1. ASSESSMENT OF FACTORS AFFECTING HOUSE HOLDS DEMAND FOR LIFE
INSURANCE: (THE CASE OF NEKEMTE TOWN)
A PROJECT PAPER SUBMITTED TO SCHOOL OF GRADUATES STUDIES IN PARTIAL
FULFILLMENT OF THE DEGREE OF MA IN BUSINESS MANAGEMENT AND
ADMINISTRATION.
BY: GEDA MISGANU
MAJOR ADVISOR: GETACHEW BESHARGO (PH.D)
CO-ADVISORS: Mr. SARFARAZ KARIM
Mr. ELIAS GIZACHEW
FEBRUARY, 2012
WOLLEGA UNIVERSITY

2. ASSESSMENT OF FACTORS AFFECTING HOUSE HOLDS DEMAND FOR LIFE
INSURANCE: (THE CASE OF NEKEMTE TOWN)
BY: GEDA MISGANU GOBENA
A PROJECT PAPER SUBMITTED TO THE PROGRAM OF BUSINESS ADMINSTRATION
FACULITY OF COOPERATIVES AND MANAGEMENT, SCHOOL OF GRADUATES
STUDIES, WOLLEGA UNIVERSITY
NEKEMTE, ETHIOPIA
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREES OF
MASTER OF BUSINESS ADMINSTRATION
FEBRUARY, 2012

3. APPENDIX-C
Approval sheet-1
This is to certify that the project entitled Assessment of factors affecting house holds demand for
life insurance, submitted in partial fulfillment of the requirements for the degree of masters in
Business Administration Program, School of Cooperative and Management, and is a record of
original research project carried out by Geda Misganu ID.NO WUSGS/016/10, under my
supervision, and no part of the research project has been submitted for any other Degree or
Diploma.
The assistance and help received during the course of this investigation have been duly
acknowledged. Therefore I recommend that it be accepted as fulfilling the research project
requirements.
______________________ _____________ ____________
Name of Major advisor Signature Date
______________________ _____________ ____________
Name of Co-advisor Signature Date
______________________ _____________ ____________
Name of Co-advisor Signature Date
i

4. APPENDIX-D
Approval sheet-2
We the under signed, members of the Board of Examiners of the final open defense by Geda
Misganu have read and evaluated his research project entitled ―Assessment of factors affecting
house holds demand for life insurance‘‘, and examined the candidate. This is therefore to certify
that the research project has been accepted in partial fulfillment of the requirements for the
degree of Masters in Business Administration.
____________________________ ___________ _______________
Name of the chair person Signature Date
____________________________ ___________ _______________
Name of major advisor Signature Date
____________________________ ___________ _______________
Name Internal Examiner Signature Date
____________________________ ___________ _______________
Name External Examiner Signature Date
ii

5. Acknowledgement
First of all I would like to thank the almighty God for all. Next I wish to express my sincere
appreciation to my advisor, Dr. Getachew Beshargo, for his encouragement, insightful guidance,
patience, and support. I would like to thank Mr. Sarfraz karim, and Mr. Elias for their time and
relentless efforts in correcting this paper. Finally, I extend the deepest and warmest thanks to my
family for their endless love and encouragement that made me stronger in different aspects.
iii

6. Table of contents
Title Page
Acknowledgement --------------------------------------------------------------------------------i
Abstract --------------------------------------------------------------------------------------------ii
Table of content ----------------------------------------------------------------------------------iii
1. Introduction -----------------------------------------------------------------------------------1
1.1 Back ground of the study -------------------------------------------------------------------1
1.2 Description of the study area ---------------------------------------------------------------1
1.3 Statement of the problem -------------------------------------------------------------------3
1.4 The research questions-----------------------------------------------------------------------
1.5 Objectives of the study ----------------------------------------------------------------------3
1.6 Significance of the study---------------------------------------------------------------------4
1.7 Scope of the study----------------------------------------------------------------------------4
2. Literature review ----------------------------------------------------------------------------5
2. Definition of insurance -----------------------------------------------------------------------5
2.1Historiccal back ground of Insurance in Ethiopia----------------------------------------5
2.2 Insurable risks --------------------------------------------------------------------------------6
2.3 Types of life Insurance ----------------------------------------------------------------------6
2.4 Benefit insurance ----------------------------------------------------------------------------11
2.5 The development level of Insurance in Ethiopia ----------------------------------------11
2.6 Insurance and society perspective ---------------------------------------------------------12
2.7. Studies on Life Insurance Purchase Decisions-------------------------------------------12
3. Research methodology ----------------------------------------------------------------------19
3.1 Population------- -----------------------------------------------------------------------------19
3.2 Data requirement-----------------------------------------------------------------------------
3.3 Sample size------------------------------------------------------------------------------------
3.4 Sampling procedure--------------------------------------------------------------------------
3.5 Source and method of data collection------------------------------------------------------
3.6 Data processing and analysis ---------------------------------------------------------------20
3.7 Method of presentation ---------------------------------------------------------------------20
4. Tentative work plan -------------------------------------------------------------------------21
5. Estimated budget to conduct the research----------------------------------------------22
6. Reference -------------------------------------------------------------------------------------23
7. Appendix -------------------------------------------------------------------------------------24
iv

7. Abbreviations
EIC- Ethiopian Insurance Corporation
SPSS-Statistical Package for Social Sciences
PC- personal computer
WL-whole life insurance
UL-universal life insurance
VL-variable life insurance
VUL -variable universal life insurance
MCA -Multiple Classification Analysis
LIMRA -Life Insurance Marketing and Research Association
ACLI -American Council of Life Insurance
ETB- Ethiopian Birr
v

8. List of tables
Table 1.1 Classification of respondents based on age
Table 1.2 Classification of respondents based on sex
Table 1.3 Classification of respondents based on marital status
Table 1.4 Classification of respondents based on their occupation.
Table 1.5 Classification of respondents based on their educational level
Table 1.6 Classification of respondents based on their religion
Table 1.7 Classification of respondents based on their family monthly income
Table 2.1 Analysis of house holds awareness about the availability of life insurance product in
the town.
Table 2.2 Analysis of the availability of insurance company in respondent‘s kebele
Table 2.3 Analysis of life insurance purchase
Table 2.4 Analysis of house holds attitude/ out look towards life insurance
Table 3.1 Summery of major factors for life insurance purchase decisions
vi

9. Abstract
This project was focused at assessing various factors affecting house holds demand for life
insurance in Nekemte town, where the average selling and purchase of life insurance contract is
still lower. Having life insurance products available in the town, one continues to wonder why
the majority of the house holds in Nekemte town does not have any life policy. This resulted into
finding out what factors play very important role in the life insurance policies purchase. The
objective of the study was to asses the factors underlying house holds perception towards
investment in life insurance and their views towards life insurance. The data was obtained from
200 house holds in Nekemte town by using schedule type of questionnaire. The general analysis
about factors affecting house holds demand for life insurance in Nekemte town. Findings and
results are performed. To the end the study also forwarded possible recommendations and
comments that might be helpful for the growth of life insurance business by avoiding or
minimizing the gap between insurance companies and the house holds.
vii

10. Chapter One
1. Introduction
1.1 Back ground of the study
Life is full of risks and uncertainties since, we are social human beings; we have certain
responsibilities too to minimize these risks. Since we are human beings we believe in future
rather than the present and desire to have a better and secured future. In this regard, a life
insurance service has its own value in terms of serving as savings, investment and risk
protection. According to Rejda (1998) Insurance is the pooling of fortuitous losses by transfer of
such risks to insurers (Insurance companies), who agree to indemnify insured, for such losses, to
provide other pecuniary benefit on their occurrence or to render services connected with the risk.
Under any insurance arrangement, a large number of persons agree to share a loss which a few of
them are likely to incur in the future. Such sharing has the advantage that the individual share of
loss is relatively small. When the sharing is done amongst a large number of persons, the
individual share remains fairly steady from year to year. Such association of persons for sharing
anticipated losses may be brought about voluntarily by all participants or may be organized by a
few individuals or by an insurance company. The function of insurance in its various forms is to
protect against heavy financial impact to anticipated misfortune by spreading the loss among
many who are exposed to the risk of similar nature. While it is not possible to predict which
individuals among the many participants are likely to be the victims of misfortunes, it is often
possible to forecast the quantum of the loss which the group as a whole may suffer. The sharing
of such loss amongst the participants insures that the victims are compensated for the loss
suffered by them as a consequence the heavy and uncertain loss to some is neutralized by
definite contribution of moderate amount that every participant is required to make.
Life insurance is the business of affecting the contracts of insurance upon human life including
any contract whereby the payment of money is assured on death or the happening of any
contingency dependent on human life and any contract which is subject to the payment of
premiums for a term dependent on human life.
In addition to the above definition, insurance can also be defined from the view point of
several disciplines including law, economics, history, actuarial science, risk theory and

