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Linked Life Insurance

Posted by Prashant Shah on September 23, 2010

These plans have been of great success in recent years. It is a hybrid plan which gives an option of choosing the investment portion to the insured. It combines the benefit of life insurance as well as giving various options of participating in the growth of the capital market. The traditional plan of insurance companies never disclose to insured where his money is invested. This non transparency part is eliminated by the linked plans. The SA or death cover, payable in the event of death during the term, is related to the premium usually as multiple like 5 times the annual premium. IRDA guideline: SA has to be 1.25 times for single premium or 5 times in case of annual premium.

When we talk about transparency and facilities we should also consider the charges of linked plans. They are as follows:

  1. Premium Allocation Charge
  2. Mortality Charges
  3. Fund Management Fees
  4. Policy/ Administration Charges
  5. Surrender Charges Service Tax Deductions

Investors may note, that the portion of the premium after deducting for all charges and premium for risk cover is utilized for purchasing units.

Lets also understand the difference between the traditional plans and the linked plans

39 Responses to “Linked Life Insurance”

  1. Akshay Surve said

    hello sir,
    1] There are 1 lacs cars & loss per year is 90 lacs n gross exps are 45% p.a. what is premium per cars?
    A) 150 B)90 C)163.63 D)138

    2] A buys annuity policy & pays premium for 2 yrs. if he dies after 2 yrs what amt. his annuity will get?
    A) 7.5 lacs B) 7.5 lacs & premium paid 3) 2 premium paid 4) Nil, Annuity continues.

    3] there are 20 lacs cycles the loss ratio is 10 cycle per 1000 cycles. what will be the rate of premium?
    A) 10 per 1000 B) 20 per 1000 C)50 per 1000 D) 25 per 1000.

    Plz help me out to solve this type of questions..

  2. Prasad Chalke said

    Ram had taken an endowment plan for 35 yrs as 20/5/90 for a SA of 250000 wherein premium payable is Rs.2000 quarterly. He dies on 18/8/06. Quarterly premium due in august 06 was paid on 6/8/06. bonus vested Rs. 144000. Interium bonus declared after valuation on 31/3/05 is Rs. 68/1000 SA. What is the amt. of claim payable under the palicy?
    A) 411000 B)407000 C) 357600

    plz sir, answer this question…

    • Vinayak said

      Dear Prasad,

      The answer is as follows:
      On death, claim payable = Sum Assured + vested bonus + interim bonus( if payable ) less unpaid premiums.
      Therefore claim payable = 2,50,000 + 144000 + 68*250000/1000 – 4000 = Rs.4,07,000
      Rs. 4000 is recovered as two quarters premium since Insurance companies always charge premium for the full year when death occurs. He had already paid two premiums for the first two quarters).

      Prashant, please inform if anything wrong in my answer.



  3. Aarohi joshi said

    In a Village there are 1000 persons aged 50 yrs & are healthy. It is expected 10 persons die during the yr. if the economic value of the loss suffered by each family of the dying person is s. 2 lacs. calculate the pure risk premium of each person [Opt- 200, 100, 10, 20]

  4. manish said

    dear sir here is my first query of insurance:-
    how does contribution support the principle of indemnity?
    a.)by ensuring that the exercise of recovery rights will provide no more than exact financial compensation
    b.)by ensuring that the insurer need not pay losses before recovering amts from those responsible for the loss or damage.
    c.)by ensuring that a combination of benefit and indemnity polices relating to the same incident will provide no more than exact financial compensation for the insured
    d.)by insuring that insured is not benefitted by underinsurance
    e.)by ensuring that dual insurance will provide not more than exact financial compensation for the insured.

    i think the answer may be c becoz the pricinciple of contribution which is the subprinciple of indemnity stops the insured from recovering more than the loss but here answer is showing d which i think is connected with the principle of average waiting for ur reply.

    • Dear Manish,
      I slightly disagree with you,

      Principle of Contribution:
      When a person has more than one policy on the same asset. Following a loss the position of the 2 policies is governed by the principle of contribution.
      Since indemnity forbids the insured from recovering more than the loss. He cannot recover the full value of the loss from each of the 2 policies
      The law does not forbid people from engaging in double insurance, it only forbids profiting from a loss
      A has a property of one lakh rupees. He gets an insurance policy for Rs. 50,000 from R & C. and Rs. 50,000 from S & Co.
      Because of fire, property is destroyed to the extent of Rs. 40,000.
      A can claim a total sum of Rs. 40,000 from either of companies, or to the extent of Rs. 20,000 from each.
      In case he claims Rs. 40,000 from R & Co. then S & Co. will pay Rs. 20,000 to R & Co. So this is known as the principle of contribution.

