Insurance

Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another,
in exchange for payment. An insurer is a company selling the insurance; an insured or
policyholder is the person or entity buying the insurance policy. The insurance rate is a factor
used to determine the amount to be charged for a certain amount of insurance coverage,
called the premium.

Insurance is a cooperative form of distributing a certain risk over a group of persons who are
exposed to it. – Ghosh and Agarwal

History of Insurance in modern India

Modern Insurance in India began around 1800 AD with agencies of foreign insurance starting
a marine Insurance business. Some Important milestones in insurance history are listed
below.

 1818: Oriental Life Insurance Company, the first life insurance company on Indian soil
started functioning.
 1870: Bombay Mutual Life Assurance Society, the first Indian life insurance company started
its business.
 1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the
life insurance business.
 1928: The Indian Insurance Companies Act enacted to enable the government to collect
statistical information about both life and non-life insurance businesses.
 1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective
of protecting the interests of the insuring public.
 1956: Nationalization of life insurance: Life insurance business was nationalized on 1st
September 1956 and the Life Insurance Corporation of India (LIC) was formed through the
LIC Act, 1956.  A capital contribution of Rs. 5 crores from the Government of India was also
made. There were 170 companies and 75 provident fund societies doing life insurance
business in India at that time. From 1956 to 1999, the LIC held exclusive rights to do the life
insurance business in India.
 1972: Nationalization of non-life insurance: With the enactment of General Insurance
Business Nationalization Act (GIBNA) in 1972, the non-life insurance business was also
nationalized and the General Insurance Corporation of India (GIC) and its four subsidiaries
were set up. At that point of time, 106 insurers in India doing non-life insurance business
were amalgamated with the formation of four subsidiaries of the GIC of India.
 Indian Insurance Sector Reforms
R N Malhothra
The formation of the Malhotra Committee in 1993 initiated reforms in the Indian insurance
sector and is considered as one of the milestones in the history of Insurance in India.

The aim of the Malhotra Committee was to assess the functionality of the Indian insurance
sector. This committee was also in charge of recommending the future path of insurance in
India.

The Malhotra Committee attempted to improve various aspects of the insurance sector,
making them more appropriate and effective for the Indian market.
The Insurance Regulatory and Development Authority Act of 1999 brought about several
crucial policy changes in the insurance sector of India. It led to the formation of the Insurance
Regulatory and Development Authority (IRDA) in 2000.

Characteristics of Insurance
 It is a contract for compensating losses.
 Premium is charged for Insurance Contract.
 The payment of Insured as per terms of agreement in the event of loss.
 It is a contract of good faith.
 It is a contract for mutual benefit.
 It is a future contract for compensating losses.
 It is an instrument of distributing the loss of few among many.
 The occurrence of the loss must be accidental.
 Insurance must be consistent with public policy.

Nature of Insurance
 Sharing of Risks
 C0-operative Device
 Valuation of Risk
 Payment made on contingency
 Amount of Payment
 Large Number of Insured Persons
 Insurance is not gambling
 Insurance is not charity

Functions of Insurance

Primary Function
 Provision of certainty of payment at the time of loss
 Provision of protection Risk sharing
Secondary Function
 Prevention of loss
 Provision of Capital
 Improvement of efficiency
 Ensuring welfare of the Society
 ROLE OF INSURANCE IN ECONOMIC DEVELOPMENT AND SOCIAL
SECURITY

