MODULE 4

LIFE INSURANCE
LIFE INSURANCE

It is a contract between an insurance policy holder and an insurer or assurer,

where the insurer promises to pay a designated beneficiary a sum of money
(the benefit) in exchange for a premium, upon the death of an insured person
(often the policy holder). Depending on the contract, other events such as
terminal illness or critical illness can also trigger payment.

The policy holder typically pays a premium, either regularly or as one lump
sum.
Life policies are legal contracts and the terms of the contract describe the
limitations of the insured events. Specific exclusions are often written into
the contract to limit the liability of the insurer; common examples are claims
relating to suicide, fraud, war, riot etc.
Life-based contracts tend to fall into two major categories:

Protection policies – designed to provide a benefit, typically a lump sum payment, in

the event of specified event. A common form of a protection policy design is term
insurance.

Investment policies – where the main objective is to facilitate the growth of capital
by regular or single premiums. Eg. whole life policy
IMPORTANCE OF LIFE
INSURANCE
•Provide safety and security

•Generates financial resources

•Life insurance encourages savings

•Promotes economic growth

•Spreading of risk
 TYPES OF LIFE INSURANCE
POLICIES
Term Policy

•In case of Term assurance plans, insurance company promises the insured for a nominal

premium to pay the face value mentioned in the policy in case he is no longer alive during the

term of the policy.

•Term assurance policy has the following features:

•It provides a risk cover only for a prescribed period. Usually these policies are short-term

•plans and the term ranges from one year onwards. If the policyholder survives till the end of

this period, the risk cover lapses and no insurance benefit payment is made to him.
The amount of premium to be paid for these policies is lower than all other life

insurance policies. As savings and reserves are not accumulated under this policy, it

has no surrender value and loan or paid-up values are not allowed on these policies.

This plan is most suitable for those who are initially unable to pay high premium,

when income is low as required for Whole Life or Endowment policies, but requires

life cover for a high amount.

 WHOLE LIFE POLICY
This policy runs for the whole life of the assured. The sum assured becomes payable to the legal
heir only after the death of the assured.

The whole life policy can be of three types.

(1) Ordinary whole life policy – In this case premium is payable periodically throughout the life of
the assured.

(2) Limited payment whole life policy – In this case premium is payable for a specified period (Say
20 Years or 25 Years) Only.

(3) Single Premium whole life policy – In this type of policy the entire premium is payable in one
single payment
ENDOWMENT LIFE POLICY
In this policy the insurer agrees to pay the assured or his nominees a
specified sum of money on his death or on the maturity of the policy
whichever is earlier.

The premium for endowment policy is comparatively higher than that of the
whole life policy.

The premium is payable till the maturity of the policy or until the death of
the assured whichever is earlier. It provides protection to the family against
the untimely death of the assured
JOINT LIFE POLICY

This policy is taken on the lives of two or more persons simultaneously.

Under this policy the sum assured becomes payable on the death of any one
of those who have taken the joint life policy.

The sum assured will be paid to the survivor(s). For example, a joint life
policy may be taken on the lives of husband and wife, sum assured will be
payable to the survivor on the death of the spouse
ANNUITY POLICY
Under this policy, the sum assured is payable not in one lump sum payment
but in monthly, quarterly and half-yearly or yearly instalments after the
assured attains a certain age.

This policy is useful to those who want to have a regular income after the
expiry of a certain period e.g. after retirement.

Annuity is paid so long as the assured survives.

 GROUP INSURANCE
Group life insurance is a plan of insurance under which the lives of many persons
are covered under one life insurance policy.

However, the insurance on each life is independent of that on the other lives.

Usually, in group insurance, the employer secures a group policy for the benefit of
his employees.

Insurer provides coverage for many people under single contract.

 CHILDREN POLICIES
These types of policies are taken on the life of the parent/children for the
benefit of the child.

By such policy the parent can plan to get funds when the child attains various
stages in life.

 Some Insurers offer waiver of premium in case of unfortunate death of the

parent/proposer during the term of the policy.
 MONEY BACK POLICIES
Money Back Plan is a special type of Life Insurance Policy. Under this policy the money

comes back to the Life Insured after specified intervals of time as Survival Benefits.

However if the Life insured dies during the term of the policy then the death benefit will be

paid to the nominee and the policy would be terminated and no further money would be paid

to him at regular intervals.

Thus a money back policy is an endowment policy with liquidity benefit. The maturity

benefit comes in instalments instead of Lump Sum at the end of the term of the policy.
These benefits received at regular intervals are called Survival Benefits. Each
installment is a percentage of sum assured. The remaining bit comes from
maturity benefit at the end of the term of the policy.
UNIT LINKED INSURANCE
PLAN
Unit linked insurance plans (ULIPs) aim to serve both the protection and investment
objectives of investing.

