Insurance planning

B . Insurance Planning

By : Ashish Ramesh Bhave

Insurance Planning :

Risk : A condition where there is a possibility of adverse outcome, however the outcome is uncertain.

This is applicable to individuals as well as corporate houses.

Probability of risk lies between 0 to 1.

Risk Management :

There are four ways to manage the risk.

Avoiding :

Controlling :

Accepting :

Transferring : Insurance.

Risk management process :Risk

No Yes

Is it measurable? No Significant Non significant

Analyze it Avoid the risk Accept the risk

Avoidable Non avoidable

Avoid it Control the risk

Controllable Non controllable

Control it Insurance

Concept :

Insurance is the tool used for the protecting asset from risk

arises of uncertainties (insurance can protect only the

economic value of the asset), as there is a chance of

damage to asset before the expected life through accidental

occurrences.

Such accidental occurrences are called as PERIL.

Insurance is a contract between Insurer ( insurance co.) &

Proposer / insured ( cover holder), where insurer accepts the

risk according to the terms & conditions, and for same

insured pays some consideration called as premium.

Working principles of Insurance:

1. Uncertainty. : Covers only uncertainties

2. Shearing of losses. : The total loss is shearing among large no. of units

having same risk.

3. Law of Large numbers. : Large no. assure the correctness in the

statistics of premium calculations.

Following are the characteristics which can be covered by

insurance :

1. Loss must occur by chance

2. Loss must be definite, quantifiable.

3. Loss must be significant.

4. Loss rate must be predictable.

5. Loss must not be catastrophic to insurer.

Principles of Insurance:

1. Principle of Utmost Good Faith

2. Principle of Insurable Interest

3. Principle of Indemnity

–Principle of Contribution

–Principle of Subrogation

4. Principle of Proximate Cause

5. Principle of Average

Principle of Utmost Good Faith :

It is a voluntary duty to disclose all material facts which can affects the judgment in

analyzing the risk.

– Examples:

Life insurance – medical history, financial status,

lifestyle (smoking, drinking) etc.

General insurance – previous convictions, previous

losses, claims, policy cancellations.

Personal accident – nature of occupation

Fire Insurance – Construction of building

Motor Insurance – purpose for which vehicle is used

Marine Insurance – Method of packing

Normally all insurance application forms has questionnaire to collect this data.

The principle of utmost good faith is applicable while entering into the contract &

come in force again at the time of revival

Principle of Insurable Interest :

Generally insurable interest exits only if insured wouldsuffer a financial loss in the event of damage to ordestruction of the subject matter.

– Insurable interest can be acquired by:Ownership, legal possession, custody of propertybelonging to others e.g. marriage-spouses on each others life, Employer - employee vice versa,partners,debtor and creditor.A parent usually deemed to have insurable interest in his or her child’s life

The insurable interest is applicable at the time of entering in the contract in the life insurance & applicable at the time of entering in the contract as well as at the time of claim in the general insurance except Marine insurance.

Principle of Indemnity:States that If an individual suffers a loss under an insurance policy, he is entitled to

recover the actual amount of loss – no more and no less – up to the amount insured by the

policy and subject to any deductible or depreciation, if applicable.

The insurance is to protect the loss due to peril and not for making profit .

This principle exist to prevent people from trying to take advantage of insurance policies.

Dose not apply in life insurance & Accidental & Disability insurance

2 Corollaries

Principle of Contribution

Should the same risk be insured by two or more

companies, the compensation must be shared

between them

Principle of Subrogation

Once an insurance company pays out

compensation it becomes owner of the item

insured

Proximate cause:

The active efficient cause that sets in motion a chain of events which

bring about a result, without the intervention of any new force started and

working actively from a new independent source.

If an asset is covered for two or more perils and the damage is caused by more

than one peril happening at the same time then it becomes important to find out

which peril has the most powerful effect .

This applies for General insurance.

