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CONTENTS Unit No. TITLE Page No. 1-24
An Introduction to Insurance
Insurance Contracts and their Elements
Plans of Life Insurance
Other Insurance plans
Insurance Documents and Policy Conditions
Distribution System and Products
Appendix A – Suggested Reference Books Appendix B – Glossary
Unit 1: An Introduction to Insurance
Structure 1.1 Introduction Objectives 1.2 1.3 1.4 1.5 1.6 Meaning and Definition of Insurance Nature and Characteristics of Insurance Importance of Insurance Functions of Insurance Classification of Insurance Self Assessment Questions I 1.7 1.8 1.9 1.10 Life Insurance Importance of Life insurance Factors affecting Life Insurance Development of Life Insurance Self Assessment Questions II
The existing insurers are facing difficulties from non-traditional competitors that are entering the retail market with new approaches and through new channels.12 Summary 1. insurance companies face a dynamic global business environment. This chapter is an attempt to briefly highlight the developments that are taking place in the insurance industry in India. • Analyze the factors affecting insurance. Objectives After completing this unit.14 Answers to SAQs and TQs. 4 . Radical changes are taking place owing to the internalization of activities.13 Terminal Questions 1.1 INTRODUCTION In the new economic reality of globalization. 1. you will be able to: • Explain the meaning and objectives of insurance. The basic premise of globalization is opening up of new service markets to provide the developing countries with new opportunities for the expansion of trade and economic growth. the appearance of new risks.1. new types of covers to match with new risk situations and unconventional and innovative ideas on customer service.
• Describe the development of life insurance. In the case of a motor car. a substitute is made available. An accident or some other unfortunate event may destroy it or make it non-functional. The asset is valuable to the owner. because he expects to get some benefits from it. Every asset is expected to last to last for a certain period of time during which it will perform. It is a benefit because it meets some of his needs. 1. Every asset has a value. In that case. The owner is aware of this and he can so manage his affairs that by the end of that period or life-time. 5 . Insurance is a mechanism that helps to reduce the effect of such adverse situations. Thus. it provides comfort and convenience in transportation. After that. the asset may get lost earlier. the owner and those deriving benefits there from.2 MEANING AND DEFINITION OF INSURANCE Business of insurance is related to the protection of the economic values of assets. the product generated by is sold and income generated. None of them will last forever. the benefit may not be available. There is an adverse or unpleasant situation. The benefit may be an income or something else. However. he makes sure that the value or income is not lost. would be deprived of the benefit and the planned substitute would not have been ready. There is a life-time for a machine in a factory or a cow or a motor car. In the case of a factory or a cow. There is no direct income. The asset would have been created through the efforts of the owner.
H.Definitions of Insurance “Insurance is a cooperative form of distributing a certain risk over a group of persons who are exposed to it” .Ghosh and Agarwal. “Insurance may be described as a social device whereby a large group of individuals. through a system of equitable contributions. risks attach to individuals” Magee D. may reduce or eliminate certain measurable risks of economic loss common to all members of the group” Encyclopedia Britannica. 6 . .Justice Tindall. to the shoulders of all. “Insurance has been defined as a plan by which large numbers of people associated themselves. “Insurance is a contract in which a sum of money is paid to the assured as consideration of insurer’s incurring the risk of paying a large sum upon a given contingency”.
fire. marine perils etc.D. Co-operative Device: Large numbers of persons share loss arising due to a particular risk. the payments being made from the accumulated contribution of all parties participating in the scheme” . Payment made on contingency: The insurer is bound to pay to insured when certain contingency arises. Valuation of Risk: Before the insurance contract is entered into the evaluation of risk is made by which premium is calculated which forms the basis of insurance contract.“Insurance may be defined as a social device providing financial compensation for the effects of misfortune.S.3 NATURE & CHARACTERISTICS OF INSURANCE Nature of Insurance Sharing of Risks: Insurance is a co-operative device for division of risk which may fall on individual or his family on the happening of some unforeseen events such as sudden death of earning member. marine perils in marine insurance. 7 .Hansell. No doubt that insurance is a co-operative device. fire in fire insurance and theft in case of general insurance. 1. The happening may be due to death.
Amount of Payment: The amount of payment depends on the value of loss occurred due to the particular provided insurance is there up to that amount. Large Number of Insured Persons: To make the insurance cheaper it is essential to insure a large number of person’s property. • The payment of Insured as per terms of agreement in the event of loss. Insurance is not Gambling: In Insurance. uncertainty is covered into converted into certainty because the insurer promises to pay a definite sum at damage or death. • The occurrence of the loss must be accidental 8 . Insurance is not charity: Charity is given without consideration but insurance is not possible without premium and thus insurance is not charity. • It is a contract of good faith • It is a contract for mutual benefit • It is an instrument of distributing the loss of few among many. Characteristics of Insurance • It is a contract for compensating losses • Premium is charged for Insurance contract.
In the form of premium the Insurance Company 9 . In India. Economic growth of the country is assured and the process of growth is accelerated which is essential in a country like India where the population is increasing very fast. All the needs of the individual such as family needs. Economic development of the country is not affected. As insurance provides protection against loss of property. Systematic saving is possible because regular premiums are required to be compulsory paid. Adequate capital from insurance company accelerates production cycle in the country.4 IMPORTANCE OF INSURANCE Insurance provides security against loss of a given contingency. Insurance provides against loss of human wealth. It stimulates more and better work. Thus. old age needs. The insurance provides adequate amount to the dependents at the early death of the property owner to pay off the unpaid loan. re-adjustment needs. the Insurance policies carry a special exemption from income tax and excise duty. the assets can be replaced without loss of production.• Insurance must be considered with public policy 1. if any such damage arises. The insurance assists the family and provides adequate amount at the time of need. Loss of damage of property can also be indemnified by the insurance company. special needs are helped by insurance for meeting requirements and necessary needs. Life Insurance is a best media of saving. A sense of security removes tension and fears.
Provision of protection.gets lot of money supply from the public which insurance corporation put into production. One of the ways or techniques of meeting the risk and loss prevention is insurance. Minor risks can be ignored but the major risks cannot be ignored and their avoidance is desirable. Provision of certainty of payment at the time of loss. Thus the money which would have come into circulation might have gone for productive purposes. 2. The insurance cannot check the happening of risk in future but it can surely provide for losses to the assured by charging premium. Life without risks and uncertainties is unthinkable. The insurer charges premium for providing certainty. 1.5 FUNCTIONS OF INSURANCE (A) Primary Functions: 1. Man encounters risks of various types since the inception of civilization. 10 . It removes all uncertainties and the assured is given certainty of payment of loss. Another function of the insurance is to provide protection against the probable chances of loss. The element of uncertainty is reduced by better planning and administrations.
automobile accidents can be minimized and life span can be prolonged by better roads. (B) Secondary Functions: 1. installation of automatic sparkler system etc. Prevention is always better than cure. observing safety instructions.3. Risk sharing. Reduction in loss causes lesser payment to the assured and so more saving is possible which will assist in reducing the premium. It spreads the whole loss over a large number of persons who are exposed by a particular risk. But sometimes prevention of protection is not possible and effective. the loss arising from the risk is also certain. For example fire can be prevented by having the fire resistant construction. Reduced premiums stimulate more business and better protection to the insured. Risk is uncertain and therefore. Risk and insurance are interwoven with each other. Lesser premium invites more business and more business in its turn results in lesser share to the assured. The insurance joins hands with those institutions which are actively engaged in preventing the losses of the society. 11 . Prevention of Loss. When prevention fails other methods must be adopted. It does not eliminate risks but it reduces the financial loss caused by risks. If the concern is big enough the handling of risk becomes a specialized function. better lights and better traffic regulations by providing better medical facilities. It is the most effective and cheapest method to avoid the unfortunate consequences. Prevention of loss is by far the best solution to the problem of risk. All business concerns face the problem of risk. similarly. Insurance is the outcome of the existence of various risks in our day to day life.
commerce and industries of a country though different schemes of investments. In India since nationalization. 12 . The accumulated funds are invested in providing proper infrastructure and n investing in productive channel.C in welfare schemes like electricity. It improves not only his efficiency but the efficiencies of the masses are also advanced.I. The development of Australia and Canada has resulted due to the assistance given by the sun Life Insurance Company of Canada and the National Mutual Insurance Association of Australia. A country’s natural resources can be exploited with the long term ad huge amounts of investments by the insurance companies. 3. In India since nationalization. The insurance companies are rendering positive help in the development of trade.” Security of life and property given by it brings peace of mid to the insured’s. The investment of L. A care free person can devote his energies for better achievement of goals. the Life Insurance Association of Australia. Provision of capital: Insurance provides capital to the society there is a great need for huge amount of capital for planned development of a country.2. Improvement of efficiency: The Insurance eliminates worries and miseries of losses as death and destruction of property. the Life Insurance Corporation has been playing an important and spectacular role in socio-economic development. Ensuring welfare of the society: “Insurance is a saga of service and security. 4.
agro industries and industrial estates has solved many pressing problems in India. insured pensions and permanent health insurance business which are normally issued for long periods-running into several years or even for whole of life time of the 13 . agriculture. depending upon the nature and type of business. insurance business have developed into: Two broad divisions of a) b) Long-term and General or non-life insurance business. industrial life. 1. Long-Term: Long-Term insurance business refers to life. The expansion of the held of insurance and industrialization automatically lead to better scope.housing water supply.6 CLASSIFICATION OF INSURANCE Classification of insurance business has evolved over the centuries as insurance has developed. and by the influence of legislation controlling the transacting of insurance business. These classifications have come about by practice within insurance companies. which is mainly short term mostly one year. The various types of covers have been grouped into several classes.
3. Recently long-term agreements have made an entry into this type of business but the duration does not normally exceed five years. Self Assessment Questions I: 1.insured. Insurance contract is a contract for _________ benefit. Business of insurance is related to the protection of the ___________ values of assets. In this context. also referred to as non-life insurance business. 14 . 4. are normally issued for twelve months or shorter durations. life business is referred to as ordinary life business to distinguish it from industrial life business. General or non-life insurance business: Policies under general insurance business. 2. The _________ in India carry a special exemption from income tax and excise duty. Insurance is a saga of service and ____________.
1.7 LIFE INSURANCE
Life insurance is the business of affecting the contracts of insurance upon human life, including any contract whereby the payment of money is assured on death or the happening of any contingency dependant on human life and any contract which is subject to the payment of premiums for a term dependant on human life. Characteristics of Life Insurance: • In life insurance, unlike in general insurance, the promise has to be redeemed sooner or later. No claim is to be paid on a fire insurance policy, if there was no fire during the term of the policy. But the holder of a life insurance policy will have to be paid earlier, if he dies. Or later if he survives the term.
• The amount payable on a claim arising in life insurance is not in doubt. It is as mentioned in the policy. The amount payable in a claim arising in general insurance depends on the extent of damage, and has to be determined through surveys and assessment.
• Most of the claimants have not suffered a loss. They are survivors, asking for fulfillment of a promise in circumstances which are not tragic.
• Claimants of death benefits are people different from the ones who had taken out the policy, and perhaps know little about the circumstances and conditions under which the policy was taken and had been looked after.
• Almost all polices are long-term ones. Most of the polices are for term of 15 years or more. There could even be terms of 40 years or more.
1.8 IMPORTANCE OF LIFE INSURANCE
Security and safety: In case of life insurance payment is made when death occurs or the term of insurance is expired. In other words, insurance as security is provided against the loss of a given contingency.
Peace of mind: A sense of security removes all tensions and fears. It stimulates more and better work. By means of insurance much of the uncertainty that centres round the modern life may be eliminated.
Protects mortgaged property: The insurance provides adequate amount to the dependents at the early death of the property owner to pay off the unpaid loan.
Eliminates savings: In the event of death of the bread winner of the family or destruction of property, the family suffers a lot. The insurance assists the family and provides adequate amount at the time of need.
Encourages savings: Systematic saving is possible because regular premiums are required to be compulsorily paid. Unlike bank deposits the deposited insurance premiums cannot be withdrawn. Life Insurance is the best media of saving.
Provides profitable Investment: The elements of investment, i.e., regular saving, capital formation and return of the capital are observed in life insurance. In India, the Insurance policies carry a special exception from income tax and estate duty.
Fulfils the need of a Person: The needs of a person may be divided into (i) Family needs, (ii) Old age needs, (iii) Re-adjustment needs, (iv) Special needs including needs for education, marriage settlement of children etc. (v) Clean up funds for ritual ceremonies, payment of taxes etc. Insurance helps for meeting requirements and necessary needs.
1.9 FACTORS AFFECTING LIFE INSURANCE
Medical examinations are carried out to learn more about your medical profile. Lower Rates" are so meaningful! Your age is also a factor in the cost of life insurance. These tests would include checking your cholesterol level. Learn how health and life insurance are related and why the words "Better Health. If you want to attract lower insurance premiums then you might consider insuring yourself at a younger age."Health" being one of the major factors.A life insurance policy is an agreement between you and your insurance company. We have thrown some light on certain health related aspects taken into account by the insurance company before granting life insurance coverage. The premiums go up as we age. Thus women may pay a lower premium. Your basic build. If the results are not according to the pre-defined standards set by the Insurance Company then you could be charged an extra amount of premium.10. the health of the applicant attracts special attention. 18 . Out of the many factors analyzed during the underwriting process. 15. blood pressure. 20 years. An agreement cannot take place without the consent of both the parties involved in the contract. You will be charged premiums based on how you are rated on several pre-determined factors . you will lock in that premium rate for length of the term . Insurance companies will check your existing medical records and conduct new medical tests in order to focus on certain specific areas to ascertain your insurance cost. A woman's life expectancy is longer than a man's. among other things. But if you buy that policy today. in the form of Height: Weight ratio shall also be calculated at the time of these tests.
In brief. Insurance companies do adjust their premium rates for those who have extraordinary occupations considered "risky" such as scuba diving. and others. 1.10 DEVELOPMENT OF LIFE INSURANCE The early development of life assurance was closely linked with that of marine insurance. excessive consumption of alcohol and smoking could result in higher premiums. the insurer paid the ransom needed to secure release of the captain and the sailors. parachuting. Your occupation also has an impact on your health and consequently your life expectancy. a family history of certain illnesses. master and the crew of the ship. If a ship was captured. piloting a plane. sailing along with the goods. sleep apnea. Our society is suffering from a high rate of health disorders such as alcoholism and excessive smoking. Insurance companies will verify your alcoholic consumption and smoking patterns to calculate the life insurance premium. insurance companies would take into consideration all the possible information that directly or indirectly affects your life or well being before finalizing your insurance premium. insurance companies do not clearly define ‘heavy alcohol consumption’. coupled with other factors could increase your cost of insurance. mountain climbing. Although. Life assurance policies were granted during the reign of Queen Elizabeth these early contracts took the form of 19 . who started issuing policies on the life of a merchant. The first life assurers were marine insurance underwriters.Health disorders such as asthma. heart disease.
self-insurance clubs. The first recorded life policy was issued on 18th June. the court ruled that payment must be made. The underwriters contended that the policy periods of twelve months” related to lunar months. which has expired.temporary assurance covering the life assured for a short period only. 1583. They issued annuities and pensions for a fixed period or for life to provide relief to widows on the death of their husbands. If persons of this category fell seriously ill. Happily. These were issued by private individuals known as underwriters who formed Mutual assurance associations which were in a way. However this first policy was subject to a dispute over payment because the policy-holders died within 11 months of issuing the policy. 8D. The premiums varied with their reputation and state of health. a huge amount of insurance was written. As the life assurances became better known. national leaders or prisoners particularly. the Equitable Life Assurance society (1762) the Westminster society (1792) were some important societies. The amicable society (1705). It was in the eighteenth century that societies began to be formed with the object of granting life assurances. In order to put an end to this speculation. particularly of well-known people. if charged with an offence that would call for capital punishment upon conviction. The application of the mortality tables in 1755 by Dodson and the introduction of actuarial science revolutionized the whole concept of life insurance. For which some sixteen underwriters were responsible. The application of the mortality tables in 1755 by Dodson and societies. an Act called the “Life Assurance Act” (commonly known as the Gambling Act) was Passed in 20 . like kings. with its attendant evils. a practice grew up of speculating in lives.
Life Assurance Companies Act.1774. Insurance Companies Act. 1946. In order to stabilize the business further. 1923. Further Acts were passed in 1871 and 1871. 1967 Self Assessment Questions II 1. 1909. Assurance Companies Act. various acts were passed to meet the growing needs of the industry and to protect the insured. Risk is uncertain and therefore the loss arising from the risk is also ________. which was applied to all classes of insurance business. Some of these acts are: Industrial Assurance Act. 2. During the early years of the nineteenth century a large number of life assurance companies were formed a large number of companies failed and many of them preferred to amalgamate their business. ____________ is the best media of saving. 21 . 1870 was passed. It prohibited all insurance on lives except those satisfying insurable interest requirements. Later on. 1958 and the Companies Act. The above legislation was repealed by the Assurance Companies Act.
Secondary functions include prevention of loss.3. insurance companies face a dynamic global business environment. provision of capital. No doubt that insurance is a co-operative device. Business of insurance is related to the protection of the economic values of assets. Primary functions include provision of certainty of payment at the time of loss. Large numbers of persons share loss arising due to a particular risk. A sense of security removes tension and fears. Insurance provides against loss of human wealth. The elements of investment are regular saving. Functions of insurance are classified as primary functions and secondary functions. ___________ and return of the capital are observed in life insurance. provision of protection & risk sharing.12 SUMMARY The basic premise of globalization is opening up of new service markets to provide the developing countries with new opportunities for the expansion of trade and economic growth. Loss of damage of property can also be indemnified by the insurance company. 22 . Improvement of efficiency and ensuring welfare of the society. In the new economic reality of globalization. 1. Insurance provides security against loss of a given contingency.
Explain the functions of Insurance. 1.13 TERMINAL QUESTIONS 1. 23 . What if a life insurance contract? Explain the importance of life insurance contract. 2. including any contract whereby the payment of money is assured on death or the happening of any contingency dependant on human life and any contract which is subject to the payment of premiums for a term dependant on human life. Give the meaning of insurance and explain the nature and characteristics.Life insurance is the business of affecting the contracts of insurance upon human life. 3. Explain the development of life insurance in India. Explain the factors affecting Life & Health consumption.14 Answers to SAQs and TQs. 1. 5. 4.
Refer 1. Capital Formation Terminal Questions 1. Certain 2. Refer 1. Economic 2.8 4.9 5.3 2. Refer 1. Mutual 3.2 & 1.SAQ I: 1. Refer 1.11 24 .10 & 1.7 & 1. Refer 1. Insurance Policy 4. Life Insurance 3.5 3. Security SAQ II 1.
NOTES 25 .
Unit 2: Insurance Planning
Structure 2.1 Introduction Objectives 2.2 2.3 2.4 2.5 Human Life Approach Needs Approach Capital Needs Approach Life Insurance Planning
2.5.1 Steps in Life Insurance Planning 2.6 Basis of Premium rate calculations Self Assessment Questions I 2.7 2.8 2.9 Factors to be considered in life insurance policy Importance of Insurance selection Criteria for Insurance Evaluation Self Assessment Questions II 2.12 Summary 2.13 Terminal Questions 2.14 Answers to SAQs and TQs
Human Life Approach
The human life value is defined as, “The present value of the family's share of the deceased breadwinner's earnings”. This approach crudely measures the economic value of a human life.
The human life value method simply calculates the present value of all earnings of the breadwinner that would have gone to the dependents. The amount of these earnings would be the estimated amount earned from work or other sources, minus the amount that would be paid in taxes, and minus the amount that the breadwinner would keep for himself. 27
While the human life value method is one way to calculate the amount of life insurance needed, it is not very valuable. It makes more sense to calculate the amount that the financial dependents will need rather than what they would have gotten if the breadwinner had lived.
The human life value can be measured by the following steps:
a. Estimate the individual's average annual earnings over his or her productive lifetime. b. Deduct federal and state income taxes, Social Security taxes, life and health insurance premiums, and the costs of self-maintenance. c. Determine the number of years from the person's present age to the contemplated age of retirement. d. Using a reasonable discount rate, determine the present value of the family's share of earnings for the period determined in step c. The use of a lower discount rate in calculating the human life value will produce a higher human life value for the individual.
The needs approach can be used to determine the amount of life insurance to own. After considering other sources of income and financial assets, the various family needs are converted into specific amounts of life insurance.
The needs calculation would involve estimating and providing a fund for all known expenses, and paying off all debt; then determine the amount of financial need after all debts have been paid off. It can be paid as a lump sum or as income using a capital retention approach.