 ULIP’s are subject to capital market risks.

FIRE INSURANCE
 FIRE INSURANCE
A fire insurance is a contract under which the insurer in return for a
consideration (premium) agrees to indemnify the insured for the financial loss
which the latter may suffer due to destruction of or damage to property or
goods, caused by fire, during a specified period.

The contract specifies the maximum amount , agreed to by the parties at the
time of the contract, which the insured can claim in case of loss.
The perils specified in the fire policy are:

A. Fire

B. Lightning, Explosion / Implosion, ,Storm, Cyclone, Typhoon, Hurricane,

Tornado, Flood, Impact Damage, Landslide including Rock Slide, Bursting
and/or overflowing of Water Tanks, Missile Testing Operations, Leakage from
Automatic Sprinkler Installations, Bush Fire.e must be
For Claim Settlement:

There must be actual loss

Fire must be accidental and non intentional

Fire insurance policy is for a period of one year, after which it is to be

renewed form time to time.
AVERAGE POLICY
Where a property is insured for a sum which is less than its value, the policy contain a
clause that the insurer shall not be liable to pay the full loss but only that proportion of
the loss which the amount insured for, bears to the full value of the property

For example: A value of the property is Rs.1,00,000. It is insured for

Rs.60,000 (60% of the total value)

The amount of loss is Rs 50,000.The insurance

company will not pay Rs.50,000 to the policyholder but will pay Rs.30,000
(60% of Rs.50,000)
VALUED POLICY
• It is usually taken where it is not easy to ascertain the value of the property.
• In this policy the indemnity is a fixed amount agreed upon at the time of
signing the contract.

• The insured is benefited when the market value of the property declines , but
suffer loss when the market value appreciates.
• The valued insurance policy is usually offered for such items like jewellery,
furs, or paintings, which value is difficult to estimate once they are damaged
or destroyed by fire.
SPECIFIC POLICY
• A specific policy is a policy in which the property is insured for a specific
sum irrespective of its value.
• If there is loss, the stated amount will have to be paid to the policyholder.

The actual value of the subject matter is not considered in this respect.

• For example: If a property is insured for Rs. 10000 though its actual
value is Rs. 20000. In the event of loss to property, not more than Rs.
10000 can be recovered.
FLOATING POLICY
• It is taken to cover loss on goods, which are lying in different places and the
stock of which is almost continuously fluctuating.
• Floating policies are suitable to those traders or products whose raw-
materials or merchandise are lying at different localities or godowns.

• For example:-Some of the goods of other trader are kept in one godown, and
few kept in another godown, some kept in the railway godown or some at
the sea port.
MARINE INSURANCE
MARINE INSURANCE
•A contract of marine insurance is a contract whereby the insurer undertakes to
indemnify the insured, in the manner and to the extent agreed in the contract,
against losses that are incidental to a marine adventure.

•Insurer in Marine insurance is known as Underwriter

•Marine insurance covers the loss or damage of ships, cargo, terminals, and any
transport or cargo by which property is transferred, acquired, or held between
the points of origin and final destination.
 SCOPE OF MARINE
INSURANCE
Hull Insurance: Hull refers to the ocean going vessels (ships trawlers etc.) as
well as its machinery.

The hull insurance also covers the construction risk when the vessel is under
construction.

A vessel is exposed to many dangers or risks at sea during the voyage. An

insurance effected to indemnify the insured for such losses is known as Hull
insurance.
Cargo Insurance: Cargo refers to the goods and commodities carried in the ship
from one place to another.

The cargo transported by sea is also subject to manifold risks at the port and
during the voyage.

Cargo insurance covers the shipper of the goods if the goods are damaged or lost.
The cargo policy covers the risks associated with the transshipment of goods.
Freight Insurance

Freight refers to the fee received for the carriage of goods in the ship. Usually
the ship owner and the freight receiver are the same person.

Freight can be received in two ways- in advance or after the goods reach the
destination. In the former case, freight is secure.

In the latter the marine laws say that the freight is payable only when the goods
reach the destination port safely.

Hence if the ship is destroyed on the way the ship owner will loose the freight
along with the ship.
Liability Insurance

It is usually written as a separate contract that provides comprehensive

liability insurance for property damage or bodily injury to third parties.

It is also known as protection and indemnity insurance which protects the
ship owner for damage caused by the ship to docks, cargo, illness or injury to
the passengers or crew, and fines and penalties.
 MARINE INSURANCE
POLICIES
Voyage Policy: Under the policy, the subject matter is insured against risk in
respect of a particular voyage from a port of departure to the port of destination,
e.g. Mumbai to New York. The risk starts from the departure of ship from the port
and it ends on its arrival at the port of destination.

