DIFFERENCES BETWEEN AMERICAN AND INDIAN LIFE INSURANCE

Though the basic principles of life insurance and the functions of life insurance companies in USA and India are somewhat similar, yet there are differences in many aspects. Types of Insurance Company Organizations: There are two types of insurance companies. * Stock * Mutual Stock Insurance Company is owned by the people and organizations that purchase shares of the company & Mutual Insurance Company is owned by its policyowners. In USA both types of these companies are prevalent, but in India only stock insurance company is active. Organizational Operations: In USA the life insurance offices are operative as home office which is often located in the state in which the company is incorporated to do business and is the location of all the company¶s executive offices. A regional office is charged with the same function and operation as the home office but is geographically closer to the market and reports to the home office. A field office is local sales office. the home and regional office provide support services to the field office. In India the life insurance offices are operative as Central office, Zonal office, Divisional office and Branch office. The cental office is like home office and the zonal and divisional office are nothing but regional offices. The branch office acts like field office. Other providers of life and health insurance: In USA, in addition to insurance companies, other organizations like fraternal benefit societies (an organization formed to provide social, as well as insurance, benefits to its members), banks, governments and medical care plans ( an organization that provides prepaid medical care services to its members) provide life and health insurance. In India, no other organization provides life insurance except life insurance companies. However health insurance is covered by general (non-life) insurance companies. Regulation of Insurance Industry: In USA, each state has the power to regulate the operation of insurance companies within the state and the regulation varies from state to state. However, the various state insurance laws are similar because they are based on model laws developed by National Association of Insurance Commission (NAIC). The NAIC is a non-governmental

Type of contract: A contract is a legally enforceable agreement between two or more parties. Federal government retained the right to enact insurance legislation if it decides that state regulation is inadequate or not in public interest. Increasing term life insurance: Death benefit starts at one amount and increases by some specified amount at stated intervals over the term. to renew the insurance coverage at the end of the term without producing evidence of insurability.organization consisting of the insurance commissioners or superintendents of the various state insurance departments. In India. Decreasing term life insurance: Death benefit begins as a set face amount and then decreases over the term according to some stated method described in the policy. In USA. only the Central Government has the authority to regulate insurance business through a body named IRDA (Insurance Regulatory & Development Authority). the contract is bilateral. · · · . within specified limits. It is of five types: · Level term life insurance: Provides death benefits that remains the same over the term of the policy. In Canada. If only one of the parties makes legally enforceable promises when the parties enter into the contract. In the contrary an informal contract may be expressed in either oral or a written form. Rating of insurance companies: In USA the insurance companies are rated by the rating agencies to assess their creditworthiness. Contracts are either formal or informal. Again contracts may be unilateral or bilateral. A formal contract is one that is enforceable. Term life insurance: The policy benefit is payable only if the insured dies during policy term.. Renewable term life insurance: It includes a renewal provision that gives the policyowner the right. the insurance companies may be incorporated under the authority of either the federal government or one of the provincial governments. Type of Products: In USA major life insurance products are 1. In India no such agency is operative. life insurance contracts are informal and unilateral where in India it is formal and bilateral. Both levels have the corresponding authority to regulate the financial soundness of insurance companies. the contract is unilateral and if both parties make legally enforceable promises. From this rating people get information about the status of the company. is in writing and the written document contain some form of seal in order to be enforceable.

