Insurance Concept

7/28/2019 Insurance Concept

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A promise of compensation for specificpotential future losses in exchange for aperiodic payment.

designed to protect the financial well being ofan individual, company or other entity in thecase of unexpected loss.

hedging instrument used as a precautionary

measure against future contingent losses. A tool of risk management.


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Only economic consequences of an asset losscan be insured .

Insurance is relevant only if there areuncertainties. If there is no uncertainty aboutthe occurrence of an event, it cannot beinsured against.

Such uncertain or accidental occurrences are

called perils. Such perils expose an asset torisks. Hence, perils are the events, risks arethe consequential losses.


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Insurable InterestThe person opting for insurance must havepecuniary interest in the property he is goingto get insured and will suffer financial loss on

the occurrence of the insured event. Principle of utmost Good faith (UberrimaFides)Disclose all material facts to the risk being

covered.If the insurance contract is obtainedby way of fraud or misrepresentation it isvoid.


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Principle of IndemnityThe insurance contract should be such that in case

of loss due to the eventualities mentioned in thecontract, the insured should be neither better offnor worse off after receiving the insured

amount. SubrogationIf you make a claim for injuries or damages under

your insurance policy, and another person orcompany is at fault, your insurance company may

choose to pay your claim and subrogate againstthe at-fault party.


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ContributionThe right of an insurer to call on other insurers similarly, but

not necessarily equally, liable to the same insured to sharethe loss of an indemnity payment i.e. a travel policy mayhave overlapping cover with the contents section of ahousehold policy. The principle of contribution allows the

insured to make a claim against one insurer who then hasthe right to call on any other insurers liable for the loss toshare the claim payment.

Proximate CauseAn insurer will only be liable to pay a claim under an

insurance contract if the loss that gives rise to the claim

was proximately caused by an insured peril. This meansthat the loss must be directly attributed to an insured perilwithout any break in the chain of causation.


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Life InsuranceInsures life of the person buying the Life InsuranceCertificate. Once a LI is sold by a company, itbecomes legally entitled to make payment to thebeneficiary after the death of the policy holder.

Medical InsuranceAlso known as mediclaim, the policy holder is entitledto receive the amount spent for his health purposesfrom the insurance company.

General InsuranceInvolves insuring risks associated with general assetssuch as automobiles, business related, naturalincidents, commercial and residential properties, etc.


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Policy holder:The person who has taken theinsurance policy and will have to pay the premiums.

Beneficiary/ Nominee:The person who is entitled toreceive the insured amount in case the policy holderdies.

Insurer: The insurance company that offers thepolicy. Premium- When you take a policy, you will have to

pay the insurance company a fixed amount everyyear. This is the premium. A one-time paymentinstead of an annual payment are single premium

policies. Term - The number of years for which the policy is

bought. If you buy it for 10 years, the policy isdescribed as one with a 10-year term.


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Bonusesi. Guaranteed bonusesIs a guaranteed return. Generally, it is not given for more thanfive years of the policy period.

By and large, it is a percentage of the sum assured. This amountis paid to the policy holder after the end of the term.

ii. Reversionary bonuses Based on the performance of the company, the insurance

company declares a bonus for policy holders every year. The amount is got after the end of the term. Reversionary

bonuses are declared after the completion of the guaranteedbonus period.

Offered purely at the discretion of the insurance company anddepends on the profits made that year. Sum assured (SA)This is also known as the cover or coverage and is the total amount

that you are insured for.


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RiderIt is an optional feature that can be added on to a policy. You have to pay an additional premium to avail this benefit. For instance, you may take a life insurance policy and add

on accident insurance as a rider. Surrender value Halfway through the policy, you might want to discontinue the

policy and take whatever money is due to you. The amount the insurance company then pays is known as

surrender value. The policy ceases to exist after this paymenthas been made.

Paid up value If you discontinue to pay the premiums, but do not withdraw themoney from your policy, the policy is referred to as paid up. The sum assured is reduced proportionately, depending on when

you exit from the policy. You then get the amount at the end ofthe term.


