insurance

1. Life Insurance
CHAPTER 1. INSURANCE
1.1 Introduction
Definition:
“Insurance is a contract between two parties whereby one party agrees to
undertake the risk of another in exchange for consideration known as premium and
promises to pay a fixed sum of money to the other party on happening of an uncertain
event (death) or after the expiry of a certain period.”
“A promise of compensation for specific potential future losses in exchange
for a periodic payment. Insurance is designed to protect the financial well-being of an
individual, company or other entity in the case of unexpected loss. Some forms of
insurance are required by law, while others are optional. Agreeing to the terms of an
insurance policy creates a contract between the insured and the insurer. In exchange for
payments from the insured (called premiums), the insurer agrees to pay the policy holder
a sum of money upon the occurrence of a specific event. In most cases, the policy holder
pays part of the loss (called the deductible), and the insurer pays the rest.”
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2. Life Insurance
Meaning of Insurance:
 Insurance provides financial protection against a loss arising out of happening of an
uncertain event. A person can avail this protection by paying premium to an
insurance company.
 A pool is created through contributions made by persons seeking to protect
themselves from common risk. Premium is collected by insurance companies which
also act as trustee to the pool. Any loss to the insured in case of happening of an
uncertain event is paid out of this pool.
 Insurance works on the basic principle of risk-sharing. A great advantage of
insurance is that it spreads the risk of a few people over a large group of people
exposed to risk of similar type.
Concept of Insurance / How Insurance Works:
The concept behind insurance is that a group of people exposed
to similar risk come together and make contributions towards formation of a pool of
funds. In case a person actually suffers a loss on account of such risk, he is
compensated out of the same pool of funds. Contribution to the pool is made by a
group of people sharing common risks and collected by the insurance companies in
the form of premium.
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3. Life Insurance
Let’s take examples to understand how insurance actually works:
Example 1 Example 2
SUPPOSE SUPPOSE
• Houses in a village = 1000 • Number of Persons = 5000
• Value of 1 House = Rs. 40,000/- • Age and Physical condition = 50
years & Healthy
• Houses burning in a yr = 5
• Number of persons dying in a year
• Total annual loss due to fire = Rs.
= 50
2,00,000/-
• Economic value of loss suffered by
• Contribution of each house owner
family of each dying person = Rs.
= Rs. 300/- 1,00,000/-
• Total annual loss due to deaths =
Rs. 50,00,000/-
• Contribution per person = Rs.
1,200/-
UNDERLYING ASSUMPTION UNDERLYING ASSUMPTION
All 1000 house owners are exposed to a All 5000 persons are exposed to common
common risk, i.e. fire risk, i.e. death
PROCEDURE PROCEDURE
All owners contribute Rs. 300/- each as Everybody contributes Rs. 1200/- each as
premium to the pool of funds premium to the pool of funds
Total value of the fund = Rs. 3,00,000 (i.e. Total value of the fund = Rs. 60,00,000
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4. Life Insurance
1000 houses * Rs. 300) (i.e. 5000 persons * Rs. 1,200)
5 houses get burnt during the year 50 persons die in a year on an average
Insurance company pays Rs. 40,000/- out Insurance company pays Rs. 1,00,000/-
of the pool to all 5 house owners whose out of the pool to the family members of
house got burnt all 50 persons dying in a year
EFFECT OF INSURANCE EFFECT OF INSURANCE
Risk of 5 house owners is spread over Risk of 50 persons is spread over 5000
1000 house owners in the village, thus people, thus reducing the burden on any
reducing the burden on any one of the one person.
owners.
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5. Life Insurance
1.2 BRIEF HISTORY OF INSURANCE
The business of insurance started with marine business. Traders, who
used to gather in the Lloyd’s coffee house in London, agreed to share the losses to
their goods while being carried by ships. The losses used to occur because of pirates
who robbed on the high seas or because of bad weather spoiling the goods or sinking
the ship. The first insurance policy was issued in 1583 in England. In India, insurance
began in 1870 with life insurance being transacted by an English company, the
European and the Albert.
1.3 EVOLUTION OF INSURANCE IN INDIA
Evolution of Insurance before Nationalization:
Life insurance in the modern form was first set up in India through a
British company called the Oriental Life Insurance Company in 1818 followed by the
Bombay Assurance Company in 1823 and the Madras Equitable Life Insurance Society
in 1829. All of these companies operated in India but did not insure the lives of Indians.
They were insuring the lives of Europeans living in India
Some of the companies that started later did provide insurance for
Indians. But, they were treated as “substandard”. Substandard in insurance parlance
refers to lives with physical disability. Therefore, Indian lives had to pay heavy and extra
premium of 20% or more. This was a common practice of the European companies at
the time whether they were operating in Asia or Latin America. The first company to sell
policies to Indians with “fair value” was the Bombay Mutual Life Assurance Society
starting in 1871.
The first general insurance company, Triton Insurance Company Ltd.,
was established in 1850. It was owned and operated by the British. The first indigenous
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6. Life Insurance
general insurance company was the Indian Mercantile Insurance Company Limited set
up in Bombay in 1907.
Insurance business was conducted in India without any specific
regulation for the insurance business. They were subject to Indian Companies Act
(1866). After the start of the “Be Indian Buy Indian Movement” (called Swadeshi
Movement) in 1905, indigenous enterprises sprang up in many industries. Not
surprisingly, the Movement also touched the insurance industry leading to the formation
of dozens of life insurance companies along with provident fund companies (provident
fund companies are pension funds). In 1912, two sets of legislation were passed: the
Indian Life Assurance Companies Act and the Provident Insurance Societies Act. There
are several striking features of these legislations.
• They were the first legislations in India that particularly targeted the insurance
sector.
• They left general insurance business out of it. The government did not feel the
necessity to regulate general insurance.
• They restricted activities of the Indian insurers but not the foreign insurers even
though the model used was the British Act of 1909.
The Birth of the Insurance Act, 1938:
In 1937, the Government of India set up a consultative committee. Mr.
Sushil C. Sen, a well known solicitor of Calcutta, was appointed the chair of the
committee. He consulted a wide range of interested parties including the industry. It was
debated in the Legislative Assembly. Finally, in 1938, the Insurance Act was passed.
This piece of legislation was the first comprehensive one in India. It covered both life
and general insurance companies. It clearly defined what would come under the life
insurance business, the fire insurance business and so on. This piece of legislation lost
significance after nationalization. Life insurance was nationalized in 1956 and general
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7. Life Insurance
insurance in 1972 respectively. With the privatization in the late Twentieth Century, it
has returned as the backbone of the current legislation of insurance companies.
Milestones of Insurance Regulations in the 20thCentury
Year Significant Regulatory Event
1912 The Indian Life Insurance Company Act.
1928 Indian Insurance Companies Act.
1938 The Insurance Act: Comprehensive Act to regulate
insurance business in India.
1956 Nationalization of life insurance business in India with a
monopoly awarded to the Life Insurance Corporation of India.
1972 Nationalization of general insurance business in India with
the formation of a holding company General Insurance
Corporation.
1993 Setting up of Malhotra Committee.
1994 Recommendations of Malhotra Committee published.
1995 Setting up of Mukherjee Committee.
1996 Setting up of (interim) Insurance Regulatory Authority (IRA)
Recommendations of the IRA.
1997 Mukherjee Committee Report submitted but not made public.
1997 The Government gives greater autonomy to Life Insurance
Corporation, General Insurance Corporation and its
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8. Life Insurance
subsidiaries with regard to the restructuring ofboards and
flexibility in investment norms aimed at channeling funds to
the infrastructure sector.