HISTORICAL BACKGROUND OF INSURANCE

Early methods of transferring or distributing risk were practiced by Chinese and Babylonian traders
as long ago as the 3rd and 2nd millennia BC, respectively. Chinese merchants travelling treacherous
river rapids would redistribute their wares across many vessels to limit the loss due to any single
vessel's capsizing. The Babylonians developed a system which was recorded in the famous Code of
Hammurabi, c. 1750 BC and practiced by early Mediterranean sailing merchants. If a merchant
received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the
lender's guarantee to cancel the loan should the shipment be stolen. Achaemenian monarchs of
Ancient Persia were the first to insure their people and made it official by registering the insuring
process in governmental notary offices. The insurance tradition was performed each year in Nowruz
(beginning of the Iranian New Year); the heads of different ethnic groups as well as others willing to
take part, presented gifts to the monarch. The most important gift was presented during a special
ceremony. When a gift was worth more than 10,000 Derrik (Achaemenian gold coin) the issue was
registered in a special office. This was advantageous to those who presented such special gifts. For
others, the presents were fairly assessed by the confidants of the court. Then the assessment was
registered in special offices. A thousand years later, the inhabitants of Rhodes (an island in Greece)
created the 'general average', which allowed groups of merchants to pay to insure their goods being
shipped together. The collected premiums would be used to reimburse any merchant whose goods
were jettisoned during transport, whether to storm or sinkage. The ancient Athenian "maritime
loan" advanced money for voyages with repayment being cancelled if the ship was lost. In the 4th
century BC, rates for the loans differed according to safe or dangerous times of year, implying an
intuitive pricing of risk with an effect similar to insurance. The Greeks and Romans introduced the
origins of health and life insurance c. 600 BCE when they created guilds called "benevolent societies"
which cared for the families of deceased members, as well as paying funeral expenses of members.
Guilds in the Middle Ages served a similar purpose. The Talmud deals with several aspects of
insuring goods. Before insurance was established in the late 17th century, "friendly societies" existed
in England, in which people donated amounts of money to a general sum that could be used for
emergencies.

Separate insurance contracts (i.e., insurance policies not bundled with loans or other kinds of
contracts) were invented in Genoa (a city and important seaport in northern Italy) in the 14th
century, as were insurance pools backed by pledges of landed estates. The first known insurance
contract dates from Genoa in 1343 and in the next century maritime insurance developed widely
and premiums were intuitively varied with risks. These new insurance contracts allowed insurance to
be separated from investment, a separation of roles that first proved useful in marine insurance. The
first printed book on insurance was the legal treatise On Insurance and Merchants' Bets by Pedro de
Santarém (Santerna), written in 1488 and published in 1552. Insurance as we know it today can be
traced to the Great Fire of London, which in 1666 devoured 13,200 houses. In the aftermath of this
disaster, Nicholas Barbon opened an office to insure buildings. In 1680, he established England's first
fire insurance company, "The Fire Office," to insure brick and frame homes. The concept of health
insurance was proposed in 1694 by Hugh the Elder Chamberlen from the Peter Chamberlen family.
In the late 19th century, "accident insurance" began to be available, which operated much like
modern disability insurance. This payment model continued until the start of the 20th century in
some jurisdictions (like California), where all laws regulating health insurance actually referred to
disability insurance. The first insurance company in the United States underwrote fire insurance and
was formed in Charles Town (modern-day Charleston), South Carolina in 1732, but it provided only
fire insurance. The sale of life insurance in the U.S. began in the late 1760s. The Presbyterian Synods
in Philadelphia and New York founded the Corporation for Relief of Poor and Distressed Widows and
Children of Presbyterian Ministers in 1759; Episcopalian priests created a comparable relief fund in
1769. Between 1787 and 1837 more than two dozen life insurance companies were started, but
fewer than half a dozen survived.

