• Needs

• Advantages

• Insurance as a Social Security Tool

• Role of Insurance in Economic Development

• Products

• Riders

• Annuities

• Children’s Plan 

What is Life Insurance?

 “Insurance” is a word very often used to assure a relief from any eventuality arising out of uncertainties.

In simple language insurance is a risk covering mechanism, rather sharing or spreading the risk. The price of cost of such a mechanism is the “Premium” the policy holder is paying The entire operation is scientifically managed by Actuaries, with their advanced mathematical analysis. Insurance is a necessity for providing economic security in a society where uncertainties are umpteen, death being the foremost.     

Death, accidents, calamities, etc are certain events causing financial loss. What we can insure is financial loss due to death/ accident. This can be controlled by insurance protection. So insurance is there to take care of the financial loss.
    
Every asset has a value. The asset would have been created through the efforts of the owner. The asset is valuable to the owner, because he expects to get some benefits from it. It is a benefit because it meets some of his needs.

Every asset is expected to last for a certain period of time during which it will provide the benefits.

In India, insurance business is classified primarily as life and non-life or general. Life insurance includes all risks related to the lives of human beings and general insurance covers the rest. General insurance has three classifications viz., Fire (dealing with all fire related risks), Marine (dealing with all transport related risks and ships) and Miscellaneous (dealing with all others like liability, fidelity, motor, crop, engineering, construction, aviation, personal accident, etc). Personal accident and sickness insurance, which are related to human beings, is classified as ‘non-life’ in India, but is classified as ‘life’, in many other countries. What is ‘Non-life’ in India is termed ‘Property and Casualty’ in some other countries.

Needs of Life Insurance

 Advantages of Life Insurance

It is superior to an ordinary savings plan

In case of death, full sum assumed is payable under a life insurance policy whereas only the accumulated savings alone will be available under other savings schemes.

Insurance encourages thrift

As it is possible to withdraw a deposit easily, it is likely to be used for any special purpose. But insurance becomes compulsory savings, as regular payments of premium is necessary to keep the policy in force

Easy settlement and protection against creditors.

The life assumed can nominate a person to receive the policy moneys in the event of his death or assign the policy to protect the same against the claims of creditors. A policy affected under the provisions of the Married Women’s Property Act 1874 constitutes a trust in favour of wife and/ or children and no separate assignment is necessary.

Administering the Legacy for beneficiaries.

In order that the claim amount received in a lump sum by the beneficiaries may not be wasted unscrupulously, the policy holder can arrange for the payment in installments.

Ready marketability and suitability for quick borrowing 

In case of a temporary need the policy holder can avail of a loan. If he is not able to continue the payment of premium, he can surrender the policy for a cash sum.

Tax Relief

Premiums paid under life insurance policies are eligible for rebate of income tax under section 80 C of Income Tax Act 1961. This in effect means lower premium.
           

INSURANCE AS A SOCIAL SECURITY TOOL

Our country is aiming at a socialistic pattern of society. In a socialistic system social security is the responsibility of the state. In Welfare states also the social security is undertaken by the Government. Our constitution has provisions under Article 41 requiring the Government to secure social security to the citizens.

ROLE OF INSURANCE IN ECONOMIC DEVELOPMENT

The savings is an important component of Gross Domestic Product. The Life Insurance is a major device for mobilization of savings of the people. The Endowment type of policies, the annuities and superannuation schemes are intended for promoting savings. The surplus of the life insurance business is added to a fund known as Life Fund. The Life Fund is invested as per the provisions of the Insurance Act 1938. These regulations are applicable to all Life Insurance Companies.  Ninety per cent of the investments should be made as per the directives of the Central Government. 

LIFE INSURANCE PRODUCTS

1.     There are different products sold by the insurers as “Plans of Insurance”. The two basic plans are:

When these two plans are combined, the amount is payable either on death or survival and the combination is called Endowment Assurance. 

By a combination of Term Assurance and Pure Endowment, different types of plans can be designed to suit the varying needs of the insured.

Individual and Group Policies

The Life Insurance Policies granted by all the Companies are generally individual policies. However joint life policies on the lives of husband and wife, business partners are also granted.

We have also group policies, such as Group Insurance policies, Group Gratuity policies and Group Superannuation policies. The Life cover is granted for a definite amount for each individual of the group. Instead of individual policy a group policy called master policy is issued. Premium is calculated for the group. Group Insurance is granted for socially weaker sections of the society and Landless, agricultural laborers.

With Profit and Without Profit Policies

Insurance Policies are granted as with profit or without profit policies. The premium is calculated based on three factors viz. mortality, interest and expenses. If the experiences are favourable, surplus will arise. 

