A.

1 Introduction: Economic growth and development of any country depends upon a well-knit financial
system. Financial system comprises, a set of sub-systems of financial institutions financial markets,
financial instruments and services which help in the formation of capital. Thus a financial system
provides a mechanism by which savings are transformed into investments and it can be said that financial
system play an significant role in economic growth of the country by mobilizing surplus funds and
utilizing them effectively for productive purpose.
The financial system is characterized by the presence of integrated, organized and regulated financial
markets, and institutions that meet the short term and long term financial needs of both the household and
corporate sector. Both financial markets and financial institutions play an important role in the financial
system by rendering various financial services to the community. They operate in close combination with
each other.
Financial System;

The word "system", in the term "financial system", implies a set of complex and closely connected or
interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy. The
financial system is concerned about money, credit and finance-the three terms are intimately related yet
are somewhat different from each other. Indian financial system consists of financial market, financial
instruments and financial intermediation
Functions of Financial System:
The financial system helps production, capital accumulation, and growth by (i) encouraging savings, (ii)
mobilising them, and (iii) allocating them among alternative uses and users. Each of these functions is
important and the efficiency of a given financial system depends on how well it performs each of these
functions.
(i) Encourage Savings:
Financial system promotes savings by providing a wide array of financial assets as stores of value aided
by the services of financial markets and intermediaries of various kinds. For wealth holders, all this offers
ample choice of portfolios with attractive combinations of income, safety and yield.
With financial progress and innovations in financial technology, the scope of portfolio choice has also
improved. Therefore, it is widely held that the savings-income ratio is directly related to both financial
assets and financial institutions. That is, financial progress generally insures larger savings out of the
same level of real income.
As stores of value, financial assets command certain advantages over tangible assets (physical capital,
inventories of goods, etc.) they are convenient to hold, or easily storable, more liquid, that is more easily
encashable, more easily divisible, and less risky.
A very important property of financial assets is that they do not require regular management of the kind
most tangible assets do. The financial assets have made possible the separation of ultimate ownership and
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management of tangible assets. The separation of savings from management has encouraged savings
greatly.
Savings are done by households, businesses, and government. Following the official classification
adopted by the Central Statistical Organization (CSO), Government of India, we reclassify savers into
household sector, domestic private corporate sector, and the public sector.
The household sector is defined to comprise individuals, non-Government, non-corporate entities in
agriculture, trade and industry, and non-profit making organisations like trusts and charitable and
religious institutions.
The public sector comprises Central and state governments, departmental and non departmental
undertakings, the RBI, etc. The domestic private corporate sector comprises non-government public and
private limited companies (whether financial or non-financial) and corrective institutions.
Of these three sectors, the dominant saver is the household sector, followed by the domestic private
corporate sector. The contribution of the public sector to total net domestic savings is relatively small.
(ii) Mobilisation of Savings:
Financial system is a highly efficient mechanism for mobilising savings. In a fully-monetised economy
this is done automatically when, in the first instance, the public holds its savings in the form of money.
However, this is not the only way of instantaneous mobilisation of savings.
Other financial methods used are deductions at source of the contributions to provident fund and other
savings schemes. More generally, mobilisation of savings taken place when savers move into financial
assets, whether currency, bank deposits, post office savings deposits, life insurance policies, bill, bonds,
equity shares, etc.
(iii) Allocation of Funds:
Another important function of a financial system is to arrange smooth, efficient, and socially equitable
allocation of credit. With modem financial development and new financial assets, institutions and markets
have come to be organised, which are replaying an increasingly important role in the provision of credit.
In the allocative functions of financial institutions lies their main source of power. By granting easy and
cheap credit to particular firms, they can shift outward the resource constraint of these firms and make
them grow faster.
On the other hand, by denying adequate credit on reasonable terms to other firms, financial institutions
can restrict the growth or even normal working of these other firms substantially. Thus, the power of
credit can be used highly discriminately to favour some and to hinder others

Ans 2 Money market is distinguished from capital market on the basis of the maturity period, credit
instruments and the institutions:
1. Maturity Period: The money market deals in the lending and borrowing of short-term finance (i.e., for
one year or less), while the capital market deals in the lending and borrowing of long-term finance (i.e.,
for more than one year).

