Introduction:-
Assets are insured, because they are likely to be destroyed, through accidental occurrence. Such possible occurrences are called as “Perils”. Fires, Floods, breakdowns, lightning, earthquakes, etc. are perils. If such perils can cause damage to the asset, we can say that the asset is exposed to that risk. Peril are the events. Risks are the consequential losses or damages.
The risk only means that there is a possibility of losses or damage. The damage may or may not happen. Insurance is done against the contingency that it may happen. There has to be an uncertainty about the risk. Insurance is relevant only if there are uncertainties. If there are no uncertainties about the occurrence of an event, it cannot be insured against it. In short we can say that
“Insurance is the Provider & Protector”
In case of human being, death is certain but time of death is uncertain. Because of uncertainty of human life. The insurance plays a major role. Human life may be lost due to unexpected early death when the person is not expected to have made adequate alternative arrangement for those who are dependent on his income. Insurance is necessary to help those dependents who will suffer due to early death of a person. In this case we can say that
“Insurance is the Trusted Friend in Need”
A person can also make a future provision for his retired life through insurance. In this case we can say that
“Insurance is little Price for a Priceless Security”
For spreading of the importance of the insurance & its advantages & do the advertisement of this good option for the every class of people I select this subject for the Research.
The business of insurance is related to the protection of the economic values of assets. Every asset would have been created through the efforts of the owner. The assets are valuable to the owner, because he expects to get some benefits from it. The benefit may be an income or something else. It is a benefit because it meets some of his needs.
However, the asset may get lost earlier, An accident or some other unfortunate event may destroy it or make it non-functional. In that case the owner & those deriving benefits there from would be deprived of the benefit & the planned substitute would not have been ready. There is an adverse or unpleasant situation. Insurance is a mechanism that helps to reduce the effect of such adverse situation.
We can say that a human life is also an income generation asset. Human life may be lost due to unexpected early death or become non-functional following sickness or disabilities cause by accidents. If this happens by the times one in on the verge of retirement when his income is about to cease, he might have made alternative arrangements to meet his needs. But this happens at a younger age when he is not expected to have made adequate alternative arrangement; those who are dependent on his income will suffer. Insurance is necessary to help those dependent on his income.
Human beings are exposed to another type of risk. It is the risk of living too long. A person, who has made necessary arrangement to meet his financial needs after retirements, also would need insurance. This means that living too long is as much a problem as dying too young. Insurance provides safeguard against these risks.
The business of insurance is deals with the assets of business as well as life of any person.
Meaning of Life Insurance
“Life insurance is a contract that pledges the payment of an amount to the person assured (or his nominee) on the happenings of the event insured against”.
The contract is valid for payment of the insured amount during
• The date of maturity, or
• Specified dates at periodic intervals, or
• Unfortunate death, if it occurs earlier.
Among other things, the contract also provides for the payment of premium periodically to the insurer by the policyholder. Life insurance is universally acknowledged to be an institution, which eliminates ‘risk’, Substituting certainty for uncertainty & comes to the timely aid of the family in the unfortunate event of death of the breadwinner.
By & large, life insurance is civilization’s partial solution to the problems caused by death. Life insurance, in short, is concerned with two hazards that stand across the life-path of every person:
1. That of dying prematurely leaves a dependent family to fend for itself
2. That of living till old age without visible means of Support.
When the insurance is deals with asset of any business as well as mediclaim, health of any person that time it is called as General Insurance.
History of Life Insurance
Some of the important milestones in the life insurance business in India are as under
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 Insurance 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 & non-life insurance business.
1938: Earlier legislation consolidated & amended to by the Insurance Act with the objective of protecting the interests of the insuring public.
1956: 245 Indian & foreign insurers & Provident Societies are taken over by the central government & nationalized. Life Insurance Corporation formed by an Act Parliament, viz. Life Insurance Corporation Act,1956, with a capital contribution of Rs.5 Corer from the Government of India
Life insurance products
Basic elements of a life insurance plan
Life insurance companies offer various plans covering the risk of dying early and the risk of living too long. Most insurance plans offered by insurance companies in India have two basic elements:
• Death cover – this amount is paid to the nominee/beneficiary in the event of death of the life insured during the term of the policy.
• Maturity benefit – this amount is paid on the maturity of the policy if the life insured survives through the term of the policy. Some policies like money-back policies also make periodic payments to the life insured during the term of the policy before maturity, known as survival benefits. Money-back policies will be discussed in detail in section B2M of this chapter.
Basic life insurance plans
The main types of life insurance plans offered by the insurance industry are discussed below.
Term insurance plan
This is the most basic plan and simplest form of insurance offered by the life insurance industry. In this plan the life insurance company promises to pay a specified amount (sum insured) if the insured dies during the term of the plan. If the life insured survives the entire duration of the plan then they will not be entitled to anything, meaning that there is no maturity benefit with such policies.
So in short, this plan offers only death cover in the event of the death of the life insured during the period of
the plan.
Key points:
• Term insurance plans offer only death cover.
• They are the simplest form of insurance plans offered by insurance companies.
• Term insurance plans are the cheapest insurance plans available in the market. For a small premium an
individual can take out a big protection cover against their liabilities.
• Tenure: as the name suggests these plans offer protection only for a specified term. Normally the term
starts from 5 years and runs to 10, 15, 20, 25, 30 years or any other term chosen by the insured and agreed
by the insurer.
• Protection against liabilities: to cover larger liabilities like home loans or car loans, term insurance cover is the best solution.
• Insurance companies, under some term plans, allow the life insured to increase or decrease the death cover during the term of the plan.
