Life insurance and its types

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Life insurance and its types

  1. 1. Life insurance Definition: Life insurance is used to provide a death benefit: a stipulated sum (the face amount of the policy) is paid to a beneficiary upon the demise of the policyholder (who has paid the premiums). Remember: a beneficiary who receives life insurance payments due to the death of the insured pays no income tax on the amount received. It is a contract in which the Insurer, in consideration of a certain premium, either in a lump sum or in any other periodical payments, in return agrees to pay to the assured, or to the person for whose benefit the policy is taken, a stated sum of money on the happening of a particular event contingent on the duration of human life. Life Insurance business” means the business of effecting contracts of insurance upon human life, including any contract whereby the payment of money is assured on death (except death by accident only) or the happening of any contingency dependent upon human life and any contract which is subject to payment of premium for a term dependent on human life and shall be deemed to include the granting of: ► Disability and double or triple indemnity accident benefits, if so provided in the contract of insurance; ► Annuities upon human life; and ► Superannuation allowances and annuities payable out of any fund applicable solely to the relief and maintenance of persons engaged or who have been engaged in any particular profession, trade or employment or of the dependents of such persons. ► The insurance contracts, which deal with disability, accidental death alone, sickness etc., are excluded from the purview of life insurance. ► However, life insurance contracts can have benefits payable on the accidental death or disability of the persons insured as additional benefits on the basic life insurance contracts. Life assurance or annuity cover may be granted to a group of people, for example, employees of a company or members of an association.
  2. 2. Nature of life insurance: 1. Peculiar nature – event bound to happen 2. Covers death due to natural causes and accidents 3. It’s a long term contract 4. A contract of assurance 5. Can’t be indemnified (subrogation and contribution doesn’t apply) 6. It is an a long term investment Principles:  Nature of a general contract  Insurable Interest  utmost good faith  Warranties  Proximate cause  Assignment and nomination  Return of premium  Alaeatory  Indemnity/subrogation (N/A) Nature of a general contract: a) agreement b) Competency (eligibility) of parties c) Free consent of parties d) Legal consideration -valid from 1st premium e) Legal objective - support the family Insurable Interest  The object of insurance should be lawful. The person proposing for insurance must have interest in the continued life of the insured and would suffer pecuniary loss if the insured person dies. This is known as Insurable Interest.  In Life Insurance the presence of insurable interest is essential at the time of affecting the Contract of Insurance.  If there is no insurable interest, the contract becomes wagering and hence illegal.
  3. 3.  Every individual has unlimited insurable interest on his/her life.  Husband has insurable interest on the life of his wife and vice versa Insurable interest Own life Other’s life Proof required Proof not required F Utmost good faith:  In Life Insurance contracts, a very high degree of good faith is required to exist between the parties to the contract, viz., the insurer and the insured. This is called the principle of utmost good faith  It is the duty of the proposer to disclose the material information for proper assessment of risk by the insurer  In the Insurance contract the product sold is intangible. It cannot be seen or felt. Most of the facts relating to health, habits, personal history and family history are known to one party only, the proposer. The insurer can know most of these facts only if the proposer decides to disclose these facts.  All the required information for the assessment of risk is known only to the proposer and the insurer has no knowledge of the risk
  4. 4.  The proposer may not be having technical knowledge about the insurance products, the benefits, pricing aspects etc. and hence will have to rely upon the insurer to ensure that the terms of the contract are fair and equitable. Warranties:  A warranty in Insurance is a statement or condition which is incorporated in the contract relating to risk, which the applicant presents as true & upon which it is presumed that the insurer relied in issuing the contract.  All information in the application for the Insurance was warranted to be absolutely exact and true. If it turned out to be untrue, the Insurance was voidable whether the misstatement was intentional or unintentional, material to the loss or immaterial.  Informative warranty  Promissory warranty  Breach of warranty Proximate cause:  An insurance policy is issued with respect to a specific peril which may result in loss to the insured. The insurance company is liable to indemnify only against the insured perils.  In case where the loss occurs as a result of a chain of events, one event causing the other, the insurer is liable to compensate only to the extent to which the loss has been caused by the immediate cause. Assignment and nomination: Nomination is an authorization to receive the claim arising out of policy in the event of the death of the life assured; it does not give the nominee an absolute right over the money received to the exclusion of other legal heirs. Further, the Nomination can be changed or cancelled at any time during the lifetime of the policyholder at his will and pleasure or by a subsequent assignment. On the other hand, assignment of an insurance policy is a transfer or assignment of all rights and liabilities to the insurance policy in favor of the assignee Return of premium: It returns the premiums paid for coverage if the insured party survives the policy's term. For example, a $1,000,000 policy bought for $10,000 a year over a 30 year period would result in $300,000 being refunded to the surviving policyholder at the end of the 30 years.