HISTORICAL BACKGROUND OF INSURANCE IN INDIA

In India, insurance has a deep-rooted history. It finds mention in the writings of Manu
(Manusmrithi), Yagnavalkya (Dharmasastra) and Kautilya (Arthasastra). The writings talk in terms of
pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics
and famine. This was probably a pre-cursor to modern day insurance. Ancient Indian history has
preserved the earliest traces of insurance in the form of marine trade loans and carriers’ contracts.
Insurance in India has evolved over time heavily drawing from other countries, England in
particular.1818 saw the advent of life insurance business in India with the establishment of the
Oriental Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the
Madras Equitable had begun transacting life insurance business in the Madras Presidency. 1870 saw
the enactment of the British Insurance Act and in the last three decades of the nineteenth century,
the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay
Residency. This era, however, was dominated by foreign insurance offices which did good business in
India, namely Albert Life Assurance, Royal Insurance, Liverpool andLondon Globe Insurance and the
Indian offices were up for hard competition from the foreign companies. In 1914, the Government of
India started publishing returns of Insurance Companies in India. The Indian Life Assurance
Companies Act, 1912 was the first statutory measure to regulate life business. In 1928, the Indian
Insurance Companies Act was enacted to enable the Government to collect statistical information
about both life and non-life business transacted in India by Indian and foreign insurers including
provident insurance societies. In 1938, with a view to protecting the interest of the Insurance public,
the earlier legislation was consolidated and amended by the Insurance Act, 1938 with
comprehensive provisions for effective control over the activities of insurers. The Insurance
Amendment Act of 1950 abolished Principal Agencies. However, there were a large number of
insurance companies and the level of competition was high. There were also allegations of unfair
trade practices. The Government of India, therefore, decided to nationalize insurance business. An
Ordinance was issued on 19th January, 1956 nationalizing the Life Insurance sector and Life
Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 non-
Indian insurers as also 75 provident societies 245 Indian and foreign insurers in all. The LIC had
monopoly till the late 90s when the Insurance sector was reopened to the private sector. The history
of general insurance dates back to the Industrial Revolution in the west and the consequent growth
of sea-faring trade and commerce in the 17th century. It came to India as a legacy of British
occupation. General Insurance in India has its roots in the establishment of Triton Insurance
Company Ltd., in the year 1850 in Calcutta by the British. In 1907, the Indian Mercantile Insurance
Ltd., was set up. This was the first company to transact all classes of general insurance business.
1957 saw the formation of the General Insurance Council, a wing of the Insurance Association of
India. The General Insurance Council framed a code of conduct for ensuring fair conduct and sound
business practices. In 1968, the Insurance Act was amended to regulate investments and set
minimum solvency margins. The Tariff Advisory Committee was also set up then. In 1972 with the
passing of the General Insurance Business (Nationalization) Act, general insurance business was
nationalized with effect from 1st January, 1973. 107 insurers were amalgamated and grouped into
four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd.,
the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General
Insurance Corporation of India was incorporated as a company in 1971 and it commence business on
January 1sst 1973. This millennium has seen insurance come a full circle in a journey extending to
nearly 200 years. The process of re-opening of the sector had begun in the early 1990s and the last
decade and more has seen it been opened up substantially. In 1993, the Government set up a
committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose
recommendations for reforms in the insurance sector. The objective was to complement the reforms
initiated in the financial sector. The committee submitted its report in 1994 wherein, among other
things, it recommended that the private sector be permitted to enter the insurance industry. They
stated that foreign companies are allowed to enter by floating Indian companies, preferably a joint
venture with Indian partners. Following the recommendations of the Malhotra Committee report, in
1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an
autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a
statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as
to enhance customer satisfaction through increased consumer choice and lower premiums, while
ensuring the financial security of the insurance market. The IRDA opened up the market in August
2000 with the invitation for application for registrations. Foreign companies were allowed ownership
of up to 26%. The Authority has the power to frame regulations under Section 114A of the Insurance
Act, 1938 and has from 2000 onwards framed various regulations ranging from registration of
companies for carrying on insurance business to protection of policyholders’ interests. In December,
2000, the subsidiaries of the General Insurance Corporation of India were restructured as
independent companies and at the same time GIC was converted into a national re-insurer.
Parliament passed a bill de-linking the four subsidiaries from GIC in July, 2002. Today there are 24
general insurance companies including the ECGC and Agriculture Insurance Corporation of India and
23 life insurance companies operating in the country. The insurance sector is a colossal one and is
growing at a speedy rate of 15-20%. Together with banking services, insurance services add about
7% to the country’s GDP. A well-developed and evolved insurance sector is a boon for economic
development as it provides long- term funds for infrastructure development at the same time
strengthening the risk taking ability of the country. The insurance sector in India has completed all
the facets of competition –from being an open competitive market to being nationalized and then
getting back to the form of a liberalized market once again. The history of the insurance sector in
India reveals that it has witnessed complete dynamism for the past two centuries approximately.

NATURE OF INSURANCE

The Nature of Insurance can be summarized as follows:

1. Insurance provides financial protection against a loss arising out of happening of an uncertain
event. A person can avail this protection by paying premium to an insurance company. A pool is
created through contributions made by persons seeking to protect themselves from common risk.
Premium is collected by insurance companies which also act as trustee to the pool. Any loss to the
insured in case of happening of an uncertain event is paid out of this pool.