1998 The cabinet decides to allow 40% foreign equity in private
insurance companies-26% to foreign companies and 14% to
Non-resident Indians and Foreign Institutional Investors.
1999 The Standing Committee headed by Murali Deora decides
that foreign equity in private insurance should be limited to
26%. The IRA bill is renamed the IRDA Bill.
1999 Cabinet clears IRDA Bill 2000 President gives Assent to the
IRDA Bill.
To implement the 1938 Act, an insurance department (that became
known as the insurance wing) was first set up in the Ministry of Commerce by the
Government of India. Later, it was transferred to the Ministry of Finance.
By 1956, there were 154 Indian life insurance companies. There were 16
non-Indian insurance companies and 75 provident societies were issuing life insurance
policies. Most of these policies were centered in the cities (especially around big cities
like Bombay, Calcutta, Delhi and Madras).
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9. Life Insurance
Evolution of Insurance during Nationalized Era: 1956-2000
Rationale for Nationalization:
After India became independent in 1947, National Planning modeled
after the Soviet Union was implemented. Nowhere it was more evident in the Second
Five Year Plan implemented by the Prime Minister Jawaharlal Nehru. His vision was to
have key industries under direct government control to facilitate the implementation of
National Planning.
Insurance business (or for that matter, any financial service) was not
seen to be of strategic importance. Therefore, there are two questions it has to address.
First, why did the Government of India nationalize life insurance in 1956? Second, why
did it not nationalize general insurance at the same time?
The nationalization was justified based on three distinct arguments.
First, the government wanted to use the resources for its own purpose because
government was not willing to pay market rate of return for the assets (it may raised the
capital whether insurance companies were private or public). Second, it sought to
increase market penetration by nationalization. How could nationalization possibly
deepen the market that private insurance companies cannot? There are two
possibilities. (1) Nationalization would create a monopoly. If there are economies of
scale in the market, it would thus become possible for government to cut the cost of
operation per policy sold below what private companies could. (2) Through
nationalization government could take life insurance in rural areas where it was not
profitable for private businesses to sell insurance. Third, the government found the
number of failures of insurance companies to be unacceptable. The government
claimed that the failures were the result of mismanagement.
The second question why general insurance was not being
nationalized in 1956.They did not deem general insurance to be “vitally needed for
economic development.” The only way this view could be justified is if they view
insurance as a vehicle for long terms investment and if they ignore the elimination of
uncertainty through insurance as a relatively minor benefit.
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10. Life Insurance
CHAPTER 2 PRINCIPLES OF INSURANCE
2.1 PRINCIPLES OF INSURANCE
1. Utmost Good Faith
2. Insurable Interest
3. Principle of Indemnity
4. Principle of Contribution
5. Principle of Subrogation
6. Principle of Mitigation Loss
7. Principle of “Cause Proxima”
 Utmost Good Faith:
One of the basic and primary principles of insurance is Utmost Good
Faith. It states that insurance contract must be made in absolute good faith on the part
of both the parties. The insured must give to the insurer complete, true and correct
information about the subject matter of the insurance. Material fact should not be hidden
on any ground. Some of these facts are very important to the insurer. Non-disclosure of
some facts leads to the insurer taking on a higher risk at a low premium. This means
that one person out of the group gets more benefits than the others. This is not fair. It is
only when the insurer knows the whole truth that he is in a position to judge.
a) Whether he should accept the risk and
b) What premium he should charge. This principle is applicable to all types of insurance
contracts.
 Insurable Interest:
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This principle suggests that the insured must have insurable
interest in the object of insurance. In other words, the insured must suffer some kind of
financial loss by damage to the subject matter of insurance. Ownership is the most
important test of Insurable Interest. Every individual had insurable interest in his own
life. Insurance contracts without insurable interest are void. Insurable Interest is not a
sentimental concept but a pecuniary interest. Insurance contract without Insurable
Interest is nothing but a wagering contract.
For example: - An exporter has Insurable Interest in the goods, which he is exporting,
the owner of a shop or a building has Insurable Interest in his shop or building.
In the case of non life insurance the existence of insurance interest is an
under:
o Ownership of a property or assets like a car, flat, etc. clearly establishes insurance
interest in the property.
o An employer has an insurable interest in the employees working with him in good
health.
o A bank has an insurable interest in the loyalty and integrity of its cashiers and
managers.
o A business has an insurable interest in the stock of goods, vehicles, furniture and
machinery.
 Principle of Indemnity:
This principle suggests that insurance contract is a contract for
affording protection and not for profit making. Indemnity means security against loss.
The object of insurance is to restore the financial position of the insured. The principal
makes sure that the insured neither makes profit from any insurance contract. The
measurement of loss or damage to the property is generally based the intrinsic market
value of the property or the asset on the date of the occurrence of loss or damage.
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The compensation will be paid in proportion to the loss actually
occurred. The amount of compensation in the insurance contract is limited to the
amount assured or the actual loss whichever is less. The compensation will not be more
or less than the actual loss. This principle is applicable to fire and marine and accident
contracts.
For Example: Mr. A has insured his office against fire for Rs. 50,000, whereas the cost
of office is Rs. 1,00,000. Further suppose, unfortunately the office catches fire and loss
stained is Rs.40,000. Mr. A will be compensated only Rs.4,00,000 which is actual loss
sustained.
 Principle of Contribution:
The principle of contribution applies when the insured has
taken more than one insurance policy for the same risk from more than one insurance
company. In case of loss or damage is incurred and if the insured gets benefits from all
the insurance companies, the insured will gets more profit than his actual loss. The
principle of indemnity will not be followed in such case and it will be against the law of
insurance.
For example: Mr. X has taken three policies for Rs. 50,000, Rs. 10,00,000 and Rs.
1,50,000 each respectively for his property companies will pay the compensation in the
ratio of 1/6, 1/3 and 1/2 respectively. Whenever, the principle of contribution applies, the
insurers make the insured responsible to file the claims in the correct proportion with the
insurers.
 Principle of Subrogation:
This principle is an extension and a corollary of the principle of
Indemnity. It states that when the compensation is paid for the total loss, all the rights of
the insured in respect of the subject matter of insurance are transferred to the insurer.
The assured will not be able to keep the damaged property because in that case he will
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realize more than the actual loss suffered. This principle prevents the insured from
making profit out of loss. This principle is applicable to fire, marine and all other accident
policies.
For Example: “A” has insured his car for Rs. 2,50,000. He met into an accident and car
was damaged and it was not in a condition to repair. The insurance company paid full
value of car to “A”. Then the insurance company has full rights to take away the
damaged car. It cannot be given, or left to the insured person.
 Principle of Mitigation Loss:
According to this principle every insured should take all the
necessary steps to minimize the loss. When the mishap takes place, it is the duty of the
insured to take all necessary steps which will help to minimize the loss. This must be
exercised as a owner of the property. He should not become careless and inactive
simply because he is insured and going to be compensated.
For Example: If a trader takes out a marine policy for the goods being shipped from
Goa to Mumbai and if the storm takes place due to which there might be risk of ship
sinking. According to this principle, the ship can be saved by throwing away some of the
goods in order to reduce the weight of the ship.
 Principle of “Cause Proxima”:
The efficient or the effective cause that causes loss is
“Proximate Cause”. It is the real and actual cause of loss. If the cause of loss is insured,
the insurer will pay. In “Life Insurance” the doctrine of “Cause Proxima” is not applied
because the insurer is bound to pay the amount of insurance whatever may be the
reason of death. It may be natural or unnatural. Hence, this principle is not much
practical importance with Life Insurance.
