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  • 1. Life Insurance CHAPTER 1. INSURANCE 1.1 Introduction Definition: “Insurance is a contract between two parties whereby one party agrees toundertake the risk of another in exchange for consideration known as premium andpromises to pay a fixed sum of money to the other party on happening of an uncertainevent (death) or after the expiry of a certain period.” “A promise of compensation for specific potential future losses in exchangefor a periodic payment. Insurance is designed to protect the financial well-being of anindividual, company or other entity in the case of unexpected loss. Some forms ofinsurance are required by law, while others are optional. Agreeing to the terms of aninsurance policy creates a contract between the insured and the insurer. In exchange forpayments from the insured (called premiums), the insurer agrees to pay the policy holdera sum of money upon the occurrence of a specific event. In most cases, the policy holderpays part of the loss (called the deductible), and the insurer pays the rest.” 1
  • 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. 2
  • 3. Life Insurance Let’s take examples to understand how insurance actually works: Example 1 Example 2SUPPOSE 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 ASSUMPTIONAll 1000 house owners are exposed to a All 5000 persons are exposed to commoncommon risk, i.e. fire risk, i.e. deathPROCEDURE 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 fundsTotal value of the fund = Rs. 3,00,000 (i.e. Total value of the fund = Rs. 60,00,000 3
  • 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 averageInsurance 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 yearEFFECT OF INSURANCE EFFECT OF INSURANCERisk of 5 house owners is spread over Risk of 50 persons is spread over 50001000 house owners in the village, thus people, thus reducing the burden on anyreducing the burden on any one of the one person.owners. 4
  • 5. Life Insurance1.2 BRIEF HISTORY OF INSURANCE The business of insurance started with marine business. Traders, whoused to gather in the Lloyd’s coffee house in London, agreed to share the losses totheir goods while being carried by ships. The losses used to occur because of pirateswho robbed on the high seas or because of bad weather spoiling the goods or sinkingthe ship. The first insurance policy was issued in 1583 in England. In India, insurancebegan in 1870 with life insurance being transacted by an English company, theEuropean and the Albert.1.3 EVOLUTION OF INSURANCE IN INDIAEvolution of Insurance before Nationalization: Life insurance in the modern form was first set up in India through aBritish company called the Oriental Life Insurance Company in 1818 followed by theBombay Assurance Company in 1823 and the Madras Equitable Life Insurance Societyin 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 forIndians. But, they were treated as “substandard”. Substandard in insurance parlancerefers to lives with physical disability. Therefore, Indian lives had to pay heavy and extrapremium of 20% or more. This was a common practice of the European companies atthe time whether they were operating in Asia or Latin America. The first company to sellpolicies to Indians with “fair value” was the Bombay Mutual Life Assurance Societystarting 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 5
  • 6. Life Insurancegeneral insurance company was the Indian Mercantile Insurance Company Limited setup in Bombay in 1907. Insurance business was conducted in India without any specificregulation for the insurance business. They were subject to Indian Companies Act(1866). After the start of the “Be Indian Buy Indian Movement” (called SwadeshiMovement) in 1905, indigenous enterprises sprang up in many industries. Notsurprisingly, the Movement also touched the insurance industry leading to the formationof dozens of life insurance companies along with provident fund companies (providentfund companies are pension funds). In 1912, two sets of legislation were passed: theIndian Life Assurance Companies Act and the Provident Insurance Societies Act. Thereare 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 thecommittee. He consulted a wide range of interested parties including the industry. It wasdebated 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 lifeand general insurance companies. It clearly defined what would come under the lifeinsurance business, the fire insurance business and so on. This piece of legislation lostsignificance after nationalization. Life insurance was nationalized in 1956 and general 6
  • 7. Life Insuranceinsurance in 1972 respectively. With the privatization in the late Twentieth Century, ithas returned as the backbone of the current legislation of insurance companies. Milestones of Insurance Regulations in the 20thCentury Year Significant Regulatory Event1912 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 7
  • 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 becameknown as the insurance wing) was first set up in the Ministry of Commerce by theGovernment of India. Later, it was transferred to the Ministry of Finance. By 1956, there were 154 Indian life insurance companies. There were 16non-Indian insurance companies and 75 provident societies were issuing life insurancepolicies. Most of these policies were centered in the cities (especially around big citieslike Bombay, Calcutta, Delhi and Madras). 8
