CHAPTER 4

INTRODUCTION TO INSURANCE

Meaning & Definition of insurance, Evolution and Importance of Insurance.

Types of Insurance

General Insurance: Meaning - type- need- Scope.

Principles- Functions of general Insurance.

Procedure in Claiming insurance.

Life Insurance Meaning- Need-& Principles of life insurance. Type of life insurance policies.

IRDA- introduction and functions

Meaning

Insurance is a contract, represented by a policy, in which an individual or entity receives

financial protection or reimbursement against losses from an insurance company. The
company pools clients' risks to make payments more affordable for the insured.
Insurance policies are used to hedge against the risk of financial losses, both big and small, that
may result from damage to the insured or her property, or from liability for damage or injury
caused to a third party.
NEED AND IMPORTANCE OF INSURANCE

(a) To provide Security and Safety

The Life Insurance provides security against premature death and payment in old age to lead the
comfortable life. Similarly in general Insurance, the property can be insured against any
contingency i.e. fire, earthquake etc.

(b) To provide Peace of Mind The uncertainty due to fire, accident, death, illness, disability in
the human life, it is beyond the control of the human beings. By way of Insurance, he may be
compensated financially but not emotionally. The financial compensation provides not only
peace of mind but also motivates to work more and more.

(c) To Eliminate Dependency :

On the death of the breadwinner, the consequences need not be explained. Similar to the
destruction of property and goods the family would suffer a lot. It could lead to reduction in the
standard of living or begging from relatives, friends or neighbors. The economic independence
of the family is reduced. The Insurance is the only way to assist and provider them adequate at
the time of sufferings.

(d) To Encourage Savings

Life Insurance provides protection and investment while general Insurance provides only
protection to the human life and property respectively. Life Insurance provides systematic saving
because once the policy is taken then the premium is to be regularly paid otherwise the amount
will be forfeited.

(e) To fulfill the needs of a person

a) Family needs b) Old age needs c) Re-adjustment needs d) Special needs: Education,
Marriage, health e) The clean up needs: After death, ritual ceremonies, payment of wealth tax
and income taxes are certain requirements, which decreases the amount of funds of the family
members.

(f) To Reduce the Business Losses

In business the huge amount is invested in the properties i.e. Building and Plant and Machinery.
These properties may be destroyed due to any negligence, if it is not insured no body would like
to invest a huge amount in the business and industry. The Insurance reduced the uncertainty of
business losses due to fire or accidents etc.

(g) To Identify the Key man: Key man is a particular man whose capital, expertise, energy and
dutifulness make him the most valuable asset in the business and whose absence well reduce the
income of the employer tremendously and upto that time when such employee is not substituted.
The death or disability of such valuable lives will prove a more serious loss than that fire or any
hazard. The potential loss to be suffered and the compensation to the dependents of such
employee require an adequate provision, which is met by purchasing an adequate life policies.

(h) To Enhance the Limit: The business can obtain loan but pledging the policy as collateral
for the loan. The insured persons are getting more loan due to certainty of payment at their death.
(i) Welfare of Employees: The welfare of the employees is the responsibility of the employer.
The employer is supposed to look after the welfare of the employees. The provisions are being
made for death, disability and old age. Though these can be insured through individual life
Insurance but an individual may not be insurable due to illness and age. But the group policy will
cover his Insurance and the premium is very low in group Insurance. The expenditure paid on
account of premium will be allowable expenditure.