It can range from a term insurance policy of short duration to a limited payment whole life policy.5 or 10 years. · · · · · · · · · . flexible face amounts & death benefits and its unbundling of the pricing factors. Followings are various permanent life insurance :· Traditional whole life insurance: Provides lifetime insurance coverage at a level premium rate. 2. Permanent life insurance: This type of insurance provides protection for the entire lifetime of the insured and also builds a cash value that functions as a savings element. Death benefit is paid to the surviving insured and the coverage ends. Last survivor life insurance: Policy benefit is paid only after both the insured have died. Pre-need funeral insurance: Whole life insurance that provide fund for insured¶s funeral and burial. After that the insurers uses its actual mortality.15 or 20 years keeping the face value of the policy same.· Convertible term life insurance: It contains a conversion privilege that allows the policyowner to change or convert the term insurance policy to a permanent plan of insurance without providing evidence that the insured is an insurable risk.2.both a lower premium rate and a maximum guaranteed premium rate. Adjustable life insurance: It is designed to allow policyowners to vary the type of coverage provided by their policies as their insurance needs change. Joint whole life insurance: Insures two lives under same policy. However in no case the rate will be higher than the maximum rate guaranteed. In the modified coverage type policy the amount of insurance will decrease by specific amount at the end of a stated period. Modified whole life insurance: Either the premium or the coverage changes with time. Monthly debit ordinary: It is a whole life insurance policy that is marketed under the home service distribution system and is paid for by monthly premium payments. The insurer charges a lower premium rate when the policy is purchased and guarantees that rate for 1.10. Indeterminate premium life insurance: It is a non-participating whole life policy that specifies two premium rates. Family policies: It is a whole life policy that includes term insurance coverage on the insured¶s spouse and children. say 5. In the modified premium type policy the premium changes after a initial period. Universal life insurance: It is a form of permanent life insurance that is characterized by its flexible premium. interest and expense experience to establish a new premium rate that may be higher or lower than the previous rate.

on minor life and on joint lives. · · 3. In India major life insurance products are: 1. it is always associated with a plan. Endowment insurance: Most of the policies are of this type. Term life insurance: Only convertible term life insurance variety is in vogue. the policies are ready-made. Whole life insurance: Only traditional whole life insurance policy is available. 3. Variable universal life insurance: It combines the premium and death benefit flexibility of universal life insurance with the investment flexibility and risk of variable life insurance. For example. A rider may be a supplementary benefit or it may be an insurance plan itself. policyowner can choose and modify a plan according to his want and need.15.g. the insurer practices.· Interest-sensitive whole life insurance: In addition to varying premium rate like Indeterminate premium life insurance. 5. Endowment insurance: It provides a specified benefit amount whether the insured lives to the end of the term of coverage or dies during that term.20 years).10. They also have a say on the type of investment. but in India. In this context it can be added that in USA the life insurance policies are tailor-made. When it is a supplementary benefit. Money Back insurance: In this type of insurance. On the other hand µterm insurance¶ may be a rider with universal life policy whereas it may be implemented as a separate plan also. it can never be implemented isolately. However this is a special variety of endowment insurance. 4. µaccidental death benefit¶ is a rider which is only active when it is associated with a plan. Rider: Rider is an amendment to an insurance policy that becomes a part of the insurance contract and that either expands or limits the benefits payable under the contract. Depending on the principle of endowment type there are a great range of insurance policies ± on own life. policyowner can neither change it in anyway nor they have any control over the investment policy of the insurer. 2. This policy permits the policyowner to select from among several separate accounts and to change this selection at least annually. . policyowner starts getting back certain percentage (15% to 60%) of face amount in specified intervals (e. Variable life insurance: It is a form of whole life insurance under which the death benefit and cash value of the policy fluctuate according to the investment performance of a special investment account. this type of policy also provides that the cash value can be greater than that guaranteed if changing assumptions warrants such increase.

This is of three types: · Terminal illness benefit: Under this benefit insurer pays a portion of the death benefit to the insured if he suffers from a terminal illness and a physician-certified life expectancy of 12 months or less. Waiver of premium for payor benefit: This is applicable for third-party policies. The supplementary benefits allowed with life insurance policies in USA are as follows: 1. This benefit also includes waiver of premium benefit. Accident Benefits: These are of two types· Accidental Death Benefit: In this benefit the insurer pays an amount of money in addition to the face value if the insured dies as a result of an accident. Disability income benefit: It provides a monthly income benefit to the insured if he becomes totally disabled while the policy is in force. Supplemental Disability Benefits: These benefits are paid to cover financial losses that result from a sickness or injury. myocardial infarction.In USA riders are available almost in all type of policies. although in some situations the benefits are provided through standard policy provisions. severe arthritis. e. stroke and coronary bypass surgery. end-stage renal failure. Dread disease benefit: Under this benefit the insurer agrees to pay a portion of the policy¶s face amount if the insured suffers from one of the specified disease like cancer. generally equal to that of accident benefit. The benefits are of three type: · Waiver of premium for disability benefit: In this rider the insurer waive the renewal premiums that becomes due while the insured is totally disabled. Dismemberment Benefit: In this benefit the insurer pays an amount of money. · · 2. Supplementary Benefits: In USA these are additional benefits provided by adding riders to the life insurance policy. This benefit provides that insurer will waive the renewal premiums that becomes due if the payor dies or becomes disabled. to the insured if he loses any two limbs or sight in both eyes due to any accident. · 3. but in India riders are limited to very few minor life policies. AIDS. · · . Long-term care benefit: It is a monthly benefit to the insured if he requires constant care for a medical condition.g. Accelerated Death Benefits: In this case a insured may elect to receive all or part of the death benefits before death if certain conditions are met. specially juvenile insurance policies.