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Maturity benefitThe amount that the insurance company has to pay you

when the policy expires is known as the maturity benefit. It generallycomprises the sum assured + bonuses. For example:

-Age of policy holder - 30 years, Beneficiary Spouse, Cover- Rs 2lakh, Term- 20 years,

Premium (per annum) - Rs 9,000 ,Type of policy - Endowment

If the policy holder passes away Insured for 20 years (between the age of 30 and 50). If he passes away

during this time, his spouse gets the maturity benefit. This will be Rs 2lakh (Rs 200,000) along with the bonus (if any).If he lives to his 51st birthday ,

He is entitled to the maturity benefit which is:i. Sum assured: Rs 2 lakh (Rs 200,000). This amount is guaranteed.ii. Guaranteed bonus: This amount is guaranteed.iii. Reversionary bonuses: This is the amount which will be declared by thecompany every year based on its performance. It is considered only afterthe guaranteed bonus period is over. This amount is not guaranteed.


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Survival benefitSome insurance policies make payments at specified intervals to the customer.Typically, they are called money back policies. The amounts paid are generally

fixed and predetermined. They are called survival benefits.Here is an example:

The policy promises to give back a portion of the sum assured (10%, 15%, 20%, 25%)every three years.

If you pass awayIf you die in the next 15 years, Rs 2 lakh (Rs 200,000) and bonuses (if any) will be

paid to your spouse.

Age of policy holder 30 yearsBeneficiary SpouseCover Rs 2 lakhTerm 15 yearsPremium (per annum) Rs 18,000Type of policy Moneyback


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If you survive , this is what the insurance company will pay you:After three years: Rs 20,000After six years: Rs 30,000After nine years: Rs 40,000After twelve years: Rs 50,000 What you will get on maturityYou have been offered a sum assured of Rs 2 lakh (Rs 200,000).

But you have already been paid Rs 140,000 as can be seenabove. On maturity, the balance sum assured (Rs 60,000) +Guaranteed bonus + Reversionary bonus will be paid to you.

Basic elements 2 basic elements- Death cover and Survival benefit.

Plans providing death cover are Term Assurance Plans. Plans providing survival benefit are Pure Endowment plans. If the

insured dies within a specified period, no payment is made.


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Term Assurance Plan :-Provides coverage for a specific period or term (most

often 1, 5, 10, 15 or 20 years).-If death occurs during the term, the policy pays cash

benefits to the beneficiary.-Once the term is over and if the policy is not renewed,

the coverage ceases.-If death occurs after the coverage ceases, no cash

benefits are paid out. It is the most straightforward type of life insurance.

Sometimes it is called "pure" insurance, since the policyhas no financial investment value and most of yourpremium goes to pay for coverage, with only a smallamount used to pay the insurance company's costs.


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policy runs as long as the policyholder is alive. requires the insurer to pay regular premiums

throughout the life. the insured amount and the bonus is payable

only to the nominee of the beneficiary upon the

death of the policyholder. no survival benefit. a major drawback is that the policyholder is not

entitled to any money during his or her ownlifetime.

For all practical purposes, some insurers paysome amount even at a certain old age, may be80.


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Endowment assurance policy is a combination ofterm insurance plan and a pure endowment plan.

the sum assured is paid on survival of thespecified period or on earlier death.

there is both a death benefit or the maturitybenefit. If the policy holder dies before the maturity of

the policy, his nominee gets the sum assured orthe death benefit and the policy terminates.

If the policy holder survives till the end of theterm,he gets the maturity benefit as per theterms and conditions of the policy.


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Is also a form of financial saving i.e. if the person coveredremains alive beyond the term of the policy, he gets investmentbenefits, usually referred to as guaranteed additions, in additionto the sum assured.

A term insurance plan with a pure endowment plan of double thevalue is called a Double Endowment Assurance plan.

Other types of endowment, like a marriage endowment plan,which stipulates the date on which the sum assured will be paidif the life insured dies early.

Another endowment plan option is the Educational Annuity plan,where the sum assured would be paid in instalments,commencing from a date which may be chosen as the likely datewhen the child is pursuing higher or professional education.

Have a fixed term or limited term . E.g. a 20-year endowmentpolicy or a 25-year endowment assurance plan.


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An endowment assurance plan normally has 2variants- with profit or without profit policy.With profit policy or participating policy enjoysthe right to participate in the growth of the

insurance company and is eligible for bonuses. Without profit or Non-participating policy is not

entitled to any bonus declared by the insurancecompany and hence are not very popular too.

Participating endowment policy has an extrapremium as compared to the non-participatingendowment policy.


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It is called Anticipated Endowment Plan i.e.the customer can anticipate when the sumassured would be paid to him.