2. Insurance works on the basic principle of risk-sharing. A great advantage of insurance is that it
spreads the risk of a few people over a large group of people exposed to risk of similar type.
Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for
payment. It is a form of risk management primarily used to hedge against the risk of a contingent,
uncertain loss.

3. An insurer or insurance carrier, is a company selling the insurance; the insured or policyholder, is
the person or entity buying the insurance policy. The amount of money to be charged for a certain
amount of insurance coverage is called the premium. Risk management, the practice of appraising
and controlling risk, has evolved as a discrete field of study and practice.

4. The concept behind insurance is that a group of people exposed to similar risk come together and
make contributions towards formation of a pool of funds. In case a person actually suffers a loss on
account of such risk, he is compensated out of the same pool of funds. Contribution to the pool is
made by a group of people sharing common risks and collected by the insurance companies in the
form of premiums.

4. Insurance may be described as a social device to reduce or eliminate risk of life and property.
Under the plan of insurance, a large number of people associate themselves by sharing risk, attached
to individual. The risk, which can be insured against include fire, the peril of sea, death, incident and
burglary. Any risk contingent upon these may be insured against at a premium commensurate with
the risk involved.

5. Insurance is actually a contract between two parties whereby one party called insurer undertakes
in exchange for a fixed sum called premium to pay the other party on happening of a certain event.

6. Insurance is a contract whereby, in return for the payment of premium by the insured, the
insurers pay the financial losses suffered by the insured as a result of the occurrence of unforeseen
events. With the help of Insurance, large number of people exposed to similar risks makes
contributions to a common fund out of which the losses suffered by the unfortunate few, due to
accidental events, are made good. An insurer is a company selling the insurance; an insured or
policyholder is the person or entity buying the insurance. The insurance rate is a factor used to
determine the amount to be charged for a certain amount of insurance coverage, called the
premium.

Insurance and Social Security

Nearly 80 per cent of Indian population is without life insurance cover while health insurance
and non-life insurance continues to be below international standards. And this part of the
population is also subject to weak social security and pension systems with hardly any old
age income security. This itself is an indicator that growth potential for the insurance sector is
immense. Along with an impressive growth rate a well-developed and evolved insurance
sector is also required for economic development as it provides long term funds for
infrastructure development and at the same time strengthens the risk taking ability. It is
estimated that over the next ten years, India would require investments of one trillion US
dollar. The Insurance sector, to some extent, can enable investments in infrastructure
development to sustain economic growth of the country. On the other hand, this kind of
system can also play an effective role in improvement of quality of services delivered to
consumers. As on day there is found huge grievances among consumer of services in India
and same is true for life insurance services.

It is now recognised that provision of social security is an obligation of the State. Various laws,
passed by the State for this purpose involve use of insurance, compulsory or voluntary, as a tool of
social security. Central and State Governments contribute premiums under certain social security
schemes thus fulfilling their social commitments. The Employees State Insurance Act, 1948 provides
for Employees State Insurance Corporation to pay for the expenses of sickness, disablement,
maternity and death for the benefit of industrial employees and their families, who are insured
persons. The scheme operates in certain industrial areas as notified by the Government. Insurers
play an important role in social security schemes sponsored by the Government such as RKBY –
Rashtriya Krishi Bima Yojana RSBY – Rashtriya Swasthya Bima Yojana PMJBY – Pradhan Mantri
Jeevan Jyoti Bima Yojana PMSBY – Pradhan Mantri Suraksha Bima Yojana All these benefit the
community in general. All the rural insurance schemes, operated on a commercial basis, are
designed ultimately to provide social security to the rural families. Apart from this support to
Government schemes, the insurance industry itself offers on a commercial basis, insurance covers
which have the ultimate objective of social security. Examples are: Janata Personal Accident, Jan
Arogya etc.
CLASSIFICATION OF INSURANCE CLASSES ACCORDING TO
INSURANCE TYPES Annex 1 to Act No. 8/2008 Coll. on Insurance and on
amendments and supplements to certain laws
Part A - Life assurance classes

1. Assurance on death only, assurance on survival to a stipulated age only, or assurance on survival
to a stipulated age or on earlier death.