Standard Policy Provisions: In USA individual life insurance policies generally contain the following standard provisions: 1. The only difference is that the coverage provided by this rider is typically sold on the basis of coverage units while the coverage provided under family insurance policy is a percentage of the face amount provided on the life of the primary insured. Among the rest only the terminal illness benefit is available under a certain plan. which is an open contract. · · 5. Free-look provision: Usually ten days are given. Entire contract provision: It defines the documents that state the contract between the insurer and insured. The premium charged for each coverage is a stated amount irrespective of the number of children covered. . that are printed in or attached to the contract. Except policies issued by fraternal insurers. 4. · In India all three types of supplemental disability benefits and two types of accident benefits are allowed. 2.4. Incontestability provision: It describes the time limit within which the insurer has the right to avoid the contract on the ground of material misrepresentation in the application. 3. are considered to be part of the contract. Second insured rider: It provides term insurance coverage on the life of an individual other than the insured. or age & sex of the insured. Insurability benefit: Two types of benefit are offered· Guaranteed insurability (GI) benefit: It gives the policyowner the right to purchase additional insurance of the same type to which the GI rider is attached without supplying the evidence of insured¶s insurability. all other policies are closed contract as only those terms and conditions. Grace period provision: It is a specified length of time (31 days) within which a renewal premium that is due may be paid without penalty. Benefits for additional insureds: This is mainly of three types· Spouse and children¶s insurance rider: It is very much similar to that provided by a family insurance policy. after the policy is delivered. Paid-up addition option benefit: This allows the owner of a whole life policy to purchase single-premium paid-up additions to the policy on stated date in future. to the policyowner to think whether he will continue the policy. Children¶s insurance rider: Very much alike the previous rider except that no spousal coverage is included. ages of the children.

Moreover in USA policyowner can specify the percentage of benefit in case of multiple beneficiaries. interest earned from the investments and office expenses. then the insurer will adjust the face amount to the amount the premium actually paid would have purchased if the insured¶s age or sex had been stated correctly. policyowner can opt any type of beneficiary. 6. according to his wish. Misstatement of age or sex provision: It states that if the age or sex of the insured is misstated and the misstatement resulted in an incorrect premium amount. half-yearly and yearly modes are allowed. Non-forfeiture benefits provision: It states that the insured does not forfeit his interest in the policy¶s cash value if the policy lapses anyway after a stated period of years. Policy loans & withdrawals: The loan provision grants the policyowner the right to take out a loan for an amount that does not exceed the policy¶s net cash value. 8. but in India only revocable beneficiary option is available. A beneficiary is said to has the unrestricted right to change the name of the policyowner has the right to change beneficiary the beneficiary¶s consent.mortality rate. If designation only after obtaining irrevocable. revocable or irrevocable. then the designation is In USA. tabular premium contains only mortality rate and office expense loading.5. whereas in India only monthly. Reinstatement provision: In this provision policyowner can put back into force his policy which became lapsed due to non-payment of premium. As discussed earlier. He will get a certain percentage of the cash value. whereas in Indian scenario all three factors are loaded in the tabular premium for obvious reason. In India all the policy provisions except the free-look provision and policy withdrawal provision are very much present in life insurance policies. quarterly. in USA policyowners have control over the type of investment of his premium. 7.revocable and irrevocable. Mode of premium payment: In USA. The withdrawal provision permits the insured to reduce the amount in the policy¶s cash value by withdrawing up to the amount of cash value in cash. There are even nine-monthly. all varieties of mode . eleven-monthly type of mode allowed in many policies. but in India no such option is entertained. . Beneficiary: Two types of beneficiary are there be revocable if the policyowner beneficiary during his lifetime.starting from weekly to yearly is available. Premium: In insurance practice an office premium contains three factors. Method of premium payment: In USA following methods of premium payment are allowed - .