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14. Life Insurance
CHAPTER 3 LIFE INSURANCE CORPORATION
3.1 HISTORY OF LIFE INSURANCE SECTOR
The business of life insurance in India in its existing form started in India in the
year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta.
Some of the important milestones in the life insurance business in
India are:
1912: The Indian Life Assurance Companies Act enacted as the
first statute to regulate the life insurance business.
1928: The Indian Insurance Companies Act enacted to enable the
government to collect statistical information about both life
and non-life insurance businesses.
1938: Earlier legislation consolidated and amended to by the
Insurance Act with the objective of protecting the interests
of the insuring public.
1956: 245 Indian and foreign insurers and provident societies taken
over by the central government and nationalized. LIC formed
by an Act of Parliament, viz. LIC Act, 1956, with a capital
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15. Life Insurance
contribution of Rs. 5 crore from the Government of India.
Life Insurance Corporation of India commenced its tryst with trust on
September 1, 1956 with formidable challenges of restoring the confidence of the people
and proper canalization of savings for the economic upliftment of the nation. LIC set out
with clear objectives. It steadily grew to become gigantic and spread its influence to the
farthest corners of the nation. Its logo and emblem became well-known. It is said, “In the
humblest of homes, our flame burns bright and hands that protect, hands that serve are
no idle boasts.” It extended cover to all section of the society. Its rural spread was
significant and even spectacular. It has immensely contributed to the growth and
development of the country in all spheres of activity. Its group schemes and social
security schemes afforded cover to the weakest and the poorer sections, the toiling
masses and the illiterate or semi-illiterate families. It was able to break resistance and
create belief in insurance.
IRDA announced applications for license to be received from August16,
2000. The first announcement of grant of licenses, IRDA said, would be on Diwali day
and indeed it kept its word. On the historic day, HDFC Standard Life Insurance,
Reliance General Insurance and Royal Sundaram Alliance were granted licenses to
commence operations. Three others- ICICI Prudential, Iffco Tokyo Marine Insurance,
and Max New York Life were granted in-principal approvals. Then followed Tata AIG,
Birla Sunlife, Bajaj Allianz, Om Kotak, SBI Life, Aviva, ING Vysya, MetLife, AMP
Sanmar, Sahara India Life and Shriram Group. Today, 14 companies in life insurance
are battling in the market.
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POPULAR LIFE INSURANCE BRANDS
COMPANY AWARENESS LEVEL (IN %)
LIC 100
ICICI PRUDENTIAL 70
HDFC STANDARD 52
SBI LIFE 25
BIRLA SUNLIFE 23
KOTAK MAHINDRA 20
TATA AIG 17
BAJAJ ALLIANZ 12
MAX NEW YORK LIFE 6
ING VYSYA LIFE 4
METLIFE 3.5
AVIVA 3
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17. Life Insurance
3.2 ADVANTAGES OF LIFE INSURANCE
Life insurance has no competition from any other business. It is also a type
of savings. But in comparison with other forms of savings Life Insurance has following
advantages which are as follows:
1. In the event of death, the settlement is easy. The heirs con collect the money quicker,
because of the facility of nomination and assignment. The facility of nomination is now
available with some bank accounts.
2. There is a certain amount of compulsion to go through the plan of savings. In other
forms, if one changes the original plan of saving, there is no loss. In insurance, there
is a loss.
3. Creditors cannot claim the life insurance money. They can be protected against
attachments in court.
4. There are tax benefits, both in income tax and in capital gains. Marketability and
liquidity are better. A life insurance policy is property and can be transferred or
mortgaged. Loans can be raised against policy.
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18. Life Insurance
CHAPTER 4 LIFE INSURANCE PRODUCTS
Life insurance products are usually referred to as ‘PLANS’ of
insurance. If we see in the market there are 100s of products, different products with
different companies.
By seeing all these products individuals always ask about why all these
many products are required. The answer is that the insurance companies operate in the
world of demand driven market where it is very necessary to introduce the products as
per the need of the customer. So a company should always be innovative in its
insurance product and customer tailored. It is not very easy to come out with these
innovative products as there are many technical issues involved in it. For that there is
one model known as KANO MODEL the details of which is as under.
4.1 KANO MODEL FOR A CUSTOMER DRIVEN INNOVATION
The Kano Model helps to identify and prioritize certain product requirements
which are important from the customer’s point of view. This knowledge about the
customer’s needs helps the insurance product developers to specify the different
attributes of the potential insurance product. The attributes are classified as must-be
requirements, one-dimensional requirements, and attractive requirements.
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Kano Model for Insurance Product
Research reports
Research reports
about insured’s
about insured’s
satisfaction level and
satisfaction level and
business
business
performance
performance
Plotting user preferences Analysis and
Analysis and
Plotting user preferences
for various insurance
for various insurance brainstorming of
brainstorming of
product features. Evalua
product features. Evalua research report
research report
-ting for satisfaction or
-ting for satisfaction or
dissatisfaction
dissatisfaction
Strategize with the
Strategize with the
client, by agreeing on
client, by agreeing on
features to be included
features to be included
in the products
in the products
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20. Life Insurance
The figure above shows the importance of different product
requirements with respect to customer satisfaction.
The insured’s needs are identified by analyzing user research reports. As
the product design meets the needs of the customer fully, it’s not only market-ready but
also “customer-driven”.
Prioritizing customer needs also reduces the time to market duration,
an important constraint, which if left unnoticed will render the product obsolete before it
reaches the market. These innovative efforts also exerts greater pressure upon the
product developers to make sure that the new insurance product does not disharmonize
the existing insurance operations.
4.2 Every plan has its own feature and benefits which are as follows:
1) Term Assurance plans:
Plans of insurance which provides only death cover are
called Term Assurance plans. If the insured does not die within the stipulated time, no
payment is made under this plan.
ONLY DEATH ON DEALTH,
BENEFIT BENEFIT PAID
0 20
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21. Life Insurance
2) Endowment Assurance Plans:
A Term Assurance plan along with a Pure Endowment
plan when offered as a single product is called an Endowment Assurance plans. In
this plan the insured will get the sum assured plus bonus either on survival till the
date of maturity or only sum assured on the early death.
IF DIED,
DEATH AND SURVIVAL ONLY S.A.
BENEFITS
ON
MATURITY,
Y S.A +
BONUSES
0 20 IF ANY
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22. Life Insurance
3) Double Endowment Assurance plans:
A Term Assurance plan with a Pure Endowment plan of
double the value is called a Double Endowment Assurance plan under which the
amount payable on survival is double the amount payable on death.
DEATH AND SURVIVAL ON DIED,
BENEFITS ONLY S.A.
ON
MATURITY,
DOUBLE
S.A.
0 20
4) With or Without Profit Policy:
In case of “With profit policy” the policyholder is paid
sum assured plus the share in the profit of the corporation. This share of profit is
called “Bonus”. The rate of premium in this policy therefore is higher. This policy is
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good for securing more financial benefits. As against the above policy “Without
profit policy”, the share in the profit is not given. Therefore the premium rates of the
policy are lower. Thus it is less burdensome for the payment of premium.
5) Joint life policy:
This policy is introduced to taken the policy on the life of two or
more person. Married couples, parents of the partnership firm etc. can go for this
policy. This policy is popular among the middle class families. Thus, this policy can
be taken for any amount. It given protection and safety to the person whose lives
have been insured jointly.