Insurance Terms :

Types of deductibles which form part of general insurance policy in most cases

Excess

• Portion of any claim that is not covered by insurance provider

• Deductible must be met before benefits of the policy can apply

• Motor insurance deductible applies to claims arising from damage to his

own vehicle.

• Travel insurance policies have deductibles

• Health insurance policies have deductible which does not

• Cover cost of routine visits

Franchisee

• Kind of excess with a difference

• Like in excess if reported claim is below limit of franchisee it is not payable

• If claim amount is more than franchisee amount the insured gets full amount of

claim without any deduction

Types of insurance policies :

3 types of life insurance policies

– Term Insurance (Risk Cover only ): provides life insurance protection for a

specific

period of time

– Pure endowment plan (Pure Investment): insurer pays fixed sum of money

periodically, while insurer will give survival benefit to insured

– Endowment (Combination of Term Insurance + Pure endowment ) : in addition to

life insurance protection, it also builds internal cash values. So policy holder

gets

both life cover as well as maturity survival benefit.

Types of insurance policies :

Term Insurance Plans

Level term

Decreasing term

Increasing term

Renewable term

Convertible term

Term insurance with return of premium

Level term: Sum Assured (SA) same and uniform throughout term of policy, in case

of death anytime during term, SA is payable.

Decreasing term: Premium remains constant, but benefit payable decreases with

time: for mortgage

Increasing term: premium and benefit increases with time, wherein the increase

could be linked to fixed %

Renewable term: policy is issued for fixed term, with option to policy holder to

renew

without providing proof of health status

Types of insurance policies :

Convertible term: policyholder has option to convert his term insurance to a

permanent insurance plan without undergoing medical test

Term insurance with return of premium: same as level term, except policyholder

on survival gets back full premium paid

Life insurance products.:

Whole life policy

Ordinary life insurance:

Limited paying life insurance

Endowment Policy

Money Back Policy

Unit Linked Policy

Pure Investments

Annuities/Pension plans

ULIP ( Unit linked insurance plan ) :

Policy rider:

Gives additional benefits that supplement basic benefit of SA. You have to pay

extra premium for same.

Life insurance products.:

Riders :

Critical illness cover rider

Disability benefit rider:

Waiver of Premium (WOP)

Accident death benefit:

Level term cover rider:

Payor rider.

General Insurance Products

Home Insurance

Motor Insurance

Accident & Disability Insurance

Mediclaim

Critical Illness

Overseas Travel: Actual Travel

Guard Policy

Liability insurance

Tax Benefits on Insurance.

Section 80C deduction: Upto 1 lac for premium paid on life of self, spouse,

children including adult children and married daughter

Section 80D deduction: for medical insurance and all health riders

upto 15000 pa (Rs. 20000 for senior citizens)

Section 10(10D): Any sum received under insurance policy including maturity

bonus etc is exempt. If annual premium is > 20% of SA on maturity,

then differential between SA & Premium paid is taxable

Accident & Disability Insurance

Cover:

Physical loss to an individual due to accidental bodily injury (including fatal)

24 hour worldwide cover

Any individual aged between 5 and 70, Subject to medical exam at 70,

person can be covered upto 80

Scope of Cover

Death 100% of SI

Permanent Total Disablement 100% of SI

Loss of 2 limbs/2 eyes or 1 limb + 1 eye 100% of SI

Loss of 1 limbs or 1 eyes 50% of SI

Permanent Partial Disablement Varying % of Sum insured as per policy

Temporary Total Disablement : 1% of SA per week, subject to Rs. 3000 max per

week, for max of 104 weeks

Accident & Disability Insurance :

Exclusions:

Compensation under more than one clause for same period of disability not

exceeding CSI

Any payment after admission of claim for 50%/100% of CSI

Any claim in the same period of insurance exceeding the CSI

Suicide, attempt there at, criminal breach of law, accidental death/injury under

influence of liquor/drugs

Pregnancy related claim

War and nuclear perils

Mediclaim :

Covers:

Expenses incurred by insured for hospitalization/domiciliary for illness/diseases

or injury sustained. Includes:

Hospital charges(room, boarding, operation theatre)

fees for surgeon, anaesthetist, nursing, specialist etc.

diagnostic tests, cost of medicines, blood, oxygen etx,

cost of appliances like pacemaker, artificial limns etc.

