
the 1840s; they added that their trustees voted to end the sale of such policies 15
years before the Emancipation Proclamation.

Market trends

Life insurance premiums written in 2005

According to a study by Swiss Re, EU was the largest market for life insurance
premiums written in 2005 followed by the USA and Japan.

] Criticism

Although some aspects of the application process (such as underwriting and

insurable interest provisions) make it difficult, life insurance policies have been
used in cases of exploitation and fraud. In the case of life insurance, there is a
motivation to purchase a life insurance policy, particularly if the face value is
substantial, and then kill the insured.

The television series Forensic Files has included episodes that feature this
scenario. There was also a documented case in 2006, where two elderly women
are accused of taking in homeless men and assisting them. As part of their
assistance, they took out life insurance on the men. After the contestability period
ended on the policies (most life contracts have a standard contestability period of
two years), the women are alleged to have had the men killed via hit-and-run car
crashes.[6]
Recently, viatical settlements have thrown the life insurance industry into
turmoil. A viatical settlement involves the purchase of a life insurance policy
from an elderly or terminally ill policy holder. The policy holder sells the policy
(including the right to name the beneficiary) to a purchaser for a price
discounted from the policy value. The seller has cash in hand, and the purchaser
will realize a profit when the seller dies and the proceeds are delivered to the
purchaser. In the meantime, the purchaser continues to pay the premiums.
Although both parties have reached an agreeable settlement, insurers are
troubled by this trend. Insurers calculate their rates with the assumption that a
certain portion of policy holders will seek to redeem the cash value of their
insurance policies before death. They also expect that a certain portion will stop
paying premiums and forfeit their policies. However, viatical settlements ensure
that such policies will with absolute certainty be paid out. Some purchasers, in
order to take advantage of the potentially large profits, have even actively sought
to collude with uninsured elderly and terminally ill patients, and created policies
that would have not otherwise been purchased. Likewise, these policies are
guaranteed losses from the insurers' perspective.