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Accounting for Companies – II
notes introduction
The major differences in accounting for life insurance as compared with other industries derive
from the long time period between receipt of premiums and the payment of claims. This gives
rise to the need for actuarial estimates of the liability in order to determine both the solvency and
the profitability of life business.
Life insurance products include term; whole-life; endowment; maximum investment contracts
including unit-linked policies; annuities; pensions; and permanent health insurance. In
with-profits insurance policyholders as well as shareholders participate in the surpluses arising
on the business. Premiums may be paid as single, regular or recurring single premiums. In setting
premium rates the actuary must allow for mortality, interest, expenses and contingencies, as well
target profit and market competition. Accounting practices are needed for premiums, for claims
on death, maturity and surrenders (including bonuses), and for commissions (including deferred
acquisition costs).
8.1 types of life insurance products
There are different types of life Insurance products which are explained in the following
sub-sections.
8.1.1 term insurance
Term insurance is designed to provide pure life cover and so will provide benefit on death during
the term of a policy. The policy can be purchased for any selected time period. The insurer pays
the policyholder’s estate if she/he dies during the term of the policy, but if she/he survives she/
he will receive nothing. Term insurance is a protection product, for example it is commonly
written in conjunction with repayment mortgages to provide a form of repayment protection.
8.1.2 Whole-life assurance
A whole life policy has no fixed term and there will always be a benefit (contractual amount,
adjusted for items such as policy loans and dividends, if any) at the death of the insured.
Example: Whole-life policies are sometimes used to provide a benefit on death to enable
beneficiaries to pay the Inheritance Tax Liability on the estate.
8.1.3 endowment assurance
An endowment assurance policy will pay the policyholder a sum after a fixed period or on death
before the period is completed. Unlike term assurance and whole life assurance the policyholder
can receive the benefit. Endowment polices are generally used as investment/saving products.
Example: Repayment of the capital amount owing on a mortgage. Many whole life and
endowment policies are written as ‘with-profit’ policies whereby the policyholders are entitled
to share in surpluses arising on the business. In a proprietary company such surpluses are often
divided on the basis of 90% to policyholders and 10% to shareholders.
8.1.4 maximum investment contracts
Certain contracts are designed to provide minimal life cover and are principally investment
products, for example, unit liked policies. Benefits may take the form of a capital sum on maturity
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