Page 33 - Life Insurance underwriting Ebook IC 22

The underwriter must carefully question the purpose of insurance when no obvious
insurable interest exists. If the beneficiaries are neighbors, casual acquaintances,
friends etc. it requires some explanation. In these situations, it appears that there is lack
of insurable interest on the part of the beneficiary towards the insured.

1.6 Insurable value

Insurance that covers non-existent financial loss also implies lack of insurable interest
on the part of the beneficiary. Significantly high coverage when compared to the amount
necessary to replace the financial loss by the beneficiary indicates miscalculation of the
insurable value of the insured.

Consequences of ignoring the insurable interest and the insurable value

Consequences of ignoring the insurable interest and the insurable value limits are
manifold. It results in payment of unnecessary coverage as it tantamount to over-
insurance. Many a times, excess coverage can serve as an incentive for homicide,
suicide or a fraudulent claim. Moreover, there can be legal consequences in some
instances that result in the policy contract being interpreted as void due to non-
existence of insurable interest at the inception of the policy.

Fraudulent claims involve misrepresentation relating to insurability of the insured person
or falsification of death of the insured person. This can take huge amounts of time,
money and resources of the company to investigate and litigate the illegal claims.

Personal insurance cover

A common reason to purchase personal insurance cover is to replace the income
stream of the decedent. This cover helps the dependents in supporting their ongoing
needs, immediate post death expenses etc.

1.7 Key principles of financial underwriting

 Always establish need for granting insurance and the amount "Does it make
sense?"
 Ensure that the insured is "Not worth more dead than alive"
 The underwriter should be able to rule out speculation out of insurance.
 Relate the past financial trends with the current economic conditions prevailing in
the country, and worldwide.

Human life value method
The human life value method is based on quantification of the estimated potential
earnings (during the remainder of the working life) of the individual to be insured. This
method attempts to arrive at a cover amount which is equal to the present value of the
insured's future earnings, and takes into account the following:

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