11. sociology. But each possible definition will not be examined at this point. Insurance is not the
basic tools of risk management but it is easily the most important illustration of the transfer
techniques and the key stone of most risk management programs.
1.2 Description of the study area
The study had been conducted to identify various factors affecting house holds demand for life
insurance in Nekemte town. Nekemte Town is in western sub region of Oromia, at the distance
of 331 Km from Addis Abeba to the west with specific location of 90 04/ North latitude and 360
30/ East longitudes. Currently the town is devided administratively into six sub-cities
administrative divisions, more than 78 clusters and above 301 development groups. The sub
cities are Bakanisa Kese, Bakke Jama, Burka Jato, Chalalaki, Darge, Kasso. Presently, the town
has 20,870 house holds. The most dominant vernacular is Afan Oromo and other languages like
Amharic, Guraginya, Tigrigna, etc.
Today in the town there are (4) four insurance companies. These are Ethiopian Insurance
Company, Nyala Insurance Company, Oromia Insurance Company and Awash insurance
company. Ethiopian Insurance Company is the only insurance company currently selling life
insurance contract in the town where as the rest three are selling life insurance services at their
head office only, because of less consumption in regional and branch offices. The study was
however focused on the customer side of the life insurance market in Nekemte Town.
However, no research had been yet conducted and published on the customer side of life
insurance market in the town.

12. 1.3 Statement of the problem
There are different perils that can destroy, wholly or partially, the economic value of human life.
These include premature death, loss of health, old age, and unemployment. Here life insurance is
needed because it is a social and economic devise by which a group of people may cooperate to
ameliorate the loss resulting from such events on members of the group. In Nekemte the average
selling and purchase of life insurance by house holds is very low (Didessa Life, Branch
Manager). Even though there is an insurance company having life insurance products available
in the town, majority of the house holds and even majority of the population in the town does not
have any life policy. The researcher believed that taking into consideration the above mentioned
issue was very much helpful for determining way and method to exploit the unexploited potential
of life insurance market in the town.
1.4 The research questions
The study focused on answering the following basic questions.
1. What are the possible reasons of non-consumption of life insurance by majority of the
house holds?
2. What are the major factors that affect house holds demand for life insurance?
3. What house holds think and how they behave (house holds attitude) towards life
insurance product in Nekemte town?

13. 1.5 Objectives of the study
General objective
The general objective of the study is to identify determinant factors affecting the house holds
demand for life insurance in Nekemte Town.
Specific objectives
1. To provide insight into the possible reasons of non-consumption of life insurance by
majority of the house holds through analyzing facts and opinions of selected individuals
in the Town.
2. To determine major factors that affect house holds demand for buying life insurance.
3. To reach on certain conclusion on the way house holds think and behave towards life
insurance product.
4. To come up with some suggestions and recommendations for policy makers.
1.6 Significance of the study
Conducting a research on ―factors affecting the purchase of life insurance in Nekemte town‖ is
expected to have importance to different parties. The following are the expected contributions of
the study for insurance companies and other interested researchers.
It will provide some insights about reasons for non-consumption of life insurance by the
majority of the population.
It tries to recommend appropriate ways to encourage consumers for buying life
insurance.
It will serve as bases for other researchers who are interested for further investigation on
the issue.

14. 1.7 Scope and limitations of the study
In this study the researcher only assessed various factors that affect house holds demand for life
insurance in Nekemte town. The study focused on house holds whose monthly income is above
one thousand five hundred. The study area is limited to the town because of high resource
requirement for conducting the research and vastness of the area.
In summery, the following are the major limitations of the study.
The number of sample house holds taken may not be large enough to represent the whole
population.
Shortage of time for very detailed investigation of the respondents.
Financial shortage and shortage of other material resources.

15. Chapter Two
2. Literature Review
Definition of insurance
Insurance is a major component of the financial sector. It is a risk transfer mechanism, where by
a proposer (the insured) transfer some uncertainties of life and property to an insurance company
(insurers) in a consideration for to a payment of money, a premium and this makes insurance a
prime importance in modern economies. It enables different sectors as well as individuals to
reduce and better mange the uncertainty of the future. (Williams and Heins 1981)
2.1 Historical background of insurance in Ethiopia
The first insurance business was transacted by bank of Abyssinia, which began operation in
1905, during the reign of Menelik II, as an agent to a foreign company. The covers given by the
bank of Abyssinia were for fire and marine risks. Another agent was an Austrian named
Weinsinger where represented the ―Baloise‖ fire insurance company some time in 1923. Until
the beginning of the 1950‘s there was no locally incorporated insurance company in Ethiopia.
The first insurance company known as the imperial insurance company was formed in 1951.
(Haile Mchael Kumsa, 1987pp 30-31)
There had been so many branches of foreign insurance companies in Ethiopia but after
proclamation number 281/1970 foreign companies was not allowed to operate in the country
either directly or though agency.
The new era of insurance industry in Ethiopia was since the establishment of Ethiopian
Insurance Corporation by proclamation number 68/1975, insurance services have been expanded
through out the country and new products have been designed by giving special attention to the
rural agricultural sector. (Haile Michael Kumsa, 1987 pp.36). Since then insurance industry had
been monopoly seized by Ethiopian Insurance Corporation, until 1994 when private insurance
companies began to appear by the new proclamation number 86/1994.

16. After this proclamation a number of insurance companies established. Today there are 10(ten)
private insurance companies and 1 (one) government owned insurance company. They are;
Ethiopian insurance corporation (government aimed), National insurance company of Ethiopia,
United insurance company, Nile insurance company, African insurance company, Nyala
insurance company, Global insurance company, Lion insurance company, Awash insurance
company, Oromia Insurance company and NIB insurance company.
2.2 Insurable risks
Even though insurance companies give compensation for the insured upon risk occurred to them
only for tutors losses are insurable, that is one that is unforeseen and unexpected and occurs as a
result of chance. (George E. Rejda page21)
Risk exits whenever future is unknown. Because the adverse effects of risk have plagued man
kind since the beginning of time, individuals groups and societies have developed various
methods for managing risk. Since no one knows future exactly, every one is a risk manger not by
choice but by share necessity.
There are many examples of risk: a homeowner faces the possibility of economic loss caused by
a house fire, a driver faces a potential economic loss if his car is damaged or if might have to pay
for injures caused to a third party in a car accident. Normally, only a small percentage of
policyholders suffer losses. Their losses are paid out of the premiums collected from the pool of
policyholders. Thus, the entire pool compensates few unfortunates as each policyholder
exchanges an unknown loss for the payment of a known premium. (Anderson & Brown, 2000).
Human life value approach focuses on the economic component of human life. Any event
affecting an individual‘s earning capacity has an impact on the individual‘s human life value.
This event may be premature death, incapacity, retirement or unemployment (Black and Skipper,
2000). The human life value concept provides the philosophical basis for the life insurance,
which is a product designed to protect the individual against two distinct risks: premature death
and superannuation (Browne and Kim, 1993). Thus, while death is not a risk, the time of death

17. is. For most people, death at any age may be considered premature when one dies before
adequate preparation has been made for future financial requirements of dependants. Life
insurance thus becomes the mechanism for one to ensure a continuous stream of income to the
beneficiaries (Black and Skipper, 2000). In this regard, life insurance may be regarded as a
saving medium, financial investment, or a way of dealing with risks (Omar and Owusu-
Frimpong, 2006).
2.3. Types Life Insurance
From a generic viewpoint, life insurance policies can be categorized as either term life insurance
or cash value life insurance (Rejda, 2004). Term life insurance provides temporary and pure
protection, whereas cash value life insurance policies not only provide protection for the whole
life of the insured but also builds a source of saving/wealth, which is called; the cash value. A
number of cash value life insurance policies are available to consumers. This section will review
term life insurance and the primary cash value life insurance policies: whole life insurance (WL),
universal life insurance (UL), variable life insurance (VL), and variable universal life insurance
(VUL).
2.3.1 Term Life Insurance
Term life insurance provides insurance protection for a limited time and pays a death benefit
only if the insured dies during that period. If death does not happen during that period, the policy
can be renewed for additional periods without evidence of insurability, if it has a guaranteed
renewable feature. Term life insurance is pure protection. It does not have a cash value. Initially,
when the insured is younger, premiums are lower than the premiums of cash value life insurance.
Term life insurance premiums, however, increase with the insured‘s age because the probability
of death increases with each year of life.
Based on the features of term life insurance, people have drawn consistent conclusions on when
it is appropriate to use term life insurance. As Rejeda (2004) and Trubey (1999) suggest term life
insurance is suitable in the following situations: if the insured has limited income that can be
spent on life insurance, such as young people who are just beginning their careers or families; or
if the need for protection is temporary, such as saving for children‘s education or paying off a