The advantages of the needs approach are as follows: 28
to indemnify survivors for lost net earnings. A variation of this method is used in litigation to compute the present value of the insured's future income. The disadvantages of the needs approach are as follows: • • • • 3. The needs approach can also be used to recognize needs during a period of disability or retirement. But the Capital Needs Analysis method raises several concerns: 29 . The family needs must be periodically evaluated to determine if they are still appropriate as family circumstances change. But this procedure goes further. Possible inadequacy of present life insurance is quickly recognized. Chartered life underwriters (CLUs) know the method as the Human Life Value Concept or the Human Capitalization Method. which may be complex and difficult to understand. The net contribution of the insured is then compared with today's spending needs of potential survivors. The needs approach ignores inflation in its simplest version. which is unrealistic. other household expenses and special expenditures. the Capital Needs Analysis method projects the income the insured will earn between now and retirement and discounts these flows.4 The family head is assumed to die immediately. Other sources of income and financial assets are considered.• • • • It is a reasonably accurate method for determining the amount of life insurance to own after family needs are recognized. it calculates the net contribution of the insured to the family's living standard by subtracting the insured's present values of future tax payments and living expenses from his or her present earnings. Capital Needs Approach The Capital Needs Analysis method is used by most insurance agents/planners and at most financial-planning Web sites. Like the earnings-multiple method. minus personal expenses. Such a needs analysis incorporates factors such as mortgage payments. Life insurance planning is required.
For married couples. the life insurance needs analysis will not be reliable. 3. which this method does not employ. a complex mathematical procedure is needed. b. __________ Approach crudely measures the economic value of a human life. Decisions about buying insurance.• If the household sets a spending target too high for survivors. To properly calculate this. The amount of life insurance purchased affects the amount of premiums paid. Third. This makes distinguishing each spouse's individual taxes difficult to determine. the recommendation would leave the household underinsured. they can easily be overstated or understated. This will cost the household too much in life insurance premiums. • • • Self Assessment Questions-1 (Fill in the blanks) a. And again. _________ is the average number of years that a person can expect to live. which influences how much life insurance the household needs. the method will generate a larger amount of life insurance than is appropriate. The ________ approach can be used to determine the amount of life insurance to own. tax payments are generally made via a joint return. c. If the spending target is set too low. spending and saving money are interrelated and need to be jointly determined.5 Factors affecting life and health insurance consumption A life insurance policy is an agreement between you and your insurance company. without an accurate calculation of future tax responsibility. which affects the household's affordable living standard. which would throw off the calculation of the amount of life insurance needed. unless future tax payments are calculated accurately on a year-by-year basis. An agreement cannot take place without the consent of both the parties involved in 30 .
You will be charged premiums based on how you are rated on several pre-determined factors ."Health" being one of the major factors. coupled with other factors could increase your cost of insurance. insurance companies do not clearly define ‘heavy alcohol consumption’.10. If you want to attract lower insurance premiums then you might consider insuring yourself at a younger age. Insurance companies do adjust their premium rates for those who have 31 . Your basic build. Your occupation also has an impact on your health and consequently your life expectancy. The premiums go up as we age. 20 years. blood pressure. 15. But if you buy that policy today. Medical examinations are carried out to learn more about your medical profile. Insurance companies will verify your alcoholic consumption and smoking patterns to calculate the life insurance premium. the health of the applicant attracts special attention. A woman's life expectancy is longer than a man's.the contract. among other things. heart disease. These tests would include checking your cholesterol level. Out of the many factors analyzed during the underwriting process. a family history of certain illnesses. We have thrown some light on certain health related aspects taken into account by the insurance company before granting life insurance coverage. sleep apnea. Health disorders such as asthma. Lower Rates" are so meaningful! Your age is also a factor in the cost of life insurance. Learn how health and life insurance are related and why the words "Better Health. Insurance companies will check your existing medical records and conduct new medical tests in order to focus on certain specific areas to ascertain your insurance cost. If the results are not according to the predefined standards set by the Insurance Company then you could be charged an extra amount of premium. in the form of Height: Weight ratio shall also be calculated at the time of these tests. Our society is suffering from a high rate of health disorders such as alcoholism and excessive smoking. you will lock in that premium rate for length of the term . Thus women may pay a lower premium. Although. excessive consumption of alcohol and smoking could result in higher premiums.
the insured must get clear cut knowledge of various advantages and needs of insurance. parachuting. on the happening of some event or damages. It gives rise to the planning or preliminary protection against the financial losses arising from death. His sudden death will disturb the family for necessaries of life. Some needs are temporary. the total amount of life insurance can be reduced. In brief.extraordinary occupations considered "risky" such as scuba diving. Self Assessment Questions-2 (State whether ‘true’ or ‘false’) a. 3. mountain climbing. Uncertainty of death is inherent in Human life. The family need for bread. clothing and housing are met out by the regular income of the family head. which include funeral expenses and unpaid medical bills.6 Life Insurance Planning The insurance contract is providing for payment of a sum of money to the insured person or to the person entitled to receive the same. While planning for an insurance product. As temporary needs are eliminated. others are permanent. 32 . Thus insurance is an institution which eliminates such risks and substitutes certainty. piloting a plane. insurance companies would take into consideration all the possible information that directly or indirectly affects your life or well being before finalizing your insurance premium. and others. An agreement cannot take place without the consent of both the parties involved in the contract. Most people have the following needs: • Final expenses.
A debt retirement fund to retire all debt, including mortgages, credit card bills, and auto loans. Being debt-free will allow a family to live with less income. An income fund provides an income to the surviving members of the family, which would be especially helpful if the surviving spouse would have to stay at home to care for children, or to pay for their care while the surviving spouse works. An education fund to pay for the future education of children. The cost for a 4 year college education can easily be more than 1 Lakh, and this will no doubt continue to increase, probably faster than inflation as it has in the past. An estate preservation fund may be desirable for those with substantial estates that may incur high attorney fees, court costs, and taxes.
Self Assessment Questions-3 (Fill in the blanks)
a. An _____________ fund may be desirable for those with substantial estates that may incur high attorney fees, court costs, and taxes.
b. ________________ is an institution which eliminates such risks and substitutes certainty.
Life expectancy is the average number of years that a person can expect to live. For people with a given life expectancy, half will die before then and half will die afterward. If someone dies early, then they may leave behind a family or other financial dependents that depended on the decedent's income.
A life insurance policy is a valued insurance policy that pays a specified amount to the beneficiary, when the insured dies. A beneficiary can be a person, business, trust, or estate. 33
Three approaches to determine the amount of life insurance:
• • •
Human life value approach Needs Approach Capital Needs Analysis
Uncertainty of death is inherent in Human life. It gives rise to the planning or preliminary protection against the financial losses arising from death. Thus insurance is an institution which eliminates such risks and substitutes certainty.
Unit 3: Principles of Life Insurance
Structure: 3.1 Introduction Objectives 3.2 3.3 3.4 3.5 Meaning of Valid Contract Essentials of a Valid Contract Insurance Contract Nature of Insurance Contract Self Assessment Questions I 3.6 3.7 3.8 Principle of Utmost Good Faith Material Fact Principle of Insurable Interest
Self Assessment Questions II 3.9 Summary
3.10 Terminal Questions 3.11 Answers to SAQs and TQs
Insurance is based on certain principles which form the foundation of an insurance policy. These principles have evolved over the decades. While in several countries, some of them may be adopted after modifications, to provide for better service levels, most of the basic principles would generally still hold good. In many countries also, Insurance is slowly evolving into a financial instrument, especially for large businesses and it would remain to be seen as to how far this aspect can really be taken to. This chapter is an attempt to explain the essentials of contract and the underlying principles of life insurance.
Objectives After completing this unit, you will be able to:
• Explain the meaning and essentials of a valid contract. • Describe the nature of insurance contract.
and which is intended to create a legally binding relationship.• Discuss the principles of life insurance. 3. According to Indian Contract Act.2 Meaning of Valid Contract A contract may be defined as an agreement between two or more parties to do or to abstain from doing an act. This could be summarized as ‘an agreement designed to have legal consequences’.3 Essentials of a Valid Contract A simple contract has to have all the following elements present in order it to be enforceable: 36 . which satisfies the following essential elements: (i) (ii) (iii) (iv) (v) (vi) Agreement (offer and acceptance) Legal Consideration Competence to Contract Legal object Certainty Possibility of performance (vii) Writing and registration. 3. “An agreement enforceable by law is a contract”.
1872. h) Possibility of performance. g) Legality of purpose.4 Insurance Contract Like any other contract the contract of insurance must fulfill all the essential elements of contracts as laid down in the law of contract of Indian Companies Act. 1872. In India. f) Consensus ad idem [a genuine meeting of mind].a) The intention to create legal relations. the relevant law is The Indian Contract Act. e) Certainty of terms. At the same time the Insurance Contract must fulfill certain other elements relating exclusively to insurance which are known as Fundamental Principles. Insurance is a contract between two parties whereby one party called insurer undertakes. b) Offer and acceptance. in exchange for a fixed amount of money on the happening of a certain event. 3. The special contract of Life insurance involves the following principles: 37 . The insurance contract involves: (a) The elements of general contract. d) Capacity to contract. c) Consideration. (b) The elements of special contract relating to insurance.
the insurer betting with the assured that his house will not be burnt or his ship will not sink and giving him the odds of its value against the premium. It is due to this uncertainty that Lord Mansfield described insurance ‘as a contract on speculation’. it is not a wagering or a speculative contract nor is it a gamble on an uncertain future. Therefore. however. indemnified for his loss and he does not gain by the happening of the event insured against. insurance contracts are not speculative or wagering contract. he does not make a profit of his loss. The 38 . if a house is burnt down or the ship is stranded. Utmost good faith 3. For example. Insurance is not merely a gamble on an uncertain future. At first sight this would seem to be a wagering transaction. Insurable interest 2. While in a wager no insurable interest is present. The following essential elements are deemed to be fulfilled after the acceptance of the premium by the insurer. the premium after the proposal being accepted. although insurance is an allegory contract depending upon an uncertain event. the insurer will pay the value of it. According to the modern view. It is a perfectly valid contract for the assured is only.1. A contract of insurance is entered as soon as the insurance company accepts. Material Facts 3.5 Nature of Insurance Contract The contract of insurance is called an allegory contract because it depends upon an uncertain event. in insurance the assured must have an insurable interest on the subject matter insured.
Following are the essentials of a contract which should be fulfilled: Agreement: It involves both offer and acceptance at the same time. 3. Filling up of a proposal form by the proposer is an offer and the notice of acceptance of the proposal by the insurer is a valid acceptance of insurance. payment of premium is the valuable consideration in return to get a lump sum on the happening of the event. 5. An insurance policy taken on a minor’s life by his legal guardian will constitute a valid contract. The intention of both the parties must be a holy one. Legal Object: The object of contract must be lawful. . The terms and conditions must be clearly understood by both. In insurance. The assured should pay his premium in time and in turn.more important conditions or elements known as fundamental principles must be satisfied for a valid insurance contract. 4. immoral or opposed to public policy. Also he must not have been debarred by any law to which he is subject to enter into agreement. Competence to Contract: If the insured person is of sound mind and has attained majority (18 years of age) he is said to be competent to enter into an agreement or contract. the insurer should pay the assured amount at the time of loss or maturity without causing any unnecessary hardship for the assured. Thus the object of insurance must be lawful. 2. Legal Consideration: To every contract there must be some legal or lawful consideration. It must not be illegal. If the proposer 39 1. loose and uncertain. Certainty: An agreement must not be vague.
2. In insurance the terms and conditions are deemed to be understood as the proposer gives an understanding on the proposal form. The insurer must be able to pay the money on happening of the event. conditions of insurance contract. An agreement enforceable by law is a _ _________. According to the modern view the insurance contracts are not speculative or _________ contract. A promise to do an impossible thing cannot be enforced. the insurer must analyze or make the terms and contracts clear to him. otherwise it would defy the meaning of the insurance plan. The insurer issues the original policy document. properly signed.turns out to be an illiterate. Self Assessment Questions I: 1. properly signed and stamped. Possibility of Performance: The agreement must be capable of being performed. The insurance company issues a printed policy document which contains all the terms and 6. 40 . there will be no mental accord. Otherwise. In insurance contract there is every possibility of its performance. duly signed by him. stamped and registered. fulfilled as the proposer makes his proposal through a printed form. The insured is expected to make regular payment of premium. Writing and Registration: The contract law requires certain formalities of writing and registration etc. For insurance the agreements must be in These formalities are writing. 7.
41 .. whether requested or not”. Though the insurance contract are subject to good faith and are based upon mutual trust and confidence. Utmost good faith in insurance means that each party to a proposed contract is legally obliged to reveal to the other party all information which would influence the other’s decision to enter the contract. it is not possible to apply any doctrine or caveat emptor (let the buyer beware) because of the fiduciary nature of insurance. Hence.6 Principle of Utmost Good Faith Insurance contracts are based upon mutual trust and confidence between the insurer and the insured. Thus one of the important basic principles of insurance is known as 'utmost good faith'. 3. all facts material to the risk using proposed. they are said to be uberrimae fidei. of the utmost good faith. “A positive duty voluntarily to disclose. i.e.3. whether such information is requested or not. The information necessary for the parties to assess the contract adequately cannot be ascertained as with contracts of sale where the buyer before contracting to purchase anything must satisfy himself as to the nature and quality of goods he needs. accurately and fully. The Insurance contract being a promise to pay in the case of a peril operating is a unique type of contract between the Assured and the Insurer. ________ involves both offer and acceptance at the same time.
However today. Our opinion yet would be that the Assured knows his business and risk best and whenever in doubt. especially with imminent privatization. the Insurer has to rely only on the description and details filled in the proposal form. etc.Very often. Therefore any mis-description. services. misrepresentation or blatantly false declarations made by the Assured would result in the Insurer paying wrong claims. in the longer term no Insurer can survive payment of wrong claims or charging of wrong premiums for the risk. must attempt to disclose that particular aspect. appraisal. since ultimately claims have to be paid out of the premium pool. A corollary to this would be that even after taking out an insurance policy. Such payment of claims also imposes a burden on the rest of the premium paying community. if there are any alterations or changes to the business or risk say alteration of process or storage of any hazardous material . surveyors. It is therefore an implied condition or principle of insurance that the Assured be required to make a full disclosure of all material particulars within his knowledge about his risk. Obviously. directly or through brokers.which increases the 42 . during its validity period. the subject matter of the insurance may very well have gone up in smoke or washed away. Whether these factors may dilute this principle and to what extent remains to be seen. etc. it would be logical to expect that insurers would attempt to become increasingly more customer friendly and provide risk survey and assessment. The Insurer has no way of verifying these details and after an insured peril has operated.
it is possible that the Insurer may partly pay the claim. the Insurer would obviously be entitled to avoid any payment of claims or monies under the Policy. the Assured must inform the Insurer of the same and get their acceptance for the same. In some quarters it has been suggested that the view of the ‘reasonable insured’ rather than a ‘reasonable underwriter’ should be the test of whether a fact is material or not. There has been some criticism of the use of the term ‘prudent underwriter’ and there has been a tendency to substitute ‘reasonable underwriter’ in applying the rule. However. additional premium payment may be required. 3. 43 . However. At times. in certain cases of misrepresentation. it is not a question of whether the proposer regards the matter as material or even whether the insurer regards a fact as material. If it is found that the Assured had misrepresented any aspect of the risk.risk. The test will be a view of a prudent or reasonable underwriter. then the Insurer would again obviously be entitled to avoid any payment of claims or monies under the Policy. where the effect may only have been increased premium.7 Material Fact The definition of Material Fact is: Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk. If it is found that an Assured has not disclosed or attempted to conceal any material aspects of the risk.
b) external factors which make the risk greater than would normally be expected. There is one exception to the rule and it occurs when there is a policy condition requiring continuous disclosure. f) Full facts relating to the description of the subject matter of insurance. which must be disclosed. The fact must be material at the date at which it should be communicated to the insurer. This would be an usual condition to find in most general insurance policies. c) previous losses and claims under other policies. but becomes material later on need not be disclosed. d) any declinature or special terms imposed on previous proposals by other insurers. Some examples of such facts are 44 . e) the existence of other non-indemnity policies such as life and accident.FACTS WHICH MUST BE DISCLOSED Those facts. A fact which was immaterial when the contract was made. The categories of facts which must be disclosed are: a) facts which show that the particular risk represents a greater exposure than would be expected from its nature or class. are any circumstances which would influence the insurer in accepting or declining a risk or in fixing the premium or terms and conditions of the contract.
a landlord should know the nature of occupancy of his property by his tenant. occupation. weight. e) Life insurance: Age. mode of carriage. b) Facts of common knowledge: An insurer is deemed to know about such things as the strife in any part or normal processes within a particular trade. f) Personal accident insurance: Age. previous medical history. details of regular drivers. As an example. smoking/drinking habits. In all classes of insurance there will be a need to have details of previous loss experience and all facts which the proposer is reasonably expected to know. fire detection and firefighting equipment. FACTS WHICH NEED NOT BE DISCLOSED There are some circumstances which are material but it is not necessary to disclose. The areas concerned are: a) Facts of law: Everyone is deemed to know the law. whether containerized. 45 . c) Motor insurance: The type of car. b) Theft insurance: The nature of stock. previous medical history. d) Marine insurance: Cargo insurance-the terms of sale. whether it has been specially adapted.a) Fire Insurance: The construction of the building. occupation. its value and the nature of security precautions. the nature of its use. These are only examples and not exhaustive. height.
a statement on a proposal form. e) Facts which a survey should have revealed: If an insurer carries out a survey then any material facts which are clearly visible. or implied warranty e. However. 3. which it is superfluous to disclose because of an express.g. the insured might suffer a financial loss. The most common example of this would be where a proposer inserts a phrase ‘see your records’ instead of completing fully the previous claims history. f) Facts covered by policy conditions: These would be facts. or which any reasonable surveyor would enquire about do not need to be disclosed by the proposer. that burglar alarms are regularly maintained. This means that the insured stands in such relation to the subject-matter of insurance that he suffers loss by its destruction or damage and is benefited by its safety. It is the legal right to insure as an insurance . d) Facts which could reasonably be discovered: This occurs where an insurer has bean put on inquiry by.” Thus insurable interest means 46 proprietary or monetary interest. the proposer is not permitted to conceal material matters from the surveyor. if the event insured against takes place. An insurable interest is “an interest of such a nature that. then there is no insurable interest.c) Facts which lessen the risk: the existence of an alarm system for a theft risk or sprinkler for fire risk.8 Principle of Insurable Interest The second principle of insurance is that the subject-matter of the insurance must be of insurable interest. If the happening of the event insured against cannot cost the insured money. for example. or existence.
He will have to incur huge expenses on its repairs. A businessman has insurable interest in the goods he deals in. if it is damaged. a person has insurable interest in the house he lives in. A wife has insurable interest in the life of her husband. If the scooter is damaged or is totally lost. (iii) The subject-matter of insurance must be the physical object or potential liability. In every contract of insurance. It must satisfy the following conditions: (i) There must be a physical object (life or limb or property) which is subject to risk and the risk can operate on such object and cause damage or destruction. the law regards possession of an insurable interest in the subject-matter of insurance to be a necessary pre-requisite. The insured must own either own part or whole of it or he must be in such a position that injury to it would affect him adversely. A creditor has insurable interest in the debtor. a man who insures his scooter against accident has insurable interest in it because he uses it for official and non-official visits and is thus benefited from its existence. For example. but relates to the insured’s interest in the property. or will have to pay hire of alternative modes of transport. or has to replace it.policy does not cover property. To be valid the insurable interest must be recognized as such under the law in operation in the country. The partners have insurable interest in the lives of one another. if it is totally lost. it would cause him financial or pecuniary loss. Similarly. 47 . A person has insurable interest in his own life. (ii) There must be a potential liability (death of a pedestrian by a motor car) and this must be caused by the operation of the insured risk or by the happening of an event which is insured.
Self Assessment Questions II (State whether True or False) 1. 2. If the happening of the event insured against cannot cost the insured money. or the creation of liability. 3.(iv) The insured must be in a legally recognized relationship with the subject-matter of the insurance. whether such information is requested or not. then there is no insurable interest.9 Summary A contract may be defined as an agreement between two or more parties to do or to abstain from doing an act. whereby he benefits from its continued safety or the absence of liability and is prejudiced by its damage or destruction. 3. 48 . Utmost good faith in insurance means that each party to a proposed contract is legally not obliged to reveal to the other party all information which would influence the other’s decision to enter the contract. Facts of common knowledge need not disclosed to the insurer as material fact. Like any other contract the contract of insurance must fulfill all the essential elements of contracts as laid down in the law of contract of Indian Companies Act. and which is intended to create a legally binding relationship.
whether such information is requested or not. 3. if the event insured against takes place. Utmost good faith in insurance means that each party to a proposed contract is legally obliged to reveal to the other party all information which would influence the other’s decision to enter the contract. Discuss about the principle of utmost good faith. 3. Explain the principle of insurable interest. At the same time the Insurance Contract must fulfill certain other elements relating exclusively to insurance which are known as Fundamental Principles. 2. the insured might suffer a financial loss. 8. Material Fact is every circumstance which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk.1872. 4. Write a short note on a valid contact with its essentials. What are Material facts? List out the facts which have to be disclosed and which need not be disclosed.8 Answers to SAQs & TQs SAQ I: 49 . An insurable interest is “an interest of such a nature that.10 Terminal Questions 1. Give the meaning of Insurance Contact and explain the nature of it. 5.