2. Marriage assurance or birth assurance.

3. Assurance linked to capitalisation contracts.

4. Assurance referred to in points 1 and 3 linked to an investment fund.

5. Retirement assurance.

6. Accident or sickness insurance, when representing supplementary insurance to some class of

assurance referred to in points 1 through 5.

Part B - Classes of non-life insurance

1. Accident insurance

a) with fixed pecuniary benefits,

b) with benefits in the nature of indemnity,

c) with combinations of the two,

d) of passengers,

e) individual health insurance.

2. Sickness insurance

a) with fixed pecuniary benefits

b) with benefits in the nature of indemnity

c) with combinations of the two

d) contractual insurance and additional insurance,

e) individual health insurance.

3. Land vehicles damage or loss insurance (other than railway rolling stock)

a) motor vehicles,

b) other than motor vehicles.

4. Railway rolling stock damage or loss insurance.

5. Aircraft damage or loss insurance.

6. Ships damage and loss insurance

a) river vessels,

b) lake vessels, c

) sea vessels.

7. Goods in transit insurance, including baggage and all other goods, irrespective of the form of
transport.

8. Property damage and loss insurance other than referred to in points 3 through 7 due to

a) fire, b) explosion, c) storm, d) natural forces other than storm, e) nuclear energy, f) land
subsidence.

9. Other property insurance against damages and losses other than those referred to in points 3
through 7 due to hail or frost or any event (such as theft) other than those mentioned under point 8.

10. Liability insurance a) for damage and loss arising out of the use of motor vehicle, b) carrier’s
liability.

11. Liability insurance arising out of the use of aircraft, including carrier’s liability.

12. Liability insurance arising out of the use of ships, vessels or boats on the sea, lakes, rivers or
canals, including carrier’s liability.

13. General liability insurance other than referred to in points 10 through 12.

14. Credit insurance a) general insolvency, b) export credit, c) instalment credit, d) mortgage, e)
agricultural credit.

15. Suretyship insurance a) direct suretyship, b) indirect suretyship.

16. Miscellaneous financial losses due to a) employment, b) insufficiency of income, c) bad weather,
d) loss of benefits, e) continuing general expenses, f) unforeseen trading expenses, g) loss of market
value, h) loss of regular income source, i) other indirect trading losses, j) other forms of financial loss

17. Legal expenses insurance.

18. Assistance insurance for persons in difficulties while travelling or while away from their
permanent residence.

Part C - Groups of non-life insurance classes

The supervisory authority within insurance business issues licences authorising to operate in several
insurance classes, designated as the following groups:

a) Accident and sickness insurance´ including insurance classes referred to in point 1 and 2,

b) Motor vehicles insurance´ including insurance classes referred to in points 3, 7 and 10,

c) Marine and transport insurance´ including insurance classes referred to in points 6, 7 and 12,

d) Aviation insurance´ including insurance classes referred to in points 5, 7 and 11,

e) Insurance against fire and other damage to property´ including insurance classes referred to in
points 8 and 9,
f) Liability insurance´ including insurance classes referred to in points 10 through 13,

g) Credit and suretyship insurance´ including insurance classes referred to in points 14 and 15,

h) General non-life insurance´ including insurance classes referred to in points 1 through 18.

The insurance company authorised to pursue one or more insurance classes may conclude insurance
contract covering also risks relating to other insurance class than those included in the authorisation
(supplementary insurance) providing that such risks represent

a) risks appearing in connection with the principal insured risk,

b) risks relating to the subject covered against the principal insured risk, and

c) risks covered by the insurance contract relating to the principal insured risk.

The risks involved in the insurance classes referred to in points 14, 15 and 17 cannot be considered
supplementary insurance.

