Basics of Insurance

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Objective Of The Session

 What is Insurance

 Over view of insurance

 Purpose of Insurance

 How Insurance Works

 Essentials of a Valid contract

 HLV Concept & Case study

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Let’s Discuss - What Is Insurance ??

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Probable Responses

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Overview Of Insurance
 Risk management technique under which the insured

conservatively cover the risk which might arise on

account of unforeseen event or losses in the future .

 Its a contract between two parties-insurer & insured

 In this contract the insurer agrees to cover the risk of

the insured in an exchange of an payment called

premium
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How Insurance Works

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Purpose of Insurance

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Considerations Before Opting For Insurance

Why Insurance ??
Don’t risk a lot for little

Don’t risk more than what

you can afford to loose

Consider the likely outcome

of risks carefully

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Contract & Essentials Of A Valid Contract
 Insurance involves a contractual agreement in which the insurer agrees to provide financial
protection against specified risks for a price or consideration known as the premium
 A contract is an agreement between parties, enforceable by law

 The elements of a valid contract include:

- Offer and acceptance
- Consideration.
- Consensus ad-idem
- Free consent
- Capacity of the parties
- Legality of the object

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Insurance Contracts – Special features
 Uberrima Fides or Utmost Good Faith : The concept of "Uberrima fides" is defined as
involving “a positive duty to voluntarily disclose, accurately and fully, all facts material to
the risk being proposed, whether requested or not“

 Insurable Interest : The existence of insurable interest is an essential ingredient of every

insurance contract and is considered as the legal pre-requisite for insurance. (Example how
insurance differs from a gambling or wager agreement)

 The Principle of Indemnity : its applicable to Non-life insurance policies. It means that the
policyholder, who suffers a loss, is compensated so as to put him or her in the same
financial position as he or she was before the occurrence of the loss event. The insurance
contract (evidenced through insurance policy) guarantees that the insured would be
indemnified or compensated up to the amount of loss and no more.
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Human Life Value – Case Study
Mr. Rajan earns Rs. 5,00,000 PA
The net earnings his family would lose, were
he to die prematurely, would be Rs 5,00,000
per year.
Suppose the rate of interest is 6% (expressed
as 0.06)

Human-Life-Value (H.L.V.) = Annual

Contribution for Dependents ÷ Rate of Interest

HLV = 500000 *100/ 6 = Rs 83,33,333/

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Basic Terminologies In Insurance
 Life assured: The person on whose life insurance cover is accepted.

 Proposer: Person proposing insurance on own life or on the life of another person.

 Sum assured (coverage) : Life insurance is meant to provide a life cover to the insured.

 Nominee: The ‘nominee’ is the person (legal heir) nominated by the policyholder, The
nominee could be the wife, child, parents, etc. of the policyholder.

 Policy tenure: The ‘policy tenure’ is the duration for which the policy provides life
insurance coverage.

 Maturity age: Maturity age is the age of the life assured at which the policy ends or
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Basic Terminologies In Insurance
 Premium: The premium is the amount you pay to keep the life insurance plan active and
enjoy continued coverage

 Premium Paying Term: Premium payment term means the period, in years, during which
premium is payable

 Riders : Riders are an additional paid-up feature to widen up the scope of the base life
insurance policy. Riders are bought at the time of purchase or on policy anniversary.

 Death Benefit: The ‘Death Benefit’ is what life insurance company pays to the nominee in
case the life assured dies during the policy tenure
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Basic Terminologies In Insurance

 Maturity Benefit: Maturity benefit is the amount that the life insurance company pays
when the life assured outlives the policy tenure.

 Survival Benefit : Survival benefit is paid when the life assured completes the pre-defined
number of years under the policy.

 Free-look Period: If you are not comfortable with the terms and conditions, you can return
the policy within the Free-look period

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Basic Terminologies In Insurance
 Grace Period If you couldn’t pay the renewal premium for your policy on time, life
insurance company gives you an extension in the number of days.