4 and 3.3 2.7 5. True 3. Refer 3. Refer 3. True TQs 1.1.8 NOTES 50 . Refer 3.5.6 4. Refer 3. False 2.2 and 3. Agreement SAQ II: 1. Refer 3. Contract 2. 3. Wagering 3.
3 Guaranteed Triple Benefit Policy 4.6 Convertible Plans 22.214.171.124 Joint Life Policies 4.4.6 126.96.36.199 Family Income Assurance 4.2 4.1 Whole Life Assurance 4.4 Limited payment plans 4.9 Variable Insurance Plans 4.5 Participating Plans 4.7 Plans covering handicapped Policy Rider s Accident Benefits & Permanent Disability Benefits 52 .2Endowment Assurance 4.4.3.Unit 4 Structure: 4.3 Introduction Objectives Plans of Life Insurance Understanding the Needs Levels Types of life insurance policies 4.3Term Assurance Self Assessment Questions I 4.5 4.1 188.8.131.52 Other Life Insurance Plans 184.108.40.206 Money Back Policy 4.4.8 Children’s Plan 4.
Both these are like fire insurance polices.8 4.9 Summary Terminal Questions 4. Those that provide only survival benefits are called ‘pure endowment’ plans. which provides for the benefit being paid on the death of the insured person within a specified period.1 Introduction Life insurance products are usually referred to as ‘plans’ of insurance. no payment is made under a term assurance plan.Self Assessment Questions II 4. Similarly.2 Understanding the Needs Levels Life Insurance is intended to classify and mitigate the adverse financial consequences that may follow because a person does not live long enough or because he lives too long enough or because he lives too long. If the specified contingency does not happen. 4. If the insured does not die within the specified period. These plans have two basic elements. no payment is made under a pure endowment plan.10 Answers to SAQs and TQs 4. Every possible 53 . if the insured dies within the specified period. which provides for the benefit being paid on survival of a specified period. The other is the ‘survival benefit’. Plans of insurance that provide only death cover are called ‘term assurance’ plans. the policy holder does not get anything from the insurer. One is ‘death cover’ or ‘risk over’.
Stage 3 Stage 4 Old age: Post. marriages. Stage 2 Children: Provision for higher education. Special Needs: Disability. all these needs exist simultaneously. The variations between people will depend on the ages.adverse consequence that requires to be taken care of constitutes a need for insurance. Start-in life. 4. for all persons. The needs of people for life insurance can be classified as under: Stage 1 Family: Protection of the interests of the family against loss of income resulted because of the death of the bread-winner.retirement income for self and family/dependants. Stage 5 Avoiding the loss of wealth (assets) due to depreciation or inflation. Insurance plans of various kinds are designed to meet these one plan alone may not meet all the needs.3 Types of life insurance policies All insurance plans are combinations of these two basic plans. accidents. All the needs can be met through a judicious mix of plans. Loss of income as a result of sickness. A term assurance plan with an unspecified period is called a ‘whole life policy’ under which the sum 54 . size of families and dependants and the nature of other properties and incomes. expenses for treatment of diseases. Generally. but not n the same measures.
There are maximum limits also for certain benefits. is effectively a combination of a term assurance plan for 20 years for full SA and 4 different pure endowment plans (20% SA for 5 years. A term assurance plan along with a pure endowment plan. Say 20% of SA is paid on survival every five years and 40% on survival of 20 years and full SA on death at any time within the 20 years. any number of plans can be developed. • In what contingency would the SA be payable? Could be on death or on survival. • When would the SA be payable? On the contingency happening or some other dates. under which the amount payable on survival is double the amount payable on death. By making changes in these features or adding and combining some of them. A plan of assurance will have the following features. under which the amount payable on survival is double Endowment Assurance plan. is paid on survival of the specified period or on earlier death.A. 20% SA for 15 years and 40% SA for 20 years). when offered as a single product is called an Endowment Assurance plan. like accident benefits. under which the S. 55 . what is called money back or Anticipated Endowment policy. • Who can be insured? The various possibilities are (i) individual adults (ii) children (minors) (iii) two or more persons jointly under one policy.assured (SA) is paid on death whenever it may occur. • What can be the SA? Some plans stipulate a minimum SA. A term assurance plan with a pure endowment plan of double the value is called a Double Endowment Assurance plan. 20% SA for 10 years. under which.
The same plan may be called by different names by insurers. Some plans provide for benefits even beyond the term. • Are there additional benefits? These. quarterly.• How would the SA be payable? Could be in one lump sum of in installments. • When would the premium be payable? Variations are in the frequency of payment (monthly). Some plans provide for premiums to be paid for a period less than the term. half-yearly or yearly). • Does the SA reduce? This can also happen. The policy money becomes payable to the beneficiary on the death of the life assured. • What would be the term (duration) of the policy? This determines the period during which the specified event should occur for the SA to be payable. between insurers are plenty. as well as the period during which it is payable.1 Whole Life Assurance A whole life policy is one which is taken to cover the entire or whole period of life of the assured.A. mainly because insurers make changes in their offers or practices from time to time.3. the accuracy of the information is not to be taken for granted. may be provided by way of riders. also called supplementary benefits. • Does the SA increase? This can happen because of participation in surpluses and bonus additions or because of guaranteed increases in S. The variations. 4. It is not possible to give details of all the plans offered by all the insurers. Even if a reference is made to a plan of any particular insurer. 56 . in addition to the basic covers. if the plan is to meet reducing liabilities under a mortgage.
L.1. If he survives the period of selected to pay.250 such reduced paid up as has already been declared on the policy. a fix paid-up policy for such reduced actually paid bearer to the number stipulate for in the policy will be automatically secured. provided the reduced sum assured including bonus is not less than Rs. no matter how he lives. will remain attached thereto. The assured is required to pay premium for a selected period of years or until his death if it occurs within the period. But the assured sum becomes payable only after his death. This is a better form of life 57 .C.I. If payment of premium ceases after at least three year’s premium have been paid. Limited Payment Whole Life Policy: In this type of policy. premium is payable throughout the life time of the assured and the policy money shall be payable after his death. selected number of years no further premium is required to be paid. issues the following usual forms of whole life policy: Ordinary whole life policy: Under this policy. The life assured shall have the satisfaction of knowing the maximum amount he will be required to pay. the life assure is required to pay premium for a fixed period from 5 to 55 years or up to the attainment of a certain age particularly up to retirement. The minimum amount for which a policy will be issued under this plan is Rs. With profits limited payment polices do not cease to participate in the profits after completion of the premium paying period but continue to share in the periodical bonus distributions until the death of the life assured. 000 and the mode of payment of the premium shall be yearly or half-yearly except under salary saving schemes.
and who can afford such singe payment. It suits those persons who get windfall income like lotteries etc. The policy is not so popular but is purchased for investment purposes. 4. The minimum sum assured is Rs. 000 and the maximum age at the entry is 45 years. These policies are more popular than whole-life policies due to the following advantages: • Compulsory savings: It is a method of compulsory savings. The object is to provide maximum insurance protection at minimum cost at the same time to offer a flexible contract which can be altered into and Endowment Assurance at the end of 5 years from the commencement of the policy by which time it is expected that there would be a rise in income and he would be in a position to pay more premium.3.5. Single Premium Whole Life Policy: This is an extreme form of limited payment life insurance.assurance for family provisions. A vast majority of people never save a rupee even though they get good incomes because of 58 . since it enables the assured to pay all the premiums during the productive years of life.2Endowment Assurance The Endowment Policy is that where policy money shall be payable to the assured person upon attaining a certain age on the event of early death to his nominee. The total amount of premium payable is paid in one lump sum by the assured. Convertible whole Life Assurance Policy: This policy is suitable to young man who is on the thresh-hold of his career and has prospects of increase in income after some time.
It the assured dies during the endowment period. The payment of premium is continued until the endowment period or death which ever is earlier. it serves as an excellent method of savings a large amount in old age. Under this policy. only the sum assured is payable a higher rate of premium is charged under the policy. Types of Endowment Policies: • Ordinary Endowment Policy: single or ordinary Endowment Policy provides an ideal combination of both family prodigious and investment. The assured is required to pay premium throughout the term or for a specified period or till death. The amount becomes payable on the expiry of the endowment period or at any time before maturity in case of death of the assured. • Double Endowment. If the policy matures. • Accumulation of Fund: The specific assured sums collected after the exposing of the endowment period may well be utilized for higher education or marriage of children. For such people this type of policy turns out to be a means of forcing thrift. say at 70 years of age of an assured. 59 . double the amount of sum assured is payable if the assured survives the policy.extravagant habits. • Old Age Provision: These policies are meant to benefit the policy holder under self-benefit scheme as he is able to beget some fund from the insurance company if he services.
5. In the event of death of the assured before the endowment term. In this policy are combined special features of whole life limited payment and a pure endowment. 000. 15.C. 20. the rate of premium is higher. • Anticipated Endowment of Money back Policy: Anticipated policies are issued with profits by the L. If he dies earlier. 25 years only. Under this policy. Benefits given ahead are guaranteed in the policy. Under pure Endowment with Return policy the sum is payable if the policy holder services the endowment period. • Triple Benefit Endowment Policy: This Policy is also known as perfect protection or family protection policy. 60 . The plan is of special interest to those who feel the need for lump sum besides desiring to provide for their old age and family. The main feature of the money back policy is that a number of installments of 20% of the sum assured are payable in cash or at certain intervals to the assured and the balance at maturity. This policy suits those who have no dependents and want to enjoy the money by themselves.I. for the terms of 12. No loan is granted under this policy and the minimum amount for which a policy is issued is Rs. 20 or 25 years. then his nominee shall receive the premium so far paid minus the first year premium.• Pure Endowment Policy: The sum assured is payable on the life assured surviving the endowment term. This type of policy is not very popular. It is issued for a fixed period of 15. full sum assured shall be payable without any deduction of payment made earlier.
The premium is paid till the death of the policy holder or for an agreed period. Premium is paid up to the death of the life assured or for an agreed period whichever is earlier. • Educational Endowment Policy: The policy aims to finance the education of the children whether or not the parents are alive after the endowment period. (iii) In case of the assureds’ survival upon the expiry of the endowment period the sum assured shall be payable. (ii) Sum assured shall also be payable in addition to the above provision at the end of the term of insurance. it is spread over ten half-yearly installments starting from the date on which the policy matures substitute another child in the place of late child. If the expires during the currency of the term the assured is given an option to substitute the name of another child as beneficiary or to accept total premier contributed so far minus the first year’s premium. Provision for school fees can be made by made by effecting an endowment policy. Besides. on the life on the parent with the sum assured. Instead of payment the assured sum in a lump sum. 61 .(i) 15% to 25% of sum assured is payable upon death of the assured and until the end of endowment period each year regularly to the family as a provision. but the policy matures after the expiry of the endowment period. payable in installments over the period of schooling. an equal amount also becomes payable after death. • Marriage Endowment Policy: As a special class of endowment policy. it enables the parents to provide funds for the marriage of their children.
• Increasing Term Assurance: Because of inflation. which provide basic death risk cover. Normally. a term. assurance with a level sum assured gives a reducing amount of real cover as the value of money declines year by year and consequently.3Term Assurance Term assurance is temporary contracts. it is only for a certain period of time and the policy money is payable on death during the term of time and policy money is payable on death during the term of the policy. Attempts are made to combat this by providing term assurance policies with some form of escalating sum assured. the policy has no value. return of premiums is allowed in the event of survival of the policy holder to the end of the term. On expiry.3. The whole life policy in effect is a term insurance policy without the limitation of a period.4. since as the description suggests. No doubt. This is the cheapest form of life assurance. The premium 62 . the policyholder does not receive any benefit on survival to the end of the stipulated term but he will have enjoyed the protection for death occurring during the policy period. The term insurance policy can be secured by paying a single premium at the start or by an annual premium covering the risk for one year at a time (which is called renewable term insurance) or by a level premium payable over the period chosen when it is called level premium payable over the period chosen when it is called level premium term insurance. These polices do not generally have surrender or loan values. a higher premium would be payable to cover the additional survival benefit. In India.
Although the sum assured decrease.4 Other Life Insurance Plans 4. the premium remains constant. Money is available at regular intervals in future to meet the specific expenses such as children's education or marriage. the policy provides insurance protection for the family as well as old age provision.1 Money Back Policy Money Back policy plan is an excellent plan with good return on reinvestment. such as the capital outstanding on a house purchaser mortgage.2. with the sum assured being linked to the reduction in the capital outstanding under the loan. 63 .would be of level amount payable throughout the term. • Decreasing Term Assurance : Term assurance of this type has a sum assured which reduces each year or even each months. 4. At the same time. The renewable term and convertible term policies as also index-linked polices which like the sum assured to an index like the cost of living index meet the need for increasing insurance cover. by a stated amount decreasing to nil at the end of the term. Features • A policy where lump sum amounts are paid to the life assured at periodic intervals on survival. best suited for businessmen and professionals. It is normally used to cover a reducing debt.
Thus. the total sum insured is paid to the nominee. The payment of benefit commences on the death of the life assured and would be payable till the expiry of policy. It is possible to limit the premium-paying period for a shorter period. Such polices would be called 64 . it is a type of decreasing term assurance where the benefit is payable over a period rather than as a lump sum. • • • • 4. Premiums are to be paid regularly to get survival benefits. till a claim arises.3 Guaranteed Triple Benefit Policy Guaranteed Triple Benefit Policy 4. This plan can be availed of for terms 20 or 25 years .4.4.2 Family Income Assurance This policy offers payment to the life assureds’ dependents of an agreed income until the expiry date of the cover.• In case of death of the life assured within the term.4. irrespective of earlier survival benefits. that is. Bonus is payable under this scheme. Family income benefit may be added to a whole life or endowment policy or may stand on its own. 4. The premiums would normally be payable till the SA becomes payable. Premiums cease at death or on expiry of term whichever is earlier.4 Limited payment plans All plans other than term assurance plans are variations of the whole life and Endowment plans.
Under these circumstances. they do not vary from whole Life policies. run this risk.4. mainly because they were issued for short periods of one year. Sometimes.limited payment polices if the limited period is only one year. with uniform premium during the entire period.6 Convertible Plans 65 . rather than insurance. who expect that their professional earnings may not continue for a long time. These are also called ‘with profit’ polices. but are offered a person who pays a single premium.5 Participating Plans Both whole life and endowment policies can be made participating in profits at the option of the policy holder. unlike regular office workers. may prefer limited payment policies.4. probably has a larger need for tax benefits. A ‘single’ premium polices for whole Life and Endowment plans are rare. These policies would be entitled to bonuses declared after every valuation. Persons. Term assurance plans are normally not issued as participating polices. officers servicing in the defense forces may retire before they reach the normal retirement age of 55 or more. 4. Performing artistes and even professionals working abroad. The methods of bonus additions are dealt with in another chapter. But insurers have begun to insure term assurance plans for long duration of 30 or 40 years. The option of participating in profits is available in such cases. 4.
But before the sixth year begins. that it can be changed to another plan after. The SA is paid on death of any of the 66 . The advantage of such convertible plans is that. the option can be exercised at any time. Such policies usually cover married couples or partners. in its terms and conditions. within a period specified in the original plan. So.. who expect their financial conditions to improve soon. In some plans. when the right of conversion is exercised. 5 years. A convertible whole life plan can be converted into an Endowment plan. This period specified in the original plan. or within. but before age 60. even if the insured has an adverse medical condition at that time. a convertible term Assurance plan can be converted into a whole life policy or an endowment policy. Such polices are usually taken by persons in the early stages of their careers. For example. a certain period after commencement. 4. the option to convert should be exercised before the end of the fourth year.7 Joint Life Policies Two or more lives can be covered under one policy. This period may be ‘not later than two years before the expiry of the original term. it will have to be done during the fifth year. there would be no further underwriting decision to be made. if the original term insurance cover is for 6 years. If the option to convert is not exercised. If the clause says that the option has to be exercised at the end of say. but would not like to delay the benefits of insurance till then. the policy will continue on the original terms. There would be no medical examination at that time. which provide. in other words.Convertible plans of assurance are plans.4. the policy of his choice will not be denied to him.
Ages are 67 .8 Children’s Plan Insurance can be taken on the lives of children. at the end of the Deferment period. The date on which the risk will commence. who are not majors. is called the ‘Deferred Date’ the deferred date will be a policy anniversary.insured persons during the term or at the end of the term. risk on the life of the insured child will begin only within when the child attains a specified age. • Bonuses accrue on the single basic SA only. In the case of joint life insurance: • A Joint life declaration is necessary to create a joint interest in the policy.A.4. on the death of one life and the policy is continued to cover the second life till maturity without payment of further premium. The professional will have to be made by a parent or a guardian. The time gap between the date of commencement of the policy and the commencement of policy and the commencement of risk is called the ‘Deferment period’. 4. the partnership deed will be examined to ascertain the nature of financial interest of each partner. • In case of partnership insurance. In these plans. If the child s 6 years old when the policy is taken and insurance is to begin when the child is 15 years old. • Each life will be underwritten separately. Some plans also provide payment of S. Practices vary widely. the deferment period is 9 years.
The main advantage of these plans is that the premium would be relatively low (age of the child at commencement) and cover will be obtained irrespective of the sate of health of the child. After vesting. This is because there cannot be a valid contract with a minor. If the child dies during the deferment period. Policy can commence when the child is some other plans. children between the ages of 5 and 12 are insured. These policies have conditions whereby the title will automatically pass on to the insured child. The policy anniversary corresponding to age of majority. various options are available. without any medical examination. The vesting age cannot be earlier than 18. of the insured child is the ‘vesting date’. with risk commencing at age 12. There is no insurance cover during the deferment period. Risk will commence automatically on the deferred date. 68 . The deferred date and the vesting date need not be the same. but not earlier than age 7. In some plans. policy can commence when the child is between I and 12 years old an risk will commence 2 years after policy commences. the premiums will be returned. on his attaining the age of majority. or any later date as may be chosen. nearest birthday or last birthday. This process is called vesting. In some other plans.reckoned as next birthday. With regard to the deferred date. the policy becomes a contract between the insurer and the insured person. as per the practice of the insurer.
The unit trust of India linked insurance plan (1971) this plan is designed for any resident in India between the ages of 12 and 55 planning to save between Rs. to be contributed in half-yearly or annual installments over a period of 10 or 15 years. The sum assures is paid a survival benefit on the latest.75000. Te sum assured is paid as survival benefit on the deferred date. A small part of the contribution is utilized for providing life cover and the balance is invested in units. The risk cover is extended to the husband three months after the insured child gets married or one month after intimation of marriage or on attainment of age 20 by the life assured. but there is no survival benefit on maturity. 4. This applies to all types of savings and not only to life insurance. Persons over can go in for a 10 year plan.6000 and Rs. No medical examination is necessary. and again on the death of the life assured before maturity. the return or appreciation is looked upon as compensation for such losses. In case 69 .4.In a plan offered by the LIC the insurance is taken on female children. considered adequate today. particularly in the context of inflation. the concern is real. may have a much lower value on maturity. In the case of stocks. The sum assured.9 Variable Insurance Plans A common objection to life insurance is that the returns are not good. whichever is the latest. after say 20 or 25 years. Although life insurance is not an investment and the criterion of return or yield is inappropriate. A small part of the contribution examination is necessary.
the effects of loss of capital could not be avoided. The security offered by the 70 . The money back type of polices help the policy holders to some extent. For example. 000 and put the balance in an investment portfolio like to mutual fund.1% or so. Policy holder would have an option as to the fund in which he would like his investment to be. income funds. Unit – Linked polices offered in India by the LIC under the brand name bima plus. debts and liquid assets. use whatever is required to support a term insurance cover of his choice. when the reverse trend happened. Such shifts would be done at certain costs. The policyholder was allocated units. which were valued every week. depending on the different pattern of investment in equities. as in mutual funds.the person dies before the end of the plan period. like 9. can be invested. balance and risk) with different risk profiles. Broadly. also called ‘unbundled’ were very popular in the years when the stock market was booming. one may collect a sum of Rs. the legal heirs will be entitled to the units to his credit and the amount of the insurance cover. technology stocks. bonds. However. Such plans. Insures have also developed innovative plans to deal with this problem.10000 from a prospect aged 30. regular statements from the insurer would indicate the growth of each of these funds and the policy holder would have a choice of shifting from one to another. growth funds. etc. The lump sums paid periodically. is a plan of this nature. say Rs200. the technique was to combine a term insurance plan with an investment plan. It offered a choice of three funds (secured. The options would be. without affecting the amount of insurance cover.