6) Annuity:
Annuities are practically the same as pensions. They provide regular
periodical payments (depending upon the mode) to employees, who have retired. They
are paid as long as the recipient is alive. Sometimes the pension is also paid to the
dependents after the pensioner’s death.
Annuities are called the reverse of life insurance. In annuity contract, a
person agrees to pay to the insurer a specified capital sum in returns for a promise from
the insurer to make a series of payments to him so long as they lives, while in
insurance, the insured pays a series of payments in return for a promise to pay a lump
sum on his death. Theoretically, under a life insurance contract, the insurer starts
paying upon the death of the insured but under an annuity contract, the insurer stops
paying upon the death of the annuitant.
There are two types of annuity policies:
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(a) Immediate Annuity:
The annuity which commence immediately after the contract is
concluded. Such an annuity is called an Immediate Annuity. The purchaser of an
immediate annuity pays the purchase price in lump sum. The first installment will start at
the end of the month, quarter, half yearly or on the yearly basis, as the case may be.
PURCHASE PRICE PAID IN
LUMP SUM BY THE INSURED
AFTER PAYMENT, PENSION IS PAID BY THE INSURER
DEPENDING UPON THE MODE TILL THE INSURED IS
ALIVE
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25. Life Insurance
(b) Deferred Annuity:
The alternative to the Immediate Annuity is a Deferred Annuity. In this
case, the annuity payment will start after the lapse of a specified period, called the
Deferment period. The purchase price can be paid as a single premium at the
commencement or may be paid in installments during the deferment period. If the
annuitant dies during the deferment period, the premiums paid are returned to the
nominee or heirs.
PAYMENT OF PAYMENT OF ANNUITY
PREMIUM BY STARTS FROM HERE
INSURED FOR SAME TILL THE INSURED IS
SPECIFIED PERIOD. ALIVE.
0 15 UNSPECIFIED
PERIOD
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7) GROUP INSURANCE POLICY:
Group insurance is a plan of insurance, which provides cover to a large
number of individuals under a single policy called “master policy”. The individuals
covered under the master policy are not parties to the contract. The contract will be
between the insurer and a body that represents the group of individual covered. This
body may be the employer, an association of individuals, a bank or a financier.
INSURANCE AS UMBRELLA
MASTER POLICY
BENEFIC-
IARIES
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8) Whole Life Policy:
Under this plan the premium paying term is 35 years or till age of 80 year
whichever is more. The sum assured becomes payable only the death of the insured
(policy holder). Thus is not benefit to the insured but to the family member only.
ANY TIME ON
DEATH, ONLY S.A. IS
PAID
0 UNSPECIFIED
AGE
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9) Whole Life policy with Limited payment:
It is also the whole life plan but the insured does not have to pay the
premium for the life time. Here, there is some specified period till which the premium
should be paid. After which insured does not have to pay the premium any more. On the
death of the insured the insurer has to pay the sum assured and the bonuses if any.
PAYMENT FOR ON DEATH, S.A. +
LINITED BONUSES IF ANY
UNSPECIFIED
0 12 AGE
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10) Money back plan:
It is also known as Anticipated Endowment plan. Here the insurer has
to pay the premium till the end of the policy. But he doesn’t get the entire sum assured
at a single time. Within the specified time the insurer gives some percentage of the
amount of the sum assured and the rest of the amount is given on maturity. But on the
death of the insured before maturity, then the entire sum assured is paid despite the
payments made before.
20% 20% 20% 40% +
BACK BACK BACK BONUSES
0 5 10 15 20
IF DEATH OCCURS ANY TIME THEN 100% OF THE S.A.
IS PAID BY THE INSURER EITHER TO THE NOMINEE OR
THE LEGAL HEIRS OF THE INSURED.
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30. Life Insurance
11) Industrial Assurance plans:
Industrial assurance plans are designed for workers with low
income. The policies are issued for smaller sum assured, with weekly premiums. The
arrangement is that the agents will visit the house or work place of the insured to collect
the premium and the agents were remunerated differently for this work.
12) Marriage endowment plans:
A Marriage Endowment plans has nothing to do with the contingencies of
the marriage. It only stipulates the date on which the sum assured will be paid, even if
the life assured dies early. That date can be chosen to coincide with the age of a son or
daughter, for whose marriage the sum assured will come in handy.
The same policy can be taken to meet any other liability expected to arise on a future
date.
13) Children’s plans:
Insurance can be taken on the lives of the children, who are not majors.
The proposal will have to be made by a parent or a guardian. In these plans, the risk on
the life of the insured child will begin only when the child attains a specified age.
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Practices vary widely. The time gap between the date of commencement of the policy
and the commencement of risk is called the “Deferment Period”. The date on which the
risk will commence, at the end of the deferment period, is called the “Deferred Date”.
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
advantages of these plans is that the premiums 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 attaining the age of maturity. This process is called vesting. The
vesting age cannot be earlier than 18. After vesting, the policy becomes a contract
between the insurer and the insured person.
14) Plans covering handicapped:
Physically handicapped persons are insured. Extras are charged in
some cases like, loss of both arms, deaf in both ears, blind in both eyes, etc. Partially
handicapped persons are mostly accepted without extra premium, except in certain
plans. These details will be gathered from the company’s underwriting department.
4.2.1 RIDERS
Rider is a clause or condition that is added on to a basic policy providing an
additional benefit, at the choice of the proposer.
Some of the riders being offered by insurers in India are mentioned below:
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32. Life Insurance
 Increased death benefit, being twice or even more than survival benefit.
 Accident benefit allowing double the Sum Assured if death happens due to accident
 Permanent disability benefits, covering loss of limbs, eyesight, hearing, speech, etc.
 Premium waiver, which would be useful in the case of children’s assurances, if the
parent dies before vesting date or in the case of permanent disability and sickness.
 Dreaded diseases cover, providing additional payments (in lump or in installments),
if the life insured requires medical attention because of specified conditions like
cancer, cardiac or cardiovascular surgeries, stroke, kidney failure, major organ
transplants, major burns, total blindness caused by illnesses or accidents, etc.
 Guaranteed increases in cover at specified or annually.
 Cover to continue beyond maturity age for same Sum Assured or higher Sum
Assured
 Option to increase cover within specified limits or dates.
As per the Regulations made by the IRDA (INSURANCE REGULATORY
DEVELOPMENT AUTHORITY) in April 2002 and amended in October 2002.
 The premium on all the riders relating to health or critical illnesses shall not exceed
100% on the basic of premium of the main policy.
 And the premium on all the other riders put together should not exceed 30% of the
basic premium.
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33. Life Insurance
CHAPTER 5 INSURANCE DOCUMENTS
A life insurance policy is a contract. The stakes in the contract are
usually large and those interested in the stakes, many. There could be disputes
involving the insurer and the insured or the insurer and the beneficiaries of the policy or
between the beneficiaries. The terms and conditions of the policy will provide the
grounds to decide the issues in the dispute. These terms will be based on and will relate
to statements and actions at various times during the policy. These will have to be
proved through documents. Documentation, therefore, is important in the life insurance
business. The life insurance contract is a long-term one, lasting 30 or 40 years.
Transactions may be few and far between. If the premiums are paid without any default
and no changes are made in address, nominations, etc., the policy file may not be
opened till the claim arises. In the absence of proper documentation, it may not be
possible to know the dues and the rights or even the identities of the persons
concerned.
There are various documents which are used in insurance transactions
which are as follows:
1. PROPOSAL FORMS:
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34. Life Insurance
The first document in the insurance file is the proposal or application for
insurance. It usual to obtain the proposal in a standardized, printed form. This is to be
completed by the proposer in his handwriting and signed in the presence of a witness.