• Minimum and maximum sum insured: for most term plans the insurance company specifies the minimum and maximum sums insured. For some insurance companies the maximum sum insured is subject to underwriting.
• Minimum and maximum age: most insurance companies specify the minimum and maximum age at entry and exit for term plans.
Return of premium (ROP) plan
Some insurance companies also offer variants of term insurance plans in the form of return of premium plans. If the life insured dies during the term of the plan, the insurance company pays the specified amount (sum insured) to the nominee/beneficiary. If the life insured survives the entire policy tenure then on maturity the insurance company returns part of the premium, or the entire premium, to the life insured according to the terms of the policy. In another variant of term insurance plans, some companies also pay some interest along with the premium on the maturity of the plan if the life insured survives until maturity.
Pure endowment plan
A pure endowment plan is the opposite of a term insurance plan. In this plan the life insurance company promises to pay the life insured a specified amount (sum insured) only if they survive the term of the plan. If the life insured dies during the tenure of the plan then they will not be entitled to anything. So in short, this plan offers only maturity benefit in the event of the life insured surviving the entire tenure of the plan. There is no death cover.
Chapter 5
Situations like the one mentioned above can confuse people about which insurance plan to choose. In order to resolve the above situation, life insurance companies have combined the features of the above two plans and offer them as an endowment insurance plan.
Endowment insurance plan
An endowment insurance plan is basically a combination of a term insurance plan and a pure endowment plan. It offers death cover if the life insured dies during the term of the policy or survival benefit if the life insured survives until the maturity of the policy.
Key points
• Endowment insurance plans pay a specified amount on maturity of the plan if the life insured survives the entire term of the plan.
• Death cover: these plans also have a death cover element. If the life insured dies before the maturity of the plan then the death cover benefit is paid to the nominee/beneficiary.
• Savings element: these plans, apart from the death cover, also have a savings element. After deducting the death cover charges and administration charges from the premium, the remaining amount is invested by the insurance company on behalf of the life insured. The returns earned are later paid back to the life insured in the form of bonuses.
• Goal-based investment: these plans can also be bought for accumulating money for specific plans like a child’s higher education or marriage etc.
• Some insurance companies also allow partial withdrawal or loans against these policies.
• This plan also comes in different variants. Some plans have a higher death cover than the maturity benefit and vice versa.
• In some plans the maturity benefit is double the death cover. This type of plan is known as a double endowment insurance plan.
Participating and non-participating policies
Most endowment policies have a savings element included in the premium. This amount is invested by the insurance company on behalf of the policyholders and earns a profit on it which is again distributed back to the policyholders in the form of bonuses. Such plans where the policyholders are entitled to participate in the profits of the insurance company are known as ‘with-profits’ plans or ‘participating’ plans. Most endowment, money-back and whole life plans are participating plans. More details on money-back and whole life plans are discussed later in this section. Plans in which the policyholders are not entitled to participate in the profits of the insurance company are known as ‘without-profits’ plans or ‘non-participating’ plans. Pure term insurance plans are an example of without-profit plans.
Whole life insurance plans
• A term insurance plan with an unspecified period is called a whole life plan. Some plans also have a savings element to them. The insurance company declares bonuses for these plans based on the returns earned on investments.
• As the name of the plan specifies, this plan covers the individual throughout their entire life
• On the death of the life insured, the nominee/beneficiary is paid the sum insured along with the bonuses accumulated up until that point in time.
• During the individual’s lifetime they can make partial withdrawals to meet emergency requirements. An individual can also take out loans against the policy.
Example
Insurance Company ABC offers a whole life insurance plan offering protection up to the age of 100.
Death cover
Should the death of the life insured occur during the policy tenure, then the sum insured, along with the accumulated bonuses up to that date, are paid to the nominee/beneficiary.
Survival benefit
If the life insured survives until age 100, then the sum insured, along with the bonuses, is paid to the life insured.
Suggested activity
So far you have studied the features of term plans, endowment plans and whole life plans. List down the scenarios/ situations in which an individual should opt for each of the three plans.
Convertible insurance plans
As the name suggests, this insurance plan can be converted from one type to another. For example, a term insurance plan can be converted into an endowment plan or a whole life plan or any other plan as allowed by the insurance company. A convertible plan is useful when the life insured cannot initially afford to pay a higher premium. They can therefore start with a term insurance plan with a lower premium and then later convert it into an endowment plan or a whole life plan with a higher premium. Also, at the time of the plan conversion the life insured is not required to undergo a medical check-up. Another advantage of convertible plans is that at the time of conversion there is no further underwriting decision to be made.
Joint life insurance plans
• Joint life insurance plans offer insurance coverage for two persons under one policy. This plan is ideal for married couples or partners in a business firm.
• With some joint life insurance plans the death cover (sum insured) is payable on the death of the first joint policyholder and then again on the death of the surviving policyholder, along with the accumulated bonuses up to that date, if the death of both the policyholders happens during the tenure of the policy. Chapter 5
• If both the joint policyholders survive until maturity or one of the joint policyholders survives until the maturity of the policy, then the maturity benefit along with the bonuses accumulated until that date is paid.
• For some joint life policies the premiums have to be paid until the selected term or premium payment ceases on the death of the first joint policyholder.
• In the case of joint life policies each life will be underwritten separately
Annuities
An annuity is a series of regular payments from an annuity provider (insurance company) to an individual (called the annuitant) in return for a lump sum (purchase price) or instalment premiums for a specified number of years.