This had happened in 2002 with some of the L.6 Policy Rider A rider is a clause or condition that is added on to a basic policy providing an additional benefit. partially handicapped persons are mostly accepted without extra premium except in certain plans. in the event of death of the life assured by accident. not depending on age or the underwriter’s decision.5 Plans covering handicapped Physically handicapped persons are insured. 71 . The additional premium for the rider of Double Accident Benefit is a constant figure.C. 4. For example. But at times of falling interest rates. But that is not so with regard to all riders. a provision that in the event of death of the life assured by accident. Extras are charged in some cases like. etc. the floor (guaranteed) levels could not be sustained and the insurers were compelled to replace existing plans with new ones that guarantee at owner levels. deaf in both ears. the SA would be double can be a rider on an Endowment policy.I. loss of both arms. These details will have to be gathered from the company’s underwriting departments. This rider can be added on to a policy under any plan.s plans some of them that guaranteed returns were withdrawn. 4. The option to participate in valuation surplus can also be offered as a rider.traditional insurance plans seemed more attractive. at the choice of the proposer. blind in both eyes. Some plans offered a minimum guarantee (of return).
• Option to increase cover within specified limits or dates. thus allowing him a lot of flexibility. 72 . if the life insured requires medical attention because of specified conditions like cancer. eyesight. • Guaranteed increase in cover at specified periods or annually. being twice or even more the survival benefit.Insurers find it convenient to have a small number of basic. 5 basic plan and 7 riders. • Cover to continue beyond maturity age for same SA or higher SA. to choose from each plan can be taken with any one or more of the riders. if the parent dies before vesting date or in the case of permanent disability and sickness. • Premium waives which would be useful in the case of children’s assurance. providing additional payments (in or in installments). with riders being offered as options. speech. so that effectively the prospect has a number of options. covering loss of limbs. Many riders can be added or removed at the will of the policyholder. hearing. • Dreaded disease cover. Such options enable customization of the product. total blindness caused by illness or accident. etc. • Accident benefits allowing double the SA if death happens due to accident. Some of the riders being offered by insurers in India are mentioned below: • Increased death benefit. effectively provide 200 or more options. stroke. major organ transplants. cardiac or cardiovascular surgeries. plans. etc. • Permanent disability benefits. kidney failure. major burns.
It is possible that this limit of 30% may be changed from time to time. violent and visible means. • The death was solely and directly and independently of all other causes. The conditions would be: • The death or injury was caused by outward. • The premium on all the riders relating to health or critical illnesses shall not exceed 100% of the basic premium of the main policy. This virtually puts a limit n the number of riders that can be offered with any policy. The exclusions. from the accident • The death occurred within 120 days or such other period as may have been stipulated in the policy.7 Accident Benefits & Permanent Disability Benefits With regard to Accident Benefit and Disability benefit proof will have to be obtained to ensure that the necessary conditions have been satisfied for payment of those benefits.As per the regulations made by the IRDA in April 2002 and amended in October 2002. 4. when accident benefit would not be payable are: 73 . • And the premium on all the other riders put together should not exceed 30% of the basic premium.
Settlement of the disability benefits however. is different. The policy does not end with this settlement.10 Lakhs.I. racing hunting. Permanent Disability Benefit: Payment of the Double Accident Benefit is part of the settlement of the death claim. The rules of each insurer have to be checked.C. (e) When the accident resulting in death arises from employment of the life assured in military service. insanity. para gliding. It is neither a death claim nor a maturity claim. etc. mountaineering scuba diving. immorality or while under the influence of intoxicating liquor. drugs or narcotic substances. the L. rebellion. 74 . had fixed it at Rs. war. attempted suicide. police duty.a) When the death is caused by intentional self-injury.5 Lakhs. river rafting. civil commotion. bungee jumping . This limit is not on a single policy but on all polices together on a single life some companies have limits up to Rs. (e) When the death is a result of committing any breach of law. c) When the death is caused by injuries resulting from riot. There is maximum limit of SA up to which accident benefit is made available. b) When the death is due to accident when the life assured was engaged in aviation or aeronautics other than as a bonafide passenger in an aircraft licensed to carry passengers.
the benefits provide for in the policy are of the following kind. compensations profit. amputation of both the hands at or above the wrist. The policy conditions define disability in physical terms. training and experience.8 Summary 75 . 10 years. would not be able to do any work.In case of permanent disability. it is also stated that disability must be total and permanent and such that the life assured then or in future. The interpretation of disability can pose some problems. 4. The most restrictive interpretation would be that the life assured is unable to follows his own occupation. or amputation of both the legs at or above ankles. the broader interpretation would be that the life assured is unable to follow his own profession or occupation or any other occupation in keeping with his education. the remaining disability benefit installments have to be paid along with the claim. (c) In case of claims (death or maturity) with the specified period. Etc. payable in installments over a specified period of years say. occupation or profession to earn or obtain any wages. viz. The maximum limit of and the exclusion clause are the same as under accident benefit. he may be considered eligible for disability benefit. loss of light of the eyes. (a) An additional sum equal to the SA. (b) The future premiums are waived. if another is an organization may be able to take up a manual job but not a job in the office due to disability. For example.
Term assurance is temporary contracts.A. it is only for a certain period of time and the policy money is payable on death during the term of time and policy money is payable on death during the term of the policy. which provides for the benefit being paid on the death of the insured person within a specified period. which provides for the benefit being paid on survival of a specified period. • A term assurance plan along with a pure endowment plan. The policy money becomes payable to the beneficiary on the death of the life assured. A whole life policy is one which is taken to cover the entire or whole period of life of the assured.Life insurance products are usually referred to as ‘plans’ of insurance. The Endowment Policy is that where policy money shall be payable to the assured person upon attaining a certain age on the event of early death to his nominee. These plans have two basic elements. under which the S. 76 . which provide basic death risk cover. when offered as a single product is called an Endowment Assurance plan. The other is the ‘survival benefit’. This is the cheapest form of life assurance. One is ‘death cover’ or ‘risk over’. since as the description suggests. is paid on survival of the specified period or on earlier death. All insurance plans are combinations of these two basic plans: • A term assurance plan with an unspecified period is called a ‘whole life policy’ under which the sum assured (SA) is paid on death whenever it may occur.
A policy where lump sum amounts are paid to the life assured at periodic intervals on survival. a.9 Terminal Questions 4. at the choice of the proposer. True b.3.3 3. that it can be changed to another plan after. A rider is a clause or condition that is added on to a basic policy providing an additional benefit. False Terminal Questions 1. Refer 5. Gratuity 2.1 77 .10 Answers to SAQs and TQs. 4. best suited for businessmen and professionals. in its terms and conditions. Refer 5. Refer 5.2.1 4. a.Money Back policy plan is an excellent plan with good return on reinvestment.1 2. which provide. Convertible plans of assurance are plans. Group Superannuation Scheme c.2. Master Policy b. a certain period after commencement. SAQs: 1. or within.6. Refer 5.
6.5. Refer 5.2 NOTES 78 .
1 Introduction Group Insurance 79 .Unit 5: Structure: 5.
6.4 5.5 5.2 Group Insurance 5. The individuals covered under the master policy are not parties to the contract.8 5.2 Features of Group Insurance 5.6 Other Group Schemes Social Security Schemes Self Assessment Questions I Annuities 5.3 Types of Group Insurance 5.7 5. The individuals 80 .3 Group insurance Vs Individual Insurance 5.1 Group Gratuity Schemes 220.127.116.11 Summary Terminal Questions Answers to SAQs and TQs 18.104.22.168.1 Meaning 5.2 Group Superannuation schemes 5.1 Nature of Annuities 5.3.2 Classification of Annuities Self Assessment Questions II 5.2 Group Insurance in India 5.1 INTRODUCTION Group Insurance is a plan of insurance that provides cover to a large number of individuals under a single policy called the “master policy”.2.Objectives 5.
the employer or the association. The insurance contract is with the body that represents the individuals. The contract will be between the insurer and the body that represents the group of individuals covered. A bank or financier can make arrangements through a group policy to protect his interests against defaults accruing because of the death of the debtors. who is interested in obtaining benefits for his employees through insurance. This body may be the employer.1 GROUP INSURANCE As discussed earlier. The body may be association of individuals through whom the collective interests of the individuals are safeguarded. Because the contract is with the body. This chapter is an attempt to explain the group insurance. which provides cover to a large number of individuals under a single policy called the “master policy”. that body is the 81 .2. like a trade or professional association. Objectives: After studying this unit you will be able to: • Explain the meaning of group insurance • Understand the different types of group insurance • Describe the concept annuities and different types of annuities 5. different types of group insurance and annuities.covered under the master policy are not parties to the contract. group insurance is a plan of insurance. Thus sometimes it is referred to the instrument of “mass insurance”.
That does not make this a policy under the Salary Savings Scheme. Because the coverage is not at the choice of the individual concerned. the entire premium is paid by the employer. Secondly. because of two basic differences.2. who may. the premium may be deducted from their salaries. One is that the ownership of the policy is with the employer and not the employee. the rules of medical examination are more liberal in the case of group insurance policies. group insurance was restricted to employer-employee groups only. that may be either full or partial. the administrative costs are low. Therefore.2 GROUP INSURANCE IN INDIA In India the development of group insurance has taken place since that of the early 1960s. the extent of cover and the terms are determined by the employer and not by the individual. Before which the group insurance business was very little. The amount and terms of insurance are negotiated by the policyholder and not by the individual beneficiaries.policyholder. As many persons are covered under one single contract. The benefits will be determined on bases that apply uniformly to all the individuals. Since then the scheme has been extended to cover different groups. If the individuals contribute to the premium. the chance of an adverse selection is low. employees are made to contribute part of the cost. If the premium is collected from the individuals concerned by an employer. Originally. Sometimes. Here individuals are the beneficiaries. In varies employer schemes. or may not. The premium will be paid to the insurer by the policyholder. collect the same from the individuals concerned. provided they are identifiable 82 . 5.
Administration costs of these schemes have been increasing over the years and Governments have found it expedient to use insurance companies to pursue these objectives. The number of persons covered by group insurance policies is increasing at a faster rate than the individuals policies.by homogeneous common attributes like profession. Insurers are seen as the natural instruments to take over these functions. In India. New insurers find that they can reach larger numbers of people easier through group insurance. benefits paid by the state during unemployment are more than the salaries of the employed. Group insurance schemes are used by the Government.C provide insurance cover of small amounts like Rs. the operations relating to social welfare are comparatively at an elementary level.3 NATURE OF GROUP INSURANCE 83 . village artisans.I. as instruments of social welfare. rickshaw pullers. 5. Social welfare measures are generally administered by Governments out of funds generated through levies and taxation. because life insurance business has a powerful social dimension. The group insurance schemes of the L. In some advanced countries. handloom workers. In some countries. 5000 or so.2. etc. the entire living expenses of elderly persons are borne by the state as a social measure. to the poorer sections of society like landless agricultural laborers. etc. Social security is a concern of Governments in all countries. But the dimensions of social security vary considerably. membership of a cooperative society.
The insurer is not concerned. 84 They are only the beneficiaries. Whether they contribute at all or not. 5. The group must have sufficient large individuals at different risks. are internal matters concerning the group. or the extent of the contribution.2. the contract is between the insurer and the individual policyholder. The policy contract is not affected.Insurance of Group: In group insurance scheme. for how much and under what plan. The members covered under the policy may be required to contribute to the premium. or group. Group Selection: Under a certain limit called “Free Cover Limit” life cover is granted without medical examination. The individual decides whether he should be insured. live covers in granted to a number of persons under one contract while individual insurance is between an individual and the corporation. It is single contract covering many lives in a group which is considered as a whole. The amount and terms of insurance are negotiated by the employer . The individuals covered under the master policy are not parties to the contract.4 GROUP INDURANCE VS INDIVIDUAL INSURANCE In the case of individual insurance. A single master policy is issued covering all the members. and apply on a uniform basis to all members. In the case of group insurance. the contract is with the employer or with the group / association. The premium has to be paid by the employer or group to the insurer. Group Selection is aimed at obtaining a group of individual lives which contain reasonable average cross-section of risk from which practicable rates of morality could be expected. The individual pays the premium and has the right to seek termination or alteration of the contract.
So also with trade unions or other vocational associations like beedi workers or rickshaw pullers. it is customary to allow existing members an option to join the scheme or opt out. Those who do not exercise the option to join may never be allowed to enter later. For example. which have been formed for reasons other than obtaining the insurance coverage. That would have been fixed on the basis of some objective criterion. . etc. The master policy will stipulate the extent of insurance cover available to each member. all those who become 85 members of the organization subsequent to the commencement of the group cover. Entry into and exits from the groups will have to be for reasons unrelated to the insurance cover.Group insurance is provided only to groups. An employee may prefer to stay with the Provident Fund benefit. the age. Entry will be compulsory on certain conditions being satisfied. When a group insurance scheme is being introduced for employees for the first time. The option will have to be exercised within specified time limits. pension benefits being introduced through a group plan may be in partial modification of existing Provident Fund arrangements. The position occupied. The member will also have no choice as to whether he should be covered by the scheme or not. The option is important if the member has to contribute to the premium or if he has to forego some other benefit in lieu of coverage. like the earnings. Employees join or leave an organization for reasons unrelated to the insurance cover provided by the organization. the seniority. However. The option is normally allowed only for existing members. The member will not have a choice about the extent of this cover.
for further distribution to appropriate members. like having taken medical leave or having been absent for long periods. He would normally be an official like the Personnel Officer of the company or Secretary or President of the Association. Normally. That is why there has to be a specified authority to deal with the insurer and remaining responsible to the members. Underwriting is based on an assessment of the group as a whole. sometimes thousands. often hundreds. Insurance cover up to certain limits is given to all without either medical examination or stringent evidence of insurability. able and willing to act on behalf of the group. The assumption is that when an individual has no choice of being covered on the amount of coverage. They would be entitled to the benefits of the group cover on fulfilling certain conditions. and receiving moneys from. Minimum requirements like ‘active-at-work’ and ‘no medical leave for the last six months’ could be the simple conditions of eligibility. The costs of administration would naturally be low. the insurer. Therefore. The premium is received in one lump sum from the group covering the entire group. there can be no adverse selection of risk. In that case. the normal average should apply. A group may consist of several members. like having completed a specified period of membership. A trust may be formed for the purpose of paying to. Individuals are not separately evaluated on risk factors. this would be the administrative office of the group acting through an authorized official.may not be allowed such an option. the 86 premium charged in group policies tends to be lower than in the case of individual . There has to be a single administrative organization. Only exceptions have to be looked for. It is not possible for the insurer to deal with each of them.
pursuant to new legislations or changes in Government policies. This system is called ‘profit-sharing’. Normally. without having accumulated enough savings. by way of reduction in the premium payable in the following year. death. to employers covering employee benefits. This scheme is found useful by employers. LIC was the Government instrument for implementing social welfare schemes.3 TYPES OF GROUP INSURANCE Initially the LIC had offered three major Group Term Insurance Schemes. In case of favorable experience. 5. premiums charged may be brought down. many other schemes were introduced. 25 persons may be considered reasonable. A fixed sum is paid on the death of a member covered under the scheme. The Group Term Insurance Scheme is a term insurance scheme renewable every year. professional groups and industry associations also find it convenient to help their members. etc. This is because of the new entrants into the scheme as well as exits due to retirement. as the premium rates would be much less than if 87 . to help employees who die young. This is the simplest and cheapest of the schemes. The premiums will also be changed according to the mortality experience of the group. Or the surplus that emerges may be passed on to the members of the group. These were the Group Insurance Scheme (Term). The premiums charged on a group policy vary from year to year. Group Gratuity Scheme and Group Superannuation Scheme or Group Pension Scheme. Over the last forty years.policies. Trade Unions. The benefit of lower costs of administration will be available only if the group is of a certain minimum size.
In the case of beedi workers. debts could place severe burdens on their heirs. They would have very little to fall back upon in case of early death. which will reduce to the extent of repayments and increase according to new loans. Group term insurance schemes would be appropriate also to cover the liabilities of members who have availed of house building loans or vehicle loans. Also. is suitable for providing social security schemes to the economically weaker section. rickshaw pullers. This may be a necessity in developing countries. several employers. Gratuity is paid to employees who retire or die and also to those who resign. 5. usually 15 years.the individual members were to take individual insurance cover themselves. after having put in specified periods of minimum service. etc. They sometimes pay more than what the Act requires. being a low-cost insurance providing only risk cover. limited companies can take such policies covering their employees. However. coir workers. can take policies covering the dues from their debtors. A term insurance could mitigate such hardships to a large extent. Public Finance companies providing loans for housing or cards or for setting up business. makes the payment of gratuity obligatory. as a certain multiple. Group term insurance. The total coverage every year would be equal to the total outstanding from the debtors.1 GROUP GRATUTUITY SCHEME Group Gratuity Schemes are related to gratuity payments. The amount of cover is fixed as either uniform for everybody or related to earnings. weavers. Many organizations had been paying gratuity even before the enactment of the Gratuity Act. particularly the 88 .3. The Gratuity Act passed in 1972.
The amount of gratuity is usually related to years of service and the salary last drawn.smaller ones. in the absence of a law compelling gratuity payment. It would be something like salary multiplied by the number of years of service. the employer has to provide funds to pay the gratuity amount when it becomes due. either because of legislation or because of employees’ service condition. 89 . (b) He may create an internal reserve in the books of accounts equal to the estimated liability. (c) He may set up a Gratuity Fund as an irrevocable trust. The trustees will manage the investments of the fund comprising of the contributions. regarded gratuity as additional cost and liability. METHODS OF MEETING GRATUITY LIABILITY Once the employer’s liability is accepted. He can arrange to meet the liability in any one of the following ways: (a) He may make the payment as and when it falls due. This is called “pay as you go” method. and make payments of gratuity out of the fund. out of current revenues. While this may be reasonable in the case of those who retire after long years of service. Both salary and the years of service would be small. it could be a small sum for the families of those who die young.
this method is not protected from the weakness of method (a) although it has some merit. If. The other two methods providing for creation of separate trusts safeguard the funds for making gratuity payments. The employees run the risk of default or delays. if the management is strict and disciplined. it will eat into the profits and affect the company’s capability to sustain dividend payments to shareholders. Group Gratuity Schemes with the insurer have the following advantages. It is not possible to prevent the company from using it for its current requirements. Therefore. The effect on the ‘bottom line’ may be interpreted unfavorably by the investing public. particularly if the business performance is sluggish. The difference between the two is that in method © the funds are retained and managed by the trustees while in method (d) the funds are paid to and managed by the insurer. Payment of gratuity from current revenues is against prudent business policy.(d) He may set up a Trust Fund as above and the trustees may enter into a Group Gratuity Scheme contract with an insurer. As for the method (b) above. 90 . on any year. the internal reserve set up by the organization is a mere accounting provision in the books and does not become a separate fund. The revenues may not be able to sustain such variable burdens every year. Therefore. this method is not preferred. the impact of gratuity is unusually heavy. The gratuity liability will vary from year to year depending upon the number of employees to be paid and their seniority in terms of service and salary.
is in a better position to secure maximum benefit from the market. Pension may also be paid to the dependents of those who die while in service. This is a necessity for all persons. It is not easy to determine the liability of the employer on account of the pension’s payable. as long as the spouse lives. than an individual trust with its relatively small portfolio can do (c) The benefit of the group term insurance.(a) (b) The trustees may not have as much expertise in the investment of funds as the insurer may have The insurer.3. 91 . given by an insurer will ensure that families of employees dying early get the same gratuity as if the employee had completed the full term of service. in terms of protection from fluctuations as well as better spread. The Group Superannuation Scheme is offered to employers in order to facilitate the funding and disbursement of pensions. It is paid as long as the employee lives. 5. It may also be paid to the spouse of the employee. Many employers provide for pensions for their employees.2 GROUP SUPERANUATION SCHEME A pension is a regular payment received after one has retired from active life. with its massive portfolios. (d) The insurer has actuarial skills to evaluate the adequacy of the fund from time to time. Pensions are payable to employees who retire from service on attaining the age of superannuation or retirement.
to select employeremployee groups. who keep accurate records of their employees. like the group gratuity fund. In case of 92 . known as the contribution for savings. of funding with an insurer is the best method for the same reasons as discussed earlier. When the schemes are drawn up with the help of the insurers. The insurer will provide actuarial. A group term insurance scheme can be arranged along with the superannuation scheme. whereby. public sector corporations and reputed companies in the private sector.because it depends on how long the employees or their spouses live. the responsibility of administering and managing the fund is passed on to the insurer. whereby the pension benefits can be much higher. A portion of this contribution is utilized for insurance cover and the balance.I. The advantages are conditional on the gratuity scheme or the superannuation scheme being approved by the Income Tax Authorities. The manner of funding for pensions becomes an important issue. The employer can set up a trust fund for provision of pensions.4 OTHER GROUP SCHEMES Group Savings-Linked Insurance Scheme. The scheme provides that the contributions are made by the members. The same is deducted from the salaries and remitted to the insurer.C. like quasi-government bodies. There are considerable tax advantages both to the employer and the employee. even in case of premature death. offered by the L. 5. the approvals come easier. is accumulated at a guaranteed rate of interest. The trustees can enter into a group superannuation scheme with the insurer. pension benefits can also be funded in four different ways. legal and taxation assistance to the trustees. in both gratuity and pension arrangements. As in the case of gratuity. The last method.
