Life Insurance in Bangladesh

Insurance is a contract in which one party known as the insured also known as assured, insures with another party (person or organization), known as the insurer, assures or underwrites his property or life, or the life of another person in whom he has a pecuniary interest, or property in which he is interested, or against some risk or liability, by paying a sum of money as the premium. Under the contract, the insurer agrees to indemnify the insured against a loss which may accrue to the other on the happening of some event. According to Investopedia, Insurance is—

“A contract (policy) in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients’ risks to make payments more affordable for the insured.” At present, insurance is being used widely and becoming more and more popular both in personal life and in the business sector as a significant risk management tool which is primarily used to hedge against the risk of a contingent, uncertain loss. Insurance contract provides financial protection to the insured by the insurer against a loss arising out of happening of an uncertain event. The insured can avail this protection by paying premium to any insurance company with whom the contract has been made. Insurance works on the basic principle and concept of risk-sharing. When a company insures an individual entity (the insured), there legal requirements to share the risks associated with the insured by the insurer, breaking of which contract creates legal bindings. A great advantage of insurance is that it spreads the risk of a few people over a large group of people exposed to risk of similar type and the re-insurance system makes the total risk at zero level in the long run. On the one hand, insurance can increase fraud; on the other it can help societies and individuals in preparing catastrophes and in mitigating the effects of catastrophes on households, business operations and societies.

Kinds of Insurance:
The insurance can be divided from two angles: first, from the business point of view and the second, from the risk point of views.

Fidelity Insurance
Liability Insurance
Property Insurance
Personal Insurance
Risk Point of View
Liability Insurance
Property Insurance (Marine, Fire, Miscellaneous)
Life Insurance
General Insurance
Social Insurance
Business Point of View

Fig: Classifications of Insurance in Business Point of View.

Fig: Classification of Insurance in Risk point of view.
Life Insurance
A life insurance policy is a contract with an insurance company. In exchange for premiums (payments), the insurance company provides a lump-sum payment, known as a death benefit, to beneficiaries in the event of the insured’s death. Typically, life insurance is chosen based on the needs and goals of the owner. Term life insurance generally provides protection for a set period of time, while permanent insurance, such as whole and universal life, provides lifetime coverage. It’s important to note that death benefits from all types of life insurance are generally income tax-free. Literature Review

According to Investopedia, Life Insurance is—
A protection against the loss of income that would result if the insured passed away. The named beneficiary receives the proceeds and is thereby safeguarded from the financial impact of the death of the insured.

According to Wikipedia, Life Insurance is ….

Life insurance is a contract between an insured (insurance policy holder) and an insurer, where the insurer promises to pay a designated beneficiary a sum of money (the “benefits”) upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger payment. The policy holder typically pays a premium, either regularly or as a lump sum. Other expenses (such as funeral expenses) are also sometimes included in the benefits.

Features of Life Insurance Contract
1. Nature of General Contract.
2. Insurable Interest.
3. Utmost Good Faith.
4. Warranties.
5. Proximate Cause.
6. Assignment and Nomination.
7. Return of Premium
8. Other Features.

Classifications of Life Insurance Policy
The general classification of life insurance policy can be divided on the basis of
A. Duration of policy.
B. Method of premium payment.
C. Participation on profit.
D. Number of persons insured.
E. Method of payment of policy amount.
F.
A. Duration of policy:
The life insurance policies according to the duration may be, 1. Whole-life Policies:
Whole-life policies are the most permanent type of life insurance. Coverage continues for the entire life of the insured. Premiums for whole life policies are fixed and are usually more expensive than other policies because of the guaranteed benefit. Some whole life policies have the option of building cash value. The whole life policies can be effected either by payment of single premium, continuous premium and limited premium. 2. Term Insurance:

Term insurance is for a short period of years ranging from months to seven years. The selected term premiums are usually payable throughout the term of the policy or till the period death of the life assured. 3. Endowment policy:

The endowment policy can be several, of which important endowment policies are; 1. Pure Endowment Policy.
2. Ordinary Endowment policy.
3. Joint Life Endowment policy.
4. Double endowment policy.
5. Fixed term (Marriage) Endowment policy.
6. Educational Annuity Policy.
7. Triple Benefit Policy.
And so on.
4. Survivorship Policy:
Survivorship life insurance—also known as “second to die” life insurance—is a type of permanent life insurance protection in which two lives (usually spouses) are insured under one policy. Under this type of policy, the death benefit is paid out upon the death of the second insured. Survivorship life insurance can take the form of whole life, variable life, or variable universal life policies, and are primarily for estate planning purposes. B. Method of Premium Payment:

