In a life assurance contract, the claim is payable to the life assured on happening of an event. This claim is paid against the premiums paid by the proposer in a specific mode. The rates of this premium forms an important part of life assurance contract fro calculation point of view. The life assurance contracts are basically long term contracts and the risk of the proposer increases with age. Thus the premium rates should also increase every year. But, the insurance company, instead of charging increasing premium every years, charges level premium. The amount of premium is fixed for the complete policy term. Thus during the commencement of the policy, the risk is low but the premium charged is more than sufficient to meet the claim. It compensates the risk increased risk with age. The excess amount charged during the commencement is invested by the insurance company and the interest on this investment is given to the life assured in the form of benefit. The extra amount added to the premium is called as loading.

Various factors affect the rates of premium:

1)    Mortality:

Mortality is the most important and significant factor while calculating the rate of premium. Mortality rate is the probability of person to die in one year. This rate again depends on following conditions:

a) Age:

Mortality is directly proportional to age. It increases as the age increases.

b) Sex:

Female lives are at a higher risk due to delicacy and complicity in child bearing period.

c) Occupation:

Lives involved in hazardous occupation like blaster aviator, X-ray machine operator etc are at a higher risk due to the extra hazard in their occupation.

d) Residence:

People residing in hilly areas or sensitive areas affected by terrorists are at a greater risk.

e) Habits:

Habits like alcoholism, smoking, drugs also increases the risk of the individual.

f) Health:

An individual suffering from a disease or have the possibility of any disease o occur in future due to heredity also affects the mortality of the individual shifting him to higher risk.

g) Longevity of the family members also affects the mortality of the person to be insured.

h) Deformities like deafness, blindness also affects the mortality and the individual needs to be insured with extra premium.

i) Body mass index:

The BMI is also taken into consideration to determine the risk. Because both overweight and underweight conditions increases the risk of the individual.

The mortality tables are build by combining all these above factors. These tables shows the rate of mortality for each combination. These tables are prepared from past experience of insured lives. Therefore selected lives experience less mortality then the general population. The premium rates are then calculated by comparing the mortality of the life proposed with the standard rates of mortality those given in mortality tables.
All the factors that affects the mortality rates and on which the premium rates are decided are supposed to be disclosed by the proposer. The insurance agents and advisers are primarily responsible to gather all the true information from the proposer. The field workers of the insurer also has the key role in gathering all the information from the proposer because basically they are the one who have met the proposer directly and hence they are also called as first line persons in risk assessment.

2)    Medical Selection:

In spite of the inquiry by the agent and field workers, it is however quiet possible in an insurance contract that the proposer hides some facts deliberately or is unaware of the disease he is actually suffering from. In such case, the verification of these hidden facts can be done by conducting medical examination.The form for this medical examination requires a detailed personal statement to be filled including the family history, personal habits, history of accident, operation, injury and disease. All these information is studied by the examiner and special attention is given on the points disclosed in the medical form. If the medical examiner has doubt in any of the point, he can clarify the doubt by cross questioning.

3)    Non medial selection: In the growing years, it has been realized that the medical examination can not be treated as the only criteria for selection of lives for insurance.

Hence nowadays transacting more and more business under non medical scheme is becoming more popular. A medical examination shows adverse features in ten out of hundred proposals. Hence only these ten cases can be completed under medical scheme. The other 90 proposals do not require any detailed information subject to the proposer discloses all the information properly and the same the checked by the agent, field officer and branch manager.

If the proposer is a regular employee of an office, institution or firm and if the employer maintains a regular leave record of the employee then it is possible keep a further check on the proposer thus reducing the possibility of frauds. The information about the proposer can be obtained from friends and family physician. The risk that the proposer is carrying can be assessed on the basis of the proposal form filled by the proposer along with the confidential report of the agent and the Branch official. The proposal form of non medical scheme is more vast and elaborate and has to be filled with personal statement, habits, health and height and weight of the proposer.

After following all these procedures, if the proposal form is found free of adverse features then the proposal is completed under non medical scheme.
For completing a proposal of female lives under non medical scheme it is compulsory that she should be educated up to a minimum standard and should be either employed or earning an independent income. Females who are pregnant or have history of caesarian, miscarriage are not allowed the benefit of non medical scheme.The sum assured under non medical scheme is limited to certain amount.The age of the proposer during the commencement is also restricted to certain maximum age.Only some restricted plans are allowed for the lives to be insured under non medical scheme.There is a limitation on the maturity age and the term of the plan under non medical scheme.

All these factors are studied and the premium rates are determined on the basis of these factors in order to meet the claim in uncertain circumstances.

Source: Insurance institute of India


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