  • 9. Life InsuranceEvolution of Insurance during Nationalized Era: 1956-2000Rationale for Nationalization: After India became independent in 1947, National Planning modeledafter the Soviet Union was implemented. Nowhere it was more evident in the SecondFive Year Plan implemented by the Prime Minister Jawaharlal Nehru. His vision was tohave key industries under direct government control to facilitate the implementation ofNational Planning. Insurance business (or for that matter, any financial service) was notseen 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, whydid 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 becausegovernment was not willing to pay market rate of return for the assets (it may raised thecapital whether insurance companies were private or public). Second, it sought toincrease market penetration by nationalization. How could nationalization possiblydeepen the market that private insurance companies cannot? There are twopossibilities. (1) Nationalization would create a monopoly. If there are economies ofscale in the market, it would thus become possible for government to cut the cost ofoperation per policy sold below what private companies could. (2) Throughnationalization government could take life insurance in rural areas where it was notprofitable for private businesses to sell insurance. Third, the government found thenumber of failures of insurance companies to be unacceptable. The governmentclaimed that the failures were the result of mismanagement. The second question why general insurance was not beingnationalized in 1956.They did not deem general insurance to be “vitally needed foreconomic development.” The only way this view could be justified is if they viewinsurance as a vehicle for long terms investment and if they ignore the elimination ofuncertainty through insurance as a relatively minor benefit. 9
  • 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: 10
  • 11. Life Insurance 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. 11
  • 12. Life Insurance 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 12
  • 13. Life Insurance 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. 13
  • 14. Life Insurance CHAPTER 3 LIFE INSURANCE CORPORATION3.1 HISTORY OF LIFE INSURANCE SECTOR The business of life insurance in India in its existing form started in India in theyear 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. Some of the important milestones in the life insurance business inIndia 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 14
  • 15. Life Insurance contribution of Rs. 5 crore from the Government of India. Life Insurance Corporation of India commenced its tryst with trust onSeptember 1, 1956 with formidable challenges of restoring the confidence of the peopleand proper canalization of savings for the economic upliftment of the nation. LIC set outwith clear objectives. It steadily grew to become gigantic and spread its influence to thefarthest corners of the nation. Its logo and emblem became well-known. It is said, “In thehumblest of homes, our flame burns bright and hands that protect, hands that serve areno idle boasts.” It extended cover to all section of the society. Its rural spread wassignificant and even spectacular. It has immensely contributed to the growth anddevelopment of the country in all spheres of activity. Its group schemes and socialsecurity schemes afforded cover to the weakest and the poorer sections, the toilingmasses and the illiterate or semi-illiterate families. It was able to break resistance andcreate 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 dayand indeed it kept its word. On the historic day, HDFC Standard Life Insurance,Reliance General Insurance and Royal Sundaram Alliance were granted licenses tocommence 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, AMPSanmar, Sahara India Life and Shriram Group. Today, 14 companies in life insuranceare battling in the market. 15
  • 16. Life Insurance POPULAR LIFE INSURANCE BRANDS COMPANY AWARENESS LEVEL (IN %)LIC 100ICICI PRUDENTIAL 70HDFC STANDARD 52SBI LIFE 25BIRLA SUNLIFE 23KOTAK MAHINDRA 20TATA AIG 17BAJAJ ALLIANZ 12MAX NEW YORK LIFE 6ING VYSYA LIFE 4METLIFE 3.5AVIVA 3 16
  • 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. 17
  • 18. Life Insurance CHAPTER 4 LIFE INSURANCE PRODUCTS Life insurance products are usually referred to as ‘PLANS’ ofinsurance. If we see in the market there are 100s of products, different products withdifferent companies. By seeing all these products individuals always ask about why all thesemany products are required. The answer is that the insurance companies operate in theworld of demand driven market where it is very necessary to introduce the products asper the need of the customer. So a company should always be innovative in itsinsurance product and customer tailored. It is not very easy to come out with theseinnovative products as there are many technical issues involved in it. For that there isone 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 requirementswhich are important from the customer’s point of view. This knowledge about thecustomer’s needs helps the insurance product developers to specify the differentattributes of the potential insurance product. The attributes are classified as must-berequirements, one-dimensional requirements, and attractive requirements. 18
  • 19. Life Insurance Kano Model for Insurance Product Research reports Research reports about insured’s about insured’s satisfaction level and satisfaction level and business business performance performancePlotting user preferences Analysis and Analysis andPlotting user preferencesfor various insurancefor various insurance brainstorming of brainstorming ofproduct features. Evaluaproduct features. Evalua research report research report-ting for satisfaction or-ting for satisfaction ordissatisfactiondissatisfaction 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 19