18. mortgage or other debts if the family head dies prematurely. Angell (1981) stated that term life
insurance is an ideal plan to carry if the insured has the necessary self-discipline to regularly
invest the difference in term and cash value life premiums. He readily admitted, however, that
many people do not have this self-control.
2.3.2 Whole life insurance
In contrast to term life insurance, which provides temporary protection, whole life insurance
(WL) is the most basic cash value life insurance offering lifetime protection. Premiums remain
level and fixed throughout the policy‘s life; they will not increase with the age of the insured.
The death benefit is guaranteed and remains constant. Under a whole life insurance policy, the
insured is overcharged for the insurance protection during the early years and undercharged
during the later years. Whole life insurance has an investment or saving element called the
policy‘s cash value which is built by the greater premiums required in the early years of the
policy‘s life. With whole life insurance, the cash value is guaranteed to grow at a fixed rate of
interest that is not known to the owner of the policy. As the cash value increases as a proportion
of the face value, the amount of pure protection decreases. At any given age, the sum of the
protection element and the cash value element will always equal the face amount of the policy.
To secure the guaranteed growth rate of WL, the insurer chooses relatively conservative financial
vehicles in order to assure that their assets meet their liabilities. This, in turn, causes a relatively
low rate of return. A key feature of WL is that the increases in cash value are not subject to
income tax if the policy is held until the insured‘s death. The death benefit, paid to the
beneficiary, is received free of income-tax.

19. The cash value can be taken in cash by surrendering the policy or borrowing against the policy
requiring interest to be paid by the owner of the policy on the loan in order to offset the loss of
interest to the insurer. This interest is relatively low and the loan principal need not be repaid,
however, the death benefit is reduced by the amount of any outstanding balance on the loan.
Though cash value life insurance has a saving element, the insured should keep in mind that the
fundamental purpose of life insurance is to provide financial protection for the family. The
saving and investment purpose of cash value life insurance is usually a secondary concern
(Angell, 1981). Angell suggested that when families have sufficient money left over, cash value
life insurance can be purchased as an investment, after all other tax advantaged saving vehicles
have been exhausted. Trubey (1999) advocated that whole life insurance is the proper choice
when the insured wants both lifetime protection and cash accumulation; wants additional income
during retirement; wants to leave an estate to their heirs; needs money for estate settlement costs
and taxes; or to save money for children‘s college funding. For many individuals, whole life
insurance may be a suitable, competitive choice, but the cost of the premiums makes WL
unaffordable.
2.3.3 Universal Life Insurance
Universal life insurance (UL), introduced in 1979, has been the most popular type of cash value
insurance sold in recent years. According to LIMRA‘s report, UL accounted for 41% of total
premiums in 2007 and the sale of UL outperformed that of other cash value life insurance policy
types. Universal life insurance is different from whole life insurance on a number of factors
(Shaw, 1985). First, the protection and saving elements are separated and unbundled in UL.
Thus, in contrast to whole life insurance, the death benefit and cash value accumulation are not
being guaranteed but the rate of return and cost of insurance are explicitly known. Second, unlike
whole life insurance, UL does not require a fixed schedule of premium payments; instead, the
premium payment schedule is flexible. Flexibility allows policy owners to skip scheduled
premium payments occasionally without causing the policy to lapse. Third, under WL, the policy
owner captures cash value by surrendering the policy or borrowing against the policy. A UL
policy holder, in contrast, can access his or her cash value by making partial withdrawals in
addition to the two options offered with WL. Finally, though UL does not guarantee a fixed
growth rate, it assures a minimum rate of interest, and it credits a current interest rate to the
policy.

20. The same income tax treatment applies to UL as to WL.
As Shaw (1985) indicated, universal life offers flexibility and adaptability in several areas
making it a more appealing alternative to most households as compared with whole life
insurance. The insured that is willing to give up certain contractual guarantees in exchange for
potentially greater cash value growth will be attracted to universal life (Trubey, 1999).
2.3.4 Variable Life Insurance
Variable life insurance (VL) can be defined as a fixed premium policy in which the death benefit
and cash values vary as a result of the investment performance of a separate account (Rejeda,
2004). Variable life insurance is the other form of cash value life insurance that performs like
traditional whole life insurance in some ways: fixed premiums, guaranteed death benefit equal to
the original face value, and no partial withdrawal. The main differences between WL and VL are
regarding how the cash values are invested and with respect to who assume the risk of the
underlying investment. Under WL, cash value growth is generated by investing in fixed-interest
vehicles and the insurer assumes the risk of investment performance. In contrast, the owner of
the policy under a VL has a right to choose various financial vehicles to invest premiums, such
as mutual funds of stocks, bonds, or money market securities. Investment options can be changed
after original purchase, thus making the decision one that is more close to an investment decision
as opposed to an insurance decision. When changing account investment choices, an account
transfer fee could apply. If the investment performance is favorable, the face amount of life
insurance is increased. If the investment performance is poor, the face amount of life insurance is
reduced, but it will typically not fall below the original face amount. Thus, the owner of the
policy bears the risk of investment results, as opposed to the insurer. Since premiums can be
invested in a variety of favorable investments, the VL policy has the opportunity to provide
potentially greater cash value growth than that available in WL. Hence, those who need long-
term insurance protection and a fixed predictable premium payment, but are not satisfied with
the conservative rate of return associated with whole life and prefer potentially greater tax free
cash value growth, a VL policy may be a suitable option (Trubey, 1999). Of course, VL policy
owners must be knowledgeable about investments and willing to accept the greater risk of poor
investment results.

21. 2.3.5 Variable Universal Life Insurance
Variable universal life insurance (VUL), introduced in 1984, is a popular type of cash value
insurance that has been widely sold in recent years. It combines the features of universal life with
variable life. These features include flexible premiums, adjustable death benefits, more methods
of accessing cash value, more investment choices, and the potentially higher rate of return and
that comes with accepting greater risk. Most VUL are sold as investments or tax shelters
(Rejeda, 2004).
Like UL, VUL allows the policy owner to adjust the amount and frequency of premium
payments and death benefits to meet his or her needs. The policy owner determines how to invest
the premiums under a VUL policy. The premiums are held in separate accounts which are not
subject to creditor claims of the insurer (Freeman, 1995). The types of investments are the same
as those of VL, ranging from very conservative guaranteed fixed accounts, to bonds, to common
stocks and highly aggressive sector funds. The policy owner can also choose how much of their
premiums will be allocated into the various accounts, allowing for a potentially greater rate of
return. Internal transfers between the different accounts are free of income tax. Like VL, VUL
has no guaranteed minimum cash value since the cash value depends on the performance of the
underlying investments. Variable universal life insurance policies have substantial investment
risk. The policy owner totally bears the risk of investment. Investment returns rely on how the
premiums are invested. If the investment performance is poor, cash values can drop to zero.
Therefore, the policy owner should be familiar with investing and be able to choose his
investment well (Trubey, 1999). The VUL policy has significant expense charges including
investment, management and mortality costs. According to a study by the Consumer Federation
of America (CFA) in 2003, these various costs can more than offset the tax benefits of VUL
policies. Thus, CFA advised purchasing a VUL only when the policy owner has made maximum
annual contributions to his or her employer‘s 401(k) plan or individual retirement account (IRA)
because they provide favorable income tax treatment at a much lower cost. This advice also
applies to other cash value life insurance purchase since the expense loading of cash value life
insurance is relatively high when compared to competing investments

22. 2.4 Benefit of insurance
Insurance have so many benefits to the society, such as indemnification which means it permits
individuals, families, business and any other exposures to be restored to their former financial
position. The indemnification function contributes greatly to family and business stability and
therefore is one of the most important social and economic benefits of insurance. Worry and fear
are reduced both before and after risk ―if family heads have adequate amount of life insurance
for example, they will be less likely to worry about the financial security of their dependents in
the event of premature death, person insure for long term disability do not have to worry about
the loss of earnings of series illness or accident occurs and property owners who are insured
enjoy greater piece mind since they known they are covered if the loss occurs‖.
Loss prevention - insurance companies are actively involved in numerous loss prevention
programs and also employ a wide variety of less prevention personnel, including safety engineers
and specialists in fire prevention occupational safety and health and products and liability.
Enhancement of credit – insurance makes a borrower a better credit risk because it guaranties
the value of the borrowers collateral or gives greater assurance that the loan will be repaid.
(George E. Rejida 7th ed. Page 28-30)
There are many social and economic values of insurance, but perhaps the greatest value lies in
the reduction of risk in society. The benefits of insurance are achieved at certain social costs.
The chief of which is the cost of the economic resources used to operate the insurance business.
(Triechmann Gustovson, 10th edition page 149)
2.5 The development level of Insurance in Ethiopia
Insurance being one of the service activities, is also very little known to the majority of the
people. In fact insurance as it is known today is a resent phenomenon in Ethiopia. However,
there have been traditional associations where by people contributed either money or labor to
assist each other whenever a member faces financial difficulties or needs assistance; for example
to build a house or harvest crops. Among these associations ―Edir‖ and ―Ekub‖ have some
similarities with modern insurance. In case of ― Edir ― people form an association where by each
member a fixed sum normally monthly, to a common fund from which predetermined