2. Credit Instruments: The main credit instruments of the money market are call money, collateral loans,
acceptances, bills of exchange. On the other hand, the main instruments used in the capital market are
stocks, shares, debentures, bonds, securities of the government.
3. Nature of Credit Instruments: The credit instruments dealt with in the capital market are more
heterogeneous than those in money market. Some homogeneity of credit instruments is needed for the
operation of financial markets. Too much diversity creates problems for the investors.
4. Institutions: Important institutions operating in the' money market are central banks, commercial
banks, acceptance houses, nonbank financial institutions, bill brokers, etc. Important institutions of the
capital market are stock exchanges, commercial banks and nonbank institutions, such as insurance
companies, mortgage banks, building societies, etc.
5. Purpose of Loan: The money market meets the short-term credit needs of business; it provides
working capital to the industrialists. The capital market, on the other hand, caters the long-term credit
needs of the industrialists and provides fixed capital to buy land, machinery, etc.
6. Risk: The degree of risk is small in the money market. The risk is much greater in capital market. The
maturity of one year or less gives little time for a default to occur, so the risk is minimized. Risk varies
both in degree and nature throughout the capital market.
7. Basic Role: The basic role of money market is that of liquidity adjustment. The basic role of capital
market is that of putting capital to work, preferably to long-term, secure and productive employment.
8. Relation with Central Bank: The money market is closely and directly linked with central bank of the
country. The capital market feels central bank's influence, but mainly indirectly and through the money
market.
9. Market Regulation: In the money market, commercial banks are closely regulated. In the capital
market, the institutions are not much regulated.

A.3 The Financial Institutions in India mainly comprises of the Central Bank which is better known as
the Reserve Bank of India, the commercial banks, the credit rating agencies, the securities and exchange
board of India, insurance companies and the specialized financial institutions in India.
Reserve Bank of India:
The Reserve Bank of India was established in the year 1935 with a view to organize the financial frame
work and facilitate fiscal stability in India.
The bank acts as the regulatory authority with regard to the functioning of the various commercial bank
and the other financial institutions in India.
The bank formulates different rates and policies for the overall improvement of the banking sector. It
issue currency notes and offers aids to the central and institutions governments.
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Commercial Banks in India:

The commercial banks in India are categorized into foreign banks, private banks and the public sector
banks. The commercial banks indulge in varied activities such as acceptance of deposits, acting as
trustees, offering loans for the different purposes and are even allowed to collect taxes on behalf of the
institutions and central government.
Credit Rating Agencies in India:

The credit rating agencies in India were mainly formed to assess the condition of the financial sector and
to find out avenues for more improvement. The credit rating agencies offer various services as:
Operation Up gradation
Training to Employees
Scrutinize New Projects and find out the weak sections in it
Rate different sectors
The two most important credit rating agencies in India are:
CRISIL
ICRA
Securities and Exchange Board of India:
The securities and exchange board of India, also referred to as SEBI was founded in the year 1992 in
order to protect the interests of the investors and to facilitate the functioning of the market intermediaries.
They supervise market conditions, register institutions and indulge in risk management.
Insurance Companies in India:
The insurance companies offer protection against losses. They deal in life insurance, marine insurance,
vehicle insurance and so on. The insurance companies collect the little saving of the investors and then
reinvest those savings in the market. The insurance companies are collaborating with different foreign
insurance companies after the liberalization process. This step has been incorporated to expand the Indian
Insurance market and make it competitive.
Specialized Financial Institutions in India:

The specialized financial institutions in India are government undertakings that were set up to provide
assistance to the different sectors and thereby cause overall development of the Indian economy. The
significant institutions falling under this category includes:
Board for Industrial & Financial Reconstruction
Export-Import Bank Of India
Small Industries Development Bank of India
National Housing Bank

A=4 7 Major Functions of the Reserve Bank of India

1. Issue of Bank Notes:
The Reserve Bank of India has the sole right to issue currency notes except one rupee notes which are
issued by the Ministry of Finance. Currency notes issued by the Reserve Bank are declared unlimited
legal tender throughout the country.