  • 20. Life Insurance The figure above shows the importance of different productrequirements with respect to customer satisfaction. The insured’s needs are identified by analyzing user research reports. Asthe product design meets the needs of the customer fully, it’s not only market-ready butalso “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 itreaches the market. These innovative efforts also exerts greater pressure upon theproduct developers to make sure that the new insurance product does not disharmonizethe 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 arecalled Term Assurance plans. If the insured does not die within the stipulated time, nopayment is made under this plan. ONLY DEATH ON DEALTH, BENEFIT BENEFIT PAID 0 20 20
  • 21. Life Insurance2) 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 21
  • 22. Life Insurance3) 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. 0 204) 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 22
  • 23. Life Insurance 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 regularperiodical payments (depending upon the mode) to employees, who have retired. Theyare paid as long as the recipient is alive. Sometimes the pension is also paid to thedependents after the pensioner’s death. Annuities are called the reverse of life insurance. In annuity contract, aperson agrees to pay to the insurer a specified capital sum in returns for a promise fromthe insurer to make a series of payments to him so long as they lives, while ininsurance, the insured pays a series of payments in return for a promise to pay a lumpsum on his death. Theoretically, under a life insurance contract, the insurer startspaying upon the death of the insured but under an annuity contract, the insurer stopspaying upon the death of the annuitant.There are two types of annuity policies: 23
  • 24. Life Insurance(a) Immediate Annuity: The annuity which commence immediately after the contract isconcluded. Such an annuity is called an Immediate Annuity. The purchaser of animmediate annuity pays the purchase price in lump sum. The first installment will start atthe 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 24
  • 25. Life Insurance(b) Deferred Annuity: The alternative to the Immediate Annuity is a Deferred Annuity. In thiscase, the annuity payment will start after the lapse of a specified period, called theDeferment period. The purchase price can be paid as a single premium at thecommencement or may be paid in installments during the deferment period. If theannuitant dies during the deferment period, the premiums paid are returned to thenominee 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 25
  • 26. Life Insurance7) 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 26
  • 27. Life Insurance8) 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 27
  • 28. Life Insurance9) 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 28
  • 29. Life Insurance10) 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. 29
  • 30. Life Insurance11) 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. 30
  • 31. Life Insurance 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: 31
  • 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 REGULATORYDEVELOPMENT 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. 32
  • 33. Life Insurance CHAPTER 5 INSURANCE DOCUMENTS A life insurance policy is a contract. The stakes in the contract areusually large and those interested in the stakes, many. There could be disputesinvolving the insurer and the insured or the insurer and the beneficiaries of the policy orbetween the beneficiaries. The terms and conditions of the policy will provide thegrounds to decide the issues in the dispute. These terms will be based on and will relateto statements and actions at various times during the policy. These will have to beproved through documents. Documentation, therefore, is important in the life insurancebusiness. 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 defaultand no changes are made in address, nominations, etc., the policy file may not beopened till the claim arises. In the absence of proper documentation, it may not bepossible to know the dues and the rights or even the identities of the personsconcerned. There are various documents which are used in insurance transactionswhich are as follows:1. PROPOSAL FORMS: 33
  • 34. Life Insurance The first document in the insurance file is the proposal or application forinsurance. It usual to obtain the proposal in a standardized, printed form. This is to becompleted 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. Thisasks for particulars about the state of health of the person proposed to be insure, hisfamily history, his personal habits, medical consultations and illnesses, absence fromwork due to medical grounds, etc. If the proposal is to be considered as a non-medicalcase, 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 underwritingpurposes. The declaration at the end of the proposal form applies to the statements inthe personal statement as will.3. FIRST PREMIUM RECEIPT (FPR): The underwriter’s decision on the proposal may be to accept at OR onmodified 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 ison modified terms, the proposer has to agree to the modified terms and pay the balancepremium if any, before the FPR can be issued. The IRDA Regulations require that thedecision of the proposer has to agree to the modified terms and pay the balancepremium if any, before the FPR can be issued. The IRDA Regulations require that thedecision of the proposal should be made by the insurer within 15 days. The FPR is the evidence that the insurance contract has begun. Thepolicy document, which is the evidence of the contract, may be issued only after some 34