Contracts require signatures to be authenticated through witnesses.
2) PERSONAL STATEMENTS:
The personal statement is to be completed along with the proposal. This
asks for particulars about the state of health of the person proposed to be insure, his
family history, his personal habits, medical consultations and illnesses, absence from
work due to medical grounds, etc. If the proposal is to be considered as a non-medical
case, particulars will be required about the employer. If the person is a female,
additional questions will have to be answered. All there details are used for underwriting
purposes. The declaration at the end of the proposal form applies to the statements in
the personal statement as will.
3. FIRST PREMIUM RECEIPT (FPR):
The underwriter’s decision on the proposal may be to accept at OR on
modified terms. If it is accepted at OR the policy can be commenced immediately,
provided the full premium has been paid. The FPR will be issued. If the acceptance is
on modified terms, the proposer has to agree to the modified terms and pay the balance
premium if any, before the FPR can be issued. The IRDA Regulations require that the
decision of the proposer has to agree to the modified terms and pay the balance
premium if any, before the FPR can be issued. The IRDA Regulations require that the
decision of the proposal should be made by the insurer within 15 days.
The FPR is the evidence that the insurance contract has begun. The
policy document, which is the evidence of the contract, may be issued only after some
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35. Life Insurance
time, if the claim arises before the policy is issued, but after the FPR is issued, the
insurer is liable. Once the policy document is issued, the FPR becomes irrelevant.
4) RENEWAL PREMIUM RECEIPT:
When the policyholder pays the subsequent premium due under the
policy Renewal Premium Receipt (RPR) are issued. This RPR’S are important to prove
payments, has defaults can lead to termination of the contract. Disputes may arise as to
whether particular payment has been made or not. If such disputes may rise at the time
of the claim, the RPR’S will provide conclusive evidence. The adjustment of subsequent
premiums do not consist conclusive evidence. This is because insurers do adjust later
payment leaving ‘gaps’ for earlier defaults to be collected at the time of claim.
Renewal receipts are not issued in respect of policies under SSS
(SALARY SAVING SCHEME). The consolidated cheque received from the employer is
adjusted as one transaction. Individual policyholders do not get receipts. Salary slips
would show deduction in premium from salary. That should be sufficient proof of
continuance of insurance. A certificate from the employer about the deduction having
been made and sent to the insurer should also suffice.
5. THE POLICY DOCUMENT:
The policy document is the most important document. It is the evidence
of the contract. It is prepared to reflect the terms of the contract. Pre-printed policy
forms containing standard policy conditions and schedules are used. The policy
document is to be signed by the competent authority and stamped, according to the
Indian Stamp Act. New technology may enable insurers to avoid pre-printed forms and
print a policy every time, with appropriate schedules and terms.
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36. Life Insurance
6. ENDORSEMENTS FORMS:
In a pre-printed policy forms, the standard policy conditions and
privileges are printed. If any of them need modification, in keeping with the terms of
acceptance, endorsements are attached to the policy. If individual policies are printed
by computers, such endorsements may be avoided.
CHAPTER 6 POLICY CONDITIONS
The policy states the obligations and the rights of the policyholders, as
well as the terms and conditions of the policy. These could differ between insurers and
also between plans of the same insurer. There are some basic conditions which apply
to all the life insurance policies which are as follows:
1. AGE:
The policy conditions provide that, if the age of the life assured is found to be
higher than the age as stated in the proposal, apart from any other rights and remedies
available to the insurer, premium at the higher rate will have to be paid from the
commencement, with interest. This is largely redundant nowadays, as the proof of age
is made available with the proposal itself.
The following are usually accepted as proofs of age:
o Certified extracts from the municipal records.
o Certificate of baptism.
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37. Life Insurance
o Certified extracts from family bible if it contains date of birth.
o Certified extracts from school or college records.
o Certified extracts from service register of employer.
o Passport.
o Identity cards issued by Defense department in case of defense personnel.
o Marriage certificate if married.
If none of them is available then Horoscopes, Self declaration by way of
affidavit, Declaration, or Certificate by village panchayat may be accepted as proof of
age.
If the proof of age is found to be false then the insurers right’s and
remedies would be declared as void ob initio on the ground of suppression of material
facts.
2. DAYS OF GRACE:
Premiums are required to be paid on the due dates mentioned in the policy.
Insurers however allow a grace period for payment of premium. Payment within the
grace period is considered to be payment on time. The grace period would be one
month, but not less than 30 days for yearly, half-yearly or quarterly modes of premium
and 15 days for monthly modes of premium.
If the premium is not paid within the days of grace, it considers a default
and the policy is said to be lapsed. No claims arise on the policy after a lapse, and all
premiums are forfeited.
3) LAPSE AND NON-FORFEITURE:
When the premium is not paid within the days of grace, then the policy is
terminated or comes to an end. Such termination of policy is called as ‘lapse’. After the
lapse of the policy all the premiums are forfeited. But the Insurance Act does not allow
such forfeiture because of the two reasons:
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38. Life Insurance
i. Premiums in the early years of the policy being more than what is justified and
ii. The saving element in the premium.
It would not be fair to forfeit the reserves. The policy conditions provide
various safeguards to policyholders, when there is a premium default. These provisions
are called Non-forfeiture provisions. There are three Non-forfeiture options which are as
follows:
a. Paid up value
b. Keeping policy in force
c. Extended term insurance
Let’s see one by one in details:
(a) Paid up value:
Under this option, the Sum Assured is reduced to a sum which bears the
same ratio to the full sum assured as the number of premiums actually paid bears to the
total number originally stipulated in the policy.
It is calculated by the following formulae:
PAID UP VALUE = NO. OF PRIMIUMS PAID X SA
NO. OF PRIMIUMS PAYABLE
EXAMPLE:
S.A. = RS. 1, 00,000
Term of the policy is 25 years
Mode of payment is half yearly
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39. Life Insurance
25 half yearly installments paid
Then, the paid up value is
= 25 X 10,000
50
= RS. 5,000
This means that the policy is effective as before, but the S.A. is RS.5, 000 not
the original RS. 10,000.
Premiums are not paid to a policy which has become paid-up. The paid up
policy is not participate in bonus. Therefore, the policy will not have further bonuses
added to it. It will also not be entitled to any interim bonus.
b) Keeping policy in force:
The option of continuing thru policy as in full force is made possible by
notionally advancing the premium as a loan from the surrender value. This can continue
as long as the total premiums advanced, is not more than the surrender value.
(Incidentally, the surrender value will increase with every premium advanced and
treated as increase with every premium advanced and treated as paid). At the stage
when the surrender value is not sufficient to advance a full installment of premium, the
policy is finally determined and any surrender value left over is paid to the policyholder.
(c) Extended Term Insurance:
The third option is of extended term insurance cover. Under this option,
the insurer converts the policy into a single – premium term insurance for the full SA of
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40. Life Insurance
the policy for such a period as the net surrender value will purchase, at the insured’s
age at the time of lapse of the policy. This is similar to the second, except that the
premium advanced from the surrender value as not the premium due under the policy,
but the premium necessary to provide a term insurance cover, equal to the SA. It has
the same advantage of securing cover, as the second option of automatic advance of
premium. The policy may last for a longer time because the premium advanced is lower.
But the surrender value would not increase as in the second option, as the saving
element of the premium is not being advanced.
