Actuarial Evaluation of Endowment Policy - A Life Insurance Product of Life Insurance Corporation of India

Abstract

Insurance is a scheme of economic co-operation by which members of a community share the unavoidable risks. Life insurance is a long term contract which provides a sense of security. The major benefits offered by life insurance are risk cover, returns and tax benefits to the assured and his/her family. Life insurance is the only investment option that offers specific products tailor made for different life stages. In independent India, Life Insurance Corporation is the only public sector insurance company offering life insurance products. However, the sector has been opened up to private players for over a decade now. There are different types of life insurance products broadly categorized as traditional and non-traditional products. Endowment policies, term assurance, whole life policies and so on are examples of traditional products while Unit linked insurance plan is a non-traditional product.An 'endowment policy' is a contract designed to pay a lump sum at an earlier death or after a specified term (on its 'maturity') which are typically ten, fifteen or twenty years. In an endowment plan the policy holder’s pay premiums for pre-defined tenure and sum assured. The premium will depend on the entry age of the policy holder, the sum assured, the planned tenure and the nature of returns. Endowment policies cover the risk for a specified period at the end of which the sum assured is paid back to the policyholder along with the entire bonus accumulated during the term of the policy. The distinct feature of the endowment payment to the policyholder on the completion of the policy’s term rightly accounts for the popularity of endowment policies.Actuarial valuation is an approach to the analysis of life insurance products based on present value analysis and probability theory. It makes use of the mortality tables and is used for computation of premia for an insurance policy. It is also used for the computation of cost of an insurance product both to the insurer and the insured. The calculation is done by professionally trained people called actuaries.