TYPES OF INSURANCE
Insurance in India can be broadly divided into three categories:
Life insurance
As the name suggests, life insurance is insurance on your life. You buy life insurance to make
sure your dependents are financially secured in the event of your untimely demise. Life
insurance is particularly important if you are the sole breadwinner for your family or if your
family is heavily reliant on your income. Under life insurance, the policyholder’s family is
financially compensated in case the policyholder expires during the term of the policy.
Health insurance
Health insurance is bought to cover medical costs for expensive treatments. Different types of
health insurance policies cover an array of diseases and ailments. You can buy a generic
health insurance policy as well as policies for specific diseases. The premium paid towards a
health insurance policy usually covers treatment, hospitalization and medication costs.
Car insurance
In today’s world, a car insurance is an important policy for every car owner. This insurance
protects you against any untoward incident like accidents. Some policies also compensate for
damages to your car during natural calamities like floods or earthquakes. It also covers third-
party liability where you have to pay damages to other vehicle owners.

Education Insurance
The child education insurance is akin to a life insurance policy which has been specially
designed as a saving tool. An education insurance can be a great way to provide a lump sum
amount of money when your child reaches the age for higher education and gains entry into
college (18 years and above). This fund can then be used to pay for your child’s higher
education expenses. Under this insurance, the child is the life assured or the recipient of the
funds, while the parent/legal guardian is the owner of the policy. You can estimate the
amount of money that will go into funding your children’s higher education using Education
Planning Calculator.
Home insurance
We all dreaming of owning our own homes. Home insurance can help with covering loss or
damage caused to your home due to accidents like fire and other natural calamities or perils.
Home insurance covers other instances like lightning, earthquakes etc.
LIFE INSURANCE
Evolution of Indian Life Insurance
 1818 saw the advent of life insurance business in India with the establishment of the Oriental Life
Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the Madras Equitable
had begun transacting life insurance business in the Madras Presidency. 1870 saw the enactment of
the British Insurance Act and in the last three decades of the nineteenth century, the Bombay Mutual
(1871), Oriental (1874) and Empire of India (1897) were started in the Bombay Residency. This era,
however, was dominated by foreign insurance offices which did good business in India, namely Albert
Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian offices were
up for hard competition from the foreign companies.
 
     In 1914, the Government of India started publishing returns of Insurance Companies in India. The
Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life business.
In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect
statistical information about both life and non-life business transacted in India by Indian and foreign
insurers including provident insurance societies. In 1938, with a view to protecting the interest of the
Insurance public, the earlier legislation was consolidated and amended by the Insurance Act, 1938
with comprehensive provisions for effective control over the activities of insurers.
 
   The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a large
number of insurance companies and the level of competition was high. There were also allegations of
unfair trade practices. The Government of India, therefore, decided to nationalize insurance business.
 
      An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector and Life
Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 non-
Indian insurers as also 75 provident societies—245 Indian and foreign insurers in all. The LIC had
monopoly till the late 90s when the Insurance sector was reopened to the private sector.

Important milestones in the life insurance business in India

1912  The Indian Life Assurance Companies Act enacted as the first statute to regulate the
life insurance business.
1928 The Indian Insurance Companies Act enacted to enable the government to collect
statistical information about both life and non-life insurance businesses.
1956 245 Indian and foreign insurers and provident societies taken over by the central
government and nationalized the insurance sector. LIC formed by an Act of Parliament- LIC
Act 1956- with a capital contribution of Rs. 5 crore from the Government of India.
1993 Setting up of Malhotra Committee
1997 The Government gave greater autonomy to Life Insurance Corporation, General
Insurance Corporation and its subsidiaries with regard to the restructuring of boards and
flexibility in investment norms aimed at channeling funds to the infrastructure sector.

In 1993, Malhotra Committee headed by former Finance Secretary and RBI Governor R.N.
Malhotra was formed to evaluate the Indian insurance industry and recommend its future
direction. The Malhotra committee was set up with the objective of complementing the
reforms initiated in the financial sector. The reforms were aimed at creating a more efficient
and competitive financial system suitable for the requirements of the economy keeping in
mind the structural changes currently underway and recognizing that insurance is an
important part of the overall financial system where it was necessary to address the need for
similar reforms.

ADVANTAGES OF LIFE INSURANCE

 DEATH BENEFIT

In case any unexpected thing happened to the insured, which results in the loss of
income for their family, the insurance company provides compensation in the form of
the death benefit. The appointed nominee receives the full sum assured plus the
bonus accrued over a period.