According to the manner in which the purchase price is paid, annuities can be either:
• an immediate annuity; or
• a deferred annuity.
An annuity is the reverse of a life insurance policy. In life insurance the insurance company takes on the risk, but with an annuity the annuitant takes on the risk that they won’t die in a very short space of time after paying the purchase price. There are a number of different types of annuity available (such as a joint life, last survivor/life annuity with return of purchase price/increasing annuity)
Group insurance plans
• A group insurance policy provides insurance protection to a group of people who are brought together for a common objective.
• The group of people can be:
– employees of an organisation;
– customers of a bank;
– members of a trade union;
– members of a professional body like an association of accountants; or
– any other group of people who have come together with a commonality of purpose or are linked to each other for a common objective.
• In a group insurance policy the insurance company issues one master policy covering all the members of the group. For example, the insurance company will issue a master policy to an employer covering all the mployees of the company. The employer would be known as the ‘master policyholder’
. • The contract of insurance is between the master policyholder and the insurance company. The employees
are not a direct party to the insurance contract.
• Group insurance schemes are also used by the Government as instruments of social welfare to provide
insurance cover to the masses (people who are below the poverty line).
• In July 2005 the insurance industry regulator (IRDA) issued guidelines on group insurance policies.
Example
Insurance Company ABC offers a group life insurance plan that addresses the insurance requirements of the less
affluent.
The company has specific eligibility criteria to identify the persons to be covered under the scheme.
Death cover
In the event of the death of a member, a sum insured of Rs. 30,000 is paid to the nominee/beneficiary. In case of death due to an accident Rs. 75,000 is paid to the nominee/beneficiary.
Micro-insurance plans
• In November 2005 the IRDA issued guidelines for micro-insurance through the IRDA (Micro-insurance)
Regulations 2005. Micro-insurance aims at providing insurance cover to low income groups.
• The IRDA has specified that the life cover provided under micro-insurance products should range from
Rs. 5,000 to Rs. 50,000.
• A life insurer may offer life micro-insurance products as well as general micro-insurance products and vice
versa. (This is only allowed for micro-insurance products, and no other types of general insurance products.)
Unit-linked insurance plans (ULIPs)
Unit-linked policies carry a higher risk than with-profit policies and contain fewer guarantees. However, they
are much more flexible. Unit-linked policies are suited to people prepared to undertake some investment
risk to obtain the benefits of flexibility. Returns are subject to movements in the capital markets where
investments such as equities (shares) are traded.
SHARES:-
Equity shares represent ownership of a company. Whenever a company wants to raise money for its growth,
set up a new production unit, acquire another company, acquire technology, working capital etc. the
company may offer shares (ownership in the company) to the public.
Example
Let’s assume a company’s total capital of Rs. 10,00,000 consists of 1,00,000 equity shares of Rs. 10. If the owners (promoters) of the company want to raise money for the company’s expansion by offering 10,000 shares to the public; then it is said that the owners are diluting 10% of their ownership in favour of the public. If an individual acquires 100 shares from the total 10,000 shares on offer, they are said to have acquired 0.1% (100 shares out of a total 1,00,000 shares) shareholding (ownership) in the company.
Once the shares are offered to the public, the buying and selling of shares takes places through stock
exchanges. Stock exchanges act as intermediaries and offer a trading platform for the buying and selling
of shares between individuals. However, individuals cannot directly buy or sell shares through the stock
exchanges, they have to place their buy and sell orders through stock brokers (members) of the stock
exchanges. The two main stock exchanges in India are the Bombay Stock Exchange (BSE) and the National
Stock Exchange (NSE).
Individuals who purchase shares have the right to receive a share in the company’s profits in the form of
dividends. The profits are distributed in proportion to the number of shares held by the shareholders.
Equity shares provide three types of income to the investor:
Dividend income The company may share a portion of the profits that have been earned with the shareholders in the form of a dividend declared from time to time.
Bonus shares When a company accumulates large cash reserves, it capitalises them by issuing bonus shares (free shares) instead of distributing them as dividends. Bonus shares are issued in proportion to the existing equity share capital of the company. The issue of bonus shares is a vote of confidence from the management to its shareholders about the good financialperformance and future prospects of the company.
Capital appreciation When shares are bought at a lower price and sold at a higher price, the difference between the two prices is known as the profit or capital appreciation
Consider this…
If you had to choose between a ULIP and a traditional policy (term/endowment/whole life), which one would you opt for? What are the points that you would consider in taking a decision on this?
Key points
• Unit-linked insurance plans (ULIPs) offer the benefits of both life insurance and returns on investment.
• In traditional plans the insurance company takes a decision on the investments to be made on behalf of
the insured. However, in a ULIP the insured has a variety of funds to choose from like equity funds, debt
funds, balanced funds and money market funds etc. for their investments.
• ULIPs give the insured the option to participate in the growth of the capital markets.
• On the death of the insured the sum insured or the market value of the investment (fund value), whichever
is higher, is paid.
• On maturity of the plan the fund value is payable.
• Settlement option:
instead of taking a lump sum amount, some plans provide the policyholder with the
option to receive the maturity benefit amount as a structured payout (periodic instalments) over a period
of time (say, 5 years or any time up to 5 years) after maturity. This is known as the settlement option. If
the policyholder wishes to take the settlement option they need to inform the insurance company well in
advance.
Questin 5.2List the features of a group insurance plan.
Child plans
• Child insurance plans help parents to save for their children’s future financial needs such as education,
marriage etc.
• Child insurance plans offer the dual benefit of savings along with insurance.