Insurance Policy Components

When choosing a policy, it is important to understand how insurance works.
A firm understanding of these concepts goes a long way in helping you choose the policy that
best suits your needs. For instance, whole life insurance may or may not be the right type of life
insurance for you. There are three components of any type of insurance (premium, policy limit,
and deductible) that are crucial.
Premium
A policy's premium is its price, typically expressed as a monthly cost. The premium is
determined by the insurer based on your or your business's risk profile, which may include
creditworthiness.
For example, if you own several expensive automobiles and have a history of reckless driving,
you will likely pay more for an auto policy than someone with a single mid-range sedan and a
perfect driving record. However, different insurers may charge different premiums for similar
policies. So finding the price that is right for you requires some legwork.
Policy Limit
The policy limit is the maximum amount an insurer will pay under a policy for a covered
loss. Maximums may be set per period (e.g., annual or policy term), per loss or injury, or over
the life of the policy, also known as the lifetime maximum.
Typically, higher limits carry higher premiums. For a general life insurance policy, the maximum
amount the insurer will pay is referred to as the face value, which is the amount paid to a
beneficiary upon the death of the insured.
Deductible
The deductible is a specific amount the policy-holder must pay out-of-pocket before the insurer
pays a claim. Deductibles serve as deterrents to large volumes of small and insignificant claims.
Deductibles can apply per-policy or per-claim depending on the insurer and the type of policy.
Policies with very high deductibles are typically less expensive because the high out-of-pocket
expense generally results in fewer small claims.

SCOPE OF INSURANCE
The insurance sector has a huge potential not only because incomes are increasing and assets are
expanding but also because the increasing instability in the system. In a sense, we are living in a
extra risky world. Trade is becoming more and more global. Technologies are changing and
getting replaced at a faster rate. In this more uncertain world, for which enough evidence is
available in the recent period, insurance have an imperative role to play in reducing the risk
burden that the individuals and businesses have to bear. The approach to insurance should be in
tune with the changing times. The aim of the insurance sector in India is to extend the insurance
coverage over a larger section of the population and a wider segment of activities.
 The three guiding principles of the industry must be to charge premium not higher than what is
acceptable by strict actuarial considerations, to invest the funds for obtaining maximum yield for
the policy holders consistent with the safety of capital and to render efficient and prompt service
to policy holders. With a creative corporate planning and an abiding commitment to improved
service, the mission of widening the network of insurance can be achieved There is a probability
of a shoot in employment opportunities. A number of web-sites are coming up on insurance, a
few financial magazines exclusively devoted to insurance and also a few training institutes are
being set up. Many of the universities and management institutes have already started or are
contemplating new courses in insurance89. Life insurance has today become a mainstream of
any market economy since it offers plenty of scope for collecting large sums of money for long
periods of time. A well-regulated life insurance industry which moves with the times by offering
its customers specially made products to satisfy their financial needs is, therefore, essential to
progress towards a unstressed future Thus, one can understand the term ‘insurance’ better from
its legal nature, principles and functions as discussed above and is the base for all the types of
insurances
Types of Insurance

1. Life Insurance or Personal Insurance.

2. Property Insurance.
3. Marine Insurance.
4. Fire Insurance.
5. Liability Insurance.
6. Guarantee Insurance.
7. Social Insurance.
These are explained below.

1. Life Insurance

Life Insurance is different from other insurance in the sense that, here, the subject matter of
insurance is the life of a human being. The insurer will pay the fixed amount of insurance at the
time of death or at the expiry of a certain period. At present, life insurance enjoys maximum
scope because life is the most important property of an individual.

Each and every person requires insurance. This insurance provides protection to the family at the
premature death or gives an adequate amount at the old age when earning capacities are reduced.
Under personal insurance, a payment is made at the accident. The insurance is not only a
protection but is a sort of investment because a certain sum is returnable to the insured at the
death or the expiry of a period.

Important Features of Life Insurance Bonus

a. The contract is not terminated because of converting the policy into a paid-up one and in
fact, the policy stands for a reduced cover.
b. Paid-up value proportionately increases if it takes place during the latter part of the policy
period.
c. Paid-up value is not paid, immediately, but is paid as per the original terms of the
contract (i.e., death or maturity).
d. No further premium is required to be paid from the time of Conversion of the policy.