Under the extended term, the policy remains in full force for the full sum
assured for a limited period instead of a reduced paid-up amount of insurance
remaining in force for the entire policy period, in the first option. Under the last two
options, at some time, the amount payable will become zero. In the third option, even if
the extended term continues till the original date of maturity, the amount paid at maturity
will not be the SA. At such timed, there is a sense of having being “cheated”. The LIC
allows only the paid-up value option and this is printed as an item under the caption,
“Non-forfeiture regulations” on the back of the policy. The policy becomes automatically
paid-up, unless the policy-holder surrenders the policy.
4. REVIVAL:
When the policy lapses it benefit neither the insurer nor the insured. The
insured loses the insurance risk cover for the full amount. It is also a reflection on the
agent’s efforts as it (the lapse) suggests that the policyholder has not been fully
convinced about the usefulness of the insurance plan. The insurer also loses. The level
premium is based on the assumption that, barring death claims, the policies will run for
the full term. The initial expenses incurred on proposals are high and the insurer can
recover them, only if the policies remain in force.
Because lapsation affects both the parties adversely and because lapsation
is not always intended by the insured to happen as lapsation may occur due to just
neglect to pay or because of temporary financial difficulties that is the reason why
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41. Life Insurance
insurers facilitate revival of the lapsed policies. The different schemes for revival offered
by the LIC are as follows:
a. Special Revival Scheme
b. Installment Revival Scheme
c. Loan-cum-revival scheme
(a) Special Revival Scheme:
On revival under this scheme, there will be a new policy with the same plan
and term as the original policy bit with the following changes, the date of
commencement will be advanced by a period equal to the duration of the lapse, but not
more than two years. Premium will be recalculated for the age corresponding to the
date of commencement after revival.
EXAMPLE:
Suppose the original policy commenced on 1.10.2004 and has lapsed on 1.1.2006,
on revival on 1.7.2007(period of lapse being 1 year and 6 months), the new date of
commencement will be 1.4.2006, 1 year and 6 months forward. If the revival was
to be done on 1.4.2008(period of lapse is 2 year and 3 months), the new fate will
be 1.10.2007(only 2 years forward), and not 1.1.2006
The Special Revival Scheme is allowed only if:
 The policy had acquired any Surrender Value on the date of lapse
 The period expired after lapse is not less than six months and not more than 3 years
 The policy had not been revived under this scheme before.
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42. Life Insurance
(b) Installment Revival Scheme:
Under this scheme, the policyholder will not be required to pay the full
arrears but only six monthly premiums, two quarterly premiums, only half yearly or half
of the yearly premium. The balance of the arrears will be spread over the remaining due
dates in the policy year current on the date of revival, and two full policy years
thereafter. This scheme is made available if the policy cannot be revived under the
special revival scheme, where the premium is outstanding for more than one year and
no loan is outstanding.
(c) Loan-cum-revival scheme:
Another scheme offered is the Loan-cum-revival scheme, where under
the arrears required for revival are advanced out of the Surrender Value of the policy, as
a loan under the policy. The policy will be revived immediately, and the loan will have to
be repaid like any other loan under insurance policies. If the loan available under the
policy is more than the amount required for revival, the excess may be paid to the
policyholder, on request.
5) ASSIGNMENT:
Life insurance policy is a property. It represents rights. A life insurance policy
forms a part of estate of the assured and can be sold, mortgaged, charged, gifted or
bequeathed. Sections 130 and 131 of the Transfer of Property Act detail the
procedure of transfer of the interest in the policy.
The assignment transfers the rights, title interest of the assignor to the
assignee. The person making the assignment should have the right or the title to the
property in question. The assigner must be the major and competent to contract. An
assignment once made cannot be cancelled or even altered in form, by the assignor
unless the assignee reassigns the policy.
Assignments are of two kinds:
a. Absolute assignment
b. conditional assignment
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43. Life Insurance
a. Absolute assignment:
In this kind of assignment, there is no repayment of any money. The property
is transferred either by way of gift. Here there is no loan taken from the assignee by the
assignor. In this type of assignment there are least chances of reassigning the policy by
the assignee to the assignor.
b. Conditional assignment:
In this type of assignment there is a loan taken by the assignor from the
assignee and due to some financial difficulties the assignor is not able to pay the loan
on time and assigns the policy as a guarantee. The interest of the policy automatically
reverts to the assignor or the life assured on the payment of the loan or on occurrence
of some specified conditions.
6) NOMINATION:
As per the Section 39 Insurance Act, 1938 the holder of the policy on his
own life, may nominate the person or persons to whom the money secured by the policy
shall be paid in the event of his death. This can be made either on the time of its
proposal or at any time during the currency of the policy.
When the policy is assigned the existing nomination is automatically
cancelled but when the assignment is made in favor of the insurer then the nomination
is not cancelled. The assignee, not being the life assured cannot make any nomination.
When the policy is reassigned the life assured have to make a fresh nomination.
A nomination gives the nominee the right to receive the policy money in
the event of the death of the life assured. When the nominee is a minor, an appointee
should be appointed by the policy holder. The life assured has a right to revoke the
appointment of the appointee and appoint a fresh appointee. The appointee loses his
status when the nominee becomes major.
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44. Life Insurance
If the nominee dies after the death of the life assured, but before the
payment of the death claim, the policy moneys would form the part of the estate of the
life assured and would be paid to his representatives.
7. SURRENDERS AND LOANS:
Surrender is a voluntary termination of contract, by the policyholder. A
policyholder can surrender the life insurance policy at any time before it becomes a
claim. The amount payable on surrender is called the surrender value. Surrender values
are published and known to the policyholders by some insurer either as part of the
prospects or by mentions in the policy conditions. Some insurers prefer to announce a
guaranteed surrender value as required by law, which may be a given percentage of the
premiums paid. The actual surrender value will be better than the guaranteed surrender
value.
In most of the life insurance policies, insurers provide the facility of loans.
Loans are given up to 80% or 90% of the surrender value of the policy in question.
Interest is charged on loans. They may be repaid, in full or in part, during the currency
of the policy or may remain as a debt on the policy monies until the claim arises.
CALCULATION OF SURRENDER VALUE AND LOAN
The surrender value and loans are calculated by using various formulae are
which are as under:
PAID UP VALUE = NUMBER OF PREMIUMS PAID X SUM ASSURED
POLICY TERM
VESTED BONUS (VB) = BONUS (DECLARED) X SUM ASSURED
1000
TOTAL PAID UP VALUE (TPV) = PAID UP VALUE + VB
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45. Life Insurance
SURRENDER VALUE = Surrender Value Factor X TPV
100
LOAN = 90% OF SURRENDER VALUE
PROBLEM:
SUM ASSURED = Rs. 30,000
TERM = 15 YEARS
MODE = QUARTERLY
FIRST PAID PREMIUM = 18TH MARCH, 1991
DATE OF COMMENCEMENT = 18TH DECEMBER, 1985
BONUSES DECLARED = Rs. 396 PER THOUSAND SUM ASSURED
SURRENDER VALUE FACTOR IS 44.2%
CALCULATE SURRENDER VALUE AND LOAN?