• It is important to note that the child does not have any income of their own. Instead, they are entirely
financially dependent on their parents. The parent pays the premium to the insurance company towards
accumulating money for the child’s future financial needs.
• The child is the beneficiary who is entitled to receive the benefit on the maturity of the policy.
• In these plans, risk on the life of the insured child will begin only when the child reaches a specified age as
stated in the policy. The time gap between the policy start date and the date of commencement of risk is
called the deferment period.
• The date on which the risk will commence at the end of the deferment period is known as the deferred
date. The deferred date will be a policy anniversary.
• There is no insurance cover during the deferment period.
• When the child reaches the age of majority (18 years old) the title of the policy will be automatically passed
on to the insured child. This process is known as vesting. The date on which the policy title passes to the
child is known as the vesting date.
• After vesting the policy becomes a contract between the insurer and the insured person (the child in
this case).
• Some child insurance plans come with a built-in ‘waiver of premium’ rider, whereas in the case of other
child insurance plans the parent can opt for the waiver of premium rider for a small additional premium.
In this case if the parent dies during the policy term the insurance company will continue to pay the
premiums on behalf of the parent (until the child reaches the age of majority) and the policy is left intact.
The child receives the benefit at the end of the policy term according to the policy terms and conditions.
More details on riders will be discussed in chapter 7.
• Child insurance plans can be taken out in the form of endowment plans, money-back plans or ULIPs.
Money-back policies
• Money-back policies combine the dual benefits of savings and insurance, and are somewhat similar to
endowment plans in terms of features.
• In an endowment plan, the policyholder receives the maturity benefit at the end of the policy term.
However, in money-back policies ‘partial survival benefits’ are paid to the policyholder during the term of
the policy at specific intervals.
• The policyholder may receive the survival benefits in fixed proportions or variable proportions during the
policy term as per the terms and conditions of the policy.
• The benefits received by the policyholder at specific intervals are tax-free according to prevailing tax laws.
• If the policyholder dies during the policy term, the nominee or beneficiary receives the entire sum insured
along with the accrued bonus (if any) without the deduction of survival benefits that have already been
paid to the insured.
Example
Chetan Mishra has taken out a 20 year money-back policy from ABC insurance company. The sum insured is
Rs. 20,00,000. He chose to take out a money-back policy as he wanted to enjoy a return on his savings while he is alive. He has nominated his wife Sumedha to be the beneficiary of the policy. Under the money-back policy that he has taken out he will receive 25% of the survival benefit after 5, 10 and 15 years and the remaining balance of 25% of the survival benefit will be payable in the 20th year.
However, tragedy strikes the family. Chetan dies in a car accident. Sumedha is a housewife and was financially
dependent on Chetan.Chetan’s death occurred in the 11th year after he took out the policy. He had already received a percentage of the survival benefit (Rs. 10,00,000) in the 5th and 10th years.
In this case Sumedha will receive the entire Rs. 20,00,000 as the sum insured, even though a percentage
(Rs. 10,00,000) of the sum insured has already been paid to Chetan in the 5th and 10th years of the policy.
Salary saving schemes (SSS)
• Salary saving schemes (SSS) are intended to cater to the needs of the working classes.
• In these schemes the insurance company has an arrangement with the employer, whereby the employer
deducts the premium from the employee’s salary and passes it on to the insurance company every month.
• As the premium is deducted from their salary before it reaches the employee they do not need to worry
about defaulting on the premium.
• The insurance company also benefits as it receives the consolidated premium from the employer for all the
employees who have enrolled on the scheme.
Consider this…
What benefit do you think this might have for the insurance company?
• The employer makes the deduction for the premium from the employee’s salary based on an authority
letter signed by the employee, which is collected with the proposal form and is sent to the employer by the
insurer, when the policy is accepted.
• A demand list containing the list of employees, their designation along with the amount to be deducted is
sent to the organisation periodically by the insurance company.
• A salary saving scheme is not a specific insurance plan. It is just a convenient arrangement to collect the
premium. It can be used for a term plan, an endowment plan or any other plan as offered by the insurer
under the SSS arrangement.
Insurance companies active in India
(January 2011)
Table 1.1 Life insurance companies in India
1 HDFC Standard Life Insurance Co. Ltd.
2 Max New York Life Insurance Co. Ltd.
3 ICICI Prudential Life Insurance Co. Ltd.
4 Kotak Mahindra Old Mutual Life Insurance Co. Ltd.
5 Birla Sun Life Insurance Co. Ltd.
6 Tata AIG Life Insurance Co. Ltd.
7 SBI Life Insurance Co. Ltd.
8 ING Vysya Life Insurance Co. Ltd.
9 Bajaj Allianz Life Insurance Co. Ltd.
10 Met Life India Insurance Co. Ltd.
11 Reliance Life Insurance Co. Ltd. (Earlier AMP Sanmar Life Insurance Company from 3 January 2002 to 29 September 2005)
12 Aviva Life Insurance Company India Limited
13 Sahara India Life Insurance Co. Ltd.
14 Shriram Life Insurance Co. Ltd.
15 Bharti AXA Life Insurance Co. Ltd.
16 Future Generali India Life Insurance Company Ltd.
17 IDBI Federal Life Insurance Company Ltd.
18 Canara HSBC OBC Life Insurance Company Ltd.
19 Aegon Religare Life Insurance Company Ltd.
20 DLF Pramerica Life Insurance Co. Ltd.
21 Life Insurance Corporation of India
22 Star Union Dai-ichi Life Insurance Co. Ltd
23 IndiaFirst Life Insurance Company Limited
Assets are insured, because they are likely to be destroyed, through accidental occurrence. Such possible occurrences are called as “Perils”. Fires, Floods, breakdowns, lightning, earthquakes, etc. are perils. If such perils can cause damage to the asset, we can say that the asset is exposed to that risk. Peril are the events. Risks are the consequential losses or damages.