Apart from providing protection against death, many life insurance policies provide
the benefit of monthly income, which is a great boon for people old-aged people or
people who are nearing the retirement age and have diminishing income. While
purchasing a life insurance policy, make sure that you compare the features and
benefits of different policies and choose the one that best suits your needs so that
you get maximum protection.

 VALUABLE RETURN ON YOUR INVESTMENT

Several financial advisors in India suggest that everyone must invest in a life
insurance policy not only to provide your family with the financial protection when you
are not around but also from the perspective of gaining valuable returns from the
investment. Many life insurance schemes in India offer a decent recent in the form of
bonus that no other investment tools offer.

Also, life insurance is a safe investment tool as compared to other investment option.
The money you invest in your policy is returned to you in full as the sum assured at
the end of the term or after the demise of the insured.
 TAX BENEFITS

One of the many advantages of life insurance is that it provides many tax benefits.

If you are a salaried employee and have purchased a life insurance policy, you can
claim deduction under Section 80C. Currently, under this section, you can get a
maximum tax deduction of Rs. 1, 50,000.

 AVAILABILITY OF LOAN

In the event of any emergency where you need money desperately, you can take
advantage of your life insurance policy and take a loan against it. Today, almost all
the major insurance companies in India provide loan facilities to the policyholders.
You can borrow a certain percentage of the cash value of the policy, or the sum
assured depending on the policy provisions. Make sure that you check with the loan
policies with the insurer before you subscribe for the policy.

 AIDS IN FINANCIAL PLANNING THROUGH DIFFERENT LIFE

STAGES

Planning your finances well through different stages of life is paramount. This is
where life insurance can play an important part. You can take leverage the benefits
of term life insurance and make provisions for financial support to your family in the
event of your sudden death.

This will not only help them cope with the financial obligations well but can also help
them live a financially independent life without having to compromise on their
lifestyle. Also, by investing in a life insurance policy, you can meet your various future
goals like child marriage, paying your child’s education, building a dream home or
building a corpus for post-retirement life. Make sure that you choose the right
insurance policy that suits your needs.

 GUARANTEED INCOME

Your family feel secured because you bring in regular income to cater to their needs.
The income you earn aids in paying the loan (if any), rent, daily bills, child education
and other household expenses. Certain life insurance policies provide regular pay-
outs, which can compensate for the loss of income due to the death of the family’s
earning member.

 ADDITIONAL COVERAGE

Many insurance companies in India allow the life insurance policyholders to purchase
additional cover, over and above the default coverage included in the policy. This
additional coverage is called riders. The riders allow you to increase the coverage
and get comprehensive coverage against risks that may not be included in the main
scope of the life policy.

The riders may include coverage against personal accident, waiver of premium
payments, critical illness, loss of income due to a disability, etc. The additional
coverage can also help you get tax benefits that are in line with the life and health
insurance policy. For example – if you have opted for a critical illness rider, you can
claim deduction on the premium under Section 80D of the Indian Income Tax Act.
 Just like every financial product in the market, there are life insurance pros and
cons. You have seen the various pros of having a life insurance policy, now lets us
look at some of the disadvantages of life insurance.

DISADVANTAGES OF LIFE INSURANCE

 CAN BE EXPENSIVE FOR OLD-AGED PEOPLE

Buying a life insurance policy would seem to be the most logical thing to do when you
are young and why not? The premium for young buyers is quite affordable. The
premium amount for a life insurance policy is determined by your personal medical
condition, family’s medical condition and your age.

But if you are over 40 or if you are nursing an illness or if you have a history of bad
medical condition in the family, the insurance company will consider you as a risky
buyer and so to mitigate the risk they charge a higher premium. So, if you are old or
carrying a chronic ailment, a life insurance policy can be helpful for your loved one,
but it would an added burden on your expenses.

 THE RETURNS ON LIFE INSURANCE ARE NOT SIGNIFICANT

Certain life insurance policies like a whole life insurance policy provide the dual
benefit of investment-cum-protection. The cash-value component of the whole life
policy is a great way to save money for your future needs like retirement and
providing coverage for the family in the event of your demise.