Time Policy: It is one under which the insurance is affected for a specified period
of time, usually not exceeded twelve months. Time policies are generally used in
connection with the insurance of ship.
Floating Policy

A merchant who is a regular shipper of goods can take out a ‘floating policy’ to avoid
botheration and waste of time involved in taking a new policy for every shipment. This
policy stands for the contract of insurance in general terms.

It does not include the name of the ship and other details. The other details are required
to be furnished through subsequent declarations. Thus, the insured takes a policy for a
huge amount and he informs the underwriter as and when he makes shipment of goods.

The underwriter goes on recording the entries in the policy. When the sum assured is
exhausted, the policy is said to be “fully declared” or “run off”.
MOTOR VEHICLE INSURANCE
Driving a motor vehicle without insurance in a public place is a punishable
offence in terms of the Motor Vehicles Act, 1988.

Motor Insurance protects you financially from:

Damage to your own car

Damage to someone else’s car or property

Injuries/ Death of Insured resulting from an accident

Injury or Death of Third Party (Pedestrians/ Cyclists etc.)

 MOTOR VEHICLES

PRIVATE COMMERCIAL
VEHICLES VEHICLES

GOODS PASSENGE MISC.

TWO R VEHICLES
PVT CARS CARRYING
WHEELERS CARRYING
 PERILS COVERED

Following perils can be covered in accordance with provision

of tariff.
1. By fire, explosion , self ignition or lightning
2. Earthquake, flood, cyclone etc.
3. By theft
4. While in transit by road, rail, air
WHAT MOTOR INSURANCE
EXCLUDES
 Not having a valid Driving License
 Under Influence of intoxicating liquor/ drugs
 While Vehicle is used for unlawful purposes
 Electrical/Mechanical Breakdowns.
 KIND OF MOTOR VEHICLE
POLICIES

 Liability / Act Policy or Third Party policy

Mandatory insurance requirement as per Indian motor vehicle act 1988.This policy
insures the liability of the owner of vehicle against third party.

 Package or Comprehensive Policy

- It covers the damage to the vehicle apart from the mandatory liability insurance.
 LIABILITY COVER
Covers..
a. Third party death or injury.
b. Third party property damage.
c. Liability towards bodily injury of passengers of vehicle
COMPREHENSIVE POLICY
 Comprehensive policy includes the below in addition to
liability only policy covers:

a. Damage to vehicle by accidental means, Fire, Explosion, Self ignition,

Lightening, theft etc.

Combination of all the risks of liability policy as well as loss or damage to

insured vehicle
 HOW IDV IS CALCULATED
 Each car is insured at a fixed value which is termed as the
Insured’s Declared Value (IDV). This sum insured is calculated on the
basis of a number of factors. Here’s how it works:
 IDV is calculated on the basis of the manufacturer's listed selling price of
the vehicle plus the listed price of any accessories after deducting the
depreciation for every year as per the schedule provided by the Indian
Motor Tariff.
HEALTH INSURANCE
Health insurance, also known as Mediclaim offers protection against
unforeseen and unexpected medical emergencies. In situations like unexpected
illness or accident the health insurance takes care of costs of treatment,
hospitalization and other medical services.

Some medical insurances that also provide support for pre as well as post-
hospitalization like costs of medical tests or purchase of medicines.
The contract may be renewable annually or monthly.

The type and amount of health care costs that will be covered by the health
plan are specified in the beginning.

A Critical Illness rider option to cover medical expenses may be added

whereby the amount insured in the policy will be given to the customer in case
he/she encounters that critical illness during the time period of the policy.
Health insurance may be provided through a government-sponsored social
insurance program, or by private insurance companies.

It may be purchased on a group basis (e.g., by a firm to cover its employees)
or purchased by individual customers. The covered groups or individuals pay
premiums for protection from huge or unexpected healthcare expenses.
TAX INCENTIVES
Health Insurance comes with attractive tax benefit as an added incentive, under Section 80D
with an annual deduction of Rs. 25,000 from the taxable income for payment of Health
Insurance premium for self, spouse and dependent children. For senior citizens, this deduction
is higher, and is Rs. 50,000.