The term insurance cover is decided for the scheme as a whole on the basis of the age distribution of the members. if he opts for a Group Insurance Scheme of the LIC. is the Group Insurance Scheme in lieu of Employees’ Deposit Linked Insurance Scheme (EDLI). the insurance cover is paid. the entire living expenses of elderly persons are borne by the State as a social measure.I. The Act empowers the Central Provident Fund Commissioner to exempt an employer from EDLI. The EDLI is applicable to all establishments and undertakings contributing to the Employees’ Provident Fund under the EPF and MP Act. In India. Governments are finding it difficult to administer these schemes. 93 . which is more beneficial to the employees. 5. However. Most of the social welfare measures are administered by the Government out of funds generated through levies and taxation. unemployment doles are more than salaries of the employer. In some advanced countries. of course. medical care is free. Another scheme being offered by the L.death during service.5 SOCIAL SECURITY SCHEMES Social security is a concern in all countries throughout the world. In some countries. In some countries. unless exempted under that Act. although the dimensions of social security vary considerably.C. The scheme provides for better benefits to the employees in the form of higher insurance cover. Insurers become the natural instruments to take over these functions. the operations relating to social welfare are comparatively at an elementary level.
say. India.8% of the world population will be over 65 years. this has gone up to 6.2% and by 2020. Rs. c. rickshaw pullers. tailors. masons. 5.9 Crores in 2002. barbers. US and Japan. village artisans. carpenters etc.3% of the population was over 65 years in age. by the Central Government. a. In 1990. Other weaker sections of society like co-operative milk producers. The concerns of living too long. 1. it is estimated that 8. The premium is financed either wholly or partly. 5. handloom workers. Longevity is increasing. will be in just 4 countries China. The number of old persons is increasing considerably in almost all countries. In 1960. with the help of social security fund. etc. Group Insurance Plan which provides cover to a large number of individuals under a single policy called the _______________. In case of death of any member a prescribed sum.6 ANNUITIES The risks in human life arise out of both dying too early and living too long. are acquiring great importance. group term insurance cover is made available to poorer sections of society like landless agricultural laborers. The number of people in India aged 60 or more was 1. It is expected to be 18 Crores by 94 . __________ is offered to employers in order to facilitate the funding and disbursement of pensions. are also covered by Group Social Security Schemes. More than 43% of all persons in the world aged 75 or older. b.In India. 5000 is paid to the dependants. Self Assessment Questions. Group Gratuity Schemes are related to ___________ payments. This amount is doubled if the death is by accident.
Their main source of income is the savings accumulated during working life. without companions and without the identity of being usefully engaged. Most of the old persons have no earnings. Those who have been working in reputed organizations or Government may receive pension. Most of the older men and almost all elderly women are dependent on others. they may be • Sick. without any retirement benefits. The problems of old people are not related only to shortage of money. within the home and outside • Unable to manage a home on their own and therefore. because the children themselves may be poor. Most of them may find the savings inadequate and may continue to be working. On the other hand. Even if well off. This means that more elderly parents will spend more years. The demographic change in the form of increased proportion of older persons in the total population has implications-both socially and economically. mostly children. about 90% of employees are in the informal sector. the problems are worse. In India. Widespread migration of young adults disrupts the traditional support for older people. wanting to share accommodation • Lonely. the life expectancy at age 60 has increased and is expected to rise to more than 20 (from its existing level of 17) in the next thirty years. not able to attend to all their personal needs. A survey has shown that 6% of the elderly did not have any surviving children. needing someone to be with them all the time • Physically weak (not ill). If the persons are poor.2025. depending on fewer 95 .
A whole new discipline of study called “Gerontology” deals with the issues of old age. have schemes which are woefully inadequate. Even those who try. They were all living under one roof. weakening of bonds and increasing independence in outlook are also other significant factors contributing to joint families giving way to nuclear (small) families. the cost of these benefits is required to be met by the younger working people contributing by way of taxes. The third source for providing financial assistance to the people after retirement is the employer. There are four ways of providing the required support for persons after they cross the stage of active life.children. Fewer children. Even the Governments of developed countries are finding it difficult to make budget provisions. In less developed countries. However. With increasing longevity. The first is the Joint Family System. The Government plays a role in many developed countries. and it is increasing. From the early period of civilization the responsibility for taking care of the older members of the family was on the younger members. the Governments cannot afford to provide social security benefits. lack of opportunities to earn in one village or town and the younger people moving out to distant places in search of jobs. health insurance benefits are also made available to older citizens. compared to needs. Besides. Social security schemes have been evolved with the active contribution of the Government to provide for the retirement benefits for workers. the joint family system is gradually disappearing due to successive partitions of agricultural lands over generations. The situation is much worse if their financial situation is not adequate. Due to the pressures from trade unions as well as enlightenment of 96 .
“Annuity may be defined as the payment of amounts periodically during the life time of the annuitant in consideration of the payment of an agreed sum to insurance company” .By W. In some developed countries.the employers. the percentage of annuity policies to the total life insurance sold is as high as 40%. Such benefits can be arranged only for salaried permanent employees and not for temporary or contract employees.6. With increasing competition. Individuals have to make their own arrangements for old age provisions. employees are being provided with support after they cease to work. The arrangements have to be firm and assured. Employers contribute substantially to such schemes. may become more employee-contributed and not employersubsidized. there are some limitations. Group Term Insurance. Group Superannuation Schemes and Group Savings Linked Insurance Schemes have become popular.A Dins dale 5. Even if employers provide adequately. the employers are careful about cutting costs and provision of employee benefits in the form of Group Superannuation. Businessmen and professionals have to make their own arrangements for the days when they may not be in a position to work actively. Employee turn-over poses difficulties in the continuation of superannuation benefits.1 THE NATURE OF ANNUITIES 97 . This is likely to be the future pattern because of the increasing numbers of self employed. Annuity policies meet these needs and are expected to become more and more popular. Group Gratuity Schemes.
When a person buys an annuity contract. in its simplest form. Since the annuity was payable only up to death. Difference between Annuity and Insurance 98 . When a person purchases a life insurance contract he agrees to make a series of payment (premiums) to the insurer in return for which the insurer agrees to pay a specified sum to the beneficiaries. in case of death of the life assured. The risk here is of living too long. a risk-sharing plan. the capital is used for paying out annuities. The contributions are made by all and the insurer applies the law of large numbers to the experience of a group of annuitants. provided for a single payment of premium by the annuitant and a promise that the insurer will pay a given amount periodically. the insurer starts paying upon the death of insured and under an annuity contract. The contributions of a large number of individuals are pooled and each member is paid an annual or monthly amount. he pays the insurer a specified capita sum. to the annuitant. based upon a group of insured of the same age. Annuity. we can say that under a life insurance contract. Thus. starting immediately or from a future date. Annuity also is. like life insurance. during his lifetime. No part of the premium paid was returnable on death. in return for a promise from the insurer to make a series of payments to him as long as he lives. There are variations which we will examine when we discuss classification of annuities. This is the basic principle and has been simplified for the sake of illustration. may be in installments. the insurer stops paying upon the death of the insured.The Annuity is called the “up-side-down application of the life insurance principle”.
who die each year. “One dying too soon and the other living too long.6. Insurance is a polling arrangement whereby a group of individuals make contributions that the dependents of the unfortunate few. 3.1.” 5.2 CLASSIFICATION OF ANNUITIES A. Single Life Annuity. B. Life insurance policy protects against the absence of income in the event of premature death or disability. 2. Multiple Life Annuity. 99 . Deferred Annuity. Annuity Due. may be indemnified for the loss of the bread winner’s income. whereas the annuity (policy) protects against the absence of income on the part of those affected with undue longevity. By Number of Lives Covered: 1. On the other hand. These two are extreme forms that assume protection to two unfortunate groups. Annuity is pooling arrangements whereby those who die prematurely and do not need further cover make a contribution so that those who live beyond their expectancy may receive more income from their contribution alone would provide. By Commencement of Income: 1. 2. 2. Immediate Annuity.
. By Mode of Payment of Premium: 1. Life Annuity. The annuity can be paid either yearly. if the annuity is to be paid annually then the first installment will be paid at the expiry of one year. In half yearly annuity the payment will begin at the end of six months. 2. Level Premium Annuities. This form of contract is of special interest to persons without dependents and it provides maximum possible consistent income. It helps to obtain a larger income that can be secured from the yield of investments. 2. Annuity Due: Under it the payment of installment starts from the time of contract. 2. The first payment is made as soon as the contract is finalized. A. Evidence of age is asked for at the time of entry.C. Guaranteed Premium Annuity. quarterly or monthly. For example. half yearly. The premium is generally paid in single amount though it can be paid in 100 1. By Disposition of Proceeds: 1. D. Annuity by Commencement of Income Immediate Annuity: It commences immediately after the end of the first income period. Single Premium Annuities. The purchase money of consideration is in single amount.
The payment of premium continues until the stated date for commencement of the installments or until prior death of the annuitant. Deferred Annuity: In it the payment of annuity starts after a deferment period or at the attainment of a specified age by the annuitant. the deferred annuity is sold on level premium. 1. The annuity due contract is beneficial for actuarial valuation. The premium may be paid as a single premium or in installment. . The Corporation does not require any medical examination but only proof of age. 101 3. No surrender value is payable after the deferment period. The deferred annuity can be surrendered for a cash amount or cash option at the end of or the deferment period. It is most beneficial to those who have no dependent and want to use all the saving during lifetime. It can be issued to male or female lives. This annuity is useful to those who desire to provide a regular income for themselves and their dependents after the expiry of a specified period. The female lives are generally able to avail lesser amount due to their higher longevity as compared to male lives after certain age. The premium may be returned without interest at the death. The surrender value is only95 percent of the premium before deferment period. Generally. B. Annuity By Number of Lives Covered Single Life Annuity: Under it one single person is contracted.installments as in the case of deferred annuity.
Generally the life insurance amount is utilized for purchasing this annuity.. i. It is of two types: Joint Life Annuity. before commencement of the payment of annuity he is given option to get the surrender value in cash or to get the paid-up values reduced in proportion to the premium paid to the premium payable. (ii) (i) Last Survivor Annuity.e. Annuity By Mode of Payment of Premium Level Premium Annuities: For the level premium annuity. D. the annuitant can deposit some amounts periodically so that at the end he can get sufficient amount of annuity in equal installments. C. 1. During the accumulation period. If the annuitant dies 102 1. 2. .2. Here payment continues up to the death of the last person of the group. Here payment of annuity stops at the first death. Annuity By Disposition of Proceeds Life Annuity: It offers a regular income to the annuitant throughout his life time. At the death of the depositor the beneficiary can get the surrender values or premiums paid whichever is higher. Multiple Life Annuities: In it more than one life is contracted. No payment is made after his death. Single Premium Annuities: The annuity is purchased by payment of single premium.
But if he survives for a longer period than expected. It means the payments will certainly be made up to this period whether the annuitant is alive or dead within this period and if the annuitant survives after period. or 20 years and thereafter up to life. The corporation issues this type of annuity where payments are guaranteed for 5. 2. This policy guarantees refund of cash value of the balance of annuity where the insurer promises to pay a lump sum to the beneficiary or to the annuitants’ estate. Here payment for a fixed number of years will continue irrespective of death. (ii) (i) Deferred Annuity with Guaranteed Payment. During the deferment period there is no difference between this annuity and ordinary deferred annuity. Sometime.before receiving all the amounts of the purchase price he is at a loss. After deferment period. 15 or 20 years and up to life thereafter. This annuity may be of two types: Immediate Annuity with Guaranteed Payment. instead of continuing the annuity payments after the death of the annuitant the difference of the purchase money and annuity installments already paid is returned as a lump sum to the nominee. annuity will continue up to the unexpired period. he is benefited by this annuity. 10. the payment under this annuity continues for a fixed period say 5. the 103 . It is issued to safeguard the loss in case of early death of the annuitant. he is paid the annuity up to his survival. If the annuitant dies before the specified period. Guaranteed Minimum Annuity: In it payment up to a period is guaranteed by the insurer. 10.
Pensions are payable to employees who retire from service on attaining the age of superannuation or retirement. Group Gratuity Scheme and Group Superannuation Scheme or Group Pension Scheme. Initially the LIC had offered three major Group Term Insurance Schemes.7 SUMMARY Group Insurance is a plan of insurance that provides cover to a large number of individuals under a single policy called the “master policy”. between the total of annuities received before the annuitants’ death and the purchase price. b. Group insurance schemes are used by the Government. Multiple life Annuity covers a single life. as instruments of social welfare. after having put in specified periods of minimum service. usually 15 years. Gratuity is paid to employees who retire or die and also to those who resign.difference. to employers covering employee benefits. if any. The Group Superannuation Scheme is offered to employers in order to facilitate the funding and disbursement of pensions. Annuity is periodical payment of amounts. Group Gratuity Schemes are related to gratuity payments. 104 . 5. 2. These were the Group Insurance Scheme (Term). Self Assessment Questions (Identify True or False in the following) a.
Explain the concept of “individual insurance Vs Group insurance”. a. Refer 5. SAQs: 1. a. Write a note on group gratuity insurance. 5. 4. Explain the classifications of annuities. 3. What is group insurance? 2. Master Policy b. 5.1 105 .The Annuity is called the “up-side-down application of the life insurance principle”.2.8 TERMINAL QUESTIONS 1. False Terminal Questions 1. Annuity means a fixed sum of money paid to a person yearly as income during lifetime. Gratuity 2. True b.9 Answers to SAQs and TQs. Give the meaning of Annuities and explain the nature of annuities 5. Group Superannuation Scheme c.
Refer 5.1 5.6. Refer 5. Refer 5.1 4. Refer 22.214.171.124 NOTES 106 .2.3 3.2.
1 Introduction Objectives 6.2 6.4 Health Care Plans Critical Illness Plans Health Insurance Riders Other Special Needs Plan 107 .3 6.Unit 6: Structure: 6.
1 Introduction Social Security is a concern in all countries throughout the world.11 Answers to SAQs and TQs 6.9 Summary 6. although the dimensions of social security vary considerably. We will also discuss about the claim settlement procedure and other 108 .3 Death Claims 6.5 Claim Procedures 6.5.2 Survival Benefits 6.5.6 6.8 Salary Savings Schemes Married Woman’s Property Act Industrial Life Insurance Self Assessment Questions II 6.5. Thus this chapter is an attempt to explain the special needs plans such as health care plans. health insurance plans and critical illness plans.10 Terminal Questions 6.7 6.Self Assessment Questions I 6. Apart from the regular plans there are so many other insurance plans which include health care plans. critical illness plans. health insurance plans.5.1 Maturity Claims 6.4 Early Claims 6.
2 Health Care Plans Purpose of buying a health insurance may differ from person to person still the primary aim of health insurance is securing medical protection for self and family members. It keeps you free from financial worries during your sickness. • Bring out the importance of other special need insurance plans. It provides you comparatively high quality medical services. Married Women’s Property Act and salary savings scheme. Objectives: After studying this unit you will be able to: • Discuss the about the various health care and health insurance plans. • Explain the procedure of claim settlement. • With the help of health insurance you can even afford to obtain costly specialized medical services. 109 • • • . which otherwise you would not have been able to afford.plans such as Industrial Insurance plans. You can use health insurance facility even for paying your regular medical services. Health insurance provides you protection for unforeseen medical expenses. 6. of a coordinated health plan.
6. It is more beneficial when your family is considerably larger and need medical treatment frequently. The purpose of a critical illness plan is to let you put aside a small regular amount now. Health insurance is most advisable to those who have number of dependents because you pay comparatively lesser premium which is surely worth paying when considered the expenses you would have to pay to your physician. If you were to obtain the same treatment at your own you might have to pay more amounts to doctors. 110 . The statistics speak for themselves and if you become a part of them at least you will be sure that lack of money won't add to your problems. Money acquired through Health insurance is not subjected to income tax so you get the tax-free money. means when you need the money most. • • • Another benefit you get is that you acquire the treatment at comparatively lower cost as health insurance agencies pay lower prices to health providers.3 Critical Illness Plans A Critical Illness plan means you can insure yourself against the risk of serious illness in much the same way as you insure your car and your house. as an insurance against all this happening.• Health insurance provides you the financial assistance during sickness. It will give you the same security of knowing that a guaranteed cash sum will be paid if the unexpected happens and you are diagnosed with a critical illness.
certain sums of money on the happening of specified events. major organ transplant. Paralysis. The real service of insurance is at the time of payment of the claim. the insurer has to fulfill the promise of making the payments.It is an insurance policy to cover to some of these critical illnesses like cancer. Claims may arise because of 111 . as per the terms and conditions of the policy. 2000 cores would be on account of death claims. the claims paid out on life insurance policies by the LIC would be approximately Rs. 6. A demand on the insurer to fulfill its promise. the total would be small compared to the payments of the LIC. is called a ‘claim’.5 Claim Procedure The operative clause of a life insurance policy states that the insurer will pay to the policyholder or nominee or such other person as may have a right to it. When such events happen. of which approximately Rs. When a claim is being settled.4 Health Insurance Riders 6. While any one of those claims could be for a sizeable amount. 12000 Crores on more than 76 Lakhs policies. The other insurers would have experienced only death claims. Primary Pulmonary Arterial Hypertension. In a year. the insurer is redeeming the promise made in the policy. stroke. multiple sclerosis. coronary artery bypass surgery. kidney failure.
the paid up value. The nominee is irrelevant in the case of maturity claim. Insurers generally initiate action on their own. In case the policy is absolutely assignee. well in advance of the maturity date. Any debt or charge under the policy. at the end of the term of the policy. as policy moneys are paid only to the policyholder.1 MATURITY CLAIMS A maturity claim is payable as per the terms of the contract. The discharge form would be sent to the policyholder with a request to return the same duly stamped. In some cases. etc will be deducted. which is the date of maturity (Maturity claims) (b) Survival up to a specified period during the term (Survival benefits) (c) Death of the life assured during the term (Death claims) 6. There could be some difficulties.(a) Survival up to the end of the policy term. if the life assured lives up to that date. signed and witnessed along with (a) The policy document for cancellation 112 . Settlement of maturity claims is usually free from complications relating to title. like loans. there could be litigations involving the policy proceeds. but before the maturity proceeds are paid out. The attempt would be to ensure that the policyholder receives the claim cheque on the date of maturity. if the policyholder dies after the date of maturity. It includes the SA and any other guaranteed additions plus vested bonuses.5. which will include the vested bonus as on that date. outstanding premium (due but not paid). If the policy remains paid up (automatically or on request). will be the claim amount.
For example. after debiting the balance amount needed to an X-charge account. if any. The gross amount normally consists of the basic SA or paid up value. the document of assignment If there is a loan subsisting. the policy document would already be with the insurer. which the LIC imposes when the renewal premium paid is less than the correct amount. An example of a charge would be the X-charge debit. the deductions. Of course. the extra premium for double accident benefit was lowered by the LIC.(b) Proof of age. The deductions from the gross amounts normally consist of loan amount. outstanding interest on the loan. but it was decided to refund the excess premiums at the time of settlement of claim. Instead of keeping the lesser amount in deposit and asking for the balance premium. a few years back. and the net amount payable. if any. this facility is used only to meet very small shortfalls. unpaid premium. any deposit lying in the said policy account and return of excess premiums collected. (monthly in respect of salary savings scheme policies) and any other charges. the vested bonus and interim bonus payable. if age is already not admitted (does not happen these days) (c) If there is an assignment executed on a separate stamped paper. as the policy has to be assigned in favor of the insurer before getting the loan. 113 . the amount is straightway adjusted and renewal premium receipt issued. the amount is straightaway adjusted and renewal premium. The discharge voucher will show the gross amount of claim. The X-charge account is verified at the time of claim and the total outstanding amount is deducted from the gross claim amount. if any.