      Principle of Average:
      Average is a concept used by insurers to deal with under-insurance.
      Under-insurance occurs when an item is insured for less than its market value.
      E.g. if a house worth Rs. 5,00,000 is insured for Rs. 300000 and a loss of Rs. 1,00,000 occurs the insured in the absence of an average clause in the policy would be entitled to Rs. 1,00,000


  5. Manish said

    Dear sir I already read the same info as which u have now explained to me then also thnk u so much for explanation but still not cleared how the answer is d?

    • Dear Manish,
      Principle of contribution states that one cannot benefit when he has multiple insurance policies for the same risk. (Not applicable to life insurance)
      While principle of average states that the claim will be settled in proportion when one is under insured.
      Hence answer seems to be ‘e’


  6. Manish said

    Dear sir got the point as contribution supports the principle of indemnity tht means contribution assures indemnity tht insured is not benefited by underinsurance now coming to option c which I think is right but now I think its wrong if there is benefit policy then insured can recover the s.a (he can recover more) which is not the part of indemnity n also the contribution correct me if m wrong?

  7. manish said

    dear sir suppose if mr x renewed his car insurance before the due date. he received a cover note subject to realization of cheque after some time mr x met with an accident he enquired from the insurer abt his insurance policy for the car and was shocked to learn that the same was not renewed due to dishonour of his cheque my question is” was he entitled to get the claim if not then tell me the reason why? he received the cover note which indicates that he renewed his policy

    • Dear Manish,
      Interesting question. Policy renewal is subject to realization. Here the company may have issued cover note but cheque is dishonoured hence no liability arises for the company if the accident happens after the original cover is over. And it is illegal to use vehicle without third party insurance at public place.

      To conclude, I think he will not get any claim from the insurance company.


  8. manish said

    n also plz tell me the answer of this question:-
    A life insurance agent has approached seema with two types of term insurance plans
    1.]plan 1,without return of premium,term 25 yrs,sum assured of rs 25 lakh,yearly premium payable rs 1.94 per thousand of sa
    2.]plan 2,with return of total premiums paid,on maturity,term 25 yrs,sum assured of rs 25 lakh yearly premium payable rs 2.95 per thousand of s.a
    seema is not clear which plan to opt for and she seeks yours advice on which policy is beneficial for her,if discounted by the risk free rate.(assuming seema lives till maturity of the insurance policy,risk-free return is 7.50%)
    a.)plan 1 is better as the net present value is higher
    b.)plan 2 is better as the net present value is lower
    c.)plan 2 is better as the net present value is higher
    d.)plan 2 is better as the net present value is lower

    • Vinayak said


      The answer is B. Calculate the present values of both the policies.
      Policy 1 : PV (0.075,25,-4850,0,1) = 58117
      Policy 2: PV ( 0.075,25,-7375,7375*25,1) = 58141
      Since the PV of policy 1 is lower, it is better.


  9. Manish said

    Thank u vinayak

  10. manish said

    Dear prashant sir if i don’t have the original or duplicate policy then can i recover the claim or not?and also want to know tht will maturity claim can be paid without the life assured signatures?

  11. manish said

    also tell me the answer of the following question:-
    State which one of the following statements is correct?
    (a) The first premium receipt is proof of commencement of risk
    (b) Risk does not commence till the policy is signed
    (c) Both statements are correct
    (d) Both statements are wrong.
    i think the answer may be c bcoz the first premium receipt is the proof tht risk was already transfered but regarding option b i m not clear wht i think tht i m agreed with option b tht risk does not commenced until the policy is signed.without the signature how can the policy is in force n if the policy is not in force then how can the risk be commenced so i think the answer is c both the statements are correct whts ur take on this sir?

  12. manish said

    dear prashant sir waiting for ur reply

  13. manish said

    dear sir when we calculate the pv i mean human life value then wht we should take type 1 or 0 if nothing is mentioned abt the mode of payments?

  14. manish said

    and wht abt need based approach when we calculate the total pv for readjustment period,dependency period,black out period wht we should take begin mode aur end mode?

    • Vinayak said


      As far as I know, you should take Begin mode only for Insurance calculations since payments will be required at the beginning of the period. We have to see what Prashant sir says.


  15. manish said

    dear vinayak will u plz help me with this i got the 89400 wht is ur?