If you take policy for the parents then,

If they are senior citizen, then you are eligible to get a deduction of Rs 50,000 in a financial
year. Therefore, the total deduction which can be claimed is Rs 75,000 (Rs 25,000 + Rs
50,000) if you are below 60 years
COVERAGE
1. Emergency health care procedures
2. Cost of most prescription drugs
3. Sometimes covers disability or long-term nursing or custodial care needs.
 EXCLUSIONS
The medical policy will not cover the following:

1. Any sickness or illness for first 30 days during the policy

2. Any medical expenses relating to pregnancy

3. Diseases caused due to nuclear weapons

4. Any expenses incurred for spectacles, cosmetic treatment etc.

5. Medical expenses done for purchasing tonics, vitamins unless incurred as part of a
treatment.
 HEALTH INSURANCE
SCHEMES (IN INDIA)
Government or State-based Systems

Central Government Health Schemec,Employees State Insurance Scheme (ESIS)

Market Based Schemes

Private Insurers : HDFC ERGO, ICICI Lombard , LIC Coverages : Jeevan Asha

Employee Administered Health Schemes

MISCELLANEOUS INSURANCE
SCHEMES
TRAVEL INSURANCE
Travel insurance can cover you for financial losses caused by a wide range of events
that can affect your trip, whether they occur before, during or even after your trip.
These might include travel modification, cancellation or interruption, medical
expenses, baggage damage or theft & more.

Most international travel insurance policies cover overseas medical expenses, lost or
stolen luggage, liability cover, accidental death or disability, and expenses if you
incur a financial loss due to delays, cancellations or rescheduled arrangements.
 CROP INSURANCE
Crop or Agriculture Insurance covers risks of anticipated loss in yield of various crops.

The main Schemes available to farmers in respect of crop insurance are as under:

National Agricultural Insurance Scheme (NAIS) of GOI

National Crop Insurance Programme (NCIP) of Government of India.

The scheme covers all food, oilseeds and annual commercial/ horticultural crops for which historical
yield data is available and crop cutting experiments are planned for the current year. State
Governments issue notifications containing names of crops, areas eligible for insurance, rates of
premium etc. at the beginning of each cropping season.
 FIDELITY INSURANCE
This type of insurance is basically a contract of insurance and guarantee.

This insurance protects organizations from any financial loss suffered as a result of acts
of dishonesty conducted by an employee.

 It is impossible for fidelity guarantee insurance to ensure that every employee in the
organization is completely honest yet it does compensate the organization for any
financial loss incurred as a result of dishonest activities conducted by employees.

 Organization will be compensated for the financial loss undergone, only within the
stipulated limits (as stated in the policy wordings) of the insurance policy.
FIDELITY GUARANTEE
INSURANCE POLICIES
Individual Policy - This policy provides coverage to an individual for a stipulated
amount.

Collective Policy - This policy provides coverage to a group of employees. It depends

on the organization to place the guarantee amount on each employee (depending on their
position and job roles).

Blanket Policy – Sometimes an organization buys the policy not by naming individuals
to be guaranteed, but on the basis of groups/categories/teams. It could usually be
accounts team, store-keeping team, clerical team, etc.
RATE OF PREMIUM
Depends upon ..

The type of employment

Position of the employee

System of check and supervision

REINSURANCE
REINSURANCE
The primary insurer transfers part or complete liability to another insurer is called as
reinsurance.

It is insurance of risk assumed by primary insurer known as ceding company.

Original insurer is known as reinsured

Second insurer is known as reinsurer.

The amount of risk retained by ceding company for its own account is called as retention. The
amount of risk ceded to reinsurer is called as cession.
Reinsurance is used for several reasons:

To increase the company’s underwriting capacity.

To spread the risk.

To obtain valuable advise or assistance with respect to pricing , underwriting

practices, retention, and policy coverage's.

To provide protection against catastrophic losses arising due to natural disasters.
TYPES OF REINSURANCE
Proportional Reinsurance

Under proportional reinsurance, reinsurers take a stated percentage share of each

policy that an insurer produces ("writes").

This means that the reinsurer will receive that stated percentage of the premiums and
will pay the same percentage of claims.

This can be further categorized as quota method and share surplus method
Under a quota arrangement, a fixed percentage (say 75%) of each insurance policy
is reinsured.

Under a surplus share arrangement, the company has a free choice, within the
liability specified in an agreement, as to how much it will retain for its own amount.
If sum assured is less than its normal retention level, it need not take any
reinsurance.
 NON PROPORTIONAL
REINSURANCE
Under non-proportional reinsurance the reinsurer only pays out if the total claims
suffered by the insurer in a given period exceed a stated amount, which is called the
"retention" or "priority".

For instance the insurer may be prepared to accept a total loss up to $1 million, and
purchases a layer of reinsurance of $4 million in excess of this $1 million. If a loss of
$3 million were then to occur, the insurer would bear $1 million of the loss and would
recover $2 million from its reinsurer.

Two largest reinsurance co. are Munich Re and Swiss Re .