Page 146 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Unit 8: Life Insurance

Notes
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Caution In annuity contract, the insurer undertakes to pay certain level sums periodically
up to expiry of the term or up to death. Since at the early death, the insurer does not suffer
loss, no medical examination is necessary. However, evidence of age is essentially asked
for and taken at the time of proposal.
The annuity is beneficial to those who do not want to leave amount for others but to use their
money during their lifetime. Alternatively in case of bank deposits, a person may leave certain
amount at early death or may suffer loss in living long due to stoppage of the money after a
certain period. The payment of annuity generally continues up to the death. Hence, the premium
rate is determined according to longevity. The amount of premium is higher at younger age and
lower at advanced age. This is based on the fact that a young person will stay alive for a longer
period in contrast to an older person.
The situations, which can arise in connection to an annuity holder, are as under:
1. If an annuitant lives exactly his life expectancy, he neither gains nor loses under an annuity
contract.
2. But if he outlives the life expectancy, the additional payments up to the date of his death
will have to be drawn by the insurer from the fund created by the contributions made by
all those who purchased annuity contracts.
3. If an annuitant dies in advance of his life expectancy, he would not have recovered his
entire contribution and the excess would go to provide annuities to those who outlived
their life expectancies.

However, it is beyond human capability to find out in advance, which of the three above
categories one would fall. Hence, the very basis of life annuities is the law of large numbers,
which is none other law but the law on which life insurance operates.

8.4.1 Need of Annuity Contracts

You need to know that the purpose of the annuity is protection against outliving one’s income
earning age. Nowadays, annuities are becoming very popular. This is due to many reasons like:

Increasing life expectancies
Need to maintain same life standard after retirement
Meeting the medical needs in old age etc.
Four ways are suggested below for providing the required support for persons after they cross
the stage of active life but in present times, annuities are the best tool to manage old age
requirements. The suggestions are as under:
1. Joint Family System: The joint family system was the norm and the members of the
family were looked after without much worry. However, it is now getting dismantled
due to successive partitions of agricultural lands over generations, lack of work
opportunities in village or hometowns. This explains the reason for the younger people
moving out to distant places in search of jobs. Fewer children, weakening of family bonds
and increasing independence in outlook are also other significant factors contributing to
birth of nuclear (small) families.

2. Superannuation Schemes: It is a source for providing financial assistance to the people
after retirement by the employer. Due to the pressures from trade unions as well as

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