Meaning Of Insurance• A contract that provides compensation for specific losses in exchange for a one time or periodic payment. – An individual contract is known as an “insurance policy” – Periodic payment is known as an “insurance premium”
How Insurance Works• A group of people exposed to similar risk come together and make contributions towards formation of a pool of funds.• In case a person suffers a loss on account of such risk, he/she is compensated out of the same pool of funds. Premium Payers Pool of Claimant Funds
Benefits Of Insurance• Safety• Protection against financial losses• Investment – Better return • A lot of Insurance products presently provide good returns which could be a beneficial way for saving necessary funds for retirement years – Insurance policies can help secure the future of children • For college / educational purposes – Tax rebate
Parties Involved• Agent – Individual who is licensed by a state to sell insurance for one or more specific insurance companies.• Beneficiary – A person who gets the amount payable by the insurance company . Also known as claimant, assignee or beneficiary.• Broker – An intermediary between a customer and an insurance company. Brokers work for their customers and represent their needs to insurance companies.• Claimant – A person who submits a claim.• Insured – A person or organization covered by an insurance policy
Elements of Insurance• Acts of god • Cash value – Natural disasters that could not have The amount available in cash upon been reasonably prevented or cancellation of an insurance policy – avoided like earthquake or flood. usually a whole life policy, before it• Asset class becomes payable upon death or – Long-term investment plan strategy maturity. Also called cash surrender under which all of the investors value or surrender value. investable assets are divided into predetermined proportions among • Claim several different types of securities. A request for a payment of a loss under• Beneficiary vs. nominee an insurance policy. – A beneficiary is the recipient of the • Deductibles proceeds of the policy when the Amounts one pays to cover a loss named insured dies or when the policy matures. before one is entitled to payment by – A nominee is the person designated the insurer by the policyholder to receive the • Depreciation proceeds of an insurance policy, upon the death of the insured. A measure of the loss in value of an item over time resulting from wear or obsolescence
Elements of Insurance (Contd.)• Exclusions • Liability – Situations that are not covered by a – Insurance protects against third policy, such as high risk professionals, party claims for bodily injury and high risk pursuits, suicide, and war. property damage caused by one.• Face amount – Liability insurance policies cover both legal costs and any legal – The amount stated on an insurance payouts for which the insured policy, to be paid upon death or would be responsible if found maturity guilty.• High Networth Individual (HNI) • Lock in period – Person with high net worth. Net worth – Period of time in which an insured is the total assets minus total liabilities cannot withdraw an insurance – Defined as having investable assets policy without paying a penalty* to• Indemnity / insurable interest the insurance company. – A type of traditional health insurance • Maturity in which the covered person is – The end of the period covered by a reimbursed for covered expenses contract. without regard to choice of provider. Also known as fee-for-service plans.
Elements of Insurance (Contd.)• Moral hazard• Mortality charges• Paid up value – Paid up value is the value of a lapsed policy to be paid at the time of maturity – = (Total number of premium / number of paid premium) * sum assured• Pecuniary interest – Opportunity to make money from a transaction in the subject securities• Person – One whose loss may cause loss of profit or increase in expenses. Types of insurance for a person are – Life and Health• Premium – This is the amount of money paid for a certain level of insurance cover for a specified period of time• Riders – Riders are the additional benefits that can be bought and added to a basic insurance policy. Types: Critical Illness Riders, Medical Expenses, Disability Riders
Elements of Insurance (Contd.) • Vesting date (only pension plan)• Sum Assured – Entitlement of a pension plan participant – The benefit payable under a life (employee) to receive full benefits at assurance policy Normal Retirement Age, or a reduced• Surrender value benefit upon Early Retirement whether or – The sum of money an insurance not the participant still works for the company will pay to the policyholder same employer or annuity holder • Waiting period – In the event his or her policy is – The period of time specified in a health voluntarily terminated before its insurance policy which must pass before maturity or the insured event occurs some or all of your health care coverage• Term can begin. – Fixed period for which an insurance • Under writing policy is issued, a time or fixed deposit – The process of evaluating applications for is made, or a contract lasts insurance based on an established set of guidelines. It determines the risk associated with an applicant and either assigns the appropriate rating class for the policy or declines to offer a policy.
Valuation Models• Multiple Earnings Model – An individual should have a life cover 3 to 10 times of Gross Annual Income• Human Life Value Model – The present value of an individual potential future earning over the rest of his working life span• Debt Approach – Life insurance should cover all the outstanding dues. It is a shallow approach as it ignores the family expenses both recurring like food, utilities and non recurring ones like marriage• Needs Approach – A method of calculating how much life insurance is required by an individual/family to cover needs. The needs approach is a function of two variables: How much will be needed at death to meet obligations, and How much future income is needed to sustain the household.
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