    Find out the claim value payable if DOD is 18 – 2 – 2002, DOC is 20 – 2 – 1989, LPP
    (Q) is 20 – 2 – 2002 ( paid on 6 – 2 – 2002), IP is 300/-, SA is 50,000/-, VB is 36,000/- and
    IB as per valuation (31 – 3 – 2001) is 68/- per thousand.
    (a) Rs. 89,700/-
    (b) Rs. 86,300/-
    (c) Rs. 89,400/-
    (d) Rs. 86,000/-

    • Vinayak said


      As per me, the answer is Rs.86,300. Interim Bonus is payable only if the policy is in force as of 31-03-2002. In this case, it is not, hence IB not payable. Premium paid of Rs.300 is to be refunded hence total claim is 50000+36000+300 = 86300.


      • akash singhal said

        hi vinayak,
        understood the whole solution except the interim bonus part. the date for interim bonus is given as 31-3-2001 then why is it not being considered?

  16. Manish said

    Why the premium will be refunded is it bcoz the he pays the succeding quarter of next year in advance or wht?

    • Vinayak said


      Yes, the premium is refunded because he has paid in advance for the succeeding quarter of next policy year.


  17. manish said

    dear vinayak but the interim bonus valuation date is 31-3-2001 not 31-3-2002 so i think ib should be added also below is the other set of questions which i just want to tally with u i schedule my paper tommorow it would be great if u could help me with this.
    1.)Find out the claim amount payable if DOD is 18 – 8 – 2002, DOC is 20 – 8 – 1989,
    LPP (Q) is 20 – 8 – 2002 paid on 6 – 8 – 2002, IP is 320/-, SA is 50,000/-, VB is 36,000/-,
    IB as per valuation as on 31 – 3 – 2001 is 68/- per thousand.
    (a) 89,720/-
    (b) 89,400/-
    (c) 86,000/-
    (d) 86,320/-
    2.)Find out the claim value payable if DOD is 18 – 2 – 2002, DOC is 20 – 2 – 1989, LPP
    (Q) is 20 – 2 – 2002 ( paid on 6 – 2 – 2002), IP is 300/-, SA is 50,000/-, VB is 36,000/- and
    IB as per valuation (31 – 3 – 2001) is 68/- per thousand.
    (a) Rs. 89,700/-
    (b) Rs. 86,300/-
    (c) Rs. 89,400/-
    (d) Rs. 86,000/-
    3.) Calculate Claim Value if DOD is 18 8 2002, DOC is 20 5 1989, LPP (Q) is 20 8 2002
    (paid on 6 8 2002), IP is 320/-, SA ia 50,000/- and VB is 36,000/- and IB is 68/- per
    thousand as per valuation as on 31 03 2001.
    (a) Rs. 85,360/-
    (b) Rs. 88,760/-
    (c) Rs. 86,320/-
    (d) Rs. 89,720/-
    4.) Find out the claim amount payable if DOD is 18 – 2 – 2003, DOC is 20 – 5 – 1989,
    LPP (Q) is 20 – 2 – 2003 paid on 6 – 2 – 2003, IP is 300/-, SA is 50,000/-, VB is 36,000/-
    and IB as per Valuation as on 31 – 3 – 2002 is 68/- per thousand.
    (a) 89,700/-
    (b) 86,300/-
    (c) 86,000/-
    (d) 89,400/-

    • Vinayak said


      As per my info, for IB calculations, if the valuation date is 31.03.2001, then IB is payable only if policy would have been in force as on 31.03.2002. This is borne out by the problems you have indicated. The following are the solutions:

      1. Answer is Rs. 89,720. Here you can observe that the policy year is 20.08.01 to 20.08.02, hence policy will be in force as of 31.03.02 and hence IB is payable.

      2. The answer is Rs. 86,300. Here IB is not payable since policy expires on 20.02.02. The premium is refunded.

      3. Here the relevant policy year is 20.05.2002 to 20.05.2003, hence IB is payable. The valuation date given in the problem should have been 31.03.2002. Two quarters premium will be deducted from the sum, hence the answer is Rs.88,760.

      4. Here also IB is payable since policy would have been in force as of 31.03.2003. The answer is Rs.89,400.


  18. sir please help me, what should i do for insurance planning…? what should i read & study ….? i want to give exam without EP help….

  19. manish said

    Dear tushar pawar i suggest u to read the book of mandar if u want to give exam without ep.but still ep is very imp for other modules like retirement,ip and tp bcoz of the complexity and basics involved in each of these modules which u can only learn from ep i also suggest u to grough the entire material of this blog,regarding for query u can intereact here with anyone.

  20. Pritesh Modi said

    Please suggest some questions about insurance planning as per new structure of exam as early as possible, if any. Beacuse I want to give exam in next 15 days

    • Harry said

      Hi Pritesh,
      Have you attempted RAIP paper, if yes how was the new pattern and have you cleared the same.. Please share with forum


  21. akash singhal said

    hello all,
    please just answer one small doubt,
    When do we multiply the bonus calculated with number of years?

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