The risk only means that there is a possibility of losses or damage. The damage may or may not happen. Insurance is done against the contingency that it may happen. There has to be an uncertainty about the risk. Insurance is relevant only if there are uncertainties. If there are no uncertainties about the occurrence of an event, it cannot be insured against it. In short we can say that
“Insurance is the Provider & Protector”
In case of human being, death is certain but time of death is uncertain. Because of uncertainty of human life. The insurance plays a major role. Human life may be lost due to unexpected early death when the person is not expected to have made adequate alternative arrangement for those who are dependent on his income. Insurance is necessary to help those dependents who will suffer due to early death of a person. In this case we can say that
“Insurance is the Trusted Friend in Need”
A person can also make a future provision for his retired life through insurance. In this case we can say that
“Insurance is little Price for a Priceless Security”
For spreading of the importance of the insurance & its advantages & do the advertisement of this good option for the every class of people I select this subject for the Research.
The business of insurance is related to the protection of the economic values of assets. Every asset would have been created through the efforts of the owner. The assets are valuable to the owner, because he expects to get some benefits from it. The benefit may be an income or something else. It is a benefit because it meets some of his needs.
However, the asset may get lost earlier, An accident or some other unfortunate event may destroy it or make it non-functional. In that case the owner & those deriving benefits there from would be deprived of the benefit & the planned substitute would not have been ready. There is an adverse or unpleasant situation. Insurance is a mechanism that helps to reduce the effect of such adverse situation.
We can say that a human life is also an income generation asset. Human life may be lost due to unexpected early death or become non-functional following sickness or disabilities cause by accidents. If this happens by the times one in on the verge of retirement when his income is about to cease, he might have made alternative arrangements to meet his needs. But this happens at a younger age when he is not expected to have made adequate alternative arrangement; those who are dependent on his income will suffer. Insurance is necessary to help those dependent on his income.
Human beings are exposed to another type of risk. It is the risk of living too long. A person, who has made necessary arrangement to meet his financial needs after retirements, also would need insurance. This means that living too long is as much a problem as dying too young. Insurance provides safeguard against these risks.
The business of insurance is deals with the assets of business as well as life of any person.
Meaning of Life Insurance
“Life insurance is a contract that pledges the payment of an amount to the person assured (or his nominee) on the happenings of the event insured against”.
The contract is valid for payment of the insured amount during
• The date of maturity, or
• Specified dates at periodic intervals, or
• Unfortunate death, if it occurs earlier.
Among other things, the contract also provides for the payment of premium periodically to the insurer by the policyholder. Life insurance is universally acknowledged to be an institution, which eliminates ‘risk’, Substituting certainty for uncertainty & comes to the timely aid of the family in the unfortunate event of death of the breadwinner.
By & large, life insurance is civilization’s partial solution to the problems caused by death. Life insurance, in short, is concerned with two hazards that stand across the life-path of every person:
1. That of dying prematurely leaves a dependent family to fend for itself
2. That of living till old age without visible means of Support.
When the insurance is deals with asset of any business as well as mediclaim, health of any person that time it is called as General Insurance.
History of Life Insurance
Some of the important milestones in the life insurance business in India are as under
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 Insurance 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 & non-life insurance business.
1938: Earlier legislation consolidated & amended to by the Insurance Act with the objective of protecting the interests of the insuring public.
1956: 245 Indian & foreign insurers & Provident Societies are taken over by the central government & nationalized. Life Insurance Corporation formed by an Act Parliament, viz. Life Insurance Corporation Act,1956, with a capital contribution of Rs.5 Corer from the Government of India
Life insurance products
Basic elements of a life insurance plan
Life insurance companies offer various plans covering the risk of dying early and the risk of living too long. Most insurance plans offered by insurance companies in India have two basic elements:
• Death cover – this amount is paid to the nominee/beneficiary in the event of death of the life insured during the term of the policy.
• Maturity benefit – this amount is paid on the maturity of the policy if the life insured survives through the term of the policy. Some policies like money-back policies also make periodic payments to the life insured during the term of the policy before maturity, known as survival benefits. Money-back policies will be discussed in detail in section B2M of this chapter.
Basic life insurance plans
The main types of life insurance plans offered by the insurance industry are discussed below.
Term insurance plan
This is the most basic plan and simplest form of insurance offered by the life insurance industry. In this plan the life insurance company promises to pay a specified amount (sum insured) if the insured dies during the term of the plan. If the life insured survives the entire duration of the plan then they will not be entitled to anything, meaning that there is no maturity benefit with such policies.
So in short, this plan offers only death cover in the event of the death of the life insured during the period of
the plan.
Key points:
• Term insurance plans offer only death cover.
• They are the simplest form of insurance plans offered by insurance companies.
• Term insurance plans are the cheapest insurance plans available in the market. For a small premium an
individual can take out a big protection cover against their liabilities.
• Tenure: as the name suggests these plans offer protection only for a specified term. Normally the term
starts from 5 years and runs to 10, 15, 20, 25, 30 years or any other term chosen by the insured and agreed
by the insurer.
• Protection against liabilities: to cover larger liabilities like home loans or car loans, term insurance cover is the best solution.
• Insurance companies, under some term plans, allow the life insured to increase or decrease the death cover during the term of the plan.