A certain percentage of the sum assured

(survival benefit ) comes back to the policyholder on survival after say every 3 or 5years, as pre-determined.

If the policy holder dies before the policy

matures, then the entire sum assured is paidto the family as death benefit, irrespective ofthe survival benefits paid or not.


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It is effectively a combination of a terminsurance plan for full sum assured and anumber of different pure endowment plans.

This policy could be taken by someone who

might require liquidity at regular intervals forpurposes like childrens education, wedding,purchase business equipment, buy an assetor some other planned expense.

Since death benefit is guaranteed irrespectiveof the survival benefits already paid , makes ita compelling insurance policy to buy.


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It is an insurance policy on the lives of children, who arenot majors. Since the age of child is below 18 years, theproposal will have to be made by a parent or a guardian.

The premium considered at the commencement of thepolicy is relatively lower because of the young age.

Usually, a child insurance plan can be purchased when the

child is 3 months old (or 91 days of age). According to the rules of IRDA (Insurance Regulatory and

Development Authority), the risk cover on the life of theinsured child will commence only when the child attains aspecified age.

This time gap between the date of commencement of

insurance policy and the commencement of risk is calledDeferment period. The date, on which the risk willcommence, at the end of the deferment period is calledthe Deferred Date.


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No mortality charges till the deferred date. If the child expires before the deferred rate, no

sum assured given, only paid premiums returned. After the child attains 18yrs of age or any later

date after that, as per the policy, the title of the

policy automatically passes on to the child fromthe guardian. This is called vesting.

The first policy anniversary after the childs 18thbirthday, is called the Vesting Date. After vesting,the insurance policy becomes a contract between

the insurance company and the child. A big asset for the childs future to take care of

various financial commitments


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Also called retirement plan or annuities. An investment is made either in a single lump sum

payment or through instalments and is paid over a certainnumber of years.

In return ,a specific sum is received every year, every half-year or every month, either for life or for a fixed number

of years. does not provide any life insurance cover. Instead, offers a

guaranteed income either for life or a certain period . The individual has the option of withdrawing up to one

third of the maturity amount in cash. The policy holder will have to buy an annuity with (at least)

the remaining two thirds amount from any life insurer ofhis choice.

Plans can be with cover or without cover.


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Immediate annuity plans - The annuity/pension commenceswithin one year of having paid the premium (which is usuallya one-time premium).

The premium paid here is also known as the purchase price.Currently in India, very few life insurance companies offer

immediate annuity plans. E.g. LIC's Jeevan Akshay II .Deferred annuity The annuity is 'deferred' up to a time, which

is decided upon by the policyholder. For example, if anindividual buys a pension plan with tenure of 30 years (alsoknown as the 'deferment period'), then his annuity will begin

30 years hence. Premiums can be paid as a 'single premium' or as regular

premium. Presently, most pension plans available aredeferred annuity plans.


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1. Lifetime annuity without return of purchaseprice: The individual receives pension for as longas he lives. The pension ceases on occurrence ofan eventuality and the insurance contract comes

to an end.2. Annuity for life with a return of the purchaseprice: The individual receives pension till he isalive. In the event of an eventuality, the purchase

price (maturity amount, which includes SA +bonuses/additions ) of the annuity is paid out tohis nominees/beneficiaries.


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3. Lifetime annuity guaranteed for a certain number of years: Theindividual receives a pension for a certain number of years (asprescribed by the plan) irrespective of whether he is alive for thesaid period or not. Moreover, if he survives the period, hecontinues to receive pension for the rest of his life.

e.g. - if the individual has opted for 'Lifetime annuity guaranteedfor 15 years', and he meets with an eventuality after only 3 years,

then his nominees will keep receiving annuity for the remaining12 years .

4. Joint life/ Last survivor annuity: The individual receives apension till he is alive. In case of an eventuality, his spousereceives the pension.

Some companies offer both, 'with' and 'without return of purchase

price'. Under the 'Joint life / last survivor annuity with return ofpurchase price', in case of an eventuality to both the individualas well as his spouse, the purchase price of the annuity is'returned' to the nominee.


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Provide a combination of risk cover andinvestment.

The dynamics of capital market have a directbearing on their performance.

Risk is borne by the investor.

Give you flexibility to invest as per your riskprofile, financial commitments and

convenience.- Equity, balanced, debt. Transparent about premium invested and

charges.