This concentration of notes issue function with the Reserve Bank has a number of advantages: (i) it brings
uniformity in notes issue; (ii) it makes possible effective state supervision; (iii) it is easier to control and
regulate credit in accordance with the requirements in the economy; and (iv) it keeps faith of the public in
the paper currency.
2. Banker to Government:
As banker to the government the Reserve Bank manages the banking needs of the government. It has tomaintain and operate the governments deposit accounts. It collects receipts of funds and makes payments
on behalf of the government. It represents the Government of India as the member of the IMF and the
World Bank.
3. Custodian of Cash Reserves of Commercial Banks:
The commercial banks hold deposits in the Reserve Bank and the latter has the custody of the cash
reserves of the commercial banks.
4. Custodian of Countrys Foreign Currency Reserves:
The Reserve Bank has the custody of the countrys reserves of international currency, and this enables the
Reserve Bank to deal with crisis connected with adverse balance of payments position.
5. Lender of Last Resort:
The commercial banks approach the Reserve Bank in times of emergency to tide over financial
difficulties, and the Reserve bank comes to their rescue though it might charge a higher rate of interest.
6. Central Clearance and Accounts Settlement:
Since commercial banks have their surplus cash reserves deposited in the Reserve Bank, it is easier to
deal with each other and settle the claim of each on the other through book keeping entries in the books of
the Reserve Bank. The clearing of accounts has now become an essential function of the Reserve Bank.
7. Controller of Credit:
Since credit money forms the most important part of supply of money, and since the supply of money has
important implications for economic stability, the importance of control of credit becomes obvious. Credit
is controlled by the Reserve Bank in accordance with the economic priorities of the government.

A=5 Repo Rate [Current Value - 7.25%]

Repo rate is the rate at which Central Bank lends money to commercial banks against securities (just like
mortgage) when commercial banks get short of funds. The higher this rate, banks will get costlier capital
and banks will, thus, charge higher rate. Just like Repo Rate there is Reverse Repo Rate, but Reverse
Repo Rate is not used to control inflation/growth so I will just give the definition here.
Reverse Repo Rate [Current Value - 6.25%]
It is the rate of interest at which Central Bank borrows money from commercial banks. It is kept at 100
basis point or 1% lower than Repo rate. Banks generally use this instrument to park their excess fund in
safe hands and still earn some interest. Central banks do not actively use this tool to control economy.
Pros and Cons of using repo rate to control inflation/growth

Pros
1.

This tool is a quick fix for woes of economy and brings in results very fast. The higher the
number goes, less money is available in economy and inflation goes down. The lower this number
and more money will be available in country to enable it to go on growth path.

Cons
1.

The change in this number affects both growth rate and inflation of economy. If this number is
raised, inflation reduces, and growth also reduces. So this tool should be used with extreme
caution.

How CRR and Repo Rates Help Impact Liquidity

The Reserve Bank of India has various tools to control and maintain liquidity in the market. Two among
them are the CRR and Repo rate.
CRR: Cash Reserve Ratio (CRR) is the ratio of deposits banks must maintain with the Reserve Bank of
India. This implies that if a person deposits Rs 1,000 in his account, the bank can use it to lend others, but
it has to deposit a percentage of that amount with the RBI. Hence, if CRR is 5%, the lender will deposit
Rs.50 with the RBI and has Rs.950 left at its disposal.
Repo Rate: The repo or repurchase rate is the interest charged by the RBI to banks when they approach it
for short term loans.
The repo rate is linked to the interest rate borrowers pay when they take loans from banks because the
latter always charges interest which is higher than the existing repo rate. Hence, lower repo rates could
induce lenders into lowering the interest rates they charge from individual borrowers too, thereby making
credit more affordable.
CRR determines bank interest rates: If a man had deposited Rs.1,000 in his account when the
CRR was 5%, the bank will have at its disposal Rs.950 after it deposits Rs.50 as CRR. The bank in turn
lends the Rs.950 to a borrower who will eventually repay the bank.
The bank will once again lend this amount (Rs.950) to another borrower after depositing 5% of the
amount (Rs.47.5) to the RBI. In this manner, the money will keep exchanging hands, or it continues to be
created and available for subsequent borrowers. This means that Rs.1,000 is helping generate a far higher
amount in the economy in an indirect manner. Therefore, even if the CRR were to be increased by only
1%, the money generated in the economy would reduce drastically.
Repo rate and inflation: When the repo rate is raised, banks are compelled to pay higher interest to the
RBI which in turn prompts them to raise the interest rates on loans they offer to customers. The customers
then are dissuaded in taking credit from banks, leading to a shortage of money in the economy and less
liquidity. So, while on the one hand, inflation is under controlled as there is less money to spend, growth
suffers as companies avoid taking loans at high rates, leading to a shortfall in production and expansion.
The RBI revises CRR and repo rates in their quarterly and mid-quarter policy reviews to maintain a
balance between growth and inflation. The past two years have been proof of this practice as the apex
bank tried to first tame the monster of inflation with aggressive rate hikes, and once it saw growth taking
a hit, reduced key rates to revive the economy