  • 35. Life Insurancetime, if the claim arises before the policy is issued, but after the FPR is issued, theinsurer 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 thepolicy Renewal Premium Receipt (RPR) are issued. This RPR’S are important to provepayments, has defaults can lead to termination of the contract. Disputes may arise as towhether particular payment has been made or not. If such disputes may rise at the timeof the claim, the RPR’S will provide conclusive evidence. The adjustment of subsequentpremiums do not consist conclusive evidence. This is because insurers do adjust laterpayment 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 isadjusted as one transaction. Individual policyholders do not get receipts. Salary slipswould show deduction in premium from salary. That should be sufficient proof ofcontinuance of insurance. A certificate from the employer about the deduction havingbeen made and sent to the insurer should also suffice.5. THE POLICY DOCUMENT: The policy document is the most important document. It is the evidenceof the contract. It is prepared to reflect the terms of the contract. Pre-printed policyforms containing standard policy conditions and schedules are used. The policydocument is to be signed by the competent authority and stamped, according to theIndian Stamp Act. New technology may enable insurers to avoid pre-printed forms andprint a policy every time, with appropriate schedules and terms. 35
  • 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. 36
  • 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: 37
  • 38. Life Insurancei. Premiums in the early years of the policy being more than what is justified andii. 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 38
  • 39. Life Insurance 25 half yearly installments paid Then, the paid up value is = 25 X 10,000 50 = RS. 5,000This means that the policy is effective as before, but the S.A. is RS.5, 000 notthe 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 39
  • 40. Life Insurancethe policy for such a period as the net surrender value will purchase, at the insured’sage at the time of lapse of the policy. This is similar to the second, except that thepremium 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 hasthe same advantage of securing cover, as the second option of automatic advance ofpremium. 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 savingelement of the premium is not being advanced. Under the extended term, the policy remains in full force for the full sumassured for a limited period instead of a reduced paid-up amount of insuranceremaining in force for the entire policy period, in the first option. Under the last twooptions, at some time, the amount payable will become zero. In the third option, even ifthe extended term continues till the original date of maturity, the amount paid at maturitywill not be the SA. At such timed, there is a sense of having being “cheated”. The LICallows 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 automaticallypaid-up, unless the policy-holder surrenders the policy.4. REVIVAL: When the policy lapses it benefit neither the insurer nor the insured. Theinsured loses the insurance risk cover for the full amount. It is also a reflection on theagent’s efforts as it (the lapse) suggests that the policyholder has not been fullyconvinced about the usefulness of the insurance plan. The insurer also loses. The levelpremium is based on the assumption that, barring death claims, the policies will run forthe full term. The initial expenses incurred on proposals are high and the insurer canrecover them, only if the policies remain in force. Because lapsation affects both the parties adversely and because lapsationis not always intended by the insured to happen as lapsation may occur due to justneglect to pay or because of temporary financial difficulties that is the reason why 40
  • 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. 41
  • 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 assignmentb. conditional assignment 42
  • 43. Life Insurancea. 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. 43
  • 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 44
  • 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) 45
  • 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, 101.78. 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. 46
  • 47. Life Insurance9. 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. 47
  • 48. Life Insurance6. 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 promisemade in the contract. The insurer has then to perform his part of the contract. Theinsurer has then to settle the claim, after satisfying him that all the conditions andrequirements 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 48
  • 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 claims2. Survival benefits3. Death claims1) Maturity claims: The date on which the term is complete, is the date of maturity andthe settlement of SA on that date, is the maturity claim. The amount payable on maturityis the SA, less any debts like loan and interest or outstanding premiums. To thisbonuses, if any, would be added, if it is a with - profit policy. The insurer is expected tomake payment on the maturity date. Post – dated cheque are normally sent a few daysin 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 beexercised to ensure that there is no attempt to defraud. It could have been pledgeelsewhere for a loan. But if the loss seems to be genuine, it is possible to settle theclaim on the basis of an indemnity and also an advertisement in the newspapers, as aprecaution.2. Survival benefits: 49