The policies according to premium payment may be of the following types, 1. Single Premium Payment:
Under this policy, the whole premium is paid at the beginning of the policy. As compared to the annual premium payable, it is costlier but as compared to aggregate of all annual premium payable, it is smaller because all the premium are received in advance and the insurer can earn additional amount on the premium received. 2. Level Premium Policy:

In this policy regular and equal premiums are paid at a definite interval. This premium is lesser than the single premium and is convenient to make premium at a regular period. C. Participation on Profit:

Policies according to participation in profit maybe,
1. Without Profit Policy or Non-participating Policies:
The holders of without profit policies are not entitled to share the profit of the insurer. These policy holders get only the sum assured and no bonus is given to them. 2. With Profit Policies or Participating Policies:

The holders of the profit policies are entitled to share the profit of the profit of the insurer. Science the policy-holders can share the profit and not the loss; they cannot be treated as co-owner of the insurance business. If there is loss, the policy holders cannot get bonus. D. Number of Persons Insured:

On the basis of number of persons insured in a policy, the policy may be, 1. Single Life Policy:
Under single life policy, only one individual is insured. It is not necessary that the policy should be issued in one’s life, it may be in others life; but the fact is that this policy insures only one life. 2. Multiple Life Policy:

In this policy more than one life is incurred it may be joint life policy and last survivorship policy. E. Method of Payment of Policy Amount:
The policy amount may be paid in,
1. Lump Sum Policies:
Where the sum assured is paid in lump sum at the events insured against. 2. Installment or Annuity Policies:
Under this policy the policy amount is payable in installments. It is beneficial to those who earning capacities are reduced to minimum in old age. At that time, this policy maybe more helpful. He may continue to get up to a fixed period up to death or both. Measurement of Risk

Insurance companies try to charge enough money in insurance premiums to cover the amount of money that they will have to pay out to their insured’s (the people who buy insurance policies) under all of the insurance policies that they have issued. Insurance companies make an educated guess about how likely they will have to pay out on the insurance policies that they issue. The likelihood of having to pay out under an insurance policy is called the level of “risk.” Identifying Risk Factors

A person called an actuary studies the history of insurance payouts and identifies which risk factors are more likely to result in insurance companies having to pay out under an insurance policy. For example, inexperienced drivers are more likely to cause a collision than more experienced drivers, and people in their sixties are more likely to die in the next five years than people in their twenties. Actuaries identify the risk factors for each type of insurance policy and compile a corresponding list of risk factors. There are different risk factors which is an insurance company identify, 1. Age:

The age of life to be assured is the most important factor to affect mortality. The corporation ask for age nearer to birth days. The people bellow six month and the person above six month older of the age will be treated of the same age. The age proof is very essential for calculating premium rate. 2. Build:

There are standers of weight according to maximum weight revels the indication of certain hidden diseases. There for this sign is not favorable. The relationship between heights, weight is the basic determination of mortality expansion. 3. Physical Condition:

The physical condition of the age life proposed has direct bearing on the mortality of the life. Insurers are therefore, very particular about the condition of an applicant’s sigh, hearing, heart, arteries, lungs, tonsils, teeth, kidney, nervure system, etc. 4. Personal History:

The personal history of the life proposed would reveal the possibility of death of him. The history may be connected with the, a) Health record.
b) Past habit
c) Previous occupation.
d) Insurance History.
There are other risk measurements factors are, family history, occupation, residence, present habits, morals, race and nationality, sex, economic status, defense services and plan of insurance.

Classes of Risk:
There are the main classes of risk:
1. Uninsurable Risk:
If the insurance can be purchased at higher premium, there should not be any uninsurable risk. Theoretically, after investigating all the factors affecting a risk, the life insurance company should be able to give each dew consideration determining the premium charge for the insurance. 2. Insurable Risk:

The insurable risk are those which after the selection process can be carried out by an insurer although there can be different terms and conditions for different policy holders. Insurable risk are divided into three broad classes, a) Standard Risk.

b) Sub-Standard Risk.
c) Super-Standard Risk.
Mortality Table
For construction of mortality table, number of living at the beginning of each age and number of death during the age are required. The figure of mortality construction should be as accurate as possible and based on a large number of persons. The source of mortality construction can be obtained either from population statistics and record of life insurance. Contraction of Mortality Table:

An example is taken for construction of mortality table. For example, 10,00,000 persons are taken at age 20; 9,98,000 persons at age 21; 9,95,006 persons at age 22 and so on. The numbers of death observed at the age are 2,000; 2,994 and 3,980 respectively. Therefore the death rate will be 0.002; 0.003 and 0.004 respectively at this stage and the death rate is calculated by the formula, Death rate = Number of deaths during the year/ Number of living at the beginning of the year. Survivor rate = 1- Death Rate.