Domiciliary Hospitalization is capped at 20% of Sum

Assured

Any person in age group of 5 to 75 years, children between 3 months and 5 years

can be covered only along with parents.

Usually claim permitted only subject to minimum hospitalization of 24 hours

except for specific ailment

Mediclaim :

Exclusions:

Diseases contracted within 30 days of insurance

Dental treatment except arising out of accident.

Debility and General Run Down Conditions.

Sexually transmitted diseases and HIV (AIDS)

Circumcision, Cosmetic surgery, Plastic surgery unless required to treat injury

or illness

Vaccination and Inoculation

Pregnancy and child birth

War, Act of foreign enemy, ionizing radiation and nuclear weapon.

Treatment outside India

Naturopathy

Experimental or unproven treatment

All external equipments such as contact lenses, cochlear implants etc.

Underwriting & Rate Making

Underwriting is a process by which insurance company gathers and

Analyzes data to evaluate an application for insurance. They may gather the

required information from one or more of the following sources:

From application

From insurance agent/financial planner

Investigation of persons background, lifestyle, etc

Physical examination, medical tests of the person

Information bureaus

Underwriting Process

Financial underwriting: determines whether the amount coverage

sought accurately reflects the amount of loss in case of damage

Medical underwriting: verifies the true nature of health of individual

Classification of Risks:

Physical hazards: age, sex, build, physical condition, physical impairments,

personal history, family history etc.

Are Accepted with Extra premium.

Occupational hazards: nature of occupation Are Accepted with Extra premium.

Moral hazard: dishonesty. Are Declined.

Policy conditions :

Days of grace : This is the additional time in days given to the policy

Holder to pay premium even after due date, in this time policy remains

active.

As per the premium frequency this grace period is given

Yearly premium : 30 days grace.

Half yearly premium : 30 days grace.

Quarterly premium : 30 days grace.

Monthly premium : 15 days grace.

If the premiums are not paid even after the grace period the policy gets lapsed

and all the benefits are forfeited.

How ever there are some non-forfeit options are also given to favor the policy

holders

Non forfeiture options :

Paid up value (Cash value of policy ) : This gives the cash value on the

Policy & calculated as

= ( total premium paid / total premium payable * SA ) + Bonus.

Surrender value : This gives the payable value on the Policy & calculated as

= PV * Surrender value factor ( SVF ).

Loan : The traditional policies has this option where the policy holder can take a

loan on the policy & pay the remaining premiums through that & can continue the

policy. Policy holder has to repay this loan.

= SV * Loan factor.

Policy need analysis :

The decision on the required insurance cover can be taken on the basis

Of Human life value calculations & can be calculated as

HLV = NPV ( E (earnings) – M (personal expenses) )^n

Can be calculated by using FV200V

Set : Begin.

N : no of years of working

I % : ( (1+discount rate)/(1+income growth rate) -1 ) * 100

PV : Solve ? ( HLV)

PMT : E-M

FV : 0

P/Y : 1

C/Y : 1

Policy need analysis :

How ever the optimisation can be done on the basis of need based analysis which

we use as our system where we can help client.

Insurance laddering system.

Claims :

There are different types of claim

Maturity claim : Given at the time completion of the term.

SA + bonus + loyalty addition.

Survival benefit : as per prescribed in policy contract.

Death claim : SA + accrued bonus.

In Ulip plan :

Maturity claim : SA or Fund value whichever is higher.

Death claim : SA or Fund value whichever is higher.

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