A=6 Commercial Paper (CP) is an "unsecured money market instrument issued in the form of a
promissory note". These are not usually backed by any form of collaterals and is allowed to be issued
only by corporate with high quality debt ratings. Commercial Paper were introduced in India in 1990
with a view to enable high rated corporate borrowers to raise short term borrowers by this additional type
of instrument which was till that at time was not available in India.
Who are Eligible to Issue Commercial Paper (CP) in India ? :
Companies, PDs and FIs are permitted to raise short term resources through CP.
A company would be eligible to issue CP provided:
(i) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs.4
crore;
(ii) the company has been sanctioned working capital limit by bank/s or FIs; and
(iii) the borrowal account of the company is classified as a Standard Asset by the financing
bank/institution.
Who Are Eligible To Invest in CP ? :
Individuals, banks, other corporate bodies (registered or incorporated in India) and unincorporated bodies,
Non-Resident Indians and Foreign Institutional Investors (FIIs) shall be eligible to invest in CP.
FIIs shall be eligible to invest in CPs subject to
(i) such conditions as may be set for them by Securities Exchange Board of India (SEBI) and
(ii) compliance with the provisions of the Foreign Exchange Management Act, 1999, the Foreign
Exchange (Deposit) Regulations, 2000 and the Foreign Exchange Management (Transfer or Issue of
Security by a Person Resident Outside India) Regulations, 2000, as amended from time to time
What are the rating requirements for issuance of Commercial Paper?
Eligible participants/issuers shall obtain credit rating for issuance of CP from any one of the SEBI
registered CRAs. The minimum credit rating shall be A3 as per rating symbol and definition prescribed
by SEBI. The issuers shall ensure at the time of issuance of the CP that the rating so obtained is current
and has not fallen due for review.
Other Guidelines for Issue of CPs :
a. CP shall be issued as a stand alone product. Further, it would not be obligatory in any manner on the
part of the banks and FIs to provide stand-by facility to the issuers of CP.
b. Banks and FIs may, based on their commercial judgement, subject to the prudential norms as applicable
to them, with the specific approval of their respective Boards, choose to provide stand-by
assistance/credit, back-stop facility etc. by way of credit enhancement for a CP issue.
c. Non-bank entities (including corporates) may provide unconditional and irrevocable guarantee for
credit enhancement for CP issue provided:
(i) the issuer fulfils the eligibility criteria prescribed for issuance of CP;

(ii) the guarantor has a credit rating at least one notch higher than the issuer given by an approved CRA;
and
(iii) the offer document for CP properly discloses the net worth of the guarantor company, the names of
the companies to which the guarantor has issued similar guarantees, the extent of the guarantees offered
by the guarantor company, and the conditions under which the guarantee will be invoked.
d. The aggregate amount of CP that can be issued by an issuer shall at all times be within the limit as
approved by its Board of Directors or the quantum indicated by the CRA for the specified rating,
whichever is lower.
e. Banks and FIs shall have the flexibility to fix working capital limits, duly taking into account the
resource pattern of companys financing, including CP.
f. An issue of CP by an FI shall be within the overall umbrella limit prescribed in the Master Circular on
Resource Raising Norms for FIs, issued by the Reserve Bank of India, Department of Banking Operations
and Development, as prescribed/ updated from time-to-time.
g. The total amount of CP proposed to be issued should be raised within a period of two weeks from the
date on which the issuer opens the issue for subscription. CP may be issued on a single date or in parts on
different dates provided that in the latter case, each CP shall have the same maturity date.
h. Every issue of CP, and every renewal of a CP, shall be treated as a fresh issue.