Age | Number of Living| Number of Death| Mortality Rate| Survivor Rate| #| lx| dx| qx| Px=1-qx|
20| 10,00,000| 2,000| 0.002| 0.998|
21| 9,98,000| 2,994| 0.003| 0.997|
22| 9,95,006| 3,980| 0.004| 0.996|
23| 9,91,026| 4,955| 0.005| 0.995|
24| 9,86,065| 5,716| 0.006| 0.994|

Crude and Graduated Mortality Rate:
The graduated mortality rates are those which are obtained by smoothing or graduation is done with help of interpolation or graphic methods.

Life insurance policy in Bangladesh
History of Life Insurance in Bangladesh:
Life insurance has several hundred years of history. In ancient Rome, ‘burial clubs’ covered the cost of members’ funeral expenses and helped survivors monetarily. But modern day life insurance started in the 17th century in England. Life insurance was introduced in Bangladesh in the pre-independence period with the opening of business by the then American Life Insurance Company, popularly known as ALICO (now Metlife Alico). Although the business of life insurance has developed a lot over the years in Bangladesh, people still perceive it to be an underground business of sorts. It is also evident in the number of policyholders. According to insurers, only four persons out of 1,000 have a life insurance policy in Bangladesh. The number is 37 in India and 21 in Pakistan. In developed countries, an individual may even have four to five policies. People are still somewhat less interested about life insurance policies that can give them and their families a big support in the event of death or an accident. Overview of new insurance act 2010:

Bangladesh‘s insurance industry is set to start a new journey with the passage of two new laws in the parliament recently. The House passed two insurance laws in a bid to further strengthen the regulatory framework and make the industry operationally vibrant. The new laws are Insurance Act 2010 and Insurance Development and Regulatory Authority Act 2010. The government has taken the pragmatic step to boost the insurance sector.

Insurance Act 2010 and Insurance Development and Regulatory Authority Act 2010 were passed to better regulate the insurance industry and protect customers’ interests. And Insurance Bill 2010 said the bill was moved aiming at modernizing and updating the old Insurance Act and to trim down the risks of investment in trade and commerce and of course particularly in the insurance industry. The laws update Insurance Ordinance 2008 and Insurance Regulatory Authority Ordinance 2008 of the past caretaker government. Insurance Development and Regulatory Authority (IDRA) were passed by the Jatiya Sangshad in March, 2010. The newly established IDRA started functioning in January, 2011. There are about 50 rules and regulations to be framed under the Insurance Act, 2010. The IDRA have been working on the initial drafts prepared under an Asian Development Bank (ADB)-funded Technical Assistance (TA) project. List of Life Insurance Company in Bangladesh:

There are 19 life insurance companies in Bangladesh, including one state-owned. These companies could not even bring one percent of the country’s 160 million population base under the umbrella of life insurance policies.

1. Jibon Bima Corporation (JBC).(Only state owned life insurance company)
2. National Life Insurance Co. Ltd.
3. Metlife Alico (American life insurance company)
4. Delta Life Insurance Co. Ltd.
5. Express Insurance Ltd.
6. Prime Islami Life Insurance Ltd.
7. Baira Life Insurance Company Ltd.
8. Fareast Islami Life Insurance Company Ltd.
9. Golden Life Insurance Ltd.

10. Homeland Life insurance Company Ltd.
11. Meghna Life Insurance Company Ltd.
12. Padma Islami Life Insurance Ltd.
13. Popular Life Insurance Company Ltd.
14. Pragati Life Insurance Company Ltd.
15. Progressive Life Insurance Company Ltd.
16. Rupali Life Insurance Company Ltd.
17. Sandhani Life Insurance Company Ltd.
18. Sunflower Life Insurance Company Ltd.
19. Sunlife Life Insurance Company Ltd.