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They allow you to track your portfolio. Offer the benefit of a single premium top up

which allows you to invest ad hoc additionalamounts.

Give you the option of a premium vacation. Switch option available.

May have the Partial Withdrawal option whichfacilitates withdrawal of a portion of theinvestment in the policy. This is done through

cancellation of a part of units. Withdrawal isallowed, provided the fund does not fall belowthe minimum fund value.


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Unit Fund - The allocated (invested) portions ofthe premiums after deducting for all the chargesand premium for risk cover under all policies ina particular fund as chosen by the policy holders

are pooled together to form a Unit fund. Unit- It is a component of the Fund in a Unit

Linked Policy.

Net Asset Value (NAV) - NAV is the value of eachunit of the fund on a given day.The NAV of eachfund is displayed on the website of the respectiveinsurers.


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Fund Type Nature of Investments RiskCategory

Equity Funds Primarily invested in company stockswith the general aim of capital

appreciation

Medium toHigh

Income, Fixed Interest

and Bond FundsInvested in corporate bonds,

government securities and other fixed

income instrumentsMedium

Cash Funds Sometimes known as MoneyMarket Funds

invested in cash,bank deposits and money marketinstruments

Low

Balanced Funds Combining equity investment withfixed interest instruments

Medium


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The different types of fees and charges are given below. However,insurers have the right to revise fees and charges over a periodof time.

Premium Allocation Charge is a percentage of the premiumappropriated towards charges before allocating the unitsunder the policy. This charge normally includes initial andrenewal expenses apart from commission expenses.

Mortality Charges are 4charges to provide for the cost ofinsurance coverage under the plan. Mortality charges depend onnumber of factors such as age, amount of coverage, state ofhealth etc

Fund Management Fees - These are fees levied for managementof the fund(s) and are deducted before arriving at the Net AssetValue (NAV) .

Policy/ Administration Charges - These are the fees foradministration of the plan and levied by cancellation of units.This could be flat throughout the policy term or vary at a pre-determined rate.


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Surrender Charges - A surrender charge may bededucted for premature partial or fullencashment of units wherever applicable, asmentioned in the policy conditions.

Fund Switching Charge - Generally a limitednumber of fund switches may be allowed eachyear without charge, with subsequent switches,subject to a charge.

Service Tax Deductions - Before allotment of theunits the applicable service tax is deducted fromthe risk portion of the premium.


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Joint life insurance policies are similar toendowment policies.

Offer maturity benefits to the policyholders,apart from covering risks.

They are categorized separately as they covertwo lives simultaneously.

Suitable for a married couple or for partners

in a business firm.


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The SA is payable on the first death and againon the death of the survivor during the termof the policy.

Vested bonuses + SA is paid after the death

of the survivor or after the maturity date ifone or both the lives survive to the maturitydate.

The premiums payable cease on the firstdeath or on the expiry of the selected term,whichever is earlier.


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Accident benefits equivalent to the SA are availableon the first death. In case both the lives are coveredunder Double Accident Benefit (DAB), the survivinglife is covered under DAB until the end of the policyyear, in which the first life dies under the cover of thepolicy.

Both the policy holders can avail these benefits, if Both the policy holders die simultaneously owing to

an accident. OR Both of them die within the specified period as a

result of the same accident OR The second policy holder also dies in the same policy

year as result of another accident. Nomination is allowed under the policy.


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Offers life insurance protection to various groupssuch as employers-employees, professionals, co-operatives, weaker sections of society, etc.

Have low premiums and simple insurability

conditions. Premiums are based upon age combination of

members, occupation and working conditions ofthe group.

Premium is the same amount for all the insuredpersons in the group


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It allows the insured to convert a term policy to apermanent policy (Whole life policy or anEndowment policy ) at a later date.

The insured person is not required to undergo

any new or additional screening at the time thepolicy is converted, regardless of his/her medicalcondition.

It benefits by providing less expensive term life

insurance now while maintaining the option toconvert to a permanent policy at a later date.


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Plans are offered primarily by LIC. Two of LIC plans- Jeevan Aadhar (Whole life

policy with limited premium payment )andJeevan Vishwas (Endowmen plan).

Extra premium is charged in cases like loss ofboth arms, deaf in both ears etc.

Plans are company specific.