The Surplus generated will be distributed to the with profit policy holders as bonus. The with-profit policy holders have to pay a little more premium.

Different Types of Insurance Products

The premium under the plan is payable so long as the policy holder is alive or for a definite period. In the case of with profit policies the policy continues participation in profits even after the maximum stipulated premiums have been paid.

This policy can be converted into an Endowment Plan after a selected period. Till the conversion, this is treated as a Term Assurance.  
Convertible whole life policy is a modified form of the above with the option of conversion to endowment after 5 years of commencement. The policy participates in profit only after conversion.

The Premiums will be refunded if the Life Assured Survives the period.

There are objections from the public that a return under Insurance Investment is not good when compared to other investments except the fact that the risk is covered. Since the value of Rupee is falling due to inflation, this fact applies to all types of savings.

This is a very attractive scheme, providing for lump sum benefits at periodical intervals, in addition to the normal benefits payable on death or survival. In case of death, any time during the term of the policy, full sum assumed and bonuses will be payable.

Combination  Plans

There are policies in which different types of benefits are combined to satisfy the policy holders. The Endowment policies and whole life policies are the basic plans. But more risk is covered by granting Jeevan Mitra, Triple Cover Jeevan Mitra policies where the death cover is 2 and 3 times, the basic sum assured respectively, besides double accident cover.

Joint Life Policies
          

Under this plan, two or more lives can be covered under a single policy, e.g. husband and wife, partners in business.  The sum assured is payable on death of one of the insured persons to the surviving partner or on maturity.

Health-related insurance
           

Insurance against sickness and medical treatment is part of a General Insurance business in India.  In many countries it is part of life insurance business.

Four major ailments are covered under this plan, viz. (1) Cancer      (2) Paralytic stroke (3) Renal failure of both kidneys (4) Coronary artery disease where bypass surgery has been done.

In case, the life assured is not afflicted by any of these diseases, the policy will have the usual benefits of an ordinary endowment assurance policy.

Unit-Linked Policies
           

Life Insurance is a long-term contract and a common objection is that the money value will come down over a period of time and there is no hedge again inflation.  The sum assured received after 20-25 years will have a much lower value in terms of purchasing power.  To meet this objection LIC has introduced Bima Plus which offers a choice of three funds, secured, balanced and risk.  The policyholder has his choice of the fund depending upon the market fluctuations.  A part of the premium is utilized to provide a term assurance cover during the period so that in the event of death, the assured amount is payable.

Riders

Additional benefits are given to the basic policy in the form of riders.  The life assured has the option to choose the required rider according to his choice.  Some of the riders offered by Insurance Companies in India are given below:-

Annuities

An Annuity is a contract providing for regular periodic payments during a specified period.

If the period is fixed irrespective of the duration of life, it is called Annuity certain. If it is related to life, it is called Life Annuity. Annuity may be immediate life annuity or certain for a period and thereafter for life or it may be deferred.

This annuity is purchased by a single premium called “the purchase price”.

The purchase price is payable in a lump sum and the annuity installments are payable for a definite term, irrespective of whether the purchase is alive or dead.

Guaranteed Life Annuity

Here the installments are guaranteed for a fixed term and will be continued till the death of the annuitant.

Deferred Annuity

In this type, the annuity installments are deferred for a definite period. The purchase price can be paid in installments during the deferment period or in a lump sum.

CHILDRENS PLANS

Insurance can be taken on the lives of children, who are minors. The proposal will have to be made by a parent or a guardian. 

In these plans, risk on the life of the insured child will begin only when the child attains a specified age. Practices vary widely. The time gap between the date of commencement of the policy and the commencement of risk is called the ‘Deferment Period’. If the child is 6 years old when the policy is taken and insurance cover is to begin when the child is 15 years old, the deferment period is 9 years. The date on which the risk will commence, at the end of the deferment period, is called the ‘Deferred Date’. The deferred date will be a policy anniversary. Ages are reckoned as next birthday, nearest birthday or last birthday, as per the practice of the insurer.

There is no insurance cover during the deferment period. If the child dies during the deferment period, the premiums will be returned. Risk will commence automatically on the deferred date, without any medical examination. The main advantage of these plans is that the premium would be relatively low (age of the child at commencement) and cover will be obtained irrespective of the state of health of the child.

These policies have conditions whereby the title will automatically pass on to the insured child, on his attaining the age of majority. This process is called vesting. The policy anniversary after attaining the age of majority, that is 18, or any later date as may be chosen, will be the ‘Vesting date’. After vesting, the policy becomes a contract between the insurer and the insured person.

The vesting age cannot be earlier than 18. This is because there cannot be a valid contract with a minor. The deferred date however, can be fixed without any such limitation. The deferred date and the vesting date need not be the same.