Frequency loadings
Life premiums are calculated as a yearly amount although in practice they are normally paid monthly. Now premiums are calculated on the basis of the whole annual premium being paid at the beginning of the year. If the premiums are paid monthly, not only is a period of interest lost but also there are higher handling charges.
To make up for this the aggregate total cost of paying monthly would be slightly higher than paying a single annual premium. The additional cost might be something in the region of 4%.
Policy administration
Policy documents
Once the proposal has been accepted and the first premium paid the life office can prepare the life insurance policy.
The policy will be given a policy number which will be unique to that policy.
There are many ways in which to produce a life insurance policy and the ways vary, however it is common to use pre-printed documents. The policy will normally consist of pre-printed terms and conditions which apply to all policies of a certain type. Then added to that would be a personalised policy schedule usually produced on the computer.
The policy will usually contain the following sections.
- Heading
- Preamble
- Operative clause
- Schedule
- Conditions
- Definitions
The heading will describe the type of life insurance contract and may give very brief details such as policy number and name of the insured, although these details are often reserved for the schedule.
The preamble will describe the policy explain what documents make up the contract and that they should be read together. The proposal will often be included as part of the contract as may other information provided at time of placement. The preamble may describe what needs to be done in the event of a claim and advise the insured to keep the policy in a safe place.
The operative clause will state that the benefit will be paid subject to payment of premiums, proof of claim and ownership of the policy. It may also state where the claim will be paid and in what currency.
The schedule will contain all the individual details of the contract. For example,
- Policy number
- Life insured
- Date of birth
- Insured (or insured)
- Policy date
- Type of policy
- Maturity or expiry date
- Premium amount
- Premium frequency
- Sum insured and when payable
- Fund selected (for unit-linked policies)
- Allocation percentage (for unit-linked policies)
The conditions will contain the practical details on how the policy will operate. These may include items such as,
- Unit allocation procedure
- Unit valuation procedure
- Consequences of non payment of premiums
- Explanation of bonus system
- Surrender provisions
- Fund switching rights
- Claims procedure
- Charging structure
- Procedure for notices of assignment
There may also be standard exclusions detailing what the policy will not cover. These may include,
- Suicide (for life policies)
- Intentional self-inflicted injury (for IPI)
- AIDS and HIV (for IPI)
- War etc (for IPI)
- Participation in a criminal act (for IPI)
- Pregnancy and childbirth (IPI)
The definition section will contain the meaning of set words which are key to interpreting the policy.
Examples would be,
- Life insured
- Sum insured
- Insured
- Bid price
- Offer price
- Valuation date
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Special Conditions