Wills have to be probated. the specified amounts are paid on the due dates. are termed as ‘Early death claims’ or ‘Premature death claims’. As in the case of maturity claims. etc. Insurers may be willing to settle the maturity claim on the basis of an indemnity bond unless the circumstances warrant more caution. but before settlement of claim. the procedures required for issue of duplicate policy may not be gone through in full.3 DEATH CLAIMS Death claims are classified into two categories viz.5. The insurer may settle the claim on the basis of an indemnity or ask for a declaration of title from appropriate judicial authorities. on receipt of the discharge voucher duly stamped.5. signed and witnessed.If at the time of claim the original policy document is not found. 6. The claim amount is then payable to the legal heirs of the policyholder.2 SURVIVAL BENEFITS The Money Back type plans promise payment of part of the SA at intervals. (a) Early claims and (b) Non early claims. during the term of the policy. X charge. Claims arising more than two years after the date of 114 . 6. The originally policy document is endorsed to record the fact of payment and then returned to the policyholder. Claims arising within two years of the date of commencement or revival or reinstatement. outstanding premium. the rights for that survival benefit vest in the estate of the deceased policyholder. after deduction of the outstanding loan interest. If the policyholder dies after the due date..
etc. (c) Certified extract from death register maintained by the Municipality. the employer. together with any deeds of assignment (b) Claimant’s statement giving the details of the cause of death. a relative of the life assured. Particulars like policy number. nature of last illness. the cause of death and the relationship of the informant to the deceased are to be mentioned in the intimation. burial or cremation. the date of death. Early claims are looked upon with some suspicion and are processed differently. not happen and that the insurer does not take action on the wrong policy. name of the life These assured/policyholder. the status of the policy is verified and the requirements are called for. assignee. treatment.risk/revival/reinstatement or non-early claim. Once the insurer is satisfied about the genuineness of the intimation. In respect of non-early claims. the normal requirements would be (a) The policy document. the local board or any other competent authority (d) Proof of title of claimant If the duration of the policy at the time of death is more than 3 years and the title of the claimant is clear. The death of the life assured has to be intimated in writing to the insurer by the nominee. the discharge voucher may be sent along with the call for 115 requirements are relevant mainly to make sure that mistakes of wrong identity do . agent or development officer.
insurers agree to waive strict legal proof of title and pay the claim on the strength of an indemnity bond. they try to confirm that (a) There is no dispute. even when there is no nomination or assignment. the claimant will have to produce satisfactory evidence of title to the estate of the deceased from a competent judicial authority.requirements. If the policy has been validly assigned or the nomination is subsisting at the time of death. While doing so. among the heirs or relatives. 116 . no further proof of title is necessary. Easy liquidity is the benefit of a life insurance policy. This is done to expedite settlement. for which evidence of title may be required to be obtained from a court. although strictly. Waiver of Evidence of Title Procurement of succession certificate or probate of will. The claimant could be in mental and financial stress. The size of the estate in question is relevant to determine the appropriate authority and nature of title. In case there is no valid nomination or assignment. In order to facilitate the claim settlement. as regards the title to the policy moneys (b) The deceased has not left a will or any other estate besides and insurance policy / policies. the discharge voucher cannot be prepared without satisfaction that the reported death is indeed the death of the life assured. there could be an urgent need for money. (c) The amount payable for waiving title under all policies is not very large. In case of death claims. takes time. The authority may be the Administrator General or a court to grant either a succession of certificate or probate of a Will.
Therefore. 6. the claim may be paid to all the natural heirs on the basis of a joint discharge and indemnity bond. mother. Enquiries are made to confirm. who is accepted by the underwriter as good for life insurance. the insurer may also waive the indemnity bond. previous history and treatment 117 . The implications of personal laws and local custom have to be verified.5. the mother). that there was no suppression of information at the time of proposal. sons and daughters of each predeceased daughter. when an early claim occurs. as far as Hindus. will have to sign the indemnity bond and the discharge voucher on behalf of the minor.Depending upon the amount payable. For example. there is need to make sure that there was no attempt to defraud. additional requirements are called for. This is done both to ensure genuineness of the claim and to safeguard the interests of the community of the policyholders. in the case of early claims. Therefore.4 EARLY CLAIMS It is assumed that a person. In case the amount payable is small. sons and daughters. the natural guardian (the father and in case of fathers’ death. is not likely to die within 2 years. Sikhs or Jains are concerned. The natural heirs vary depending upon the religion of the deceased. as follows (a) Statement from the last medical attendant giving details of last illness. the widow. form the natural or Class I heirs. If any of the aforesaid heirs is a minor.
witnesses.(b) Statement from the hospital. certified copies of postmortem report. time. The decision to admit the claim. even if it is not to influence the decision of the risk. Enquiries are made from the deceased’s neighbors. place. in case the deceased life assured had received hospital treatment (c) If death was due to accident or unnatural causes. 1938 provides that. is taken on the information gathered during enquires and the evidence collected. irrespective of its importance in underwriting. Thus a misrepresentation. etc. if any taken by the life assured on grounds of sickness Enquiries are made about the life assureds’ state of health prior to the commencement of the policy. (e) Statement from the employer about the leave. is adequate to repudiate liability. However. In many countries now. Sec. The insurer can deny liability under an early claim on the ground that material information had been suppressed at the time of proposal. there are legal provisions prohibiting the insurers from repudiating claims. and doctors in the locality. (d) Details of cremation or burial. police inquest report and magistrate’s / coroner’s verdict. The courts also interpret the life insurance contract more liberally. the insurance company cannot question the contract unless 118 . In India.45 of the Insurance Act. employer. unless it can be established that the misrepresentation was deliberate and made with a view to secure undue advantage. in favor of the claimants. after two years from the date of the policy. if the claim arises by death within two years. colleagues or partners in business. insurers do not repudiate the contract only on grounds of misrepresentations.
The Supreme Court of India. 3. Easy liquidity is the benefit of a ___________ policy. that it was false or that it suppressed facts. 2. of India. Such evidence is not easy to come by. Settlement of ___________is usually free from complications relating to title. in the case Mithoulal Nayak vs. which it was material to disclose. The claim amount is then payable to the __________ of the policyholder. The immediate requirements 119 .certain conditions are fulfilled.6 Salary Savings Schemes The SSS is intended to help salary earners. In the case of frauds involving large amounts. (AIR 1962) summarized the three conditions as follows: (a) The information in question must be on a material fact required to be disclosed (b) The suppression must be fraudulently made by the policyholder and (c) The policyholder must have known at the time of making the statement. The onus of proving that these three conditions are satisfied is on the insurer. Life Insurance Corp. there would be organized efforts to conceal or destroy evidence. the repudiation of a death claim is done by insurers only after obtaining valid evidence in support of the fact of suppression. Self Assessment Questions 1. as policy moneys are paid only to the policyholder. Many of them find it difficult to cope with the multiple demands on their monthly incomes. Thus. 6.
The insurer benefits because the payment of the premium is assured. Life Insurance premium becomes a first charge on his salary. Therefore. He adjusts his living to his net income. lapsations are almost zero. Such instances may be few. The employee does not have to bother about paying the premium to the insurance office. This advantage is lost if the number of employees under one employer is very small. the SSS provides for deduction of the premium every month from the salary. as long as the employee is in service. 15 employees. The deduction becomes compulsory like Income Tax. the defaults may continue and the policy will lapse. In order to avoid such contingencies. This can be 120 . Provident Fund and other statutory deductions. Because of the assured receipt of premium. There is no maximum limit. The employer sends to the insurer all premium deducted from all employees in one lump sum. Lapsations can still happen if the salary in a month is less than the premium payable because of absence without salary or some other reason. The procedures of accounting become simple because there is only one transaction for all the employees under one employer. The employee gets his salary only after deduction of premium. Problems may occur also is the employee is transferred to different departments or locations and the instructions about deductions are not conveyed. but may need more effort for verification and correction. the SSS is made available only if there is a minimum number of say. Ultimately.will get priority over insurance premiums.
To cover this time gap. The extra-load on the monthly mode of premium payment is waived in the case of SSS policies.avoided if the insurer is prompt in reconciling the remittances received from the employers. if the system has to function smoothly. the names must be arranged in the order in which the employer will find it most convenient. listing out the deductions to be made. even separate demand lists may have to be provided for each department. after the proposal has resulted into a policy. If the employer has many departments. usually the 121 The premium is . Such letters of authority are collected along with the proposal for insurance and are sent to the employer by the insurer. The employee has to authorize the employer to deduct the premium from his salary. Since the lapsations of SSS policies is expected to be low and the cost of service is also low. The list cannot be in policy number order. SSS policies are issued only after the employer has agreed to make deductions regularly from the salaries of the employees and remit the premiums to the insurer. with details of policy number and amount of premium. calculated as if the mode is yearly and then divided by 12. the premium on a SSS policy is not calculated in the way the monthly mode premium is normally calculated. as that is irrelevant to the employer. The insurer’s administrative procedures and the employer’s procedures have to match. When the insurer sends a demand list to the employer. There will be a gap between the time the policy is completed and the time advice for premium deduction is sent to the employer. The names may have to be listed department-wise or code number-wise or rank-wise as the employer would like.
The resistance would be less and the relationship with the group can be strong. or any of them. 30. or any of them.P. The facility is available only if (i) the employee is the policyholder as well as the life insured and (ii) the installment monthly premium is at least Rs. his wife and children.first two monthly premiums are collected with the proposal and the machinery is set in motion for collecting the third monthly premium onwards through the SSS. so long as any 122 . There is no contract with the employer as in the case of Group Insurance Schemes. the employer is not liable for any consequences.7 Married Woman’s Property Act Section 6 of the Married Women’s Property Act 1874 (M.). Even though arrangements are made with the employer for deduction of premium from the salaries.W. shall be deemed to be trust for the benefit of his wife. 6. The employee.Act. who is the policyholder. and shall not. provides that a policy of insurance effected by any married man on his own life and expressed on the face of it to be for the benefit of his wife. SSS differs from other policies only in respect of the method of payment of premium. his wife and children. An added advantage of the SSS is that there is a group pressure to buy life insurance. according to the interests expressed. has to ensure that the policy is kept in force. making the job of an agent slightly easier. it is understood that the responsibility for keeping the policy in force is entirely that of the policyholder and not that of the employer. If the premium is not deducted for any reason.
daughters.W. Act. on the death of the life assured.P. Thus. Thus.P. the respective shares of the different beneficiaries must be mentioned. would go to the person who becomes a widow at that time and those children by any marriage and whenever born. They must be named and must be existing on the date of the policy. only the surviving beneficiary or beneficiaries would be entitled to the moneys on a claim arising. and taken out by himself. If two or more beneficiaries are involved. (g) The life insurance policy under M. or form part of his estate. (ii) any one or more children.W.W. The salient features of the MWP Act provisions are as follows: (a) A ‘married man’ includes a widower or a divorced man and the term ‘children’ includes sons. Act policies can be (i) the wife alone. (iii) the wife and any one or more children jointly. (c) A Non-Mohammedan can provide that the beneficiaries should be the named parties and that the benefit should go to them jointly or to the survivors or survivor of them. Act must be on the life of a married man. who survive him. In this case. (f) A Mohammedan proposer cannot take out policies for the benefit of the wife and children as a class. joint life policies or Children’s Deferred Assurance policies cannot be taken under M. If any beneficiary dies before the policy becomes a claim.object of the trust remains. or his creditors. 123 .P. both natural and adopted (b) The beneficiaries under M. under such a policy. be subject to the control of the life insured. that share would go to his legal representatives (e) He can make a trust in favor of his wife and children as a class. the benefit. (d) He can also specify equal shares or specify unequal shares.
less than $500 in U. is required to complete an Addendum.(h) The proposer.8 Industrial Life Insurance Industrial life insurance is intended mainly for workers with small incomes. A trustee has to be appointed. The premiums due from the area allotted to an agent is ‘debited’ to his account notionally. not for doing business. (i) No loan can be granted under a M. from the residence or the workplace of the insured.Act. may reserve the power to revoke the appointment of trustee and appoint another. The trustees cannot surrender the policy. The list may include persons insured by agents from 124 . The industrial life insurance agent is assigned the duty of collecting premiums from policy holders in a specific area.P.A. Premiums are collected at short intervals. The choice of plans. Act policy unless the proposer had while appointing the trustees specifically authorized the trustees to obtain loan on the policy.W.P. The cover is usually small. 6. Because of the facility for collection of premium personally from the insured. Mortality rates and lapse ratios also tend to be higher than in the ordinary branch. The proposer who appoints the trustee.S. but term insurance is not offered. The debit list may consist of even 1000 or more policyholders. in general is the same as in the ordinary branch. the cost of administering industrial insurance is higher than that of the ordinary business.W. generally weekly. except as a combination with other plans. who desires to affect the assurance under the M. This area is only for collection of premium.
W. The arrangement is that the agents will visit the house or place of work of the policy holder every week to collect the premium. did not become popular. Life Insurance premium becomes a first charge on his salary in Salary Savings Scheme. In the U. Joint life policies or Children’s Deferred Assurance policies can be taken under M. The policyholders are given receipt books individually. The policies are issued for small SAs. Industrial life insurance is intended mainly for workers with small incomes. to collect the premium. Agents have to be remunerated differently because they are expected to visit every policy holder every week.K.9 Summary 125 The signature of the collecting is . Such policies. there used to be many more industrial life assurance polices in force than ordinary life polices. introduced in India in the early days of the L. Act. 2.elsewhere. 1.I. The agent has to sign this book each time he collects the premium. will find a place in the debit list of some other agent. The administrative costs are high. some of his policyholders from another area. Both mortality and laps rates tend to be high. 3. Self Assessment Questions II State whether the following statements are true or false. with weekly premiums. adequate proof that premium has been paid.P. Similarly. 6.C as ‘Janata’ Polices. Industrial assurance plans are designed for workers with low incomes.
The Salary Savings Scheme is intended to help salary earners. With the help of health insurance you can even afford to obtain costly specialized medical services. Claims arising more than two years after the date of risk/revival/reinstatement or non-early claim.). What are Health Care Plans? 2.Act. Explain the claim settlement procedure 3. his wife and children. at the end of the term of the policy. provides that a policy of insurance effected by any married man on his own life and expressed on the face of it to be for the benefit of his wife. Industrial life insurance is intended mainly for workers with small incomes. You can use health insurance facility even for paying your regular medical services.Health insurance provides you protection for unforeseen medical expenses. if the life assured lives up to that date.. are termed as ‘Early death claims’ or ‘Premature death claims’. 4. A maturity claim is payable as per the terms of the contract.W. (a) Early claims and (b) Non early claims. Death claims are classified into two categories viz. The operative clause of a life insurance policy states that the insurer will pay to the policyholder or nominee or such other person as may have a right to it. certain sums of money on the happening of specified events. Write short notes on Salary Savings Scheme.P.10 Terminal Questions 1. 126 . 6. Claims arising within two years of the date of commencement or revival or reinstatement. Explain the Married Women’s Property Act. Section 6 of the Married Women’s Property Act 1874 (M.
Maturity Claims b.7 5.27 2. Legal Heirs c. Refer 6.5 3. True Terminal Questions 1. Life Insurance Policy II a. Refer 6.11 Answers to SAQs and TQs SAQs: I a.6 4.5.8 NOTES 127 . Refer 6. True b. Refer 6. Discuss about Industrial Life Insurance. Refer 6. 6. False c.
Unit 7: Structure: 7.2.5 Special Reports Self Assessment Questions I 7.3 Medical Examination 7.3 Policy Documents 7.2.2 Introduction Objectives Insurance Documents and Policy Conditions Insurance Documents and Conditions 7.1Proposal and other documents 7.2.1 7.3.1 Needs and Format 129 .2.4 Age Proof 7.2.2 Prospectus 7.
6 Alterations Self Assessment Questions II 7.7.7 Duplicate Policy Summary Terminal Questions Answers to SAQs and TQs 7.5 Other Conditions and Privileges 7.1 INTRODUCTION A life insurance policy is a contract.5 7.2 Policy Preamble 7. This chapter is an attempt to explain the insurance documentation.3.6 7.3. need and format of policy document and other conditions and privileges related to a insurance contract. There could be disputes involving the insurer and the insured and the beneficiaries of the policy or between the beneficiaries. These terms will be based on and will relate to statement s and actions at various times during the course of the policy. These will have to be proved through documents.4 Attestation 7.4 7.3. Documentation therefore is important in the life insurance business.3. The stakes in the contract are usually large and those interested in the stakes are many. Objectives: 130 .3.3 Schedule 7.
etc.1 PROPOSAL FORMS AND OTHER RELATED DOCUMENTS The first and the foremost document in the insurance file is the proposal or application for insurance. nominee. 7.2 INSURANCE DOCUMENTS AND CONDITIONS The life insurance contract is a long-term one. Transactions may be few and far between. nominations. etc. • Explain the different policy conditions. is required to give details about himself (name. it may not be possible to know the dues and the rights or even the identities of the persons . 7. date of birth. The person proposing for insurance. address. lasting 30 or 40 years. the policy file may not be opened till the claim arises. the plan and term preferred.2. concerned. If the premiums are paid without any default and no changes are made in address. called the proposer.. 131 In the absence of proper documentation. The proposal form in which the application for insurance are made. • Describe the concept duplicate policy. mode of premium. name and particulars of the person to be insured. is printed by the insurer and made available through agents. the amount of insurance. Some companies make the proposal form available through the Internet.After studying this unit you will be able to: • Discuss about various insurance documents. The proposal form is normally given to the insurer along with (i) the personal statement of health and habits of the person to be insured. and occupation).
someone else familiar with the language. has to declare that he had explained the contents to the proposer and that the proposer had understood the same. The proposer declares at the end of the proposal form. which sends it the insurer along with his report of the medical examination. If any averment is shown to be untrue. or for some other reason. Sometimes. if the proposal is for a huge amount or the person to be insured is of advanced age and does not have any insurance on his life so far. the personal statement is given to the medical examiner.filled up by the proposer and (ii) the confidential report of the agent. If the proposal is filled up in a language which is not familiar to the proposer or if the proposer is illiterate and can only affix his thumb impression instead of a signature. but also the statement in the proposal form constitutes the basis of the contract. Its purpose is to provide additional data to the underwriter for assessing the risk. This would be a requirement in countries like India where there are many spoken languages. particularly the moral hazard. the insurer may ask for such a report from some other senior official. If medical examination is required. The proposal form is an important document not just because it contains valuable information. other than the business language of the insurer and because the level of literacy is low. This report will contain information regarding the proposer’s financial position and life styles. He is thus bound to the declaration in the proposal and the consequences thereof. that the answers and statements are given by him are true and complete. if any. 132 . the contract will become null and void ab initio. The confidential report of the agent is significant for the insurer to assess the risk and the acceptability of the proposal for insurance.
The 133 . an offer made to the public to come forward and invest in the company. public companies entering the capital market for funds. That person is called the proposer.It is understood clearly and also explicitly stated in the policy. i. It may be called as an ‘offer at large’.2 (3b) of the Companies Act. Some companies attach the proposal to the policy as part of it. The person to be insured could be different from the proposer. The application and the documentations have to satisfy the requirements of a valid contract. In other words.2.2 PROSPECTUS An insurance contract is issued on the basis of an application called a proposal. habitual and family history of the life to be insured.e. a prospectus is a document inviting the deposits from the public or inviting offers from the public for the subscription or the purchase of shares or debentures of a body corporate. The IRDA Regulations require that a copy of the proposal should be given to the policyholder along with the policy. etc. Because it is the basis of the contract. offering shares or debentures or through deposits are expected to issue a prospectus giving details of the business they are in. statements showing their financial condition. their set-up and the various products/services they offer. made by the person who wants to insure. the proposal has extensive questions on the state of health. The proposal is considered and accepted by the insurer. 1956. The form tends to be quite lengthy. as in the case of parents proposing for insuring minor children. 7. that the proposal and its contents is the basis of the insurance contract evidenced by the policy. As per Sec.
the prospectus gives complete details about the set up of the company. increasingly. It is quite simpler in content and in the purpose. the characteristics of an investment offer. In few countries however. Some insurers print separate pages for each plan describing the benefits and obligations and also a summary of the terms and conditions of the particular policy. the plans of insurance they make available and other general terms and conditions. whether the policy is participating or not participating. the life insurance contract assumes at least partly. In this way the argument runs. there would seem to be no reason to exempt life insurance companies from disclosure and prospectus regulations. In that case. This is partly the consequence of the boundaries between financial services becoming blurred. the riders available along with that policy and the scope of the riders. In terms of the IRDA Regulations. the latter portion being funded and growing separately in selected portfolios of investment. disclosures. When an insurance plan is offered as partly risk and partly investment. A prospectus is not necessarily a single book containing all details of all the plans under offer.prospectus under the Companies Act has to conform to the strict regulations of the SEBI as to transparencies. the prospectus should state details of the various insurance plans on offer. in competition with other finance companies. In life insurance. the benefit and other terms and conditions. objectives. risks. public opinion is veering to the view that life insurance companies should also conform to the requirements of investment companies that solicit public funds for investment in shares or debentures or deposits. etc. The prospectus of the life insurance company is not bound by the regulations of the SEBI. 134 .
the LIC has adopted a policy of waiving the requirement of medical examination for persons satisfying certain conditions. with the experience and increase in the base of the insured population. Increasing rigor means more specialized tests like radiology. In the rural areas.Whatever may be the theoretical rationale. the problem is more acute. 7. A medical examination process involves some inconvenience to the prospect. To the doctor an examination for insurance purposes is relatively of a lower priority than the other patients who are sick and need more urgent attention. is normally subject to medical examination to determine the state of health and the terms of insurance if agreed upon. etc. Gradually. lipid profile. stress test. Authorized medical examiners are not too many. The agent and the person to be examined may have to travel some distance to reach the doctor even in urban centres. sonography. The rigor of the medical examination increases along with that of the age increase of the person to be insured and the proposed SA. ECG. Over a period of time. the reality seems to be that very few prospects that decide on purchasing life insurance on the basis of a prospectus.3 MEDICAL EXAMINATION The individual proposed to be insured. Dominantly they rely heavily on the advice of the agent.2. If the proposal is for a large SA. these conditions 135 . the distance and the waiting may be more.