 Due date: means a fixed date on which the policy premium is due and payable by the
policyholder

 IRDAI: Insurance Regulatory and Development Authority of India. It is the regulatory body
for the Insurance sector

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Term Plan – Pure Risk Cover Plan

 It provides death risk cover for a specified period. In case the life assured passes away
during the policy period, the life insurance company pays the death benefit to the
nominee. It is a pure risk cover plan that offers high coverage at low premiums

 There’s an option to add riders to widen up the coverage

 The death benefit is payable as lump sum, monthly pay-outs, or a combination of both

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Term Plan – Pure Risk Cover Plan

 There’s no pay-out if the life assured outlives the policy term. However, these days there
are companies offering Term Plans with Return of Premiums (TROPS), where insurance
companies payback all the paid premium amount in case the life assured outlives the
term period. But, such plans are costlier than the vanilla term insurance plan

 Benefit of Term Plan: In case of an untimely death of the breadwinner, family is

supported with an lump-sum amount (sum assured) which helps them to replace the loss
of income due to the breadwinner’s death. moreover the money could be utilized to pay
off loan, monthly household expenses, child’s education, child’s marriage, etc.

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Whole Life Insurance– Life Coverage For Whole Life
 A whole life insurance policy covers the life assured for whole life, or in some cases, up to
the age of 100 years unlike term plans which are for a specified term

 The sum assured or the coverage is decided at the time of policy purchase and is paid to
the nominee at the time of death claim of the life assured along with bonuses if any

 However, if the life assured outlives the age of 100 years, the insurance company pays the
matured endowment coverage to the life insured

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Whole Life Insurance– Life Coverage For Whole Life
 The premiums are higher as compared to term plans

 Best known for:

Life coverage for whole life

 Benefit of Whole Life Plan:

Lifelong protection to the insured and an opportunity to leave behind a legacy for

heirs

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Endowment Plan
 Endowment plan is another type of life insurance plan, which is a combination of
insurance and saving

 A certain amount is kept for life cover – insurance, while the rest is invested by the life
insurance company. In an endowment plan, if the life assured outlives the policy term,
the insurance company offers him the maturity benefit. Moreover, endowment
plans may offer bonuses periodically, which are paid either on maturity or to the
nominee under death claim. On death, the death benefit is payable to the nominee

 Endowment plans are also commonly known as traditional life insurance, although,
there is an investment component but the risk is lower than the other investment
products and so are the returns

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Endowment Plan
 Best known for:

Long-term saving option for people with much lower risk appetite for investment

 Benefit of Endowment Plan:

Long-term financial planning and an opportunity to earn returns on maturity

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Money Back Plan–Periodic Returns With
Insurance Cover
 It is a unique type of life insurance policy, wherein a percentage of the sum assured is paid
back to the insured on periodic intervals as survival benefit

 Money back plan are also eligible to receive the bonuses declared by the company from
time to time. This way, policyholder can meet short-term financial goals

 Best known for:

Short-term investment product to meet short-term financial goals

 Benefit of Money Back Plan: Short-term financial planning and an

opportunity to earn returns on maturity.

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Child Plan – Helps To Secure Child's Future
 Child plans help to build funds for child’s education and marriage. most of the child`s
plan provides annual instalments or one time pay-out after the age of 18 years.

 In case of an unfortunate event during the policy term , immediate payment is payable
by the insurance company. Some child plans waive off the future premiums on death of
the life insured and the policy continues till maturity.

 Best known for:

Building corpus for your child’s future

 Benefit of Child Plan:

Helps in fulfilling your child’s dream
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ULIP-Unit Linked Insurance Plans
 A unit linked plan is a comprehensive combination of insurance and investment. The
premium paid towards ULIP`s is partly used as a risk cover (insurance) and partly invested
in funds. One can invest in different funds offered by the insurance company depending
on his risk appetite. The insurance company then invests the accumulated amount in the
capital market i.e. in bonds, equities, debts, market funds, hybrid funds etc.

 Best known for:

Long-term investment options

 Benefit of ULIP:
Invest money as per your risk appetite. you have the option to invest either in equity,
debt or in hybrid funds through the life insurance company with complete transparency
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Retirement Plans
 Retirement plan helps to build corpus for your retirement. Helping you to live

independently financially and without worries. Most of the plans provide annual

instalments or one time pay-out after the age of 60 years.

 Retirement plans are of two types

A) Immediate annuity

B) Deferred annuity

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Retirement Plans
 Immediate Annuity :
There is no accumulation phase. It is purchased with a lump sum and the annuity
payment starts immediately either for a limited tenure or lifetime as chosen

 Deferred annuity : These are the pension plans in which the annuity starts after a certain
date. It can be further divided into the following:
- Accumulation Phase
- Vesting Phase

 Best known for: Long-term savings and retirement planning

 Benefit of Retirement Plan: Helps in building corpus for retirement

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Benefits of Life Insurance.

Protection Savings

Wealth Creation Tax Benefits

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