Insurance introduction


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Insurance introduction

  1. 1. Introduction To Insurance
  2. 2. The Indian Contract Act 1872• A contract is an agreement between two or more parties to do or to abstain from doing an act and which is• intended to create a legally binding relationship An Agreement enforceable by Law is a contract
  3. 3. Essentials of a Valid Contract Two or Free More Consent Parties fa s o ct ial ra nt nt Lawful se o Lawful Objectiv Es id C Consider e val ation Offer & Acceptance
  4. 4. The Life Insurance Contract Insurer Insured Agreement will pay will pay claims PremiumsOn happening of insured event orsurvival to a specified term
  5. 5. Is Life Insurance a Legal Contract?• Intention is legal• Proposer offers-insurer accepts• Premium is consideration• Insured must be major with sound mind-capacity to contract• Insured and Insurer are in agreement –of same mind and free consent Yes, since all essentials of valid contract are present
  6. 6. Principles of Life Insurance Utmost Insurable good Interest faith Insurance Contract is based on Fair Play
  7. 7. Insurance Contract Vs Commercial Contract INSURANCE CONTRACT COMMERCIAL CONTRACT• In Life Insurance proposer has all • When one buys a TV or Fridge he the facts examines the quality/quantity• The Insurer Knows only those • Buyer has no right to come later facts that the proposer discloses and ask for termination of contract• Ordinary faith is not sufficient- • Buyer Beware or Caveat Emptor Utmost Good Faith is required applies
  8. 8. Utmost Good Faith• A Positive Duty to voluntarily disclose,accurately and fully, all facts material to risk being proposed, whether requested or not.
  9. 9. What is a material Fact? The Mind of a Which Prudent Any Fact or Circumstance Influences Underwriter In determining In Fixing the whether to take premium the risk
  10. 10. What must be disclosed?• Facts of higher Risk• External Factors that make the risk higher• Any refusal/special terms imposed on previous proposals• Existence of other policies• Facts relating to health
  11. 11. Declaration Proposal Form is the Basis Of Contract If any statement/declaration by the proposer is found untrue The Contract can be made Null and Void and Premiums ForfeitedThe Effect of declaration is to turn Representations in the proposal form into warranties
  12. 12. Breach Of Utmost Good Faith Breach of Utmost Good Faith Misrepresentation Non-Disclosure
  13. 13. Section 45 of the Insurance Act,1938 Policy Start Date 2 years If Material Facts discovered The policy cannot be called in question within 2 years of the policy after 2 years, on the grounds of then the insurer can declare inaccurate or false statement unless it is the policy null and void proved to be material and fraudulent.
  14. 14. What is Insurable Interest ? Insurable Interest is not defined in Insurance Act 1938 If No Insurable Interest .A contract is a Wagering Contract which is void Section 30 IndianInsurable Interest is a Legal Prerequisite Contrac t Act 1872
  15. 15. Insurable Interest •All risks are not Insurable •Insured must suffer a loss, if the risk is not covered •Financial interest in Subject matter of Insurance The insured must be interested in the safety and the well being of the subject of Insurance He Should not benefit from loss or damage to it
  16. 16. What is Insurable Interest ? Relationship with subject Recognized in Law and Matter gives Legal Right to a person To insure that Subject Matter Insurable Interest is the monetary interest
  17. 17. Who have insurable interest in each other• Any person in himself• Husband and wife in each other• Creditor on Debtor(To the Extent of Outstanding Mortgage with Interest)• Surety on Principal(To the extent of Debt)• Partners in business• Employer on its employees• Parents in Lives of their Minor Children
  18. 18. When do these principles apply?• Insurable Interest interest is required at the time of entering the contract• Utmost Good Faith is required Throughout the contract
  19. 19. Principle Of Indemnity• Insurance is meant to compensate the losses• The Mechanism of Insurance cannot be used to make profits• Amount of claim cannot exceed the amount of loss incurred• Insurance makes good the loss• In Life Insurance, insurable interest on own life is unlimited hence Principle of indeminity does not apply but it does apply in General Insurance
  20. 20. Risk Management AvoidanceRisk can be managed Transfer Retention
  21. 21. Classification of Needs• Protection of the standard of living of family incase of early death• Future Expenses eg. Children Education• Income incase of Retirement or Disability• Helps by facilitating borrowing
  22. 22. Case Study 1• In a village there are 400 houses, each valued at Rs 20,000.• Every year on an average, 4 houses get burnt, resulting into a total loss of Rs 80,000. Find a Solution
  23. 23. Sharing Risk400 owners come togetherand contributed Rs 200 each Fund Fund Size = 400×200 = Rs 80,000
  24. 24. Sharing RiskRisk of 4 house owners 4 00 r ove a d re Sp Sp re ad ov e r4 00
  25. 25. Type of Risks Risks Pure Speculative No prospect of gain Offers possibility of loss or gainExample: Fire in a Example: Investing inbuilding stocks
  26. 26. Type of Risks Risks Fundamental ParticularAffect large section Consequences are of society comparatively restrictedExample: Famine Example: Most insurable risks
  27. 27. How to Manage Risk• Avoiding Risk• Controlling Risk• Accepting Risk• Transferring Risk
  28. 28. Why we need life insuranceDependents’ Education Retirement Estate Support Costs Income Planning
  29. 29. Insurance vs. Gambling Insurance Gambling Risk already exist Risk not existent. It is created. No total loss. Entire group provides One gains at the cost of others. for themselves. It is based on mathematical It is highly speculative. prediction.
  30. 30. Basic Life Insurance Policy
  31. 31. Term Insurance• Provides a death benefit if the insured dies during a specified period 150,000 benefit Death 100,000 50,000 1 2 3 30 No of years the policy is in force
  32. 32. Term Insurance In case of death during the policy term, the SA = 100,000 is paid 1 2 3 30 No of years the policy is in force
  33. 33. Whole Life Policy Whole life insurance provides insurance coverage throughout the insured’s lifetime. Policy purchased at age 30 150,000 Benefit Death 100,000 50,000 30 40 50 60 70 100 or death Insured’s Age
  34. 34. Types of Whole Life Policies Regular - Premium Policies Limited Payment Policies Premiums are payable Premiums are payable until the insured’s death until some stated period expires Date of Insured’s Date of End of policy death policy specifiedpurchase purchase period
  35. 35. Endowment Policies• Endowment policies provide insurance coverage for a specified period.• On surviving the specified period, policyholder gets the sum assured + bonuses.• On death during the specified term, policyholder gets the sum assured + bonuses.
  36. 36. Endowment Policies Policy purchased at age 30 SA + 150,000 Benefit Bonuses Death 100,000 SA 50,000 30 35 40 45 50 55 Insured’s Age
  37. 37. Endowment Policies Policy purchased at age 30 150,000 SA + Benefit Death Bonuses 100,000 On death at age 50,000 45 30 35 40 45 50 55 Insured’s Age
  38. 38. Annuities• An annuity is a series of periodic payments. In annuity contract, a person agrees to pay to the insurer a specified capital sum in return for a series of payments. Periodic Payments made Annuity benefit payment
  39. 39. Factors Affecting Annuity Benefits• The amount of money invested• The interest rate earned on investment• The number & timing of annuity payments• The time over which money grows at interest
  40. 40. How Immediate Annuity WorksYou made Your annuitylump sum payments startpayment from age 31 Age 30 Age 31
  41. 41. How Deferred Annuity works Retirement Age 60 Deferment Period Annuity Period Age 85 Age 30 Age 60 You pay premium Insurer pays you while you work annuity/pensions during your retirement