Government industrial undertakings. Dispensing with medical examination does not mean that the stand of selection is lowered. The maximum sum assured permissible varies between Rs. which can be on more than one policy. The risk is assessed and accepted on the strength of the statements in the proposal and personal history forms and on the agent’s confidential report. limited payment whole life and convertible whole life are allowed under this scheme. Female lives have to be literate and have income of their own. A very large number of cases are considered without medical examination. The Non-medical (General) scheme offered by the LIC is applicable to all male and female lives.have been liberalized. 6 Lakhs. 136 . Pregnant women or women with history of miscarriages or abortion are not eligible. The Non-medical (Special) scheme which can be availed of by employees working in Government offices. Professionals may be considered up to Rs. reduction of the inconvenience to the parties concerned and saving of costs to the insurer (medical fee is not to be paid). They are called as non-medical insurances. Quasi-Government offices like Municipalities. State corporations.. Non-medical selection requires a more detailed proposal form and more detailed report from the agent and other officials. Normal plans of insurance like endowment in its various forms. District boards. Those above 45 years may also be considered for lower levels. 1 and Rs. 2 Lakhs. if not standard. Age proof. The maximum age at which entry is done is 45 years and the maximum maturity/premium ceasing age is 70 years. maturity age and term. results in further restrictions on entry age. Non-medical insurance schemes result in the simplification process of assessing the risk. Local boards etc.
Non-Government commercial and industrial undertakings, and reputed institutions like private colleges and schools which normally insist on medical examination before recruitment, provide good working environment, give fair remuneration and maintain leave records. The employee must have completed at least one year service with his present employer to become eligible for insurance under Nonmedical (Special) scheme. The maximum sum assured under the Non-medical (Special) scheme for persons aged not more than 45 years, is as under: (a) Male lives and first class female lives (SSLC/Matric passed) (b) Commissioned officers in Armed Forces Falling in Category A-1 7.2.4 AGE PROOF The risk of death is higher as age increases. The likelihood that a person aged 70 will die in the next year is more than that of a person aged 20 years dying within one year. Age of the proposer, therefore, plays a vital role in assessing the risk of death and therefore the amount of premium to be charged. Age is considered along with other features like health, habits, etc., by the underwriter. Fifty years ago, age-proof was not insisted at the time of accepting the risk. Premium used to be calculated on the basis of the age as stated in that of the proposal. It was assumed that the age stated would be, by and large, correct. The
- Rs. 8 Lakhs
- Rs. 10 Lakhs
proof of age could be submitted later during the currency of the policy. The claim would not be settled without the age having been proved. If the age when proved was higher, the arrears of difference in premiums was recovered with interest. This practice proved to be very inconvenient. Delays were caused. Proof of age was also not easily available, particularly if it were a death claim. At times it was found that had the correct age been stated, the policy may not have been issued. For these reasons, proof of age is now-a-days insisted upon at the commencement itself. The standard age-proofs acceptable to the life insurance companies are: (a) (b) (c) (d) Certified extract from Municipal or other records, made at the time of birth. Certificate of baptism or certified extract from family Bible, if it contains age or date of birth. Certified extract from school or college records Certified extract from the service register in the case of employees of Government and Quasi-Government institutions and reputed commercial and educational institutions. (e) (f) (g) Passport Identity cards issued by Defense department in case of defense personnel. Any other document where date of birth has been proved on the basis of one of the other standard proofs of age acceptable to the insurance companies. Other alternate age-proofs which are acceptable in India are marriage certificate issued by a Roman Catholic Church, extracts from service records of employers,
who verify age at the time of recruitment. If standard proofs of age are not available, then other documents like horoscopes, elder’s declaration, selfdeclaration, or certificate by village panchayats are accepted. This is subject to the discretion of the underwriter, who may not be very strict if he is satisfied that the risks are not much. He may even charge some extra premium or restrict the terms to safeguard against the possibility of the correct age being a few years higher than what is stated. 7.2.5 SPECIAL REPORTS Besides the proposal form, personal statement, agent’s report, medical examiner’s report and age-proof, special medical reports may also be called for, if the following conditions are applicable: (a) (b) (c) (d) The SA is very high, say Rs. 15 Lakhs or more The age at entry is very high, say, 60 years or more The proposer wants insurance cover under a high-risk plan The normal medical examination discloses some adverse feature
The underwriter has the right and discretion to ask for any additional information through special reports, if he considers such reports necessary for a fair assessment of risk. These special reports may relate to medical condition or they may relate to income, habits, life styles, etc. He may ask for medical reports, even if the proposal is for non-medical insurance. In the case of key man insurance, the reports may be to establish that the life assured is indeed a key person and that the SA proposed represents fairly the value of that person to the enterprise.
the reports of the officials and the medical reports. The balance of premium if any will have to be paid. (a) (b) (c) (d) (e) (f) accepting for a lesser SA than proposed accepting for a shorter term than proposed accepting for a different plan than proposed charging a higher premium than the standard rate imposing a lien which reduces the insurer’s liability under the policy for some time. The underwriter may decide to accept the proposal as proposed at O.R. O. the deposit paid along with the proposal. the proposer has to agree to those modified terms. If the acceptance is on modified terms. If the acceptance is as proposed and at O. He may take the expert opinion of a medical referee who is a senior doctor familiar with implications of medical history in life insurance.R (Ordinary Rates) or on modified terms. personal statement. or under some conditions excluding certain specified risks under the policy The terms under which the proposal is accepted by the underwriter. If all the requirements are fulfilled by the proposer.R means that the premium chargeable would be as per the standard premium tables. the First 140 .The underwriter arrives at a conclusive decision about the acceptance of the proposal. if adequate will be adjusted as First Premium and the risk will commence from that time. The modifications would be of the following kind. after scrutinizing the particulars available in the proposal form. will be conveyed to the proposer.
It contains the subject matter and the terms and conditions of the contract. by and large. Some insurers therefore. The insurance contract is issued on the basis of an application called ____________. The specimens of forms included as Annexure to this course are only specimens.1 NEED AND FORMAT 141 . because the format and the wordings have been developed over the years. They may change from time to time. The First Premium Receipt is the evidence of commencement of risk. Passport is a document considered for ________________. till the policy document is issued. But. 2.3. issue a small supplement along with the policy to explain in simple language the main contents of the policy. Each insurer will have its own forms. The wordings may sound to be too legalistic. 7. the duties and obligations of the insurance company and of the policyholder. the contents would be the same.Premium is adjusted and the risk commences. 7. They will also differ according to the plan of insurance proposed for. Self Assessment Questions I: 1. The First Premium Receipt is the evidence of commencement of risk. 3.3 POLICY DOCUMENTS The policy document is the main evidence of the insurance contract. till the policy document is issued. All insurance policies are most likely to follow the similar format. It sets forth the rights.
The policy document is required to be signed and also stamped as per the Stamp Act. it cannot be enforced in a court of law. It is usual to divide the policy document into the following divisions: (a) (b) (c) (d) (e) (f) Preamble Operative clause Provision Schedule Attestation and Conditions and Privileges 7.3. Most of the standard terms and conditions are printed on the document. are attached to the policy document and form part of the contract. Otherwise. In the case of PLI. Special clauses. the policy is exempt from stamp duty. relevant to a particular contract. which states in the following substance: • That the insurer had received a proposal with a personal statement and the first installment of premium • That the insurer had agreed to grant the insurance cover (promise to pay the sums specified on the occurrence of the events specified) on the terms stipulated later in the policy document 142 .2 POLICY PREAMBLE A typical policy document begins with a paragraph.
as promised. makes the Proposal and Declaration signed by the proposer. the insurer will get involved into the disputes between rival claimants. The payment of benefits is subject to the production of proof: (i) The happening of the event (ii) The age of the life assured being admitted and (iii) The title or right of the person claiming payment being established. Proof of the tile of the claimant claiming the policy monies is essential so that the benefits are paid to the person legally entitled to receive payment and competent to give valid discharge. A person with the title to claim payment is the 143 . which is called the Preamble. The truth of the statements made therein is secured to be warranties. The assured has to pay the premiums as stipulated in the policy. if specified. Any untrue averments therein vitiate the validity of the contract. The Preamble also contains the ‘Operative Clause’. The insurer has to pay the benefits. The benefits will include bonus additions. which has laid down the mutual obligations of the two parties. on the happening of the specified events. part of the policy. Otherwise.• That it is understood and agreed that the basis of the grant of the insurance cover is the statements made in the proposal and personal statements signed by the proposer • That the grant of the insurance cover is subject to the proposed paying the premiums stated in the policy document on the due dates This opening paragraph.
address of the proposer and of the life assured Date of proposal Date of birth and age of the life assured Date of commencement of insurance Plan and Term Sum Assured 144 . This is called the ‘Proviso’. The Schedule contains particulars and details as under. the nominee under Section 39 of the Insurance Act. if he is alive. The opening paragraph which is called as the Preamble. (a) (b) (c) (d) (e) (f) (g) Policy Number Name. are a part of the policy. are the normal terms and conditions. of which the policy document is the evidence. 7.3. If the policy had been assigned. or the heirs. if there is no nomination. which mention the specific details relating to the insurance contract. What are printed on the document.policyholder himself. also clarifies that the terms and conditions printed on the policy document as well as endorsements placed on it. the title will pass on to the assignee. because the contract is conditional on these terms. while the endorsements lay down the special conditions determined during the underwriting of the proposal. If the policyholder is not alive. will be entitled to receive the benefits.3 SCHEDULE The Preamble is followed by the Schedule of the policy. which must have been conveyed to and accepted by the policyholder.
Some insurers prepare a supplementary contract in respect of the additional benefits provided through the riders. 7. Those which limit the scope of the assurance. 7. in the sense that they elaborate or clarify the provisions made in the Schedule of the policy. or restrictive conditions.3. quarterly or monthly and due dates Installment premium Date of last payment of premium Name of the nominee Date of maturity Conditions and privileges not applicable Additional or special conditions The Schedule gives all the particulars of the subject matter of the contract. It identifies the proposal referred to in the Preamble.3. yearly. It will appear at the end of the first page of the policy. the . half-yearly. supplementary contract will be attested separately.4 ATTESTATION Attestation is the signature on the behalf of insurer.5 CONDITIONS AND PRIVILEGES The policy conditions and privileges can be classified as follows: (a) (b) (c) Those which are explanatory in nature.(h) (i) (j) (k) (l) (m) (n) Mode of payment of premium viz. Those which add to the benefits of the insurance and provide privileges 145 In such case.
Accident benefit is 146 . This would happen in all case except when the premium is paid on a yearly basis. or in case it is found that any untrue or incorrect statement is contained in the proposal. Again. In case of female lives not having income of their own. Conditions that limit the scope of the assurance are restrictive conditions. One common restriction is that no claim would be entertained if the life assured committed suicide. the policy shall be void and all benefits will cease and premiums paid forfeited. there could be a clause stating the notice of assignment or nomination should be submitted for registration by the office of the insurer. subject to the provisions of the Insurance Act. which are not taken into account when fixing the premiums. For example. or the return of the premiums. Another clause may clarify that if death takes place.. declaration and connected documents. as the conditions may state. personal statement. expect to the extent of a third party’s bonafide beneficial interest. This restriction operates normally for one year from the commencement of the policy. the unpaid installments of premium for that policy year would be deducted from the claim amount. the assurance is limited to the payment of the surrender value. If any such risk is incurred. coverage of suicide risk is sometimes excluded for 3 years. The first groups of conditions are intended for information of the insured.A. or some proportion of S. the suicide clause operates for two years from the date of issue of policy. In some countries. 1938. The restrictive conditions are designed to eliminate certain risks. there is a condition which states that in case the premiums are not duly paid.(d) Those which provide extended benefits or supplementary benefits.
while traveling outside the country. however. Double accident and disability benefit. the L. For example. there is no restriction imposed on account of hazardous occupation but extra premium is charged to cover the extra risk to which the life assured gets exposed due to the hazardous occupation. which reduce the apparent severity of the contract. Now. 7. they are made free from war risk restrictions. including aviation. makes the policy free from all restrictions as to travel and residence. are not available in the event of death as a result of accident while the life assured is engaged in aviation.never paid in case of suicide.1 CONDITION AND PRIVILEGES The provisions of the contract which are stated in the first page of the policy.C. The policy conditions provide the following. Foreign travel and residence may also be a restriction in some cases. premiums are payable when they fall due and failure to pay premiums on or before the due date. expect for double accident benefits. if strictly interpreted. In some policies. would make the contract very rigid and hard on the policy holder. Some insurance companies exclude coverage in the event of death within five years or a result of war. it is laid down that no loans are payable. Failure to do so may invalidate the accident benefits or other benefits . In India.3. 147 Some insurers require that change of occupation to be notified. other than as a passenger in a commercial airline. Insurance policies of the LIC used to exclude deaths occurring as a result of war. Generally. would involve complete forfeiture of the assurance. secured through riders.I.
In the case of the LIC. These may be incorporated into the policy document as policy conditions are mentioned as riders. CONDITIONS WITH EXTENDED BENEFITS OR SUPPLEMENTARY BENEFITS. there are separate policy document formats for the following policies: • Policies with Accident benefit • Policies without Accident benefit • Policies which participate in profits • Policies which do not participate in profits 148 . These are many benefits which are covered by the riders.(a) (b) (c) (d) (e) (f) (g) Days of grace Revival of lapsed policies Non-forfeiture regulations Paid up provisions Surrender value Loans Claim concessions All the privileges are discussed in detail in the following chapters. while the policy document will deal with the standard terms and conditions.
Or he may ask for change of mode of payment of premium. Part 4 gives the amount of Guaranteed Surrender Value. In the case of one insurer. 7. bonus. revival. viz the policyholder may desire alterations in the terms of the contract to suit changed circumstances. This part also explains the policyholder’s right to commute or accumulate. in part or in full. For example. The types of alterations for which requests are normally made are as follows: (a) Alteration in plan or term 149 . including the benefits under the riders. nonforfeiture. exclusions related to suicide and documents required for making claims. It is like having separate endorsements. lapse.In the case of some insurers. relevant event. assignments. loans. Part 3 details the terms and conditions relating to age admission.3. limitations. the policyholder may find it difficult to continue the payment of premiums for the original SA and may like to reduce the SA. exclusions. surrender values. guaranteed additions). the policy is in four parts. after the Preamble. These terms continue to operate throughout the currency of the policy unless it is modified by mutual consent of the parties to the contract. the installments payments due to him. and the benefits as such are detailed in separate forms which are annexure or addenda to the policy. the policy document refers to the additional benefits. Part 2 gives details of the benefits payable (amounts.6 ALTERATIONS The policy document embodies the terms of the contract. The first part contains the Schedule. nominations.
unless they are by way of correction or changes which do not affect the basic insurance contract. Increased SA. While considering the request for alterations. etc. the risk should not increase after alteration. alterations are generally not allowed if they involve change: (a) (b) To a longer term Extending the premium paying period 150 . change in nominations.(b) (c) (d) (e) (f) (g) (h) (i) (j) Reduction in SA Change in mode of payment of premium Alteration in name Change of the nominee Removal of an extra premium. change from endowment to anticipated endowment plan. the insurer tries to ensure that there is no “adverse selection” against the insurer. increasing the term. Splitting up of policy into two or more policies Alteration from without profit to with profit plan or vice versa Grant of accident benefit Settlement option of payment of SA by installments Grant of premium waiver benefit Correction in policies (generally soon after commencement) (k) (l) Alterations are considered if the policy is in force for the full Sum Assured (SA). That is. are alterations that increase risk. Alterations are not normally allowed in the first year of the policy. like change in addresses. For this reason.
But the policyholder might want the document for making an After all. Insurers issue duplicate policies on the request of policyholders. The fee is partly meant to cover expenses and partly to discourage frequency in alterations. Sometimes the document may also get damaged due to moisture or termites. people may shift residences and rearrange personal belongings. if the policy has to be split into two or more policies incorporating the desired alterations. A fee is usually charged to affect alterations expect in certain cases such as correction of mistakes. 7. represents property. It is possible that after some years. However. may be paid to the claimant even without the policy document. for example. having been misplaced or lost. in such cases.4 DUPLICATE POLICY During the long duration of the policy term. a policy document assignment or for pledging it against a loan. they are cautious in such matters as they do not like to become parties to any mischief. The loss or damage does not absolve the insurer of his liability to pay the policy moneys. 151 . when the claim arises.(c) From one plan of insurance to another that represents increased risk Some alterations are made by suitable endorsements on the policy itself. the policy document is not found. This will happen. A fresh policy document may be issued if the alterations are of a substantial nature. No fee is charged for alteration of frequency of mode of payment from quarterly to yearly or half yearly mode because such an alteration reduces the administrative work in servicing the policy. The claim.
It is possible that the policyholder may have mortgaged or assigned the policy to someone else and might report to the insurer that the document is lost. stamp duty. have to be borne by the policyholder. (a) (b) (c) (d) IRDA Indian Contract Act Stamp Act. The costs of issuing the duplicate policy which is including advertisement.which may be attempted. it is a good as the original for all practical purposes. Though the policy document has clearly showed that it is a duplicate because of a rubber stamp to that effect or otherwise. Therefore. Yet precautions are necessary in all cases. the policyholder will have to file a first information report with the police authorities and get the final investigation report of the police. the policyholder may be asked to advertise in the local newspaper and / or provide an indemnity bond signed by the policyholder and a surety. etc. enquiries are made to be satisfied that the reported loss or damage is genuine. Such attempts at fraud may be few. In case the policy is lost by theft. 152 . None of the above. Before issuing a duplicate policy. The policy document is required to be signed and also stamped as per the ___________________. Self Assessment Question II: 1.
3. is printed by the insurer and made available through agents. 7. In the case of the LIC. The confidential report of the agent is important for the insurer to assess the risk and the acceptability of the proposal for insurance. The types of alterations for which requests are normally made are as follows: (a) (b) (c) (d) Alteration in plan or term Reduction in SA Change in mode of payment of premium All the above. there are separate policy document formats for the following policies: (a) (b) (c) (d) Policies with and without Accident benefit Policies which participate and do not participate in profits Both (a) and (b) None of the above. 153 .5 SUMMARY The proposal form in which the application for insurance are made.2.
The proof of age is now-a-days insisted upon at the commencement itself. The risk of death is higher as age advances. is normally subject to medical examination to determine the state of health and the terms of insurance if agreed upon. 15 Lakhs or more The age at entry is very high. It is usual to divide the policy document into the following divisions: (a) (b) (c) Preamble Operative clause Provision 154 . if the following conditions are applicable if the (a) The SA is very high. say.A prospectus is a document inviting deposits from the public or inviting offers from the public for the subscription or purchase of shares or debentures of a body corporate. Special medical reports may also be called for. It contains the subject matter and the terms and conditions of the contract. say Rs. 60 years or more The proposer wants insurance cover under a high-risk plan The normal medical examination discloses some adverse feature (b) (c) (d) The policy document is the evidence of the insurance contract. The person proposed to be insured. Premium used to be calculated on the basis of the age as stated in the proposal.
6 TERMINAL QUESTIONS 1. What are Insurance Documents? 2. Medical Examination b. 5. 7. 155 .9 Answers to SAQs and TQs. What is a Duplicate Policy? Explain the circumstances and conditions under which Duplicate policy is issued. 5. Write a short note on a. What is a policy document? Explain the need and format of it.(d) (e) (f) Schedule Attestation and Conditions and Privileges Insurers issue duplicate policies on the request of policyholders. Explain about the proposal form and other documents required to enter into a insurance contract. Special Reports 4. 3. But this is issued by the insurers by taking various precautionary measures and the cost of issuing the duplicate policy also have to be borne by the policy holder. Age Proof c.
Refer 7. 4.1 5.3 & 7. Ans (c) Terminal Questions 1. Refer 7. Ans (d) 3. Age Proof 3 The First Premium Receipt SAQ II 1.2. Refer 7.5.2 2.2.3. Refer 7. Refer 7. 7.4 & 7.4 NOTES 156 .1 3.2. Ans (c) 2.SAQ I: 1.2. Proposal 2.3.
