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Understanding Life Insurance Terminology — An Actuary’s Perspective

Getting comfortable with life‑insurance vocabulary is the first big unlock for actuarial students. These words aren’t just definitions — they map to cashflows, reserves, pricing, regulation, and professional judgement you’ll use every day.

1) Policy basics (the “cast of characters” and the timeline)

  • Policyholder: Owns the contract; may be different from the person insured.
  • Life Assured: The life on which the insurance risk is written.
  • Sum Assured: Guaranteed amount payable on death or maturity (per product rules).
  • Premium: Single or regular payments made to keep the policy in force.
  • Term: Contract duration; defines the risk window and benefit timing.
  • Maturity: When survival benefits are paid if the life assured outlives the term.

These basics anchor every projection model: who pays, who receives, how much, and when.

2) Types of benefits & products

  • Death Benefit: Paid if the life assured dies during the term.
  • Survival/Maturity Benefit: Paid if the life assured survives to maturity.
  • Term Assurance: Pure risk cover; benefit only on death within term.
  • Endowment: Pays on death or on survival to maturity — whichever occurs first.
  • Whole Life: Coverage for (almost) entire lifetime (often to age 99/100).
  • Annuity (Immediate/Deferred): Converts capital into a series of payments, commonly for retirement income.
  • ULIP: Life cover + investment component (premiums allocated to funds).

Actuarial angle: Product design = benefit promise + funding method + charges/expenses + risk sharing. Change any one knob and pricing & reserving change with it.

3) The cashflow view (how actuaries “see” policies)

  • Premiums are inflows; claims/benefits are outflows.
  • Expense loadings (acquisition, admin, commission) are priced into premiums.
  • Surrender Value: Payable if policy ends early; reflects accumulated value, penalties, and regulation.
  • Paid‑up Value: Reduced benefits when premiums stop but the contract continues.
  • Reserves: Today’s liability for future promised outgo — cornerstone of solvency and reporting.

Think in projected cashflows discounted to today, then add capital requirements and profitability tests.

4) Mortality & risk terminology

  • Mortality rate (qx): Probability a life aged x dies before x+1.
  • Survival probability (px): Probability a life aged x survives to x+1 (so px = 1 − qx).
  • Force of mortality (μx): Instantaneous mortality rate used in continuous models.
  • Select vs Ultimate: Newly underwritten (select) lives typically enjoy lower early‑duration mortality than longer‑standing (ultimate) policyholders.
  • Risk pooling: Spreading individual uncertainty across many lives to make outcomes predictable.

5) Actuarial notation you’ll meet early

  • Ax: PV of a whole‑life assurance of 1 payable at end of year of death.
  • ax, äx: PV of life annuities (immediate and due).
  • v = 1/(1 + i): Discount factor per period; connects to time value of money.
  • δ = ln(1 + i): Force of interest (continuous compounding).

6) Regulation & professional landscape

  • Capital & solvency (e.g., Solvency II / RBC): Ensuring insurers can meet obligations; liabilities measured as best‑estimate PVs with appropriate discounting.
  • With‑profits vs Non‑par: With‑profits share surplus via bonuses; non‑participating do not.
  • Policyholder Reasonable Expectations (PRE) and Treating Customers Fairly (TCF): Principles guiding product design, communication, and claims handling.

Mini‑case: turning a brochure into cashflows

Scenario: 20‑year endowment, ₹10 lakh sum assured, annual level premiums, survival benefit on maturity, death benefit during term, surrender allowed after year 3.

  1. Map benefits — death during term → outflow at end of policy year of death; survival to year 20 → outflow at maturity; surrender after year 3 → contingent outflow.
  2. Map inflows & charges — annual premiums (inflows) adjusted for expense loadings and lapses.
  3. Risk assumptions — use qx/px by duration (select → ultimate) for mortality; add lapse and expense assumptions.
  4. Valuation — discount expected outflows/inflows using v = 1/(1 + i) (or δ for continuous models); compute reserves each year; test profitability and sensitivities.

Quick self‑check (2 minutes)

  • Distinguish policyholder vs life assured in one sentence.
  • Explain when an endowment pays vs a term assurance.
  • Define surrender value vs paid‑up value.
  • State what qx and μx mean — and when you’d use each.
  • Write v and δ in terms of i.

FAQs

1. Is the policyholder always the life assured?
No. A parent can be the policyholder while the child is the life assured, or an employer can own a key‑man policy.
2. What’s the difference between surrender value and paid‑up value?
Surrender value is the amount payable if you terminate early; paid‑up value keeps the contract in force with reduced benefits when premiums stop.
3. Why do actuaries care about select vs ultimate mortality?
Underwriting creates a temporary “selection” effect — early‑duration mortality is typically lighter, impacting pricing and reserving by policy duration.
4. Where does time value of money show up here?
Every projection is discounted to today using v = 1/(1 + i) or δ for continuous models. For a refresher, see our post on Time Value of Money.

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