payroll deduction and over the counter method are practiced by insurers. 2. Interest option: Insurer invests policy proceeds and pay the interest periodically. 4. Over the counter: Policyowner can pay the premium in cash or cheque in cash counters in the insurance office. However. Paid-up additional insurance option: Insurer uses the dividend as a single premium to purchase paid-up additional insurance on the insured¶s life. Payment by mail: The policyowner receives a premium notice from insurer before each due and he returns by mail a portion of the notice along with the payment. 3. Fixed amount option: Insurer pays policy proceeds in a stated amount until it is exhausted. Policy dividend option: In USA. In India there is no concept of cash value in any type of individual policies. Lump sum option: Policy proceeds given in lump sum. 5. few group insurance policies contain this feature. electronic fund transfer method and payroll deduction method. . Settlement option: Following settlement options are present in USA: 1. Cash dividend option: Insurer send the policyowner a cheque in the amount of dividend as and when declared. five options are there: 1. In India payment by mail. In India. Additional term insurance option: Insurer uses the dividend to purchase one-tear term insurance. 3.1. 4. 2. Automatic payment techniques: Most commonly used methods are preauthorised cheque system. Fixed period option: Insurer pays policy proceeds in equal amount for fixed period of time. 3. policy dividend (known as bonus) is given with claim payment only Cash Value: Cash value is a savings element which is included in permanent life insurance policies in USA. 2. Accumulation at interest option: Dividend accumulates with interest and the policyowner can withdraw it when he wishes. Premium reduction option: Insurers applies the dividend towards payment of renewal premium.

only agency building distribution system is applicable. These are Lump sum option. Neither there is sharable commission nor commission on policy fee and collection fee. · · In India. Underwriting Practices: Risk classes: There are four types of risk classes practiced in USA . but in India only one license is valid for the whole country. serves as financial intermediary and supervises the sale process (generally applicable for variable life products). substandard class (mortality is higher than average and higher than the standard premium is charged) and declined class (mortality rate is so high that insurer can¶t provide coverage). so standard premium rate is charged). Fixed period option and Life income option. standard class (mortality rate is average. Moreover the commission may be shared by two or more agents on predefined percentage. Broker-Dealers: It is a firm that provides information and advice to its customer regarding sale and purchase of securities. They also pay advance commission to the agents if they achieve a certain level. no level commission or advance commission are allowed to agents. Agent licenses: In USA the agents should get license from each state in which they intend to sell insurance. In India. Distribution system: In USA. 2.preferred class (represent lower than average risk and are charged lower than average premium). finance or house the agents. . following distribution systems are in vogue 1. Personal selling distribution system: · Agency-building distribution system: Insurance companies recruit and train agents and provide them with office facilities. Life income option: Insurer pays the policy proceeds in periodic instalments over the payee¶s lifetime. Commission on policy fee and collection fee are also prevalent in USA. Commission: In USA level commission schedule are practiced by some insurers. only three options are available. among the above five.5. Direct response distribution system: Consumer purchases product directly from a insurance company. In India. The agents do not have exclusive contracts with one insurance companies. Non agency-building distribution system: Insurance companies do not train. In India the preferred class of risk is not practiced.