• Minimum and maximum sum insured: for most term plans the insurance company specifies the minimum and maximum sums insured. For some insurance companies the maximum sum insured is subject to underwriting.
• Minimum and maximum age: most insurance companies specify the minimum and maximum age at entry and exit for term plans.
Return of premium (ROP) plan
Some insurance companies also offer variants of term insurance plans in the form of return of premium plans. If the life insured dies during the term of the plan, the insurance company pays the specified amount (sum insured) to the nominee/beneficiary. If the life insured survives the entire policy tenure then on maturity the insurance company returns part of the premium, or the entire premium, to the life insured according to the terms of the policy. In another variant of term insurance plans, some companies also pay some interest along with the premium on the maturity of the plan if the life insured survives until maturity.
Pure endowment plan
A pure endowment plan is the opposite of a term insurance plan. In this plan the life insurance company promises to pay the life insured a specified amount (sum insured) only if they survive the term of the plan. If the life insured dies during the tenure of the plan then they will not be entitled to anything. So in short, this plan offers only maturity benefit in the event of the life insured surviving the entire tenure of the plan. There is no death cover.
Chapter 5
Situations like the one mentioned above can confuse people about which insurance plan to choose. In order to resolve the above situation, life insurance companies have combined the features of the above two plans and offer them as an endowment insurance plan.
Endowment insurance plan
An endowment insurance plan is basically a combination of a term insurance plan and a pure endowment plan. It offers death cover if the life insured dies during the term of the policy or survival benefit if the life insured survives until the maturity of the policy.
Key points
• Endowment insurance plans pay a specified amount on maturity of the plan if the life insured survives the entire term of the plan.
• Death cover: these plans also have a death cover element. If the life insured dies before the maturity of the plan then the death cover benefit is paid to the nominee/beneficiary.
• Savings element: these plans, apart from the death cover, also have a savings element. After deducting the death cover charges and administration charges from the premium, the remaining amount is invested by the insurance company on behalf of the life insured. The returns earned are later paid back to the life insured in the form of bonuses.
• Goal-based investment: these plans can also be bought for accumulating money for specific plans like a child’s higher education or marriage etc.
• Some insurance companies also allow partial withdrawal or loans against these policies.
• This plan also comes in different variants. Some plans have a higher death cover than the maturity benefit and vice versa.
• In some plans the maturity benefit is double the death cover. This type of plan is known as a double endowment insurance plan.
Participating and non-participating policies
Most endowment policies have a savings element included in the premium. This amount is invested by the insurance company on behalf of the policyholders and earns a profit on it which is again distributed back to the policyholders in the form of bonuses. Such plans where the policyholders are entitled to participate in the profits of the insurance company are known as ‘with-profits’ plans or ‘participating’ plans. Most endowment, money-back and whole life plans are participating plans. More details on money-back and whole life plans are discussed later in this section. Plans in which the policyholders are not entitled to participate in the profits of the insurance company are known as ‘without-profits’ plans or ‘non-participating’ plans. Pure term insurance plans are an example of without-profit plans.
Whole life insurance plans
• A term insurance plan with an unspecified period is called a whole life plan. Some plans also have a savings element to them. The insurance company declares bonuses for these plans based on the returns earned on investments.
• As the name of the plan specifies, this plan covers the individual throughout their entire life
• On the death of the life insured, the nominee/beneficiary is paid the sum insured along with the bonuses accumulated up until that point in time.
• During the individual’s lifetime they can make partial withdrawals to meet emergency requirements. An individual can also take out loans against the policy.
Example
Insurance Company ABC offers a whole life insurance plan offering protection up to the age of 100.
Death cover
Should the death of the life insured occur during the policy tenure, then the sum insured, along with the accumulated bonuses up to that date, are paid to the nominee/beneficiary.
Survival benefit
If the life insured survives until age 100, then the sum insured, along with the bonuses, is paid to the life insured.
Suggested activity
So far you have studied the features of term plans, endowment plans and whole life plans. List down the scenarios/ situations in which an individual should opt for each of the three plans.
Convertible insurance plans
As the name suggests, this insurance plan can be converted from one type to another. For example, a term insurance plan can be converted into an endowment plan or a whole life plan or any other plan as allowed by the insurance company. A convertible plan is useful when the life insured cannot initially afford to pay a higher premium. They can therefore start with a term insurance plan with a lower premium and then later convert it into an endowment plan or a whole life plan with a higher premium. Also, at the time of the plan conversion the life insured is not required to undergo a medical check-up. Another advantage of convertible plans is that at the time of conversion there is no further underwriting decision to be made.
Joint life insurance plans
• Joint life insurance plans offer insurance coverage for two persons under one policy. This plan is ideal for married couples or partners in a business firm.
• With some joint life insurance plans the death cover (sum insured) is payable on the death of the first joint policyholder and then again on the death of the surviving policyholder, along with the accumulated bonuses up to that date, if the death of both the policyholders happens during the tenure of the policy. Chapter 5
• If both the joint policyholders survive until maturity or one of the joint policyholders survives until the maturity of the policy, then the maturity benefit along with the bonuses accumulated until that date is paid.
• For some joint life policies the premiums have to be paid until the selected term or premium payment ceases on the death of the first joint policyholder.
• In the case of joint life policies each life will be underwritten separately
Annuities
An annuity is a series of regular payments from an annuity provider (insurance company) to an individual (called the annuitant) in return for a lump sum (purchase price) or instalment premiums for a specified number of years.