LPP - 18 – 03 – 1991
(+) 03
-------------------
FPP - 18 – 06 – 1991
(-)
DOC - 18 – 12 – 1985
-------------------
06 – 05
(IT MEANS 5 YEARS AND 6 MONTHS)
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46. Life Insurance
NOW TO FINS THE INSTALLMENTS WHICH IS PAID THE PROCEDURE IS
AS FOLLOWS:
5 X 4 + 2 = 22 INSTALLMENTS.
PAID UP VALUE = 22 X RS. 30,000 = RS. 11,000
60
VESTED BONUS = BONUS DECLARED X SUM ASSURED
1000
= 396 X RS. 30,000 = RS. 11, 880
1000
TOTAL PAID UP VALUE = RS. 11, 000 + RS. 11, 880
= RS. 22, 880
SURRENDER VALUE = 44.2 X RS. 22, 880 = RS. 10, 113
100
LOAN = RS. 10, 113 X 90% OF SURRENDER VALUE
= RS. 9, 101.7
8. ALTERATIONS:
Insurers allow alterations in the policies that have been issued. Some
alterations may be very simple, like change in address, change of mode in payment of
premium, or change in nomination. Some changes may be to make a participating
policy, non-participating or vice versa or to break one policy into two or more policies of
smaller SA. The governing principle followed in these matters is that alterations in
existing policies may be allowed if the risk does not increase.
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47. Life Insurance
9. RESTRICTIONS:
While considering a proposal for insurance, the underwriter takes note
of the risks based on the health, occupation, life styles, habits, etc, of the life to be
insured. After the acceptance and the completion of the contract, there are no
restrictions on these and changes therein do not affect the insurance contract, unless
there are specific exclusion clauses. A person with the sober habits may become an
alcoholic, but as long as the policy remains in force, this is of no consequence. It may
affect the revival of the policy is allowed to lapse.
CHAPTER 7 METHOD FOR TAKING OUT LIFE INSURANCE
POLICY
As insurance policy is a contract it has to follow a particular method (steps)
which are follows:
1. SELECTION OF A COMPANY.
2. CALLING AN AGENT.
3. SUBMISSION OF PROPOSAL FORM.
4. SUBMISSION OF REQIRED DOCUMENTS.
5. MEDICAL EXAMINATION.
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48. Life Insurance
6. UNDERWRITING.
7. ACCEPTANCE OF THE PROPOSAL.
8. PAYMENT OF PRIMIUM.
9. ISSUE OF POLICY.
CHAPTER 8 CLAIMS
A claim is the demand that the insurers should redeem the promise
made in the contract. The insurer has then to perform his part of the contract. The
insurer has then to settle the claim, after satisfying him that all the conditions and
requirements for settlement of claim have been complied.
Before settlement of claim the insurer has to check:
o Whether insured event has taken place?
o What are the obligations assumed under the contract, which are required to be
performed? These may be payment of bonuses, payment of SA in installments,
waiver of future premiums, etc.
o Whether the policyholder has performed his part? The policy status with regard to
premium position, age admission, outstanding loan & interest, survival benefits, if
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49. Life Insurance
any, legal requirements such as under MWP Act, Foreign Exchange Regulations,
report of investigation, police reports, if any.
o Who are the persons entitled to demand performance? Nomination / assignment /
income tax notice / prohibitory orders / official assignee’s notice – are all relevant.
There are three types of claims which are to be settled by the insurer:
1. Maturity claims
2. Survival benefits
3. Death claims
1) Maturity claims:
The date on which the term is complete, is the date of maturity and
the settlement of SA on that date, is the maturity claim. The amount payable on maturity
is the SA, less any debts like loan and interest or outstanding premiums. To this
bonuses, if any, would be added, if it is a with - profit policy. The insurer is expected to
make payment on the maturity date. Post – dated cheque are normally sent a few days
in advance of the maturity date, provided the discharge form is received duly signed.
Sometimes the original policy is reported to be lost. Caution is to be
exercised to ensure that there is no attempt to defraud. It could have been pledge
elsewhere for a loan. But if the loss seems to be genuine, it is possible to settle the
claim on the basis of an indemnity and also an advertisement in the newspapers, as a
precaution.
2. Survival benefits:
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50. Life Insurance
A survival benefit is paid during the currency of the policy, before the date
of maturity. The procedure will be similar to payment of maturity claims. Action will be
initiated by the insurer and post dated cheque will be sent in advance.
If the policy is reported to be lost, insurers are unlikely to settle on the
basis of an indemnity, as may be done in the case of a maturity claim. The reason is
that when a maturity claim is paid, no further obligations remain under the policy. But,
the policy does not cease to exist after the survival benefits. A duplicate policy may be
asked for, on which endorsements will be made regarding the settlement of the survival
benefits.
If the life assured dies after the date when the survival benefit was due,
but before it is settled, the survival benefit will not be paid to the nominee.
3. Death Claim:
The procedures in settling a death claim is more complex than in case of
maturity claims. This is mainly because, the facts relating to death have to be studied
and the identities of the claimants have to be studied and the identities of the claimants
have to be established.
The death claim action begins with an intimation being received in the
insurer’s office. The intimation may be sent by the nominee, assignee, a relative of the
life assured, the employer, agent or development officer. This intimation may have very
little information, other than the policy number, the name of the life assured and the date
of death.
Only the name is not enough to establish identity. The following will be
necessary before a death claim is settled:
1. Policy document
2. Deeds of assignment
3. Proof of age, if age is already admitted
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51. Life Insurance
4. Certificate of death
5. Legal evidence of title, if the policy is not assigned or nominated
6. Form of discharge executed and witnessed
If the claim has occurred within 3 years from the commencement of policy,
or from a revival, following additional requirements may be called for in order to verify
the possibility of suppression of material facts at the time of proposal:
1. Statement from the last medical attendant giving details of last illness and treatment.
2. Statement from the hospital, if the deceased wad been admitted to hospital.
3. Statement from the person, who had attended last rites and had seen the dead body.
4. Statement from the employer, if the deceased was employed, showing details of
Leave.
If the life assured had an unnatural death, such as accident, suicide or
unknown causes, police inquest report, panchnama, chemical analyzer’s report, post
mortem report, coroner ‘s report, etc. would also be looked into. Depending on
preliminary data, a special enquiry may be ordered.
CALCULATION OF DEATH CLAIM:
Before the calculation of death claim there are following conditions which
has to be fulfilled which are as follows:
 Premiums are always paid in advance.
 Premiums are supposed to be paid for full policy anniversary (In which the death
has occurred irrespective of mode of payment).
 If the death occurs within 6 months from First Unpaid Premium and the premium
had been paid for at least 3 years the nominee can get the claim after deducting the
unpaid premium.
 If the death occurs within 1 year from the First Unpaid Premium and the premium
has been paid for at least 5 years the nominee can get the claim after deducting the
unpaid premium.
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52. Life Insurance
FOR EXAMPLE:
S.A. = RS. 30,000
AGE = 25 YEARS
DATE OF COMMENCEMENT (DOC) = 13 – 12 – 1990
MODE OF PAYMENT ANNUAL
FIRST UNPAID PREMIUM (FUP) = 13 – 12 – 1999
DATE OF DEATH (DOD) = 27 – 11 – 2000
TERM = 30 YEARS
PREMIUM = RS. 250
CALCULATE DEATH?
HERE, THE POLICY HOLDER HAS PAID THE PREMIUM FOR MORE THAN 5
YEARS, SO HE IS ELIGIBLE FOR THE SUM ASSURED.
NOW,
DEATH CLAIM = SUM ASSURED – 1 UNPAID PREMIUM
= RS. 30, 000 – RS. 250
= RS. 29, 750
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53. Life Insurance
CHAPTER 9 INSURANCE AGENCY
9.1 INTRODUCTION
Definition of an Agent:
An agent is one who acts on behalf of another. The ‘another’ on
whose behalf the agent acts, is called the principal. This is a simple definition.