The life cover still remains operative for this reduced sum-insured and this sum-insured is paid
as per original terms of the policy, (i.e., death or maturity) The students should realize that no
further premium is required to be paid from the time the policy is converted into paid-up

2. General Insurance

General insurance includes Property Insurance, Liability Insurance, and Other Forms of
Insurance. Fire and Marine Insurances are strictly called Property Insurance. Motor, Theft,
Fidelity and Machine Insurances include the extent of liability insurance to a certain extent.

3. Property Insurance

Under the property insurance property of person/persons are insured against a certain specified
risk. The risk may be fire or marine perils, theft of property or goods damage to property at the
accident.
 4. Marine Insurance

The marine perils are; collision with a rock or ship, attacks by enemies, fire, and captured by
pirates, etc. these perils cause damage, destruction or disappearance of the ship and cargo and
non-payment of freight. So, marine insurance insures ship (Hull), cargo and freight.Previously
only certain nominal risks were insured but now the scope of marine insurance had been divided
into two parts; Ocean Marine Insurance and Inland Marine Insurance. The former insures only
the marine perils while the latter covers inland perils which may arise with the delivery of cargo
(gods) from the go-down of the insured and may extend up to the receipt of the cargo by the
buyer (importer) at his go down.

5. Fire Insurance

In the absence of fire insurance, the fire waste will increase not only to the individual but to the
society as well. With the help of fire insurance, the losses arising due to fire are compensated and
the society is not losing much. The individual is preferred from such losses and his property or
business or industry will remain approximately in the same position in which it was before the
loss. The fire insurance does not protect only losses but it provides certain consequential losses
also war risk, turmoil, riots, etc. can be insured under this insurance, too.

6. Liability Insurance

The general Insurance also includes liability insurance whereby the insured is liable to pay the
damage of property or to compensate for the loss of persona; injury or death. This insurance is
seen in the form of fidelity insurance, automobile insurance, and machine insurance, etc.

7. Social Insurance

The social insurance is to provide protection to the weaker sections of the society who are unable
to pay the premium for adequate insurance. Pension plans, disability benefits, unemployment
benefits, sickness insurance, and industrial insurance are the various forms of social insurance.

General Insurance: Meaning - type- need- Scope.

Definition: Insurance contracts that do not come under the ambit of life insurance are called
general insurance. The different forms of general insurance are fire, marine, motor, accident and
other miscellaneous non-life insurance.

Description: The tangible assets are susceptible to damages and a need to protect the economic
value of the assets is needed. For this purpose, general insurance products are bought as they
provide protection against unforeseeable contingencies like damage and loss of the asset. Like
life insurance, general insurance products come at a price in the form of premium.
Differences between life insurance and general insurance

BASIS FOR LIFE INSURANCE GENERAL INSURANCE

COMPARISON

Meaning Life insurance can be General insurance refers to the

understood as the insurance insurance, which are not covered under
contract, in which the life risk life insurance and includes various types
of an individual is covered. of insurance, i.e. fire, marine, motor, etc.

What is it? It is a form of investment. It is a contract of indemnity.

Term of contract Long term Short term

Claim payment Insurable amount is paid, either Loss is reimbursed, or liability incurred
on the occurrence of the event, will be repaid on the occurrence of
or on maturity. uncertain event.

Premium Premium has to be paid over the Premium should be paid in lump sum.
years.

Insurable interest Must be present at the time of Must be present, both at the time of
contract. contract and at the time of loss.

Policy value It can be done for any value The amount payable under non-life
based on the premium the insurance is confined to the actual loss
policy holder willing to pay. suffered or liability uncured, irrespective
of the policy amount.

Savings Life insurance place has a General insurance has no such savings
component in savings. component.

3.5 Principles of Insurance

Principle #1 – Principle of Utmost Good Faith

The principle of utmost good faith is the most basic and primary level principle of insurance and
it applies to all kind insurance policies. It simply means that the person who is getting insured
must willingly disclose to the insurer, all his complete & true information regarding the subject
matter of insurance. The insurer’s liability exists only on the assumption that no material fact is
hidden or falsely presented by the person getting insured.