  5. 5. When a party who is covered by any life insurance policy lives past the term of the insurance, the premiums paid for the traditional term policy are considered spent money for the "risk" that never occurred. By using a return of premium term life insurance policy, the insurance company would return all premiums to the party who paid for the policy. Alaeatory: ((A contract type in which the parties involved do not have to perform a particular action until a specific event occurs. Events are those which cannot be controlled by either party, such as natural disasters and death. Aleatory contracts are commonly used in insurance policies. The insurer does not have to pay the insured until an event, such as a fire, results in property loss.)) • Insurance contracts are aleatory • There is no equal value exchanged 1. Either insurer collects premium and if there is no loss doesn’t pay back (or) 2. The insured pays small premium and collects huge amounts as compensation Indemnity/subrogation:     Insurance contracts other than life insurance contract are contracts of indemnity in the sense that the amount payable by the insurer in case of the contingency stated in the policy occurring is limited to the loss that the insured will suffer. The insurance contract promises to keep the insured indemnified against the financial loss that he would suffer on account of the happening of the event. Subrogation means the restitution of the rights of an assured in favor of the insurer against the third party for any damages caused by the third party, after the insurer has indemnified the assured for the loss. In accordance with this principle the insurance company acquires the right of the insured to sue the third party to compensate for the loss inflicted, when it indemnifies the insured for the losses suffered by him. This means that, if another vehicle hits your vehicle, and the insurer pays you the claim, then the insurer, not you, can sue the owner of that vehicle to claim damages.
  6. 6. Types of life insurance: Types of Life insurance Duration of the Method of Participation Number of lives Method of Unit policy payments premium in profits covered payment insurance payments linked of claim Duration of the policy payments:  Term life insurance o Protection for a limited number of years. o It terminates with no maturity value. o The policy is payable only if the insured’s death occurs during the stipulated term. o Nothing is paid in case of survival. o Issued for a short period but customarily provides protection for at least a set number of years, such as 10 or 20 years, or to a stipulated age, such as 65 or 70 years. o Re-entry, Convertibility, Renewability o e.g.: - Temporary Assurance Policy, Renewable Term Policies, Convertible Term Policies  Whole life insurance o Intended to provide Life Insurance protection over one’s lifetime – provides for payment of the assured amount upon the insured’s death regardless of when it occurs. o The payment of assured sum is a certainty; only the time of the payment of the assured sum is an uncertainty o e.g. Ordinary Whole Life Insurance, Limited Payment Whole Life Insurance, Convertible Whole Life Insurance
  7. 7.  Endowment insurance o Benefits under the policy paid on the death of the life insured during the selected term or on his survival to the end of the term. o Normal durations ranging from 10 to 30 years or more; shorter term policies ranging from 3 to 10 years o Single premium endowment insurance policies, Money Back or Cash Back or Anticipated Endowment Insurance Policies On the basis of premium payment  Single premium  Level premium On basis of participation of profits Participating policies o in which the company shares the costs of coverage with policyholders; if premiums exceed costs, a policy dividend is issued Nonparticipating policies o in which the company does not share profit (or loss) with the policyholders; the premiums for these companies tend to be lower On the basis of number of persons insured • Single life • Multiple life On methods of payment • Lump sum policies • Annuity policy -Immediate annuity - Deferred annuity - Fixed and variable annuity
  8. 8. Unit linked policies o These are unique insurance plans which are basically a mutual fund and term insurance plan rolled into one. The investor doesn't participate in the profits of the plan per se, but gets returns based on the returns on the funds he or she had chosen. o The premium paid by the customer is deducted by initial charges by the insurance companies (basically the distribution and initial costs) and the remaining amount is invested in a fund (much like a mutual fund) by converting the amount into units based upon the NAV of the fund on that date. o Mortality charges, fund management charges and a few other charges are deducted in regular intervals by way of cancellation of units from the invested funds. o A Unit Linked Insurance Plan (ULIP) offers high flexibility to the customer in form of higher liquidity and lower term. o The customer has the choice of choosing the funds of his choice from whatever his/her insurance provider has to offer. He can switch between the funds without the necessity to opt out of the insurance plan.

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