23. compensation are paid to members upon occurrence of un for seen events such as death of family
members or relatives. The compensation is meant to cover expenses that a member would incur
as result of the incident.
The other insurance type of association is ―Ekub‖. ―Ekub‖ members contribute a fixed sum of
money weakly, fortnightly or monthly to a pool of fund and lots are cast where upon the winner
receives the money so collected and uses if for a project if he/ she has one or sells it to another
member at a premium. If something happens to a member, who had already taken the money that
would not enable him to continue contributing to the fund, his guarantees will have to be held
responsible (Haile Michael Kumsa 1987, page 28-30)
2.6. Insurance and society perspectives
Insurance is a business and an investment it has been described as the business that exists in
order to insurance to success and survival of other business. (National Bank of Ethiopia, Birritu,
1996)
One of the reasons why the large portion of the insurance buying public is not buying
insurance may be on the one hand, lack of knowledge about the risk exposure an n the other hand
lack of confidence. Through education and supply of relevant information the insurance industry
can fair the confidence of the public to cooperate with it to preserve the national assets by way of
an insurance contract. (National Bank of Ethiopia, Birritu 2000 no. 77)
2.7. Importance‘s of life insurance
According to (Ms. Naveen Dual) insurance is a contract under which the insurer (Insurance
Company) in consideration of a premium paid undertakes to pay a fixed sum of money on the
death of the insured or on the expiry of a specified period of time whichever is earlier.
In case of life insurance, the payment for life insurance policy is certain. The event insured
against is sure to happen only the time of its happening is not known. So life insurance is known
as ‗Life Assurance‘. The subject matter of insurance is life of human being. Life insurance

24. provides risk coverage to the life of a person. On death of the person insurance offers protection
against loss of income and compensate the titleholders of the policy.
Life Insurance is of great importance to individuals, groups, business community and general
public. Some of the main benefits of life insurance are given below.
i. Protection against untimely death
Life insurance provides protection to the dependents of the life insured and the family of the
assured in case of his untimely death. The dependents or family members get a fixed sum of
money in case of death of the assured.
ii. Saving for old age.
After retirement the earning capacity of a person reduces. Life insurance enables a person to
enjoy peace of mind and a sense of security in his/her old age.
iii. Promotion of savings.
Life insurance encourages people to save money compulsorily. When a life policy is taken, the
assured is to pay premiums regularly to keep the policy in force and he cannot get back the
premiums, only surrender value can be returned to him. In case of surrender of policy, the
policyholder gets the surrendered value only after the expiry of duration of the policy.
iv. Initiates investments
Life Insurance Corporation encourages and mobilizes the public savings and channelizes the
same in various investments for the economic development of the country. Life insurance is an
important tool for the mobilization and investment of small savings.
v. Credit worthiness
Life insurance policy can be used as a security to raise loans. It improves the credit worthiness of
business.
vi. Social Security
Life insurance is important for the society as a whole also. Life insurance enables a person to
provide for education and marriage of children and for construction of house. It helps a person to
make financial base for future.
vii. Tax Benefit
Under the Income Tax Act, premium paid is allowed as a deduction from the total income.

25. 2.8. Important terms in insurance
According to (Robert H. Flashman. 1997), the major reason most consumers buy life insurance is
to provide financial support to beneficiaries in case the insured person dies prematurely.
However, there are additional reasons why life insurance is purchased—to pay off debt or the
balance on a home mortgage upon death, for funeral expenses, for children‘s college education,
and for investment and estate planning.
Who is the owner?
The policy owner is the person named in the insurance contract who has control of the policy.
Usually, this is the person whose life is insured. Or a beneficiary, such as the spouse, could be
the owner.
In other cases, neither of these parties is the owner. This often occurs when a business buys
insurance on its partners to cover the value of the insured's share of assets in the company.
The policy owner has certain important rights to the policy, including:
♦ paying the premium;
♦ naming beneficiaries;
♦ determining the various options within the life insurance policy, such as
♦ Settlement options;
♦ Changing owners of the policy in the future;
♦ Borrowing from a cash buildup in the policy; and
♦ changing any other feature in the insurance policy
Why is ownership important?
As previously mentioned, you do not have to be the owner of a life insurance policy covering
your own life. The policyholder could be another person, such as a spouse or other relative, or a
trust. Ownership has greater impact when major life events, such as divorce or death, occur.
A life insurance policy is a legally binding contract and, as with any other contract, you need to
know what the contract actually says. Here are some commonly used insurance terms and their
definitions.
Primary Beneficiary (-ies):-the individual(s) or organization who will receive money (called
―death benefit,‖ ―face value,‖ or "proceeds") from the insurance company when the insured
person dies.

26. Contingent beneficiary (-ies):-the individual(s) or organization who receives the proceeds if the
primary beneficiary (-ies) dies before the insured dies.
Insured:-the person whose life is covered by the policy. When the insured dies, the death benefit
is paid.
Owner (policyholder) of life insurance contract (policy):-the person who exercises control over
the policy. The owner can make any changes without the consent of anyone else, including
beneficiaries, unless there are court-imposed constraints in place.
2.9. Basic principles of life insurance contract
According to (Ms. Naveen Dual) the basic principles of life insurance are:-
1. Insurable interest
The insured must have insurable interest in the life assured. In absence of insurable interest,
Contract of insurance is void. Insurable interest must be present at the time of entering into
contract with insurance company for life insurance. It is not necessary that the assured should
have insurable interest at the time of maturity also.
Insurable interest exists in the following cases:
(a) A person has an unlimited insurable interest in his/her own life.
(b) A person has an insurable interest in the life of his/her spouse.
(c) A father has an insurable interest in the life of his son or daughter on whom he is
dependent. Likewise a son may have insurable interest in life of his parents.
(d) A creditor has an insurable interest in the life of the debtor, to the extent of the debt.
(e) A servant employed for a specified period has insurable interest in the life of his
employer.
2. Utmost good faith
The contract of life insurance is a contract of utmost good faith. The insured should be open and
truthful and should not conceal any material fact in giving information to the insurance company,
while entering into a contract with insurance company. Misrepresentation or concealment of any
fact will entitle the insurer to repudiate the contract if he wishes to do so.
3. Not a contract of indemnity
The life insurance contract is not a contract of indemnity. A Contract of life insurance is not a
contract of indemnity. The loss of life cannot be compensated and only a fixed sum of money is

27. paid in the event of death of the insured. So, the life insurance contract is not a contract of
indemnity. The loss resulting from the death of life assured cannot be calculated in terms of
money.
2.10. Pricing of life insurance
According to Ms. Naveen Dual Pricing of insurance product is a complex task as premium rates
to be charged depend upon variety of factors namely, expected losses, operating expenses,
income from investments and profit margin of the insurance company.
Actuaries employed by the insurer calculate and determine the premium rates to be charged for
different policies and from people of different age.
If the premium charged is very low, the company would not be able to collect sufficient amount
to pay claims, bear expenses and earn some profit.
On the other hand, excessively high premium charged will result in loss of prospective clients of
the insurance company because company may lose the prospective insurer to its competitors in
the market.
Pricing also depends on the market forces of demand and supply of insurance products.
Pricing refers to the methods used to calculate rate of premium to be charged on insurance
products.
Premium is a price for which the insurer is willing to accept the risk.
The payment of premium by the proposer is acceptance of the price charged by the insurer for
providing the life insurance cover.
Pricing objectives
The following are the objectives kept in mind while deciding upon the pricing of various
insurance products:
i. adequacy rates
The premium rates fixed by the insurance company should be adequate in order to pay the
benefits promised to the policyholders and meet all the operating expenses. In other words the
rates charged must be sufficient to collect the premium incomes the insurance company required
to pay various operating expenses, to pay the claims and at some profit margin.