A=7 The assets of the banks which dont perform (that is dont bring any return) are called Non
Performing Assets (NPA) or bad loans. Banks assets are the loans and advances given to customers. If
customers dont pay either interest or part of principal or both, the loan turns into bad loan. According to
RBI, terms loans on which interest or installment of principal remain overdue for a period of more than
90 days from the end of a particular quarter is called a Non-performing Asset. However, in terms of
Agriculture / Farm Loans; the NPA is defined as under:

For short duration crop agriculture loans such as paddy, Jowar, Bajra etc. if the loan (installment /
interest) is not paid for 2 crop seasons , it would be termed as a NPA.
For Long Duration Crops, the above would be 1 Crop season from the due date.

Provisioning Coverage Ratio For every loan given out, the banks to keep aside some extra funds to
cover up losses if something goes wrong with those loans. This is called provisioning. Provisioning
Coverage Ratio (PCR) refers to the funds to be set aside by the banks as fraction to the loans.
Standard Asset
If the borrower regularly pays his dues regularly and on time; bank will call such loan as its Standard
Asset. As per the norms, banks have to make a general provision of 0.40% for all loans and advances
except that given towards agriculture and small and medium enterprise (SME) sector.
However, if things go wrong and loans turn into bad loans, the PCR would increase depending up the
classification of the NPA as discussed in next section.
Classification of the NPAs Banks are required to classify nonperforming assets further into three main
categories (Sub-standard, doubtful and loss) based on the period for which the asset has remained non
performing. This is as per transition of a loan from standard loan to loss asset as follows: If the borrower

does not pay dues for 90 days after end of a quarter; the loan becomes an NPA and it is termed as Special
Mention Account.
If this loan remains SMA for a period less than or equal to 12 months; it is termed as Sub-standard Asset.
In this case, bank has to make provisioning as follows:

15% of outstanding amount in case of Secured loans

25% of outstanding amount in case of Unsecured loans

If sub-standard asset remains so for a period of 12 more months; it would be termed as Doubtful asset.
This remains so till end of 3rd year. In this case, the bank need to make provisioning as follows:

Up to one year: 25% of outstanding amount in case of Secured loans; 100% of outstanding
amount in case of Unsecured loans
1-3 years: 40% of outstanding amount in case of Secured loans; 100% of outstanding amount in
case of Unsecured loans
more than 3 years: 100% of outstanding amount in case of Secured loans; 100% of outstanding
amount in case of Unsecured loans

If the loan is not repaid even after it remains sub-standard asset for more than 3 years, it may be identified
as unrecoverable by internal / external audit and it would be called loss asset. An NPA can declared loss
only if it has been identified to be so by internal or external auditors.
Example of NPA We suppose that a party was disbursed a loan on January 1, 2010. Its due date is June 1,
2010. But the party does not make a payment. So

It will be an Standard Asset from January 1, 2010 till June 1, 2010 (Due Date)
It will be a Special Mention Account From June 2, 2010 till August 29, 2010 (90 days)
It will be Sub-standard from August 30, 2010 till August 29, 2011
It will be doubtful from August 30, 2011 till August 29, 2012

It may remain doubtful Asset for a period of 3 years, beginning from 12 months of being an NPA, but
once the auditors identify it as a loss, it will be assigned a loss asset; however, the period may be anything
above 3 years.
Implications of the NPAs on Banks The most important implication of the NPA is that a bank can neither
credit the income nor debit to loss, unless either recovered or identified as loss. If a borrower has multiple
accounts, all accounts would be considered NPA if one account becomes NPA.
Gross NPA and Net NPA
The NPA may be Gross NPA or Net NPA. In simple words, Gross NPA is the amount which is
outstanding in the books, regardless of any interest recorded and debited. However, Net NPA is Gross
NPA less interest debited to borrowal account and not recovered or recognized as income. RBI has
prescribed a formula for deciding the Gross NPA and Net NPA.
NPA and SARFAESI Act
The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest
(SARFAESI) Act has provisions for the banks to take legal recourse to recover their dues. When a
borrower makes any default in repayment and his account is classified as NPA; the secured creditor has to