According to the manner in which the purchase price is paid, annuities can be either:
• an immediate annuity; or
• a deferred annuity.
An annuity is the reverse of a life insurance policy. In life insurance the insurance company takes on the risk, but with an annuity the annuitant takes on the risk that they won’t die in a very short space of time after paying the purchase price. There are a number of different types of annuity available (such as a joint life, last survivor/life annuity with return of purchase price/increasing annuity)
Group insurance plans
• A group insurance policy provides insurance protection to a group of people who are brought together for a common objective.
• The group of people can be:
– employees of an organisation;
– customers of a bank;
– members of a trade union;
– members of a professional body like an association of accountants; or
– any other group of people who have come together with a commonality of purpose or are linked to each other for a common objective.
• In a group insurance policy the insurance company issues one master policy covering all the members of the group. For example, the insurance company will issue a master policy to an employer covering all the mployees of the company. The employer would be known as the ‘master policyholder’
. • The contract of insurance is between the master policyholder and the insurance company. The employees
are not a direct party to the insurance contract.
• Group insurance schemes are also used by the Government as instruments of social welfare to provide
insurance cover to the masses (people who are below the poverty line).
• In July 2005 the insurance industry regulator (IRDA) issued guidelines on group insurance policies.
Example
Insurance Company ABC offers a group life insurance plan that addresses the insurance requirements of the less
affluent.
The company has specific eligibility criteria to identify the persons to be covered under the scheme.
Death cover
In the event of the death of a member, a sum insured of Rs. 30,000 is paid to the nominee/beneficiary. In case of death due to an accident Rs. 75,000 is paid to the nominee/beneficiary.
Micro-insurance plans
• In November 2005 the IRDA issued guidelines for micro-insurance through the IRDA (Micro-insurance)
Regulations 2005. Micro-insurance aims at providing insurance cover to low income groups.
• The IRDA has specified that the life cover provided under micro-insurance products should range from
Rs. 5,000 to Rs. 50,000.
• A life insurer may offer life micro-insurance products as well as general micro-insurance products and vice
versa. (This is only allowed for micro-insurance products, and no other types of general insurance products.)
Unit-linked insurance plans (ULIPs)
Unit-linked policies carry a higher risk than with-profit policies and contain fewer guarantees. However, they
are much more flexible. Unit-linked policies are suited to people prepared to undertake some investment
risk to obtain the benefits of flexibility. Returns are subject to movements in the capital markets where
investments such as equities (shares) are traded.
SHARES:-
Equity shares represent ownership of a company. Whenever a company wants to raise money for its growth,
set up a new production unit, acquire another company, acquire technology, working capital etc. the
company may offer shares (ownership in the company) to the public.
Example
Let’s assume a company’s total capital of Rs. 10,00,000 consists of 1,00,000 equity shares of Rs. 10. If the owners (promoters) of the company want to raise money for the company’s expansion by offering 10,000 shares to the public; then it is said that the owners are diluting 10% of their ownership in favour of the public. If an individual acquires 100 shares from the total 10,000 shares on offer, they are said to have acquired 0.1% (100 shares out of a total 1,00,000 shares) shareholding (ownership) in the company.
Once the shares are offered to the public, the buying and selling of shares takes places through stock
exchanges. Stock exchanges act as intermediaries and offer a trading platform for the buying and selling
of shares between individuals. However, individuals cannot directly buy or sell shares through the stock
exchanges, they have to place their buy and sell orders through stock brokers (members) of the stock
exchanges. The two main stock exchanges in India are the Bombay Stock Exchange (BSE) and the National
Stock Exchange (NSE).
Individuals who purchase shares have the right to receive a share in the company’s profits in the form of
dividends. The profits are distributed in proportion to the number of shares held by the shareholders.
Equity shares provide three types of income to the investor:
Dividend income The company may share a portion of the profits that have been earned with the shareholders in the form of a dividend declared from time to time.
Bonus shares When a company accumulates large cash reserves, it capitalises them by issuing bonus shares (free shares) instead of distributing them as dividends. Bonus shares are issued in proportion to the existing equity share capital of the company. The issue of bonus shares is a vote of confidence from the management to its shareholders about the good financialperformance and future prospects of the company.
Capital appreciation When shares are bought at a lower price and sold at a higher price, the difference between the two prices is known as the profit or capital appreciation
Consider this…
If you had to choose between a ULIP and a traditional policy (term/endowment/whole life), which one would you opt for? What are the points that you would consider in taking a decision on this?
Key points
• Unit-linked insurance plans (ULIPs) offer the benefits of both life insurance and returns on investment.
• In traditional plans the insurance company takes a decision on the investments to be made on behalf of
the insured. However, in a ULIP the insured has a variety of funds to choose from like equity funds, debt
funds, balanced funds and money market funds etc. for their investments.
• ULIPs give the insured the option to participate in the growth of the capital markets.
• On the death of the insured the sum insured or the market value of the investment (fund value), whichever
is higher, is paid.
• On maturity of the plan the fund value is payable.
• Settlement option:
instead of taking a lump sum amount, some plans provide the policyholder with the
option to receive the maturity benefit amount as a structured payout (periodic instalments) over a period
of time (say, 5 years or any time up to 5 years) after maturity. This is known as the settlement option. If
the policyholder wishes to take the settlement option they need to inform the insurance company well in
advance.
Questin 5.2List the features of a group insurance plan.
Child plans
• Child insurance plans help parents to save for their children’s future financial needs such as education,
marriage etc.
• Child insurance plans offer the dual benefit of savings along with insurance.
