A Study on Risk-Return Characteristics of Life Insurance Policies

Life insurance policies are no longer seen solely as a means of insuring life. Due to many new features introduced by life insurers, they are seen in the new light of serving savings and even investment purposes besides the basic purpose of insuring life. The present study discusses the rates of return given by different types of policies, and the effect of mortality on these rates of return across age, sum assured, and maturity period in each type of policy studied. Comparisons in different categories were made for both the unadjusted and mortality-adjusted rates of return. Analysis was made to determine the type of relationship that the unadjusted and mortality-adjusted rates of return follow and to determine their degree of sensitivity to mortality. The findings indicate that different types of policies give different rates of return and that mortality does have an effect on the rates of return. Endowment plans have higher rate of return with mortality incorporated, while for unit-linked investment plans, the rate of return is higher when it is treated purely as an investment instrument. The study also revealed that the unadjusted and mortality-adjusted rates of return follow a linear relationship that is very similar to the capital asset pricing model. The study opens a further scope of research by extending the methodology to include other relevant risk factors besides mortality, and for different types of policies across companies.