Teleunderwriting: In this method. Medical information: Medical information is supplied by MIB (it is a non-government body which collects and records all sorts of medical information of almost every citizen of USA) in USA. There is no interference of Government in this matter. But insurers who started to issue policies having large face amount bypassed the above law. One is the Guideline Premium Test or Corridor test A which states that the Guideline Single Premium should not be more than the Total Guideline Level Premium. The main feature of these acts was that they defined under certain forms of accumulation. There is no existence of MIB in India. Investment: In USA. This method is generated to evaluate simple cases quickly and inexpensively. The first in this line of regulations was Tax Equity and Fiscal Responsibility Act of 1982 (known as TEFRA). The other test is the Cash Value Test or the Corridor test B which states that the cash surrender value should not be greater than the net single premium required to fund the future benefits. It proposed two different tests to check the Corridor. Moreover the insureds can choose the investment pattern of their policies. It was also found that people were escaping the tax net through these covers. Underwriting by agents: In USA the agents can underwriting non-medical policies with low face value. Taxation: Towards the beginning of the 80¶s in USA it was found that the emphasis of the insurance contract changed more from risk coverage towards investment. Jet Unit Underwriting: This method of underwriting in USA is valid for certain type of applications for immediate policy issue. a home office employee of insurance company gathers most of the medical. In India there is no practice of such underwriting. This difference came to be known as the TEFRA Corridor. In order to check that the Deficit Reduction Act (DEFRA) came into existence in 1984. The insureds also have no say upon the investment pattern of their policies. in USA. The next law enacted was the Tax Reform Act (TRA) of 1986. the insurers can investment their money at their own wish. but in India no agent can do this. it is no longer considered an insurance contract. an insurance contract would be taxed as an investment. Thus this law made fixed difference between the cash value and the face value. Such method is not applicable in India. The TEFRA Rule says that the policy cash value cannot be greater than a certain percentage of the face amount and this percentage would vary by age. A series of tax laws were enacted in the 80¶s to cover this problem. In India. while in India insurers appoint medical examiners who examine the customer and supply medical information to the insurers. If any contract fails to satisfy the above conditions. the insurers can not investment policy moneys at their own wish. personal and financial information needed for underwriting in a telephonic conversation. as there is statutory guideline of IRDA about the investment of the fund. It .

Actually Sec. the withdrawal won¶t be taxed.determines how the taxation of policy proceeds would take place. But if after exchange if the policy moves up the hierarchy it is taxable (if an annuity is exchanged for endowment or whole life plan. Another feature of the TAMRA is the introduction of Grandfathering. in difference to the normal process that makes a law effective only from the day of the passing of the legislation. The moneys that are exchanged are called either rollover money or 1035 moneys. The policies are arranged hierarchically as below: 1. the Insurers began to add a life cover to the annuity policies. Whole Life 2. The last major legislation in this line was the Technical and Miscellaneous Revenue Act (TAMRA) of 1988. it is taxable). which may not be of the same company. a major segment went towards cash value buildup. if a whole life policy is exchanged for a whole life. A policyowner can move the accumulation under one policy to another policy. . an endowment or an annuity one. Endowment 3. So the act says as long as the Withdrawal is less than the Cost Basis (total premium paid in). it is not taxable). Interest is the last money that goes into the policy. This is the method followed for taxing all risk-bearing policies. Annuity Conversion of a policy from one type to another at the same level or any lower level is not taxable (e. If funding for a particular contract exceeds 7-pay test it would be regarded as Modified endowment and LIFO method of taxation would result. The legislation introduced a new test called the 7-Pay Test.First in.1035 controls the exchange of policy contracts. LIFO .. Another concept that is important in insurance field is the 1035 exchange.This rule says that the first money that are put in a contract will be the first money withdrawn and that will not be taxed.Modified Endowment and nonModified endowment. Now premiums are the first money that is put in a policy.This rule says that the last money that is being put in the policy is the first money to be withdrawn and will be taxed. This ensured that maximum of the premium for first 7 years goes to provide risk cover.g. The concept of Grandfathering makes any law effective from the day it was introduced for legislation. This was enacted when it was found that in order to provide for FIFO taxation. While a small segment of premium went to provide life cover. It also divided life insurance policies into two types . The two systems that are followed are: FIFO .Last in. No such tax law is present in India. The major reason behind this legislation was to protect the annuity policies as it was found that people tend to withdraw money more from the annuity policies than risk bearing policies. first out . Any further withdrawal results in draining the premiums out of policy and that is not taxable. Thus all withdrawal from the policy is taxed until the cash value of the policy becomes equal to the cost basis. If the withdrawals exceed the cost basis. then it is the income part of cash value and will be taxed. Otherwise it would be called a non-Modified endowment and FIFO method of taxation would apply. All annuity policies are taxed in this manner. first out .