28. Insurers do conduct periodic reviews to assess whether the initial premium levels established are
equitable and not too high i.e. adequate.
ii. Fairness and rate equity
The insurance rates must be fair and equitable. The rates charged to the policyholders with the
same expected losses and other costs should be equal.
This is known as rate equity. It means that the insurance company should charge premiums in
accordance with the expected payment of benefits and expenses.
The rates must be same for homogenous groups and must not be same for heterogeneous groups
(say of different age groups).
If the two individuals of different ages, say one 25 years and other 50 years intend to purchase
same policy for the same time period with same terms, the insurer will be charging the higher
rate of premium from the person who is 50 years old as there is comparatively higher death
probability of the older client.
In the case of the young person of 25 years the company cannot associate very high death
probability.
If there are two persons of the same age who want to take same policy with same terms and
conditions but one person is chronically ill, the insurer must charge them different rates as the ill
person has higher probability of dying at a certain age (so should be giving higher premium).
iii. Reasonableness
The rates of the premium charged to the policyholders should not be too high because it will lead
to loss of insurance business to the competitors in the industry. Charging excessive premium is
therefore unfair to the customers.
iv. Simplicity
The premium rates charged should be simple to understand and should not change very
frequently.
Life insurance pricing elements
1. Rate of death of large number of insured persons.
2. Administration cost and other expenses of the insurer.
3. Income from investment of premium.

29. i. rate of death of large number of insured persons
The mortality rates depend on the age, occupation, life style, and medical history of the insured.
The premium rates charged are calculated on the basis of rate of deaths of very large number of
persons insured, i.e., the past experience of large number of cases is taken into consideration
before deciding on mortality rate.
ii. Administration cost and other expenses of the insurer:
Every insurer incurs certain expenses or administrative costs related to the service provided. The
administration cost incurred may depend on frequency of payment of premium and the volume
of records kept. If the premium is paid annually, cost is lesser as compared to quarterly and half
yearly or monthly payments.
ii. Income from investment of premium:
Premium collected by the insurance company from various policyholders is again invested and
the income earned on the same helps the insurance company to bear various expenses incurred
and benefits given to policyholders.
2.11. Studies on Life Insurance Purchase Decisions
The demographic, economic and psychographic factors found to be the most robust in predicting
life insurance demand will be the focus of this review.
2.11.1 Demographic Factors
2.11.1.1 Age
There are contradictory conclusions about the effect of age on the demand for life insurance. For
example, Berekson (1972), Showers and Shotick (1994), Baek and DeVaney (2005) found that
the effect of age was positive and significant, but Ferber and Lee (1980), Bernheim (1991) and
Chen et al. (2001) found a negative significant relationship between age and life insurance
demand, whereas Hammond et al. (1967), Duker (1969), Anderson and Nevin (1975), Burnett
and Palmer (1984), Gandolfi and Miners (1996) argued that age was not a significant factor in
purchase of life insurance.
Bernheim (1991) used a probit, a Tobit and a Heckman model, respectively to investigate the
impact of bequest motives on savings based on the estimates of the demand for life insurance,
using the 1975 Longitudinal Retirement History Survey data. The youngest respondent was 64

30. years old and the oldest respondent was 69 years old in the 1975 survey. The effect of age on life
insurance holding was also examined in the models. The results of all three models showed that
the probability of life insurance holdings fall with age. Bernheim pointed out that this negative
relationship could reflect dissaving behavior after retirement of the respondent. Using the 1984
LIMRA data, Gandolfi and Miners (1996) found that age was negatively associated with the
demand for life insurance for husbands, while the age variable was not significant in the model
when studying life insurance demand for wives.
2.11.1.2 Education
Most researchers such as Hammond et al. (1967), Ferber and Lee (1980), Burnett and Palmer
(1984), Gandolfi and Miners (1996), and Baek and DeVaney (2005), agreed in their research that
there is a positive relationship between education and life insurance demand. They recognized
that those who have a better education will purchase more life insurance, potentially due to the
fact that households with greater education can expect their incomes to continue to increase at a
faster rate and for a longer period of time.
Using the 2001 Survey of Consumer Finance data, Baek and DeVaney (2005) examined the
effect of human capital, bequest motives, and risk on term and cash value life insurance
purchased by households. They explained this positive relationship was due to a greater loss of
human capital when the household head dies. Households with a head with greater education
have potentially higher incomes. The death of such a household head will bring more financial
loss to the family as compared with those with lower education. Hence, the purchase of life
insurance for those with greater education increases as the value of the lost human capital
increases. Anderson and Nevin (1975), however, found a negative association between education
and the amount of life insurance purchased. The authors explained that higher educated people
may believe that inflation often decreases the cash value of life insurance from a savings
standpoint and hence declines their need for life insurance.
2.11.1.3 Family size or number of children
Family size and number of children were found to be significant explanatory variables for
determining the demand for life insurance in many studies (Hammond et al., 1967; Ferber and
Lee, 1980; Burnett and Palmer, 1991; Showers and Shotick, 1994). Burnett and Palmer (1991)
employed a dollar amount of total individual life insurance including term, whole life and
endowment as a dependent variable. Using Multiple Classification Analysis (MCA), three

31. demographic variables were found to be statistically significant in their association with the
amount of life insurance. Number of children was one of positive significant variables. Burnett
and Palmer noted that as the number of children increased, the amount of insurance purchased
also increased. This is as expected with households with more children having a greater demand
for financial resources if the household head dies.
Showers and Shotick (1994) examined the positive relationship between family size and life
insurance purchased in their 1994 study. They found that when household size is added by one
person, on average, the need for life insurance will have a corresponding increase in insurance
premiums of $28.58. In contrast, Anderson and Nevin (1975) obtained the result that there is no
significant association between family size and the purchase of life insurance using the data of
Consumer Decision Processes 1968-1971.
2.11.1.4 Employment
Previous studies have consistently conclusion that, if household heads or husbands are employed,
more life insurance will be purchased by individuals or households. These studies‘ authors
include Hammond et al. (1967), Mantis and Farmer (1968), Duker (1969), Ferber and Lee
(1980), and Fitzgerald (1987). Fitzgerald (1987) developed a one period model of the amount of
life insurance purchased by a married couple with data from the Wisconsin Assets and Income
Survey (1946-1964). The dependent variable in this study was the face amount of life insurance
held by the husband. The results showed that occupation of husband had a positive impact on the
amount of life insurance purchased. Gandolfi and Miners (1996) found that the wife‘s
employment status has a negative impact on the husband‘s life insurance ownership. They
argued that full-time labor force participation by the wife reduces the husband‘s life insurance
demand. The analysis of Baek and DeVaney (2005), however, indicated that labor force
participation by the wife enhanced the purchase of both cash value and term life insurance of the
household.
2.11.1.5 Other demographic factors
Just two research articles have examined the influence of health status or life expectancy on the
life insurance purchase. Zhu (2007) studied an individual‘s choices on the purchase of life
insurance and the purchase of stocks using one-period and two-period models. Zhu argued that
when an individual decided the purchase of life insurance and stocks, he or she would consider

32. his or her personal circumstances, such as wealth, future income, health status and survival
probability, attitudes toward risk and bequest. Zhu found that an increased survivor probability
encouraged the individual to hold more life insurance. Similarly, Baek and DeVaney (2005)
showed that a household with a healthy head spends more on life insurance expenditures.
Marital status has also been found to strongly affect both household and individual life insurance
demand in previous studies (Hammond et al., 1967; Mantis and Farmer, 1968) Mantis and
Farmer (1968) were among the first to examine how marital status influences life insurance
demand of households. Multiple linear regression analysis was used on data obtained from the
Life Insurance Fact Book (1929-1964). Premium expenditures were used as the dependent
variable to see if there was an association with six demographic independent variables.
Hammond et al. (1967) also investigated the relationship between life insurance premium
expenditures and various demographic characteristics of households. Marital status and race
were included among the independent variables. The authors believed that race mirrored some
cultural differences, such as attitudes toward death, family, individualism, and risk aversion.
These differences may explain some variation in premium expenditures among households.
Using the cross-sectional data, they found that marital status was negative and significant and
race was not significant in the multiple linear regression analysis where premium expenditure
was the dependent variable.
2.11.2 Economic Factors
2.11.2.1 Income
Income is commonly found to be positively related to the demand for life insurance, holding
other factors constant. The effect of current income on life insurance demand is examined in
numerous studies (Duker 1969; Ferber and Lee, 1980; Truett and Truett, 1990; Showers and
Shotick, 1994; Gandolfi and Miners, 1996). Showers and Shotick (1994) used a Tobit analysis to
analyze the effect of household characteristics on the demand for total life insurance with data
from the Consumer Expenditure Survey in 1987. The dependent variable used was premium
expenditures on life insurance products. They assumed that life insurance was a normal good.
The Tobit analysis indicated that a positive relationship existed between income and
expenditures on life insurance premiums. They explained that as income increased the household