issue notice to the borrower giving him 60 days to pay his dues. If the dues are not paid, the bank can take
possession of the assets and can also give it on lease or sell it; as per provisions of the SAFAESI Act.
Reselling of NPAs
If a bad loan remains NPA for at least two years, the bank can also resale the same to the Asset
Reconstruction Companies such as Asset Reconstruction Company (India) (ARCIL). These sales are
only on Cash Basis and the purchasing bank/ company would have to keep the accounts for at least 15
months before it sells to other bank. They purchase such loans on low amounts and try to recover as much
as possible from the defaulters. Their revenue is difference between the purchased amount and recovered
amount.
A=8 Fundamental principles of insurance
(A) Insurable Interest
Insurable interest means that the person opting for insurance must have pecuniary interest in the property
he is going to get insured and will suffer financial loss on the occurrence of the insured event. This is
one of the essential requirements of any insurance contract. Therefore, a person can go for insurance of
only those properties where he stands to benefit by the safety of the property, and will suffer loss,
damage, injury if any harm takes place to such property. Thus, if you want to insure Taj Mahal or Red
Fort, you will not be allowed to do so as you do not have any pecuniary interest in these properties.
(B) Principle of utmost Good faith (Uberrima Fides)
Like in other contracts, the insurance contract must be based on good faith. If the insurance contract is
obtained by way of fraud or misrepresentation it is void.
(C) Material Facts Disclosure
In the Insurance contract, the proposer is required to disclose to the insurer all the material facts in
respect of the proposed insurance. This duty of disclosing the material facts not only applies to the
material facts which are known to him but also extends to material facts which he is supposed to know.
Thus, in case of Life Insurance the proposer must disclose the true age and details of the existing illnesses
/ diseases. Similarly, in case of the insurance of a building against fire, the proposer must disclose the
details of the goods stored if such goods are of hazardous nature.
(D) Principle of Indemnity
The insurance contract should always be a contract of indemnity only and nothing more. According to
this principle, the insurance contract should be such that in case of loss due to the eventialities mentioned
in the contract, the insured should be neither better off nor worse off after receiving the insured amount.
The main object of this principle is to ensure that the insured is not able to use this contract for
speculation or gambling.
What is Non-life?
All insurance excluding life insurance falls under general insurance.
For e.g.

General Insurance comprises of insurance of property against fire, burglary, theft etc.

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The non-life insurance companies also offer policies covering machinery against breakdown. A
granite factory owner would like to buy a policy to cover his granite cutting machines.

Further, insurance of motor vehicles against damages and theft forms a major chunk of non-life
insurance spends.
Following are some of the products that fall in non-life category

Household Insurance

Auto Insurance

Business Insurance

Health Insurance

Travel Insurance Etc

Why you need non-life insurance?
When one has earned and accumulated property, protecting it is prudent.One of the main reasons one
should insure assets is to protect themselves against the financial losses likely to occur due to their
destruction/ inability to perform. Anyone who owns a valuable asset can buy insurance to protect it
against losses due to fire, theft, and so on.
By Law
The law also requires us to be insured against some liabilities. This is to ensure that we can afford to pay
compensation in case a liability arises. Once you have insurance, the responsibility of paying the
compensation is transferred to an insurance company.
That is, in case we should cause a loss to another person, that person is entitled to compensation (for e.g.
the third party auto insurance, which is a compulsory part of the motor insurance we buy).
Following are the four primary categories of Non-life insurance
Medical Insurance
Medical Insurance protects you from costly medical bills in case of any emergency. It covers you and
your family against expensive healthcare costs.
Auto Insurance
Auto Insurance is a protection of your automobile against physical damages from
fire,theft,explosion,accidents, etc. This is also compulsary, especially because while drive, there is always
a possibility of damaging third-parties, and hence you need the insurance to settle the liabilities arising.
Property Insurance
Having Property Insurance will protect your dream home, office, factory, shop, valuables, domestic or
electronic items, etc from fire, burglary, theft and any other untoward incident.
Travel Insurance
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It becomes all the more important to consider your safety and wellbeing when you are traveling. Travel
insurance protects one from travel related medical emergencies, delays or loss in baggage, loss of
passport in foreign countries, etc.
different types of life insurance policies in India.
Pure Insurance Products
Term Plans
Unfortunately, in the pure insurance category, there is only one product available which is called term
insurance. Term insurance policy covers only the risk of your dying. You pay premium year on year to the
insurance company and if you die, the insurance amount, called the Sum Assured, is paid out to the
nominees. If you survive, you dont get anything and lose the yearly premiums you paid.
Since everything that you pay goes towards covering the risk on your life, term insurance is the cheapest.
There is no investments clubbed with a pure term insurance plan.
There is a variant of term insurance called term-insurance-with-return-of-premium wherein the premiums
you pay are returned to you at the end of the policy term. The premium for such policies will obviously be
more as compared to pure term plans.