As per the Insurance Act, “an insurance agent is one who is licensed
under Section 42 of that act and is paid by way of commission or otherwise, in
consideration of his soliciting or procuring insurance business, including business
relating to the continuance, renewal or revival of policies of insurance.”
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54. Life Insurance
Procedure for Becoming an Agent :
The Insurance act, 1938 lays down that an insurance agent must
possess a license under Section 42 of that act. The license is to be issued by IRDA.
The IRDA has authorized designated persons, in each insurance company, to issue the
license on behalf of IRDA.
A license issued by the IRDA is valid for three years. The license may
be to act as an agent for a life insurer, for a general insurer or as a composite insurance
agent working for a life insurer as well as general insurer. No agent is allowed to work
for more than one life insurer or more than one general insurer.
The qualifications necessary before a license can be given are
that the person must:
I. Be at least 18 years old.
II. Have passed at least the 12th standard or equivalent examination, if he is to be
appointed in a place with a population of 5000 or more or 10th standard otherwise
III. Have undergone practical training at least 100 hours in life or general insurance
business, as the case may be, from an institution, approved and notified by the IRDA.
In the case of a person waiting to become a composite insurance agent, the applicant
should have completed at least 150 hours practical training in life and general
insurance business, which may be spread to over 8 to 10 weeks.
IV. Have passed the pre-recruitment examination conducted by the Insurance Institute
of India or any other examination body recognized by the IRDA.
A person with the following disqualification is debarred from holding a
license:
i. He has been found to be of unsound mind by a court of competent jurisdiction
ii. He has been found guilty of criminal breach of trust, misappropriation, cheating, forgery
or abetment or attempt to commit any such offence.
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55. Life Insurance
iii. The license once issued can be cancelled whenever the person acquires a
disqualification.
iv. A license issued is expires in 3 years. Applications for renewal have to be made at least
thirty days before the expiry of the license, along with the renewal fees of Rs. 250. if the
application is not made at least 30 days before the expiry, but is made before the date
of expiry of license, an additional fee of Rs. 100 is payable. If the application is made
after the term of expiry then, it would normally be refused.
Prior to the renewal of the license, the agent should have completed at
least 25 hours of practical training in life or general insurance business are at least 50
hours of practical training in life and general insurance business in case of composite
agents.
9.2 Methods for Remunerating Agents:
A life insurance agent works on commission basis. He is paid a stated
percentage of the premium collected through his agency. Section 40 A (1) of the
Insurance Act stipulates that the maximum amount which can be paid to a life insurance
agent, by way of commission or remuneration in any form, shall be 35% of the first
year’s premium, 7.5% of the second and third year’s renewal premium and 5% of the
subsequent renewal premium.
9.3 Functions of an Agent:
The agent’s main function is to solicit and procure life insurance
business for the insurer, which has appointed him for that purpose. At the same time, he
is trusted by the prospect to advise him suitably keeping his circumstances and needs
in mind. He is thus in the unique role of a person trusted by both parties to the
transaction. His function would include:
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a. Understand the prospect’s needs and persuade him to buy a plan of life insurance that
suits his interests best
b. Complete the formalities (paper work, medical examination) necessary to get the policy
expeditiously.
c. Keep in touch to ensure that changing circumstances are reflected in the arrangements
relating to premium payments, nomination and other necessary alterations.
d. Facilitate quick settlement of claims
e. Be totally honest with both the prospect and the insurer.
CHAPTER 9 FUTURE OF LIFE INSURANCE IN INDIA
 LIC planned to enter into more alliances with banks and with leading educational
institutes for training. It would also increase offshore activities and set up an exclusive
technology company for sourcing software.
 Other priorities were the setting up of special cells and single-window facilitation
centers for high-end customers, rapid introduction of innovative policies, and a
renewed thrust on mass and group business.
 The corporation also decided to offer value-added services to high-end customers,
besides special services. At a later stage, it planned to have separate dedicated
branches for high-end policyholders.
 The decision to have its own separate IT set-up was driven by the requirement of
software for the sprawling network of LIC's branches and other offices.
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57. Life Insurance
 Life Insurance market a big boost to growth and expand in future the reason behind
foreign companies making a beeline to enter the insurance business in the country
because of Life insurance policy demand is increase among people due awareness of
policy benefit.
CHAPTER 9 SUMMARY OF FINDING
Company was facing constantly challenges in customization like ‘Excess,
Awareness and Affordability’.
o Excess it needs to have excellent distribution network, vibrant broking systems, and
agents being in touch with the customer, which is quite critical.
o Awareness is about knowing better, and differentiating the product. A broking company
can provide customers a comparative analysis of the various products available to him
from various producers. Awareness, in general, means knowing about the company, its
various policies and the importance of insurance.
o Affordability is about pricing. Pricing depends on the perception of companies
undertaking the risk and so on.
One good thing which happened after privatization is that companies are
now coming up with introducing new developments like giving advertisements on
Radio, Televisions, etc. So new intermediaries like broking companies and corporate
agents have made the market quite dynamic. So, in these five years, new players have
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58. Life Insurance
come up, new products has introduced raised the level in the life insurance market,
and most of the private players have done huge business. So today, we had agents,
but now we have corporate agents. Not only banks but also bancassurance has
substantially contributed to the growth of insurance.
Insurance companies are using technology. Many private players are
using the C drives. This is one of their USPs (Unique Selling Point). Companies are
introducing online policies. It means, instead of going to the company, the customer can
get the policy from the intermediaries. Many insurance policies are sold from these
dealer counters, which also use technology. Perhaps, we need to talk about the process
of application and how to make it simpler because it depends on the type of policy
which we take. For mass retail product we can go for a simple policy, but when we are
going for a property insurance policy then a lot of things need to be taken care of. The
process of simplification has to happen to improve penetration.
Agents are important for the insurance industry. Life insurance needs to
explain details like age, earnings, family, etc. So, agents play a critical role. IRDA had
improved the agency model like introducing examinations for professionals, improving
the remuneration structure, etc. Earlier, there used to be flat discounts on public sector
policies. But now, the agency commissions are more attractive. Many people are hired
as agents so that they can meet more people and be in touch with them which would
indirectly help in improving the business.
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CHAPTER 10 CONCLUSION
The ever rising population levels and the risk involved in our
everyday lives provide an attractive opportunity for the global majors to seek their
fortunes here. This is the reason why we find so many private players today competing
with LIFE INSURANCE CORPORATION OF INDIA (LIC) the only life insurer prior to
liberalization of our economy, for insuring Indian lives. Even today not more than 20% of
the population of our country is aware about the very basic concepts regarding Life
Insurance.
This project throws light on the functioning of the insurance industry in
India. Further the main aim of this project was to clear most of the doubts that may be
clouding the minds if an average Indian, regarding the LIFE INSURANCE SECTOR IN
INDIA. As Insurance industry is a booming sector and there is much more scope to it so
people can also make a good career and also earn a lot of money through this
business.
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CHAPTER 12 BIBLIOGRAPHY
BOOKS AUTHOR PUBLISHED BY
P.S Palande
Insurance in India R.S Shah Response Books
M.L Lunawat
Himalaya Publication
Principle of Insurance Dr P K Gupta
House
Insurance Meaning and its
B.D.Bhargava Pearl Books
Principle
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61. Life Insurance
Websites:
www.newindia.co.in
Search Engines:
Google
Yahoo
Wikipedia
AltaVista
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62. Life Insurance
Websites:
www.newindia.co.in
Search Engines:
Google
Yahoo
Wikipedia
AltaVista
61