33. has a motive to buy more life insurance because life insurance is bought as a function of the
income replacement needed in the event of unexpected death of the major wage earner.
2.11.2.2 Net worth or wealth
There are inconsistent conclusions in previous research regarding how net worth or wealth
affects life insurance purchase decisions. Some authors believed there is a positive relationship
between net worth or wealth and the demand for life insurance (Duker, 1969; Anderson and
Nevin (1975); Hau, 2000) since life insurance might provide protection for households‘ wealth.
Using the data from the Panel on Consumer Decision Processes (1968-1971), Anderson and
Nevin investigated the variables associated with the amount and type of life insurance purchased
by a sample of young newly-married couples. The data were analyzed through Multiple
Classification Analysis (MCA). There were two dependent variables in their study. One was the
amount of life insurance purchased which was a continuous dependent variable measured in
dollars. The other dependent variable was the type of life insurance purchased which is a dummy
dependent variable, with ―0‖ indicating cash value insurance and ―1‖ indicating term insurance.
The results of MCA showed that net worth was a positive and significant factor in explaining
both the amount of life insurance purchased and the purchase of term life insurance. Conversely,
some studies support the conclusion of negative association between net worth and the purchase
of life insurance arguing that the households with higher net worth or wealth have greater
capability to hedge against the financial loss that may follow the primary earner‘s premature
death (Fortune, 1973; Lewis, 1989). Lewis viewed household demand for life insurance from the
perspective of the beneficiaries. He thought that life insurance was chosen to maximize the
beneficiaries‘ expected lifetime utility. Using the data from LIMRA survey in 1976, Lewis found
that net worth of the household was negatively associated with the demand for life insurance,
when premiums for life insurance were the dependent variable.
2.11.2.3 The rate of interest and inflation
Several researchers have examined whether consumers are sensitive to market rates of interest
when making life insurance purchases. Headen and Lee (1974) indicated that the interest rate has
a different effect on the demand of insurance depending on whether it is in a short or a long run
situation. In the short run, the demand increases with higher interest rates, whereas in the long

34. run, the interest rate has no obvious influence on the demand for life insurance. In another paper,
Pliska and Ye (2007) found that a wage earner buys less life insurance as the interest rate
increased. They reasoned this result was due to the wage earner tending to spend less on
consumption including buying life insurance and saving more money for the future as interest
rates increase. Inflation has also been studied as a factor in the life insurance purchase decision
and has been found to not be significant factor in the demand for life insurance (Neumann, 1969;
Chang, 1995).
2.11.2.4 Homeownership
It is widely believed that homeownership is positively related to the amount of life insurance
held (Anderson & Nevin, 1975; Ferber and Lee, 1980; Gandolfi and Miners, 1996). Gandolfi and
Miners estimated the influence of income and the value of household production on the amount
of life insurance purchased for both husbands and wives and investigated whether the influence
differed by gender. The data in their study was collected by the American Council of Life
Insurance (ACLI) and the Life Insurance Marketing and Research Association (LIMRA) in
1984. Husbands and wives were examined separately and total, group, and individual life
insurance were used as three separate dependent variables in the Tobit model. They did not
separate term policies from cash value policies due to the data limitations. The analysis indicated
that home ownership was strongly positive in all the equations for both husbands and wives.
2.11.3 Psychographic Factors
2.11.3.1 Risk aversion
The research on how risk aversion relates to the demand for life insurance is varied. It is
expected that the greater a household‘s risk aversion, the greater their incentive to buy life
insurance. This point is supported in the studies of Burnett & Palmer (1984), Baek and DeVaney
(2005), and Zhu (2007). In Baek and DeVaney‘s study, attitude toward risk was measured by the
question: ―Which of these statements comes closest to the amount of financial risk that you are
willing to take when you save or make an investment?‖ The analysis of Baek and DeVaney
showed that above-average risk takers were more likely buy term life insurance than those who
preferred taking average risk. Also, those who take average risk hold 10% more cash value life
insurance than those who take no risk. However, Greene (1963) measured the attitude toward

35. risk by twenty questions and used the index for these questions. He found no significant
relationship between risk attitude and insurance purchase behavior.
2.11.3.2 Other psychographic factors
Using consumer panel data from a mid-sized southwestern city, Burnett and Palmer (1984)
explored 14 psychographic factors, such as work ethic, self esteem, community involvement,
fatalism, socialization preference, religious salience, and so on, as influential in determining life
insurance demand. They found that life insurance is related with personality traits of individuals.
The results showed that if people are self-sufficient and believe that they are in control of their
own well being, they will buy more life insurance. Other interesting results include: people who
are more likely to own life insurance purchase are individuals who are not opinion leaders, are
not price conscious, are not information seekers, and are low in self esteem.
2.12. Life insurance policies available at Ethiopian Insurance Corporation
1. Endowment
Anticipated Endowment Policy (with profit)
Children‘s Education Policy (with profit)
Endowment Annuity
2. Medical
Individual Medical Assurance
Group Medical Assurance
Executive Medical Assurance
Travel health insurance
3. Term
Individual Term Life Assurance
Regular Term Life Assurance
Modified Large group Term Life Assurance
Mortgage Protection Assurance

36. 4. Whole Life Assurance
(A Bi- annual Magazine of EIC. Medin No. 30, August 2011).

37. Chapter Three
3. Research methodology
3.1 Population
The population for this specific study was all house holds dwelling in Nekemte town whose
monthly income is above one thousand five hundred.
3.2 Data requirement
The required information and data has been gathered from primary source. Here the material
used for collecting data was schedule type of questionnaire. The schedule contains both
subjective (open ended) and objective (close ended) questions.
3.3 Sample size
In determining sample size the researcher evaluated several methods such as, traditional
inferences, personal judgments, budgeting approach and Bayesian status approach. Among the
methods personal judgment has been selected and used, to make the conditions flexible for a
change if needed. Total number of house holds in the town is 20,870 and only 200 households
whose monthly income is greater than 1500 was selected to respond to the questions.

38. 3.4 Sampling procedure
Since gathering data from the whole population is impossible, sampling has been the only
choice. Stratified random sampling is preferred so as to give equal chance for house holds from
different kebeles, age range, and sex and from different religions in the study area. The
population has been stratified based on sub cities. The town has six sub cities and the number of
respondent house holds taken from each stratum was as shown in the following table.
S.no Name of sub city Number of house holds Sample
1 Cheleleki 3,695 35
2 Burka Jato 3,887 37
3 Kasso 2,779 27
4 Bake Jama 2,241 21
5 Darge 3,997 38
6 Bekenisa Kesse 4,271 42
Source:- population and housing census report, Aug 2010, A.A
3.5 Source and methods of data collection
The schedule as a material of data collections is selected because it is less costly, convenient for
all, free from bias. The data has been gathered from primary source. Four enumerators was
employed because of vast area of the study and because it was too difficult to collect data from
different house holds in different higher and kebeles within a short period of time.
3.6 Data processing and analysis
The collected data was edited for minor errors, coded and classified to have organized and
classified data into similar characteristics that makes the information ready for analysis.
Descriptive statistics has been used for analysis. In this phase respondents remark about various
factors affecting house holds demand for life insurance was carefully investigated. This has been
made by sorting, tallying by hand, pencil, pens and calculators. SPSS was not used for this
analysis because of lack of accessibility and because it was not supported by researchers PC.

39. Percentages are used to express the result relative to relevant variables considered in order to
make comparisons on trends overtime and among categories. The interpretation focused on only
results relevant to the study.
3.7 Methods of presentation
Data has been summarized and presented by means of tabulations and set of percentages. The
result of the analysis has been interpreted carefully to reach on certain conclusion about what
factors play very important role in the life insurance policies purchase and to evaluate the factors
underlying consumer perception towards investment in life insurance and individuals views
towards life insurance.

40. Chapter Four
4. Analysis, Description and Interpretation
This chapter is concerned with analysis, description and interpretation of the data collected from
the sample population. The analysis, description and interpretation of each of the responses were
done one after the other under the given subtitle. In summery the research project conducted to
assess various factors affecting house holds demand for life insurance in Nekemte town in March
and April 2012 was brought with the following results.
4.1 Respondents personal profile
4.1.1 Age of respondents
4.1.1 Age of respondents
S.no Age span frequency percentage
1 18-25 0 0
2 26-35 59 29.5
3 36-45 88 44
4 Above 45 53 26.5
Total 200 100
Table 1.1 Classification of respondents based on age
According to the above table, 44% of the total number of respondents is between age lain of 36-
45. 29.5% of the total number of respondents is between age lain of 26-35. The rest 26.5% of
total number of respondents is above age 45.
The age spans of all respondents well lain above 26 as indicated in the table. This means all
respondents are matured enough to respond to the question provided for them and can answer the
questions even by adding their own experience since they are house holds.