  • 50. Life Insurance A survival benefit is paid during the currency of the policy, before the dateof maturity. The procedure will be similar to payment of maturity claims. Action will beinitiated 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 thebasis of an indemnity, as may be done in the case of a maturity claim. The reason isthat 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 beasked for, on which endorsements will be made regarding the settlement of the survivalbenefits. 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 ofmaturity claims. This is mainly because, the facts relating to death have to be studiedand the identities of the claimants have to be studied and the identities of the claimantshave to be established. The death claim action begins with an intimation being received in theinsurer’s office. The intimation may be sent by the nominee, assignee, a relative of thelife assured, the employer, agent or development officer. This intimation may have verylittle information, other than the policy number, the name of the life assured and the dateof death. Only the name is not enough to establish identity. The following will benecessary before a death claim is settled:1. Policy document2. Deeds of assignment3. Proof of age, if age is already admitted 50
  • 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. 51
  • 52. Life InsuranceFOR EXAMPLE:S.A. = RS. 30,000AGE = 25 YEARSDATE OF COMMENCEMENT (DOC) = 13 – 12 – 1990MODE OF PAYMENT ANNUALFIRST UNPAID PREMIUM (FUP) = 13 – 12 – 1999DATE OF DEATH (DOD) = 27 – 11 – 2000TERM = 30 YEARSPREMIUM = RS. 250CALCULATE DEATH? HERE, THE POLICY HOLDER HAS PAID THE PREMIUM FOR MORE THAN 5YEARS, SO HE IS ELIGIBLE FOR THE SUM ASSURED.NOW, DEATH CLAIM = SUM ASSURED – 1 UNPAID PREMIUM = RS. 30, 000 – RS. 250 = RS. 29, 750 52
  • 53. Life Insurance CHAPTER 9 INSURANCE AGENCY9.1 INTRODUCTIONDefinition of an Agent: An agent is one who acts on behalf of another. The ‘another’ onwhose 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 licensedunder Section 42 of that act and is paid by way of commission or otherwise, inconsideration of his soliciting or procuring insurance business, including businessrelating to the continuance, renewal or revival of policies of insurance.” 53
  • 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 otherwiseIII. 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 jurisdictionii. He has been found guilty of criminal breach of trust, misappropriation, cheating, forgery or abetment or attempt to commit any such offence. 54
  • 55. Life Insuranceiii. 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: 55
  • 56. Life Insurancea. Understand the prospect’s needs and persuade him to buy a plan of life insurance that suits his interests bestb. 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 claimse. 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 LICs branches and other offices. 56
  • 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 57
  • 58. Life Insurancecome 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 hassubstantially contributed to the growth of insurance. Insurance companies are using technology. Many private players areusing the C drives. This is one of their USPs (Unique Selling Point). Companies areintroducing online policies. It means, instead of going to the company, the customer canget the policy from the intermediaries. Many insurance policies are sold from thesedealer counters, which also use technology. Perhaps, we need to talk about the processof application and how to make it simpler because it depends on the type of policywhich we take. For mass retail product we can go for a simple policy, but when we aregoing for a property insurance policy then a lot of things need to be taken care of. Theprocess of simplification has to happen to improve penetration. Agents are important for the insurance industry. Life insurance needs toexplain details like age, earnings, family, etc. So, agents play a critical role. IRDA hadimproved the agency model like introducing examinations for professionals, improvingthe remuneration structure, etc. Earlier, there used to be flat discounts on public sectorpolicies. But now, the agency commissions are more attractive. Many people are hiredas agents so that they can meet more people and be in touch with them which wouldindirectly help in improving the business. 58
  • 59. Life Insurance CHAPTER 10 CONCLUSION The ever rising population levels and the risk involved in oureveryday lives provide an attractive opportunity for the global majors to seek theirfortunes here. This is the reason why we find so many private players today competingwith LIFE INSURANCE CORPORATION OF INDIA (LIC) the only life insurer prior toliberalization of our economy, for insuring Indian lives. Even today not more than 20% ofthe population of our country is aware about the very basic concepts regarding LifeInsurance. This project throws light on the functioning of the insurance industry inIndia. Further the main aim of this project was to clear most of the doubts that may beclouding the minds if an average Indian, regarding the LIFE INSURANCE SECTOR ININDIA. As Insurance industry is a booming sector and there is much more scope to it sopeople can also make a good career and also earn a lot of money through thisbusiness. 59
  • 60. Life Insurance 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 HouseInsurance Meaning and its B.D.Bhargava Pearl Books Principle 60
  • 61. Life InsuranceWebsites:www.newindia.co.inSearch Engines:GoogleYahooWikipediaAltaVista 61
  • 62. Life InsuranceWebsites:www.newindia.co.inSearch Engines:GoogleYahooWikipediaAltaVista 61