However, you must know that the returns offered on the investment are much lower
than other investment tools. You can invest your hard-earned money in a term
insurance plan and invest the additional cash in other investment tools and increase
your chances of earning higher returns.

 INSURERS MAY NOT PAY THE BENEFIT

There have been many instances wherein the insurance companies have denied
paying the sum assured or the death benefit to the policyholder or the nominee. A lot
of times, the insurance company uses various tricks to evade paying the benefits
even after the maturity of the policy. They would cite many hidden charges or clauses
to reduce the pay-out. It is, therefore, important to carefully understand the finer
details of the policy and choose a company that has a positive pay-out rate.
Further, it would be best advised to consult your financial advisor about the pros and
cons of the policy before entering a contract.

 COMPLEX POLICIES

In India, many insurance policy providers offer a wide range of life insurance policies
to suit the different needs of the customers. While the vast choices give you the
liberty to choose the best, it can also create confusion in the minds of the policy
buyers, especially the ones who have no prior experience of buying an insurance
policy.
 Also, different insurance policies have different features, and it can be novice buyers
to understand the difference. Some policies are simple, and some are not so simple,
which can be beyond the understanding capacity of a common man. It can be
daunting to choose the right life insurance policy.

 EXCLUSIONS

All the life insurance policies do not provide comprehensive coverage; there are
bound to be certain exclusions. For example, your insurance policy may not cover
loss of life due to drug overdose or involvement in criminal/illegal activities. In such
cases, depending on the type of insurance policy you have purchased and your
needs, you may have to buy an additional rider to increase the coverage. The riders
will automatically increase the premium amount.

Life insurance key terms

Sum assured

The sum assured, also known as the life cover, lies at the heart of a life insurance policy.

 The sum assured is the amount of money promised to the policyholder’s nominee upon their
death, as per the terms of the policy.
 The general rule of thumb is to opt for a sum assured that is 10-15 times your current annual
income.
Premium

The premium

 The amount that you pay your insurer for continued policy coverage is called the premium.
 The premium-paying frequency can differ as per your financial needs. It can usually be paid
monthly, annually or bi-annually.
 If you fail to pay your premium as the terms of the policy require you to, your policy might
terminate after factoring in the applicable grace period.

Maturity

 You may have heard of the phrase, ‘once your policy reaches maturity’. This merely implies
that your policy period is over.
 In certain cases, you might receive a lump sum amount upon maturity, if you outlive the
policy term. This is called the maturity benefit.
 In case of traditional life insurance policies, you can renew the policy upon maturity and
continue enjoying the life cover.
Death benefit

In case of your unfortunate demise within policy term, the person you had nominated while
acquiring the policy will receive an amount which could include sum assured, bonuses,
premiums paid, or any other amount as per policy terms. This amount is called the death
benefit.
 Nominee

 The nominee is a person appointed by you while opting for the policy.
 The death benefit is paid to this nominee.
 It could be your spouse, child, parents, etc. There is usually a separate procedure in case you
want to name a friend.
Riders

These are additional benefits that you can add to your policy to enhance your coverage. They
can be bought while buying the policy or even afterwards. They save you the hassle of opting
for another policy. Some of the most common riders offered by life insurance firms are

 Accidental Death Benefit

 Accidental Total and Permanent Disability Benefit
 Critical illness Cover
 Child Support Benefit
 Waiver of Premiums (in case of a certain incident such as accident, further premiums are
waived off and policy remains active)
Grace period

If you fail to pay your premium, the insurer will offer you a buffer time called the grace
period. However, if you fail to clear your dues even after the grace period, your policy might
lapse. It is advisable to choose a premium amount and mode that fits well into your budget to
avoid lapse of policy.

Surrender value

If your policy term hasn't ended and you still wish to discontinue your policy, you surrender
it. You might receive an amount from your life insurance company, which depends on policy
terms. It would be best to check this while buying the policy itself.

Claim

In case of one’s death during the policy term, their nominee would have to make a claim with
the insurance company. It is also necessary for your nominee to know all about life insurance
in order to carry out this process smoothly and receive the proper amount to help your family.