41. 4.1.2 Sex
S.no sex frequency percentage
1 Male 166 83
2 Female 34 17
Total 200 100
Table 1.2 Classification of respondents based on sex
The above table shows that 83% of the total number of respondents was male and the rest 17%
was female respondents.
The data obtained show that majority of the respondent were male house holds. Even though the
responsibility of male house holds and female house holds with regard to their family is similar,
male house holds with regard to the issue raised are believed to have greater exposure than
female house holds do. This means the respondents can give proper answer to the raised
question.
4.1.3 Marital status of respondents
S.no Marital frequency percentage
status
1 Single 0 0
2 Married 188 94
3 Divorced 2 1
4 widowed 10 5
Total 200 100
Table 1.3 Classification of respondents based on marital status
The table shows that 94% of the respondents are married, 5% of them are widowed and the rest
1% is divorced. So majority of the respondents are married, few of them are divorced and
widowed. This means almost all of the respondents have dependents and hence, they can easily
understand the importance of life insurance in their own career than others.

42. 4.1.4 Occupation of respondents
S.no Occupation frequency percentage
1 Civil 146 73
servant
2 Merchant 37 18.5
3 Farmer 7 3.5
4 Others 10 5
Total 200 100
Table 1.4 Classification of respondents based on their occupation.
From the above table 73% of the total number of respondents are civil servant, 18.5% of the total
number of respondents are merchants, 3.5% of them are farmers. The rest 5% responded others
(religious men, business owners, private workers).
This shows that the respondents were from different occupational back ground. This means the
respondents can appear with different know how, experience, and exposures with the issue under
consideration and hence, they can see the problem from different angles.
3.1.5 Educational level of respondents
S.no Educational level frequency percentage
1 Illiterate 0 0
2 1-6 0 0
3 7-8 2 1
4 9-12 8 4
5 Certificate 22 11
6 Collage diploma 78 39
7 Degree and above 90 45
Total 200 100
Table 1.5 Classification of respondents based on their educational level

43. The above table shows that, 45 of the total number of respondents achieved educational level of
first Degree and above, 39% of the total number of respondents achieved Collage diploma, 11%
of them achieved certificate. The rest 5% completed primary and high school level.
The minimum educational level achieved was 7-8, where as the majority of the respondents
achieved higher educational level more than 84% of the respondent house holds achieved collage
diploma and above. This means the respondents are literate and educated. They can successfully
understand the question and easily give appropriate responses.
4.1.6 Religion of respondents
S.no Religion frequency percentage
1 Christian 136 68
2 Muslim 53 26.5
3 Others 11 5.5
Total 200 100
Table 1.6 Classification of respondents based on their religion
According to the above table, 68% of the total number of respondents was Christians, 26.5% of
the total number of respondents was Muslims and the rest 5.5% responded others (Wakefata and
pagan).
Religion matters much in this issue, this means, as the respondents are fellows of different
religions, they hold different doctrinal opinions with regard to the purchase of life insurance
protection. So, since the respondents are from different religious back ground, they can offer
important information on the issue under consideration

44. 4.1.7 Monthly income of respondents
S.no Monthly income frequency percentage
(ETB)
1 Below 500 0 0
2 Between 501-1000 0 0
3 Between 1001-1500 0 0
4 Between 1501-2000 96 48
5 Between 2001-3000 72 36
6 Above 3001 32 16
Total 200 100
Table 1.7 Classification of respondents based on their family monthly income
From the above table, 48% of the total number of respondent‘s monthly income was
between1501-2000, 36% of the total number of respondent‘s monthly income was between
2001-3000. The rest 16% of the total number of respondent‘s monthly income was above 3001.
(All scale described in ETB i.e Ethiopian Birr).
This means the monthly income of all respondents lain above 1500. With the assumption that
―there is a positive relationship between income and life insurance‖ (shown in literature review
part) and the respondents have better income in the town, they are expected to recognize life
insurance as a product at least once in their experience. Hence, they can also give better response
than lower income house holds.

45. 4.2 Life insurance related personal questions
4.2.1 House holds awareness
S.no Aware frequency percentage
1 Yes 44 22
2 No 136 68
3 Neutral 20 10
Total 200 100
Table 2.1 Analysis of house holds awareness about the availability of life insurance product
in the town.
According to the above table, 68% of the total number of respondents is not aware about the
availability of life insurance product in the town, 22% of them are aware and the rest 10%
remained neutral to the question.
This means majority of the house holds in the town are not aware about the availability of life
insurance product in the town. Consumer awareness as a concept of universal concern for all
sectors in an economy is very crucial. It is the main spring of demand creation which runs the
wheels of the industry. This study indicated, there existed huge untapped market potential for life
insurance in the town. This may not mean that house holds don‘t need life insurance.
4.2.2 Availability of insurance company in respondent‘s kebele.
S.no Available frequency percentage
1 Yes 39 19.5
2 No 91 35
3 Neutral 70 45.5
Total 200 100
Table 2.2 Analysis of the availability of insurance company in respondent‘s kebele
As shown in the above table, 45.5% of the respondents remained neutral to the question, whereas
19.5% responded Yes, it is available and the rest 35% responded No, it is not available.

46. This means only few house holds can get insurance company in their surrounding /sub city. This
may even be one of the factors for less awareness of house holds about availability of life
insurance in the town. The availability of life insurance business around the living areas of ones
may create awareness about insurance in that person in such away that it affects the attitude of
individuals towards life insurance positively. According to the data collected only few house
holds i.e. 19.5% of the house holds in the town gets insurance company in their surrounding.
4.2.3 Life insurance purchase
S.no Purchased frequency percentage
1 Yes 0 0
2 No 194 97
3 Neutral 6 3
Total 200 100
Table 2.3 Analysis of life insurance purchase
According to the above table 97% of the total number of respondents have no life insurance
coverage, and the rest 3% remained neutral to the question. No household responded that he/she
bought life insurance yet.
This shows that, surprisingly almost all of the house holds in Nekemte town have no life
insurance coverage. It definitely proved the statement which say‘s ―In Nekemte the average
selling and purchase of life insurance is very low‖ in problem statement. It means that house
holds are putting the financial future of their families at risk, should they lose their job, fall ill or
pass away. Perhaps unsurprisingly, it is single parent families that are most vulnerable.
As Hofstede (1995) stated, ‗the major function of life insurance is to protect against financial
loss from loss of human life. Besides covering the risk of death, it also covers the risks of
disability, critical illness, and superannuation‘. Life insurance is therefore developed on the
concept of human life value (Sayin, 2003).

47. 4.2.4 House holds attitude
S.no Attitude frequency percentage
1 Positive 41 20.5
2 Negative 61 30.5
3 Neutral 98 49
Total 200 100
Table 2.4 Analysis of house holds attitude/ out look towards life insurance
As indicated in the above table, 49% of the total number of respondents have neutral attitude/
outlook towards life insurance, 30.5% have negative attitude towards life insurance and only the
rest 20.5% of the total number of respondents have positive attitude towards life insurance.
Majority of the house holds in Nekemte town have negative attitude towards life insurance
product. A large portion of the population are neutral (not positive, not negative) towards life
insurance and only a smaller portion of the population have positive attitude. This means they do
not like the product and they do not normally think of buying life insurance unless they need
some push from the marketer.
Purchase (behavioral) intention is a function of attitude toward the behavior in question and the
subjective norm. Attitude toward the behavior is the degree to which the person has a favorable
or unfavorable evaluation of the behavior in question. Subjective norm is the influence of
perceived social pressures in respect to performing or not performing the behavior in question
and the individual‘s motivation to comply with these pressures (Ajzen and Fishbein, 1980).
4.2.5. Reasons for non consumption of life insurance by the house hold.
In general the response of the respondents with regard to, ―why they haven‘t purchased life
insurance yet is summarized under the following three major categories (issues)
1. Financial capacity issue

48. Financial shortage or lack of capital to pay premium was responded by 46% of the total
number of respondents. As described by the majority of the respondents, many house holds
in the town live in hand to mouth life, and therefore they are not capable of paying premiums
and they can not afford to buy life insurance.
2. Religion issue
Another 24% of the total number of respondents responded that religion is the most factor or
constraint for non consumption of life insurance. According to these respondents, the
purchase of life insurance contradicts with their doctrine and being insured for their life is
considered as a sin and for bidden by the doctrine of their religion. These respondents motto
is ―God is my protector‖ and they believe that buying life insurance is unfaith fullness in
God.
3. Awareness issue
Awareness related issues were raised by many respondents that, they were not aware about
the availability of life insurance product in the town and they have no knowledge about life
insurance and how it works.
4. Priority issue
The rest respondents responded that, life insurance is not high priority compared to the other
expenses they have. These respondents describe that, life insurance is not basic need to be
fulfilled and there are so many expenses prior for buying life insurance.