There is a process called as “Underwriting” in insurance industry which is the activity of

studying the risk and assigning the premium value for the case and it’s very important that the
person buying any kind of insurance tells all the facts correctly and does not hide it.

If you think about term plan or health insurance, you need to correctly mention things like

 If you are a smoker or drinker

 Your family illness history
 The Industry you work for
 Your Income
 Your Age
 Your current illnesses (which you are already aware of)
If you do not tell these things correctly, you are violating the “Principle of utmost good faith”
here and it can impact your insurance claim process in future.

Principle #2 – Principle of Insurable Interest

This principle says that the person who is taking insurance should have some insurable interest in
that thing which is getting insured. So if there will be financial loss to the person if the insured
object gets destroyed. If this is not the case, insurance cannot be taken So when a breadwinner
takes life insurance for his life, it makes sense because incase the person dies, there will be
financial loss to family . In the same way, you can get your car, bike, home, gold insured because
you have insurable interest in that object. You can’t get your neighbor car insured and benefit
because you do not have insurable interest in that.

Principle #3 – Principle of Indemnity

Principle of Indemnity says that Insurance is not to make profit, but only to compensate you
against the losses incurred. It’s an assurance to restore the same position which was there before
the loss. So the compensation paid cannot be more than the losses incurred. In term plan, people
ask why companies ask for income details. It’s to make sure that a person takes limited insurance
which goes with his financial status and is good enough to restore back his family life style
which was there in existence. If a person earns Rs 1 lacs per month. Then Rs 2-3 crores is a good
enough life insurance for the person and they cannot take Rs 500 crore insurance even if they can
pay the premiums, because then the intention is not to cover your financial loss but to
benefit/profit from the insurance policy.

Principle #4 – Principle of Contribution

This principle is just a corollary of the principle of indemnity. As per this principle, the insured
company are liable to pay only their own contribution and they have right to recover back the
excess money paid from other insurer.

Let’s see how it works. Imagine you have two health insurance policies A and B , both for Rs 5
lacs sum assured. If there is a claim for Rs 4 lacs, then each insurer is liable to contribute Rs 2
lacs each for this claim. However in real life, you as insurer can go to any insurer and claim it
from them or divide it between insurers. So you can claim full Rs 4 lacs either from policy A or
policy B or Rs 2 lacs from A and B each. However if you claim Rs 4 lacs from company A, in
that case company A can recover back Rs 2 lacs from company B as per the principle of
contribution.
Principle #5 – Principle of Subrogation

As per this principle, once the insured is paid for the losses due to damage to his insured
property, then the ownership right of such property shifts to the insurer. So if your car / bike /
house / valuables which you have insured is fully damaged and once you get compensation from
insurance company, then they get the ownership of the item and now they can sell off the
remains to recover their dues by that process

Principle #6 – Principle of Loss minimization

As per this principle, it’s the insured duty & responsibility to take all actions to minimize the
losses if it’s in their control. The insured person should take all necessary steps to control and
reduce the losses if possible. Imagine there is a small fire in the car for example. If the car is
insured, the insured person can’t just sit and relax thinking that the car is insured, he will get the
claim for sure. If it’s in his control, he can try to control the fire, call the fire department or take
first level steps like throwing water etc. If they don’t do it, it’s the violation of this principle.

Principle #7 – Principle of Causa Proxima (Nearest Cause)

This is a very important principle of insurance which an insured person should be aware about.
As per this principle of causa proxima, when a loss if caused by more than one causes, then the
nearest or the closest cause should be taken into consideration to decide the liability of the
insurer. The nearest cause should be insured by the insurer, only then the insurer liability comes
into picture and policy holder will be paid. Insurer will not be liable for the farthest cause.