Problems of life insurance in Bangladesh:
1. Low Per Capita Income:
Poor economic condition is considered to be the main reason for poor life insurance penetration in Bangladesh. The country has a very low per capita income and over 50% of our total population lives below the poverty line. Inability to save or negligible savings by a vast majority of population kept them away from the horizon of life insurance. 2. Poor Knowledge of Agents:

The marketing of insurance is greatly hampered in the remote village of Bangladesh where the agents are appointed from respected locality. This is because; educated young people are seemed to be reluctant to become insurance agents. Therefore, persons finding no job or persons having lesser knowledge become insurance agents whom cannot acquaint themselves fully with the whereabouts of insurance. Such agents cannot play efficient role in convincing a prospective policyholder. 3. Illiteracy:

Mass illiteracy is another factor that adversely affects the marketing of insurance. About 70% of the population is floating in the sea of ignorance. Illiteracy leads one to think that the insurance is deception; it is no value in life. They cannot think rationality because they do not know what is insurance and what its importance as security for future. 4. Regulators Superstition:

Religious attitude of the people also stands against efficient insurance. The religious people believe that the future is uncertain, it is in the hand of Allah and they do not think it necessary to buy life insurance policy for them. 5. Low Awareness:

Insurance awareness is poor. Agents are not skilled enough. These agents cannot perform their job properly to make the people aware of life insurance. 6. Low Savings: People of Bangladesh have a very small saving potentially and thus have less or no disposable income. Almost the whole of the income is exhausted in the process of maintaining the day-to-day life. Thus they are left with little amount, which may not deemed to sufficient for the payment of premiums. This factor discourages many to buy life insurance policy. 7. Lack of Continuity:

Discontinuation of insurance policy is found higher. This also adversely affects the market efficiency of insurance business. 8. Shortage of Fund:
Most of the policyholders cannot continue their policies owing to price spiral and shortage of fund. 9. Lack of Reminders:
Increase in liability, lack of reminder notice from the insurance company causes for discontinuation of policy. 10. Negligence of Policy Holders:
Many of the policyholders have expressed that; their policies lapsed for their own negligence to pay premium in time. 11. Restriction:
Another important reason for discontinuation is restriction investment allowance by the government relating to income tax.

12. Poor service to consumers:
An important reason for the dismal performance of insurance business in Bangladesh is poor client services provided by the insurance companies. The public image of service from life insurance institutions is very poor. 13. Image:

High lapses of life insurance policies do much to harm insurance image. 14. Lack of new product:
In a dynamic life insurance market, one can expect to see new product coming out every now and then. But still today one can hardly see any new product in the insurance market in Bangladesh Another problems are, low return, traditional marketing, restrictive insurance act, nature of intangibility, inadequate training, lack of advertisement, low quality service, lack of confidence and so on.

Present situation of life insurance in Bangladesh:
After the emergence of the People’s Republic of Bangladesh in 1971, the government nationalized the insurance industry along with the banks in 1972 by Presidential Order No. 95.By virtue of this order, all companies and organization transacting all types of insurance business in Bangladesh came under this nationalization order. This was followed by creation of five insurance companies in the life and non-life sector. Thus the insurance sector in Bangladesh has grown up substantially and deepened remarkably with number of companies in life insurance. With the expansion of size of the insurance market, the volume of assets of the industry has also increased substantially. After the new insurance act 2010 the insurance sector a remarkable solution of employment problem and also aware the benefits of life insurance.

Conclusion
Insurance Industry is playing a significant role in the economic improvement of Bangladesh through its risk sharing operations which motivate investment in many important businesses. The government has now embarked on a reform programmed in the insurance sector to promote a vibrant insurance sector in our country. As a first step towards achieving the objective, the Insurance Act, 2010 in replacement of the previous Insurance Act, 1938, and the Insurance Development and Regulatory Authority Act, 2010 also has been passed for establishing a stronger insurance sector in Bangladesh. In the era of globalization, domestic market should be well organized while the legal framework should be effective to address the changed circumstances in the business and socio-economic entities. In order to meet the challenges caused by changes, the Insurance Ordinance 2010 should be kept as flexible as practicable so that any change in the operational procedure, accounting, actuarial standard that would be needed in future inline without change in the international and domestic environment could be made without further amendment to the Ordinance. The new Insurance Act 2010 promised to bring the positive changes and we are looking forward for the beginning of a Globally Competitive Modern Insurance Sector in Bangladesh.