49. 4.3 Life insurance related general questions
4.3.1. Factors for life insurance purchase decisions
According to the literature review studies on life insurance purchase decisions, the demographic,
economic and psychographic factors found to be the most robust in predicting life insurance
demand was the focus of this review. The research results agree with the literature data as shown
in Table 3.1 below.
S.no Factors Strongly Agree Neutral Disagree Strongly
agree disagree
1 Demographic Factors
a. Age 0% 80% 15% 4% 1%
b. Education 55.5% 32.5% 12% 0% 0%
c. Family size or
number of children 40.5% 51% 1.5% 7% 0%
d. Employment 27.5% 44% 28.5% 0% 0%
e. Religion 35.5% 59% 5.5% 0% 0%
2 Economic Factors
a. Income 87% 13% 0% 0% 0%
b. Net worth or wealth 23% 19.5% 50% 7.5% 0%
c. The rate of interest 36% 27% 25% 12% 0%
and inflation
d. Homeownership 24% 53.5% 15% 6.5% 1%
3 Psychographic Factors
a. Risk aversion 38% 36% 14.5% 11.5% 0%
b. Lack of awareness 85.5% 14.5% 0% 0% 0%
Table 3.1 Summery of major factors for life insurance purchase decisions

50. 4.3.2. Other factors affecting house holds demand for life insurance
According, to the data collected from 200 sample respondent house holds, by using
subjective question which say‘s ―what do you think are other factors that affect house
holds demand for life insurance in the town?‖. The responses of the respondents were
summarized as follows.
i. Lack awareness/Lack of knowledge
Most of the house holds in Nekemte town are not aware about the availability of
life insurance product in the town and others are not even clear with the idea of
life insurance.
ii. Lack of willingness to buy
Some respondents mentioned that majority of the households are not willing to
buy life insurance. This could be because they have negative attitude towards the
product or because the product is unsought in nature.
iii. Less value /Priority/ given during buying
According to the data collected from the sample house holds, there are many prior
expenses to the purchase of life insurance. This could be because of the financial
capacity issue of the households described under major reasons for non
consumption of life insurance.
iv. Miss conception /Miss information
Many peoples perceive it painful to accept, ―we will die some day in the future‖
because they think, they have to die to win.
v. Work place condition
Riskiness of his/her occupation is also another important factor described in this
section. If his/her work place is very risky, household may think of buying life
insurance.

51. 4.3.3. Suggestions forwarded by the respondents
The last subjective question was the question which say‘s ―what means should be taken
in order to minimize these problems or gap?‖
The respondents suggested what they think should be taken as a means to minimize the
gap. In general form what the respondents suggested was summarized as follows.
- Rising the awareness of people through training depending upon their educational
back ground
- Giving overall information about life insurance and its activities through different
Medias.
- Differentiate and announce different types of life insurance at sub cities and kebele
level, if possible at house hold level.

52. Chapter five
5. Summery, Conclusion and Recommendations
Under this chapter the main findings of the study is summarized and recommendations were
given based on the conclusion.
4.1 Summery and Conclusions
In this part of the study major findings based the analysis made in chapter three a summarized as
conclusions.
The study was undertaken to assess factors affecting house holds demand for life insurance in
Nekemte town. A sample of 200 respondents whose monthly income is above 1,500 was selected
among resident house holds of the town, to gather information.
In determining sample size, the researcher used personal judgment method. Personal judgment
was preferred among other techniques because it reduces the cost of the research and also makes
the researcher understandable.
The researcher used schedule type of questionnaire to collect data from the selected sample
population and minor editing were done when needed. Schedule were selected because of its
competitive advantages over self administered questionnaire and interview solely.
The respondents were randomly selected to respond to the schedule and four well trained
enumerators participated in data collection. The researcher administered careful management
during data collection.
In analyzing and disclosing the facts and opinions obtained from the respondents through
schedule, percentages and tabular presentations were used.

53. Thus the findings are summarized below:-
 Households awareness about the availability of life insurance in the town
The result showed only 22%of the total number of respondent are aware. The larger
portion i.e, 68% of the total number of respondents is not aware and 10% of the total
number of respondents responded neutral. This factor play very important role in the
purchase of life insurance by the households.
 Availability of insurance company in the respondents kebele
The result of this analysis showed that, majority of the respondents (45.5%) do not know
i.e. they were neutral. The next largest portion responded that, no insurance company is
available in their kebele. While few portion of the respondents (19.5%). Responded yes,
insurance company is available at their kebele. This may play a role in house holds
awareness about life insurance business in the town.
 Respondent‘s participation in life insurance policy purchase
Surprisingly no house hold responded that he/she has purchased any type of life
insurance coverage. As a result of this, no respondent attended the 4th and 5th questions
under life insurance related personal questions.
 Attitude (out look) of respondents towards life insurance
The study indicated that only 20.5% of the total number of respondents have positive
attitude towards life insurance product, cohere as the larger portion i.e. 79.5% of the total
number of respondents have negative and neutral attitude towards the product. Neutral
stands for not negative, not positive state.
 The major reasons for non-consumption of life insurance by the house holds
According to the data collected the following are the major reasons for non-
consumption of life insurance product.
Financial shortage /lack of capital
Religion
Lack of knowledge or awareness

54. Non- priority of the product as compared to other products.
There are so many reasons for non consumption of life insurance products by the house holders
dwelling in Nekemte Town but the above listed reasons are the major ones.
 Factors for life insurance purchase decisions
According to the data gathered on this issue, which was adopted from literature review
part, majority of the respondents agree as the listed factors are strongly determinant
factors and considerable in life insurance purchase decisions. These factors are :-
1. Demographic Factors (Age, Education, Family size or number of children,
Employment, Religion)
2. Economic Factors( Income , Net worth or wealth, The rate of interest and
inflation, Homeownership)
3. Psychographic Factors (Risk aversion, Lack of awareness)
 Other factors that affect households demand for life insurance in the town
As per the data collected, in addition to the above objective factors the respondents listed
the following reasons:-
Lack awareness/Lack of knowledge
Lack of willingness to buy
Less value /Priority/ given during buying
Miss conception /Miss information
Work place condition
 Finally, the respondents forwarded their comments on how to minimize the problems or
the gap between insurance companies and the house holds, all the comments revolves
around one core point which says raising awareness and knowledge of the house holds
through training and providing overall information about life insurance and its activities

55. through different Medias. Advertisement on different medias may not give detailed
explanation about what life insurance mean, when, why, how it works and the
responsibilities they take and the clients responsibility in order to get the services
provided by them. As a result many individuals are confused about the companies‘
objectives.
Solving this problems help the insurance companies to successfully operate and achieve
their objectives. However solving such problem may not be an easy task. A number of
challenges are there but the companies should apply their efforts and maximum of their
capacity to over come the uncertainties.

56. 4.2 Recommendations
On the basis of the findings and conclusions drawn from the study, possible recommendations
which are feasible and relevant to avoid or minimize the gap between Life insurance business
and the households, or to tackle the problems that challenge the operation of the business.
1. As the attitude of most of the house holds in the town towards life insurance is Neutral
and Negative, First the insurance companies should work to change house holds attitude
towards the product. This is possible through offering detailed and general information
about what life insurance mean, its objectives, and services provided by the company. It
may change the attitude of people to some extent and creation of awareness indirectly
takes place. Thus marketing communication objectives should be based on creating
awareness, inform of the benefits inherent in life insurance and to reinforce the
purchasing decision.
2. The Life insurance premium to be paid by the insured‘s should be set as economical as
possible because the many house holds specified shortage of finance/ lack of capital to be
insured. This helps the insurance companies to attract more number of clients and make
spreading of loss caused by particular risk over a number of persons possible. In
economics, ―The lesser the premium price, the higher will be the demand for the product
and the higher the price the lower the demand will be, the law of demand‖.
3. Life Insurance services providers will, therefore, have to introduce proactive strategies
that are primarily aimed at educating households and encouraging greater usage of life
insurance. And also, the company should expand this study nationally to over come
limitations faced by the researcher in the study.

57. Reference/ Bibliography
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59. WOLLEGA UNIVERSITY
SHOOL OF GRADUATES STUDY
MBA PROGRAM
This schedule type of questionnaire is prepared in order to get the necessary information about
factors that affect house holds demand for life insurance in Nekemte Town. The information will
be obtained from house holds and will be used only for academic purpose. The researcher would
like to thank in advance for your cooperation in answering this schedule.
PART-I. RESPONDENTS PERSONAL PROFILE
Kebele____________ Sub city ______________
1. Age: a. 18-25 yrs. b. 26-35 yrs c. 36-45 yrs d. 45+ yrs
2. Sex: a. Male b. Female
3. Marital status:
a. Single b. Married c. Divorced
d. Widowed
4. Occupation:
a- Civil servant b. Merchant
c- Farmer d- Others____________
5. Educational level:
a. Illiterate b. 1-6 c. 7-8 d. 9-12
e. Certificate f. Collage diploma g. Degree and above
6. Religion:
a. Christian b. Muslim c. Other _____________
7. Family (monthly) income (in ETB):