One of the common examples given for this is this

A cargo ship base was punctured by rats and because of that puncture, sea water entered the ship.
If you look at the events, there are two reasons for damage of ship

 Rats punctured the base of ship (farthest)

 Sea Water entered the ship (closest)
Here as the insurance company will have to pay because the ship was insured against sea water
entering the ship and that reason was closest.

Conclusion

Understanding these principles are a good way to understand how insurance works and how
claim process works. Just because you have taken an insurance policy does not mean that it’s
written in stone that your claim will be paid. You claim will be paid only when insurer liability
arises in a given condition.

Different Types of General Insurance

Today it is crucial to know about the different types of general insurance because of the
numerous benefits they offer. Read on to know more about them:
1. Home Insurance
As the home is a valuable possession, it is important to secure your home with a proper home
insurance policy. Home and household insurance safeguard your house and the items in it. A
home insurance policy essentially covers man-made and natural circumstances that may result in
damage or loss.
2. Motor Insurance
Motor insurance provides coverage for your vehicle against damage, accidents, vandalism,
theft, etc. It comes in two forms, third-party and comprehensive.
When your vehicle is responsible for an accident, third-party insurance takes care of the harm
caused to a third-party. However, you must take into account one fact that it does not cover any
of your vehicle’s damages. It is also important to note that third-party motor insurance is
mandatory as per the Motor Vehicles Act, 1988.
A comprehensive insurance policy safeguards your vehicle against fire, earthquake, theft, impact
damage, etc. Additionally, it provides coverage against any third-party liability in the case of
third-party property damage, bodily injury, or death.
3. Travel Insurance
When you are travel internationally and suffer losses because of loss of baggage, trip
cancellation, or delay in flight, a travel insurance policy safeguards you. You may also be
offered cashless hospitalization if you are hospitalized while travelling.
4. Health Insurance
Health insurance is a vital tool for risk mitigation and helps you deal with medical emergencies.
A health insurance plan covers hospitalization expenses up to the sum insured. When it comes
to health insurance, one can opt for a standalone health policy or a family floater plan that offers
coverage for all family member

Claim Settlement under Non-Life Insurance

The non-life insurance industry is witnessing shifting trends across policy administration, and
claims—the two core functions in insurance.
The claims process is the defining moment in a non-life insurance customer relationship.
To retain and grow market share and improve customer acquisition and retention rates,
insurers are focused on enhancing customers’ claims experience.

In a highly competitive insurance market, differentiation through new and more

effective claims management practices is one of the most important and effective ways
to maintain market share and profitability.

In particular, insurers can transform the claims processing by leveraging modern claims
systems that are integrated with robust business intelligence, document and content
management systems. This will enhance claims processing efficiency and effectiveness.
It can benefit the insurers both operationally and strategically by enabling them to reduce
claims costs to improve their combined ratio, improve claims processing efficiency, and
drive customer retention and acquisition.

Today in any insurance office the claim process is built on

• Claim document & content management tool

• Mobile based & smart phone based technology solutions the key
• STP processing to minimize delay
• Modern claim processing platform which is seamless & robust

Normal claim process followed by General Insurers

1. An insured or the claimant shall give notice to the insurer of any loss arising
under contract of insurance at the earliest or within such extended time as may be
allowed by the insurer.
2. On receipt of such a communication, a general insurer shall respond immediately
and give clear indication to the insured on the procedures that he should follow. In cases
where a surveyor has to be appointed for assessing a loss/ claim, it shall be so done
within 72 hours of the receipt of intimation.
3. Where the insured is unable to furnish all the particulars required by the surveyor
or where the surveyor does not receive the full cooperation of the insured, the insurer or
the surveyor as the case may be, shall inform in writing the insured about the delay that
may result in the assessment of the claim.