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Riders are additional optional benefits that can be attached to a life insurancepolicy. These can be purchased at a marginally additional premium.

a) Waiver Of Premium Payment of premiums is waived off when the insured person suffers total

disability.

In such a case, further payment of premiums is exempted but the policy

continues.Need: This optional benefit ensures that the policy continues to invest theregular premium as planned and that the objective for taking the insurancepolicy is not compromised.

b) Critical Illness Cover If any critical illness is diagnosed in a policyholder during the course of the

policy, the sum assured is paid out to the insured person as a lump sumamount.

the policy continues though the critical illness cover ceases to exist.


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Need: To live up to exorbitant medical costs, which can becovered to some extent, at a nominal extra premium.c) Accidental Death BenefitAn additional amount is payable in the case of accidental death

of the insured during the term of the rider.Need: To compensate for additional financial inconveniences tothe family/dependents due to the event.

d) Accelerated Sum AssuredThe insured person is paid the sum assured on being diagnosed as

suffering from any of the critical illness. After the settlement ofclaim the basic policy is terminated.

Need: The accelerated sum assured is useful when one wantscritical illnesses to be covered but desires the same at a marginalcost as compared to Critical illness cover.


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Plan OptionDeath Benefit(on death of

insured parent during thepolicy term) Maturity Benefit

Accelerated Benefit Plan Sum Assured + BonusesDeclared.

The policy terminates

immediately.

Sum Assured + Bonuses

Declared

Maturity Benefit Plan Your family need notpay any further

premiums and the policy

continues.


Declared

Double Benefit Plan Sum Assured. Your family need not

pay any further

premiums and the policy

continues.


Declared


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Our insurance regulator, IRDA, allows every

policyholder 15-days from the receipt of thepolicy to return your policy to the insurance

company. It is a very consumer friendly facility that

protects the interests of a policyholder. You can ask for your premium to be returned

to you. Brings in transparency in the process of

buying Insurance.


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It is the practice of mitigating insurance risks. Risks are shared with another insurance

carrier in exchange for paying that othercarrier a part of the premium.

This makes it possible for larger policies tobe written.

Simplifies things for the customer and

generally does not affect rates. The practice of reinsurance could date back

to as early as the 1300s.


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Typically, reinsurance is applied to largerinsurance policies or a large number of smallhigh risk policies.

Companies may also engage in the practice

when they do not specialize in a particularinsurance product.

It provides the opportunity for a companywith more expertise in a certain area to stepin and handle those matters.


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Principle of Utmost Good Faith: Reinsurers

maintain utmost faith in underwriters of theircompany. These underwriters in turn maintainutmost good faith in the underwriters of theprimary insurance company.

Principle of Indemnity: The principles ofindemnity of the insured risk apply automatically

on reinsurance.

No reinsurance without retention.


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There are two basic methods of reinsurance: Treaty Reinsurance is a method of reinsurance requiring

the insurer and the reinsurer to formulate and execute areinsurance contract. The reinsurer then covers all theinsurance policies coming within the scope of thatcontract.

Facultative Reinsurance Here, the ceding company cedesand the reinsurer assumes all or part of the risk assumedby a particular specified insurance policy.

Reinsurance is negotiated separately for each insurancecontract

It is normally purchased for individual risks not covered

by the reinsurance treaties. Underwriting expenses are higher relative to premiums

written on facultative business because each risk isindividually underwritten and administered.


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It is one of the most important services that aninsurance company can provide to its customers.

Insurance companies have an obligation to settleclaims promptly.

You will need to fill a claim form and submit allrelevant documents such as original death certificateand policy bond to your insurer to support yourclaim.

Most claims are settled by issuing a cheque within 7

days from the time they receive the documents. If the insurer is unable to deal with all or any part of

your claim, you will be notified in writing.


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Maturity Claim Death Claim Claim intimationIn case a claim arises: Contact the respective life insurance

branch office or Contact your insurance advisor Claim requirementsFor Death Claim: 1)Death Certificate 2) Original Policy Bond

3) Claim Forms issued by the insurer along withsupporting documentsFor Accidental Disability / Critical Illness Claim: 1Copies ofMedical Records, Test Reports, Discharge Summary,Admission Records of hospitals and Laboratories. OriginalPolicy Bond Claim Forms along with supporting documentsFor Maturity Claims: Original Policy Bond , Maturity ClaimForm .

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