2.2.3 Focus on multiple channels Self Assessment Questions I 8.2.1 Introduction Objective 8.1 Distribution Scenario in Indian Market 8.5 Insurance Intermediaries Remuneration to Agents Trends in distribution channels Self Assessment Questions II 158 .Unit 8: The Distribution System Structure: 8.2 Challenging Scenario of role transformation of intermediaries 8.3 8.4 8.2 Distribution System in Life Insurance 8.
While it is true that insurance purchasers today have more options available than they did five years ago. market segments and also products is very important. make them be the part of the occupying market and highly promoting the development of their own. Insurance companies should continuously innovate and integrate the distribution channel. banks. Direct marketing. A variety of distribution channels are currently used in this market place and some insurers utilize a combination of distribution channels. it is unclear if and when these channels will dominate 159 . By establishing the successful distribution channel.6 8. Distribution System is the relationship between distribution channels. brokers. the last step of the products moving towards consumers that distribution is an essential part.8. networks etc. In insurance marketplace is undergoing a transformation that may eventually lead to significant changes in how consumers purchase insurance products.7 8. insurance companies could largely cover the market and gain the loyalty of customers. and cut down the cost. the agents. so to achieve the competitive advantage among the competitors.8 Summary Terminal Questions Answers to SAQs and TQs 8.1 INTRODUCTION With regard to insurance.
various insurance intermediaries/channels and trends in distribution channel. you will be able to: • Explain the distribution system of life insurance in India • Mention the different types of intermediaries/channels in insurance industry • Discuss the benefits that remuneration to agents 8. it may be that consumers consider insurance products to be more complex than originally thought. This chapter is an attempt to explain the distribution system in insurance. In specific. The public sector companies have already established themselves in the market.existing insurance distribution channels. Consumers still do not view even personal lines insurance products to be commodity products. But there are multiple challenges faced by these life insurance companies. of which two are critical: • Designing of products suiting the market • Using the right distribution channel to reach the customer 160 . There are several obvious factors that impacts on a channel’s adoption are consumer attitudes and preferences.2 DISTRIBUTION SYSTEM IN INSURANCE It has been years since the Indian life insurance market has opened up. Objectives: After studying this unit. and the entrants into the market have set up shop in all major cities.
1 DISTRIBUTION SYSTEM IN INDIAN INSURANCE MARKET In present Indian insurance market. A person who has lived in the locality for many years sells the products of the insurance company with a local branch nearby.While the companies have been quite successful in dealing with the first of these challenges using the existing product features and leveraging the technical knowhow of their partners most are still grappling with the right channel mix for reaching potential customers. and may not have sold the best possible product to the client. the customer trusted the agent and company.2. Nonetheless. This ensures the last mile touch point being closer to the customer. 161 . This arrangement worked adequately in the absence of competition. Of course. the public sector insurance companies have their branches in almost all parts of the country and have attracted local people to become their agents. 8. the profile of the people who acted as agents suggests they may not have been sufficiently knowledgeable about the different products offered. the challenge to insurers and intermediaries is Two-pronged: • Building faith about the company in the mind of the client • Intermediaries being able to build personal credibility with the clients Traditionally tied agents have been the primary channels for insurance distribution in the Indian market. The agents are from various segments in society and collectively cover the entire spectrum of society.
which are ‘needed’ by people because they give immediate benefits. Not many people understand what insurance is and how it works. as is the case in most markets.2. very few people feel the need for life insurance. The possibility of death is either ignored or not considered imminent. Almost all the new players follow this model primarily because the regulations for other channels are yet to be put in place. which we believe will take more time than expected. The tendency is to defer the decision. and global marketing practices and ideas being tested. Very few people recognize that the suddenness of untimely death is a real possibility in their own lives. more new players coming in. Someone has to explain to and persuade the prospective buyer that there is need for life insurance. But none of this has changed the fundamental character of the market. 8. In the case of life insurance. Life insurance is not bought by anybody. Even if not absolutely 162 . there is very little compulsion.2 THE DISTRIBUTION SYSTEM IN LIFE INSURANCE Unlike tangible goods like soaps or refrigerators. What have emerged are a much more difficult and evolving market scene with existing players. However there is great excitement in the industry over the impending broker regulations and companies are planning possible channels in their enthusiasm to increase volumes. General insurance is often bought because there are compulsions under the law (Motor Vehicles Law) or from the financiers asking for insurance as collateral security. The requirements of today take priority over the requirements of tomorrow.In present scenario agents continue as the prime channel for insurance distribution in India. supported by call centers to a small extent.
Otherwise the insurer will refuse to grant the insurance cover. By the time someone realizes himself the need for life insurance. not a option.essential. Tomorrow never comes. the chances are that he may not be in the best of health and the insurer may have doubts about the insurability. There are notions about life insurance not being a good investment (yields are low. Another category of intermediary is the ‘broker’. Insurance has to be sold. Beliefs and cultural or religious backgrounds often interfere with the process of considering the usefulness of life insurance. Agents are necessary for the selling life insurance due to the following reasons: 163 . the requirements of today seem to be more compelling. They are the salesmen or intermediaries between the insurer and the public. There is a tendency to leave everything to fate. explaining to and persuading people are called agents. people have to be persuaded that there is need to be concerned about the future and that life insurance is a necessity. along with or without the agent. the word ‘agent’ is used to refer to all salesman. the money after 20 years is worth much less) and so on. Sometimes the officers of the insurer may have to do the selling. In this complex milieu. Those who do the job of meeting. whether called an agent or insurance advisor or by any other name. During the rest of this chapter. A licensed agent can work with only one life insurer of his choice and is paid commission on the premiums collected through agency. Life insurance has to be secured when in the best of health. Agents have to be licensed under the Insurance Act. more as an excuse for inaction than as a substantial belief.
Colleges of insurance offer long duration courses. There is also the system of brokers. The agent. like accountants or company secretaries or architects. Negotiation of terms will be necessary. canvas business and place the same with insurers on terms that are standard or even negotiated. leading to grant of certificates or degrees. He collects commission from the insurer with whom the business is placed and does not charge the prospect. some of the agents are very experienced and professionally qualified. In some countries. A broker usually does business with more than one insurance company. which is vague and far away. is in a position to provide some of this valuable information. who are independent not attached with any particular insurer. if the needs of the proposer are unique and not met by the benefits under the standard plans of insurance. who gets to meet the proposer closely. 164 . family etc.• Insurance is an idea that has to be explained and its usefulness clarified personally • Each prospective buyer has special needs and requires specialized solutions • Personalized guidance can be given only when there is a live interaction with the agent • Significant amount of money is to be set aside immediately and regularly for a long term in future for a benefit. Negotiation of terms that is standard or even negotiated. • The insurer has to access the risk involved in every proposal for insurance for which the necessary information would include details on personal life styles. habits.
Sometimes overhead and administrative expenses may be reimbursed. The other companies are steadily adding to their strength of agents. and the Asian Market is no exception. whose primary duty is to procure business for PLI. None of them have to be licensed. 8. An Agent is allowed to work for one life insurer and one non-life insurer. The touch point with the ultimate customer is the distributor or the producer (as they are known in certain markets).The LIC has about 10 Lakhs agents on its rolls. The PLI appoints unemployed youth and extra-departmental branch postmasters to procure business under the Rural PLI. Agents do not themselves enter into a contract with the insured. Some of them are whole time and some of them are part time. all of them together had about one lakh agents. Agents have to obtain licenses from IRDA. to procure business. Development officers are fulltime employees.2. By the end of the year 2002.3 CHALLENGING SCENARIO OF INTERMEDIARIES Insurance has to be sold the world over. and the role played by them in insurance markets is critical. They are remunerated by commission payment. They only sell of behalf of the insurer. on commission basis. It is the distributor who is makes the difference in terms of the quality of advice for 165 . Retired employees of the Posts and Telegraphs departmental and that of the Railways are employed as field officers. without which they are not allowed to procure business and to collect commission from the insurer.
and work site marketing.choice of product. with their distinct cultural and social ethos. For example. etc.. 88% of the Life insurance executives responding identified agents as the primary channel of distribution. call centers. is just beginning to grow. This calls for leveraging multiple distribution channels in a cost effective and customer friendly manner. insurance companies must move from selling insurance to marketing an essential financial product. in the developed markets producers (brokers and agents) form the major channels of distribution. Self Assessment Questions I 166 . servicing of policy post sale and settlement of claims. direct mail. The distinction of channels in the developed markets are personal distribution systems and direct response systems. telemarketing. while the web as a complementary channel is catching up slowly. In the Asian markets. which utilizes various media such as the Internet. these conditions will play a major role in shaping the distribution channels and their effectiveness. Direct response distribution systems are the method whereby the client purchases the insurance directly. Thus. banc assurance. The distributors have to become trusted financial advisors for the clients and trusted business associates for the insurance companies. Personal distribution systems include all channels like agencies of different models and brokerages. This segment. According to a Forrester survey.
____________ includes all channels like agencies of different models and brokerages. 2. and work site marketing. 8. Though a multi-channel strategy is better suited for the Indian market as well. __________ is the relationship between distribution channels. Two critical challenges faced by life insurance companies are __________ and _________. the product. exhibiting different traits and needs.1 AGENTS Today's insurance agent has to know which product will appeal to the customer.1.3 INSURANCE INTERMEDIARIES/CHANNELS. Each of the markets within this conglomeration requires a different approach. Apart from geographical spread the socio-cultural and economic segmentation of the market is very wide. and also know his competitor's products in the same space to be an effective salesman who can sell his company. 8. banc assurance. 3. Let us look at the various insurance distribution channels and the challenges faced by them from these perspectives. it is important to keep in mind that this market is really a conglomeration of multiple markets. market segments and also products is very important.3. and himself to the customer. To 167 .
Perceptions about the public sector companies are also cemented in his mind. thereby diluting the process. Unable to attract this segment.who know the people and are themselves known in the community. all of which may not be possible in this business with its price pressures and the complexity of selling insurance. The new companies are looking for educated. the schoolteacher. they have started easing recruitment conditions as against the stringent norms they had earlier. an elite group who can be attracted only with high remuneration and the lure of a fashionable job. every new company is the same. they continue to suffer from high attrition rates due to indiscriminate agent appointment. The most successful of these companies' tied agents are hardly of the elite variety of salesman. The relevance of this kind of agent continues even today as agents are sought or contacted by families by word of mouth. While the public sector companies are able to attract agents. 168 . They are still the neighborhood do gooders -. believing that a suited and booted customer care consultant or financial consultant will necessarily appeal to the average Indian customer.the average customer. The challenge here is the lack of knowledge of the competitive market and the inability to do intelligent comparisons with the competitor's products.the postman. Insurance companies are advised not to follow the path of FMCG's/credit card companies. Educating and training these agents is a serious challenge for the insurance company. and the shopkeeper -. aware individuals with marketing flair.
nurses.can target the female segment of the population more effectively. annuities etc. 8. Max New York Life has adopted a version of this strategy by appointing gram sahayaks4 to sell and service the rural customers. which is looking for a solid trustworthy person from whom they can buy insurance. A very young up-market agent who is a typical salesman may not appeal to a large segment of the middle class. especially for the female population.Another social feature in the market is the considerable respect for age in Indian society and a belief that an older person knows better. 169 .g. especially the public sector banks. gram sevikas3 -. Women to whom the customers can relate --e. What is applicable for the rural women and children health programs and population control programs is equally applicable for insurance selling also. But this in no way diminishes the benefits of intermediary segmentation. With this kind of segmentation of intermediaries the challenge for the insurance company lies in training and educating these people to become effective sales persons. Gender of agents is another relevant feature in the rural context that makes a difference.3. In this context it might be a rewarding exercise to recruit some older people (who have taken VRS2 from banks and other financial institutions) to sell some lines of products like pension plans.. Can they also become the foremost channel for distribution of insurance? Banks have become a predominant channel for selling insurance with a paradigm shift.2 BANKS Banks in India are all pervasive.
The major lines of business that can be sold through banc assurance successfully are term insurance.3 BROKERS With the broker regulation under review and expected any time. This awareness is growing and is evident from the fact that nearly every insurance company has partnered with one or many banks to implement banc assurance. For historical reasons the image that 'broker' carries in the 170 . and they have launched their first creditor insurance product. Motor and Personal accident. Homeowners comprehensive insurance etc.. SBI Life is planning a similar product for home loan borrowers of State Bank of India. and travel and tourism.i. This will be a new experience for the insurance customer.e. Some advantages and disadvantages are: The strategy should be to use multiple banks according to their presence in different regions. selling simple. One of their major product lines is creditor insurance. which is waiting for the broker regulation to be put in place in order to move ahead aggressively with the banc assurance model. This model has high relevance in the Indian context with farflung villages where the insurance potential is in volume and not in high per capita premiums. accustomed to brokers in financial services. this could be the next hope. An example is SBI Life. creditor insurance. and non-life products like Property. Success would come by using banc assurance where it will be most effective . 8. which covers the liabilities of the creditor in case of death of debtor. especially for the urban market.3. cheap products to the masses at a low cost. real estate.
with a wide range of competitive products. This is applicable in the case of life insurance for the high-end and corporate/group segment. For individual customers also.minds of the customer is not very favorable. as they have the trust of the people. We envisage scenarios like that in Bangladesh's micro lending growth and the milk co-operatives7 in Gujarat selling insurance in addition to milk production and distribution. These are the players with the potential to make the difference. they stand a good chance of succeeding and can help the new players get a foothold in the rural market. the challenge lies in establishing regulations that protect the customer and attract the 171 . In the non-life segment. Brokers represent the customer and will sell the products of more than one company. The positives are that brokers in the urban arena can attract the elite and the upper middle class customer. the broker can get a good deal. However. as reinsurance brokers were arranging exotic covers. It would be a new dawn in Indian insurance distribution! With the right impetus the Indian rural insurance scenario could be one with high business volume and tremendous growth potential. Thus the new breed of insurance brokers faces the challenge of establishing credibility. If NGOs based in rural areas can be attracted into the rural sector cooperatives arena. broking is not entirely new. The corporate broking companies will have to play a prominent role. ICICI Prudential Insurance and HDFC Standard Life Insurance have already partnered with NGOs to sell some low cost insurance in rural areas. They seek to determine the best fit for the client and can effectively address the mind block faced by the public about the various companies.
4 WORK SITE MARKETING This area needs to be tapped. If not an identical model a similar approach can be used for selling insurance. group products or work site products do have a definite market that cannot be ignored. product customization and efficient post sales servicing. With changes in human resources management polices and compensation packages. as in any country one of the biggest markets is through the worksite. Banks and financial institutions have been successfully marketing credit cards and other financial products using this channel.5 INTERNET 172 . Here the advantages would be: • Captive customer base • Potential to sell individual insurance and group insurance • High trust factor • High hit ratio for the intermediaries The challenges would be the cost effectiveness.3.right players into the brokerage market rather than creating another middlemen segment eroding the premium. which would determine continued business. Technology has a key role to play in worksite marketing to ensure cost benefits. 8. 8.3.
which underwrites it. In the Indian market. While the technology capability is there. We do not see the web evolving into a means for direct selling of insurance in the current scenario. On the life side. which must be initiated by the client. but rather can only be enablers for the human channels. automobile insurance. . the insurance company or its representative is not the entity marketing the products. and credit card related insurance could be 173 . improvements in bandwidth and infrastructure are needed. where insurance is sold after considerable persuasion even after face-to-face selling.3. the usage is still a small fragment. Also needed are simpler products where autounderwriting is feasible. one of the segments of insurance purchased "off the shelf" in India. The insecurity associated with transactions over the net is still an inhibiting factor. term assurance for standard lives with simplified underwriting is a possibility. the selling over the net.6 INVISIBLE INSURER In this model. 8. Though a few banks provide online banking. The insurance cover is sold by an automobile /credit card company as an add-on product leveraging the brand of the retailer. Automobile insurance. would be the ideal segment to start with. The risk is carried by the insurance company. These channels by themselves will not be able to overcome the mindset of the people. Products like creditor insurance. using net for transactions has not yet caught up.Though India is joining the fast growing breed of net users. At present most of the insurance companies have product information and/or illustrative tools on the web. would take some more time.
Payment of commission related to the business done c. It is already prevalent in some areas like credit card insurance and crop insurance for agricultural loans. However. These firms will largely arrange insurance cover for Maruti's captive customer base. 174 . Part payment of fixed salary and part payment of commission based on business done. MIDS has been registered as a corporate agent with an exclusive arrangement with Bajaj Allianz General Insurance. This model can be adopted in all market segments for the lines of business mentioned. The new players are also attempting this model. group creditor insurance may be the most suitable product for this channel.distributed using this channel. while MIBL has linked up with state-owned National Insurance Company Limited. In the life segment. What makes these arrangements attractive is the low distribution cost and captive customer base. The venture of Maruti’s 9 into insurance by setting up two subsidiaries MIDS10 and MIBL11 to sell automobile insurance is a case in point.4 REMUNERATION TO AGENTS Persons appointed by an insurer may be remuneration in any of the following ways: a. repeat business or renewal of business cannot be assured. Payment of fixed monthly salary b. 8.
It may also vary from year to year. high in first year and lower in subsequent years. He must have completed at least 3 years as an agent at the time of his death. 175 . d. The death must take place before he has completed 60 years of service c. Commission may be paid right to the through the term of the policy or may be paid only for a fixed number of years. The agent should not have completed 50 years on the date of appointment as an agent. Bonus commission is also payable on the first year premium as an incentive for higher performance.Commission to agents is specified as a percentage of premiums paid. b. He must have an insurance policy on his own life for at least Rs. The following other conditions also have to be fulfilled: a. This percentage may vary between different plans of insurance. provisions exist whereby agents who have performed certain qualifying levels of business during 10 years of the agency are entitled to receive commission for the rest of their lives under certain conditions. This is a percentage of the eligible first year commission increases. In India.5000 SA and the policy must have been in force at the time of his death. Agents of the LIC are entitled to term insurance and gratuity benefits. Commission is also payable to the heirs after the agent’s death. The amount of term insurance is linked to the average annual commission (renewal) earned in the three agency years preceding his death.
Belgium and Spain distribute on takes place also through banks. 8. criminal breach of trust. conviction on a charge of criminal misappropriation.An agent will be eligible for gratuity if he has worked continuously for 15 years or more and his agency is not terminated due to fraud. notably France. Gratuity is paid only once in the agency career. Direct mailing is becoming increasing popular in developed countries. offering rebate or giving false information in the agency application form with a view to defraud the insurer. The amount of gratuity is related to the renewal commission earned in the last 15 qualifying years preceding the date of claiming gratuity. Part-Time agents and lady agents form a good proportion of the agency force. The scope and the experience are being watched. this has started in India. 180th part of the aggregate of the qualifying year renewal commission is the eligible rate. Holland. Self Assessment Questions II: 176 . In European countries. Gratuity is admissible at the eligible rate for each qualifying year for the first fifteen qualifying years and at half the eligible rate for the subsequent ten qualifying years subject to a maximum. In a small way. The Japanese life insurance industry depends entirely upon agents. acting against the interests of the insurer.5 TRENDS IN DISTRIBUTION CHANNELS Agency and brokerage systems are not common and contribute maximum share of life insurance business in the developing countries. cheating or forgery.
and travel and tourism. Direct response distribution systems are the method whereby the client purchases the insurance directly. Today's insurance agent has to know which product will appeal to the customer. market segments and also products is very important. Personal distribution systems include all channels like agencies of different models and brokerages. the public sector insurance companies have their branches in almost all parts of the country and have attracted local people to become their agents. the product. 3.6 SUMMARY Distribution System is the relationship between distribution channels. The distinction of channels in the developed markets are personal distribution systems and direct response systems. and himself to the customer. Agents of the _______ are entitled to term insurance and gratuity benefits. real estate. 177 . and also know his competitor's products in the same space to be an effective salesman who can sell his company. 2. A new experience for the insurance customer is accustomed to ________ in financial services. ________ have become a predominant channel for selling insurance with a paradigm shift. The agents are from various segments in society and collectively cover the entire spectrum of society. 8. banc assurance. and work site marketing.1. The primary channels for insurance distribution in the Indian market.
Personal Distribution Systems II 1. Commission to agents is specified as a percentage of premiums paid. 3.8 ANSWERS TO SAQs & TQs Self Assessment Questions: I. payment of commission related to the business done and part payment of fixed salary and part payment of commission based on business done.7 TERMINAL QUESTIONS 1. Distribution Systems 2.Persons appointed by an insurer may be remuneration in any of the following ways Such as payment of fixed monthly salary. Banks 178 . high in first year and lower in subsequent years. 1. How is an agent in life insurance remunerated? 8. This percentage may vary between different plans of insurance. 8. Discuss the various insurance intermediaries and channels. It may also vary from year to year. Explain the distribution channel of life insurance in India. Designing of products & Right Distribution Channel 3. 2.
3.3 (inclusive of 8.4 NOTES 179 . LIC Answers to TQs: 1. Brokers 3.2.1-8. Refer to 8.2 (inclusive of 8.1-8.6) 3.3) 2. Refer to 126.96.36.199. Refer to 8.
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