4. The surveyor shall be subjected to the code of conduct laid down by the
Authority while assessing the loss, and shall communicate his findings to the insurer
within 30 days of his appointment with a copy of the report being furnished to the
insured, if he so desires. Where, in special circumstances of the case, either due to its
special and complicated nature, the surveyor shall under intimation to the insured, seek
an extension from the insurer for submission of his report.
5. In no case shall a surveyor take more than six months from the date of his
appointment to furnish On receipt of the survey report or the additional survey report, as
the case may be, an insurer shall within a period of 30 days offer a settlement of the
claim to the insured. If the insurer, for any reasons to be recorded in writing and
communicated to the insured, decides to reject a claim under the policy, it shall do so
within a period of 30 days from the receipt of the survey report.

6. Upon acceptance of an offer of settlement by the insured, the payment of the

amount due shall be made within 7 days from the date of acceptance of the offer by the
insured. In the cases of delay in the payment, the insurer shall be liable to pay interest at
a rate which is 2% above the bank rate prevalent at the beginning of the financial year in
which the claim is reviewed by it.

LIFE INSURANCE
is an arrangement through which a person can plan for the continuation of income when
uncertainties and certainties (i.e.) illness or Accident and death or old age disrupt or destroy his
ability to earn his livelihood.

Therefore the Insurance is

1. The business of insurance is related to protection of human life, human created assets, human
disability and business liabilities possessed by human beings which have a definite value, and
2. Assets and human life generate benefit and income for the owner and his/her family members,
and

3. Loss of assets / human life for any reason stops the benefits and income to the owner and
family members respectively, and

4. Results in falling of living standards in the family, quality of life and future growth of the
associated family members,

5. Insurance is a mechanism that helps to reduce such adverse consequences through pooling,
spreading and sharing of risk.

Benefits to Economy
i. Rapid investment z Improve Quality to Life (New risk covers)
ii. Competition will bring Consumer Friendly Products
iii. Large Scale Mobilisation of Funds
iv. Insurance & Reinsurance Facilities to Major Projects
v. Export Projects covered at Home

Benefits to Government
i. Long Term Funds for Infrastructure
ii. Long Term Debt Market Instruments Available
iii. Increased Employment Opportunities & Compensation
iv. Reduced Financial Burden of Rural, Social & Backward Classes
v. Contributions in Calamities (Sharing of Social Responsibilities)

Benefits to Consumer
i. Superior Quality at Lower Prices
ii. Wider Choice of Products
iii. World Class Service to the Consumer
iv. Increased Penetration of Insurance

Benefits to Employee
i. Human Resource Development
ii. Exposure to ‘State of the Art Practices”
iii. Greater Job Opportunities
iv. Higher Remuneration
v. Professional Management Practices

Benefits to Society
Insurance Companies Act as Guardians in number of Ways: -

i. Risk cover for Large Industry, Trade & Property are offered in Compliance to Law
ii. Environmental Risks get Reduced
iii. Hit – and – Run Compensations
iv. Crop Insurance for Covering Risk of Nature – Poor Rainfall etc.

Type of life insurance

Life Insurance products

1. Term insurance plans

Term insurance is valid only during a certain time period that has been specified
in the contract. The term can range from as short as it takes to complete an
airplane trip to as long as forty years. Protection may extend up to age 65 or 70.
One-year term policies are quite similar to property and casualty insurance
contracts.

All premiums received under such a policy may be treated as earned towards the
cost of mortality risk by the company. There is no savings or cash value element
accruing to the insured.

a) Purpose:

A term life insurance fulfils the main and basic idea behind life insurance, that is,
if the life insured dies prematurely there will be a sum of money available to take
care of his/her family. This lump sum money represents the insured’s human life
value for his loved ones: either chosen arbitrarily by self or calculated
scientifically. A term insurance policy also comes handy as an income
replacement plan. Here in place of payment of a lump-sum amount to the
dependents, on the happening of an unfortunate death during the term of the
policy, a series of monthly, quarterly or similar periodical pay outs for a pre-
defined duration may be provided to the dependent beneficiaries. b) Disability:

Normally a term insurance policy covers only death. However, when it is

purchased with a disability protection rider on the main policy and if someone
were to suffer such a catastrophe during the period of term insurance, the
insurance company will provide a payout to the beneficiaries/insured person. If
the insured dies after the term ends, there are no benefits available as the deal is
over as soon as the term expires.
2. Whole life insurance

While term assurance policies are examples of temporary assurance, where

protection is available for a temporary period of time, whole life insurance is an
example of a permanent life insurance policy.