Insurance-cum-Investment Products
As the name goes, these are plans that provide insurance and along with it return on investments.

Endowment Plans
Take a term plan and add an offer of some returns on the premiums you pay that is an endowment
policy for you. If you survive the policy term, you get the sum assured plus the returns and if you die
during the policy tenure, you still get the sum assured plus some returns. To get these returns along with
the life cover, you end up paying more premium.
It is from these yearly premiums that the insurance company covers you for protection, invests to give
you some returns and deducts administrative expenses. That makes the overall yield of an endowment
plan somewhere between 4-7%. There are two types.
Without-profit endowment plans : These plans do not participate in the profits the insurance company
makes each year. Apart from the sum assured, you could possibly get a loyalty bonus, which is a one
time payout made in appreciation of your sticking to the insurance company.

12

With-profit endowment plans : These plans share the profits the insurance company makes each year
with the policyholder. So they offer more returns than without-profit endowment plans and are more
expensive as well that it, for all parameters considered same, the premiums will be higher than withoutprofit endowment plans.
If you know at the beginning what the profit is, then you have picked up a assured returns insurance plan
and this in insurance parlance is called guaranteed additions. In case the assurance is shaky or non
guaranteed, it is called bonuses. Bonuses are to insurance policies what dividends are to shares. Non
guaranteed. Watch out for these terminologies.
Money-back plans
Money-back plans are variants of endowment plans with one difference the payout can be staggered
through the policy term. Some part of the sum assured is returned to the policy holder at periodic
intervals through the policy tenure. In case of death, the full sum assured is paid out irrespective of the
payouts already made.
Bonus is also calculated on the full sum assured and not the balance money left. Because of these two
reasons, premiums on money-back plans are higher than endowment plans.
Whole-life plans
Term plans, endowment plans and money back plans offer insurance cover till a specified age, generally
70 years. Whole-life plans provide cover throughout your life. Usually, the policyholder is given an
option to pay premiums till a certain age or a specified period (called maturity age).
On reaching the maturity age, the policyholder has the option to continue the cover till death without
paying any premium or encashing the sum assured and bonuses.
Unit-linked insurance plans (ULIP)
In all the above mentioned insurance-cum-investment products, you have no say on where your money is
invested. To keep your money safe, most of these products will invest in debt. Unit-linked insurance plans
give you greater control on where your premium can be invested.
Think of them like mutual funds. The annual premium you pay can be invested in various types of funds
that invest in debt and equity in a proportion that suits all types of investors. You can switch from one
fund plan to another freely and you can also monitor the performance of your plan easily.
There are various charges to be aware of in a ULIP and is suitable for those who understand the stock
market well. Of late, ULIPs qualified as the most abused insurance plan.
Investment Products
Pension Plans
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Pension plans are investment options that let you set up an income stream in your post retirement years by
giving away your savings to an insurance company who invests it on your behalf for a fee. The returns
you get depends on a host of factors like how much you contributed and when is it that you started, the
number of years when you want the money to come to you and at what age that starts.
When you buy the pension plan contract, if the payment to you (called annuity) starts immediately it is
called an immediate annuity contract. However, if the payout start after some years of deferment, it is
called a deferred annuity.

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