• It is important to note that the child does not have any income of their own. Instead, they are entirely
financially dependent on their parents. The parent pays the premium to the insurance company towards
accumulating money for the child’s future financial needs.
• The child is the beneficiary who is entitled to receive the benefit on the maturity of the policy.
• In these plans, risk on the life of the insured child will begin only when the child reaches a specified age as
stated in the policy. The time gap between the policy start date and the date of commencement of risk is
called the deferment period.
• The date on which the risk will commence at the end of the deferment period is known as the deferred
date. The deferred date will be a policy anniversary.
• There is no insurance cover during the deferment period.
• When the child reaches the age of majority (18 years old) the title of the policy will be automatically passed
on to the insured child. This process is known as vesting. The date on which the policy title passes to the
child is known as the vesting date.
• After vesting the policy becomes a contract between the insurer and the insured person (the child in
this case).
• Some child insurance plans come with a built-in ‘waiver of premium’ rider, whereas in the case of other
child insurance plans the parent can opt for the waiver of premium rider for a small additional premium.
In this case if the parent dies during the policy term the insurance company will continue to pay the
premiums on behalf of the parent (until the child reaches the age of majority) and the policy is left intact.
The child receives the benefit at the end of the policy term according to the policy terms and conditions.
More details on riders will be discussed in chapter 7.
• Child insurance plans can be taken out in the form of endowment plans, money-back plans or ULIPs.
Money-back policies
• Money-back policies combine the dual benefits of savings and insurance, and are somewhat similar to
endowment plans in terms of features.
• In an endowment plan, the policyholder receives the maturity benefit at the end of the policy term.
However, in money-back policies ‘partial survival benefits’ are paid to the policyholder during the term of
the policy at specific intervals.
• The policyholder may receive the survival benefits in fixed proportions or variable proportions during the
policy term as per the terms and conditions of the policy.
• The benefits received by the policyholder at specific intervals are tax-free according to prevailing tax laws.
• If the policyholder dies during the policy term, the nominee or beneficiary receives the entire sum insured
along with the accrued bonus (if any) without the deduction of survival benefits that have already been
paid to the insured.
Example
Chetan Mishra has taken out a 20 year money-back policy from ABC insurance company. The sum insured is
Rs. 20,00,000. He chose to take out a money-back policy as he wanted to enjoy a return on his savings while he is alive. He has nominated his wife Sumedha to be the beneficiary of the policy. Under the money-back policy that he has taken out he will receive 25% of the survival benefit after 5, 10 and 15 years and the remaining balance of 25% of the survival benefit will be payable in the 20th year.
However, tragedy strikes the family. Chetan dies in a car accident. Sumedha is a housewife and was financially
dependent on Chetan.Chetan’s death occurred in the 11th year after he took out the policy. He had already received a percentage of the survival benefit (Rs. 10,00,000) in the 5th and 10th years.
In this case Sumedha will receive the entire Rs. 20,00,000 as the sum insured, even though a percentage
(Rs. 10,00,000) of the sum insured has already been paid to Chetan in the 5th and 10th years of the policy.
Salary saving schemes (SSS)
• Salary saving schemes (SSS) are intended to cater to the needs of the working classes.
• In these schemes the insurance company has an arrangement with the employer, whereby the employer
deducts the premium from the employee’s salary and passes it on to the insurance company every month.
• As the premium is deducted from their salary before it reaches the employee they do not need to worry
about defaulting on the premium.
• The insurance company also benefits as it receives the consolidated premium from the employer for all the
employees who have enrolled on the scheme.
Consider this…
What benefit do you think this might have for the insurance company?
• The employer makes the deduction for the premium from the employee’s salary based on an authority
letter signed by the employee, which is collected with the proposal form and is sent to the employer by the
insurer, when the policy is accepted.
• A demand list containing the list of employees, their designation along with the amount to be deducted is
sent to the organisation periodically by the insurance company.
• A salary saving scheme is not a specific insurance plan. It is just a convenient arrangement to collect the
premium. It can be used for a term plan, an endowment plan or any other plan as offered by the insurer
under the SSS arrangement.
Insurance companies active in India
(January 2011)
Table 1.1 Life insurance companies in India
1 HDFC Standard Life Insurance Co. Ltd.
2 Max New York Life Insurance Co. Ltd.
3 ICICI Prudential Life Insurance Co. Ltd.
4 Kotak Mahindra Old Mutual Life Insurance Co. Ltd.
5 Birla Sun Life Insurance Co. Ltd.
6 Tata AIG Life Insurance Co. Ltd.
7 SBI Life Insurance Co. Ltd.
8 ING Vysya Life Insurance Co. Ltd.
9 Bajaj Allianz Life Insurance Co. Ltd.
10 Met Life India Insurance Co. Ltd.
11 Reliance Life Insurance Co. Ltd. (Earlier AMP Sanmar Life Insurance Company from 3 January 2002 to 29 September 2005)
12 Aviva Life Insurance Company India Limited
13 Sahara India Life Insurance Co. Ltd.
14 Shriram Life Insurance Co. Ltd.
15 Bharti AXA Life Insurance Co. Ltd.
16 Future Generali India Life Insurance Company Ltd.
17 IDBI Federal Life Insurance Company Ltd.
18 Canara HSBC OBC Life Insurance Company Ltd.
19 Aegon Religare Life Insurance Company Ltd.
20 DLF Pramerica Life Insurance Co. Ltd.
21 Life Insurance Corporation of India
22 Star Union Dai-ichi Life Insurance Co. Ltd
23 IndiaFirst Life Insurance Company Limited