In other words there is no fixed term of cover but the insurer offers to pay the
agreed upon death benefit when the insured dies, no matter whenever the death
might occur.
The premiums can be paid throughout one’s life or for a specified period of time
which is limited and is less than one’s lifetime.

Whole life premiums are much higher than term premiums since a whole life
policy is designed to remain in force until the death of the insured, and therefore it
is designed to always pay the death benefit. After the insurance company takes the
amount of money it needs from the premium, to meet the cost of term insurance,
the balance money is invested on behalf of the policyholder. This is called cash-
value.

A whole life policy is a good plan for one who is the main income earner of the family
and wishes to protect the loved ones from any financial insecurity in case of
premature death.

Whole life insurance plays an important role in household saving and creating
wealth to be passed on to the next generation.

3. Endowment assurance

An endowment assurance contract is actually a combination of two plans:

A term assurance plan which pays the full sum assured in case of death of the
insured during the term. b. A pure endowment plan which pays this amount if the
insured survives at the end of the term.

The product thus has both a death and a survival benefit component. From an
economic point of view, the contract is a combination of decreasing term
insurance and an increasing investment element.

Shorter the policy term, larger the investment element. The combination of term
and investment elements is also present in whole life and other cash value
contracts. It is however much more pronounced in the case of endowment
assurance contracts. This makes it an effective vehicle to accumulate a specific
sum of money over a period of time.
4. Money back plan

A popular variant of endowment plans in India has been the Money Back policy.
It is typically an endowment plan with the provision for return of a part of the sum
assured in periodic instalments during the term and balance of sum assured at the
end of the term.

Example:

A Money Back policy for 20 years may provide for 20% of the sum assured to be
paid as a survival benefit at the end of 5, 10 and 15 years and the balance 40% to
be paid at the end of the full term of 20 years.

If the life assured dies at the end of say 18 years, the full sum assured and bonuses
accrued are paid, regardless of the fact that the insurer has already paid a benefit
of 60% of the face value. These plans have been very popular because of their
liquidity (cash back) element, which renders them good vehicles for meeting short
and medium term needs.

Full death protection is meanwhile available when the individual dies at any point
during the term of the policy.

5. Unit linked insurance

Unit Linked Insurance Plan (ULIP) is a mix of insurance along with investment.
From a ULIP, the goal is to provide wealth creation along with life cover where
the insurance company puts a portion of your investment towards life insurance
and rest into a fund that is based on equity or debt or both and matches with your
long-term goals. These goals could be retirement planning, children’s education
or another important event you may wish to save for.

When you make an investment in ULIP, the insurance company invests part of the
premium in shares/bonds etc., and the balance amount is utilized in providing an
insurance cover. There are fund managers in the insurance companies who
manage the investments and therefore the investor is spared the hassle of tracking
the investments.

ULIPS allow you to switch your portfolio between debt and equity based on your
risk appetite as well as your knowledge of the market’s performance. Benefits like
these which offer investors the flexibility of switching is a huge factor
contributing to the popularity of these investment instruments.

One of the changes brought about by the Insurance Regulatory and Development
Authority of India (IRDAI) in the year 2010 as regards ULIPs, was to increase the
lock in a period from 3 years to 5 years. However, insurance being a long-term
product, as an investor you may not really reap the benefits of the policy unless
you hold it for the entire term of the policy which can range from 10 to 15 years.

6. Index linked insurance policy

The index linked policies are life insurance policies with which insurance
premiums are invested in instruments whose returns are linked to the performance
of one or more indices.

As the trend of the performance indices is uncertain by definition, if it is not

suitable to the risk profile of the subscriber, the policy is often accompanied by a
guarantee on the capital that has been invested. In this case the greater part of the
money is invested in zero coupon bonds and the remainder is invested in
structured products linked to the indices and are therefore more risky.

In addition, for index linked policies are estimated implicit and explicit costs. The
former are very clear in the statements that concern the classic illustrative and
expenses related to an insurance policy. The implicit costs are those relating to
instruments on which invests the policy. Zero coupon bonds for this feature
usually have a higher price than the market and then structured products which
have a not predictable cost because usually incorporate tools financial derivatives.

7. Life Annuity A life annuity is an insurance product that features a predetermined

periodic pay-out amount until the death of the annuitant. They are commonly used
to provide for a guaranteed income in retirement that cannot be outlived. Typically,
the annuitant pays into the annuity on a periodic basis when he or she is still
working. However, annuitants may also buy the annuity product in one large,
lump-sum purchase, usually at retirement.

Defined benefit pension plans are a form of a life annuity, in that they pay a
lifetime benefit based on an employee's salary, age, and length of service.

Once funded and enacted, the annuity makes periodic pay-outs to the annuitant,
usually monthly, providing a reliable source of income. When a triggering event
occurs, such as death, the periodic payments from the annuity usually cease,
though they may continue to pay out depending on the option the annuity buyer
chooses.

While annuities generally pay a benefit every month, but can also pay quarterly,
annually or semi-annually, depending on the needs or tax circumstances of the
annuitant. Many retirees fund a life annuity to match their recurring housing
(mortgage or rent), assisted living, health care, insurance premium or medical
expenses. While a life annuity pays a guaranteed income, it is not indexed to
inflation, so purchasing power can erode over time. A life annuity, once enacted,
is not revocable.

There are two phases to an annuity: accumulation (or deferral), when the buyer
funds an annuity with premiums, and distribution during which the annuitant
receives payments until death.

Insurance Regulatory and Development Authority (IRDA)

The Committee on reforms of the insurance sector under the chairmanship of Shri R N
Malhotra, ex-governor of Reserve Bank of India, recommended for the creation of a
more efficient and competitive financial system in tune with global trends. It
recommended amendments to regulate the insurance sector to adjust with the economic
policies of privatization.

The decision to establish the Insurance Regulatory and Development Authority was
implemented by the passing of the Insurance Regulatory and Development Authority Act, 1999.

In India, presently after the opening up of the insurance sector, the regulator for the
monitoring of the operations of the insurance companies is the IRDA, having its head
office in Hyderabad.

The regulatory framework mainly aims to focus on three areas, viz.,

i. The protection of the interest of the consumers

ii. To ensure the financial soundness of the insurance industry
iii. To pave the way to help a healthy growth of the insurance market where
both the government and the private players play simultaneously.

Some of the important duties, powers and functions of Authority

include
I. To Issue certificate of registration, to applicants interested in insurance
business, and also to renew, modify, withdraw, suspend or cancel such
registration.
II. Specify requisite qualifications and practical training for insurance
intermediaries and agents.
III. Specify the code of conduct for surveyors and loss assessors.
IV. Levy fees and other charges for carrying out the purposes of this Act
V. Control and regulate the rates, terms and conditions that may be offered
by insurers in respect of general insurance business.
VI. Regulate investment of funds by insurance companies.
VII. Regulate maintenance of margin of solvency
VIII. Adjudication of disputes between insurers and insurance intermediaries
IX. Supervise the functioning of the Tariff Advisory Committee.
X. Specify percentage of life and general insurance business to be
undertaken by the insurer in the rural or social sector.