Table of Contents

Insurance....................................................................................................................................................... 2 Principles of Insurance .............................................................................................................................. 2 Types of Insurance .................................................................................................................................... 2 Life Insurance ........................................................................................................................................ 2 General Insurance ................................................................................................................................. 4 Bancassurance .......................................................................................................................................... 5 Distinguishing characteristics of Insurance Contract ................................................................................ 5 Principal of indemnity ........................................................................................................................... 5 Rules of Insurable Interest .................................................................................................................... 5 Subrogation ........................................................................................................................................... 6 Utmost Good faith ................................................................................................................................ 6 Aleatory Contract .................................................................................................................................. 6 Aleatory contract is a contract wherein the performance of one or both the parties is based on the occurrence of an event. Such insurance contracts may be a boon to one party but create a major loss for the other................................................................................................................................... 6 Contract of Adhesion ............................................................................................................................ 6

Insurance
Insurance therefore is a contract between two parties whereby one party agrees to undertake the risk of another in exchange for consideration known as premium and promises to pay a fixed sum of money to the other party on happening of an uncertain event (death) or after the expiry of a certain period (in case of life insurance) or to indemnify the other party on happening of an uncertain event (in case of general insurance). The party bearing the risk is known as the insurer or assurer and the party whose risk is covered is known as the insured or assured.

Principles of Insurance
Insurance works on two principles, which are: Principal of probability Principal of cooperation

Types of Insurance
There are two types of insurances, which are: Life Insurance (deals with insurance of human life) Non-life insurance (Also called General Insurance refers to all insurances other than life)

Life Insurance The various types of life insurance policies are: Endowment policy Whole life policy Term life policy Money back policy Joint life policy Childrens insurance policy

Endowment policy The sum assured is payable on the death of the assured or after a fixed period of years whichever occurs first. This type of policy combines the advantage of security or protection for the family in the event of the assureds premature death and /or facilitates retirement by paying out a lump sum amount at an age agreed upon, should the assured continue to live up to that age. Generally, people try to coincide this with their retirement age of say 60 years. Endowment policies are popular in India as it combines life assurance with investment option and appeals to the security conscious people. However, the premium under this policy is higher as the insurer has to definitely pay out a claim either to the beneficiary in the event of the death of the assured or to the insured if he lives up to a certain age. 2

Whole life policy The oldest and the purest form of life assurance is Whole Life insurance. The premium is paid by the assured throughout the life time of the assured and the sum assured is paid to the beneficiary on the death of the assured. This policy satisfies the original intention of life insurance which is to provide security to dependants on the death of the assured. Under this type of policy the beneficiary named in the policy is paid the benefits under the policy on the death of the assured. The payment under the policy is assured and this policy does not have an end date. As these policies provide for payment only in the event of death, the premium under this policy is lower than other policies. The assured can insure himself or herself for higher amounts (at comparatively low premiums) so that his dependants are well provided for in the event of his or her death. Term Life policy As the name implies, these policies are issued for a term or a period of time and if the death of the assured occurs during the term of the policy, the policy pays the sum assured. If the insured lives beyond the period stated in the policy, no payment under the policy is envisaged. The term insurance provides pure death protection and does not have any savings element as some other insurance policies do. The premium under the term policies is lower as the policies are issued for a fixed period. However, this type of policy is not a great option as a saving instrument as the assured does not get any amount from the policy should he survive the policy period i.e. if the policy is issued for a period of 20 years expiring on 31st December 2012 and the insured is still alive on that date, he will not be entitled to receive any money under the policy. Money Back policy Unlike ordinary endowment insurance plans where the survival benefits are payable only at the end of the endowment period, this scheme provides for periodic payments of partial survival benefits as follows during the term of the policy, of course so long as the policy holder is alive.

Example: In the case of a 20-year Money-Back Policy , 20% of the sum assured becomes payable each after 5, 10, 15 years, and the balance of 40% plus the accrued bonus become payable at the 20th year. An important feature of this type of policies is that in the event of death at any time within the policy term, the death claim comprises full sum assured without deducting any of the survival benefit amounts, which have already been paid. Similarly, the bonus is also calculated on the full sum assured. Joint Life This is generally issued to cover the husband and wife together. The sum insured is payable under this policy either on expiry of a stated number of years or on death of one of the assured whichever is earlier. With this payment the policy comes to an end and does not continue to cover the second assured. This policy is jointly taken by a husband and wife.

Childrens Insurance (Also called deferred insurance) The purpose is to provide for life assurance to a child. The parents propose the life of the child as assured. As the name suggests the insurance is deferred. a) The life assurance for the child commences when he or she reaches the age of 18 to 22 (i.e. any age between 18 and 22 can be chosen for the commencement of life assurance) No claims are paid during the deferment period, i.e. the period between commencement of premium payment and the chosen age when the life assurance begins. For e.g. if a parent starts a policy for his child when the child is 10 and wishes to commence life assurance from the age of 22, then the deferment period would be 12 years from the time the child is 10 years old till he reaches the age of 22. b) In case of death of the child before the agreed age when the risk commences, the premium is returned. c) In case the parent (the premium payer) dies, the premium must be continued to be paid by someone else till the deferred date. d) Once the child reaches the vesting age, i.e. the age when the life assurance commences, he or she can claim cash option i.e. he can opt to receive the premium amount paid so far under the policy in case the policy is discontinued. e) On reaching majority i.e. the age of 18, irrespective of the vesting age chosen under the policy, the life assured signs an agreement with the insurer and from that date the contract is between the insurer and the life assured. f) Health proof is not asked for once the assured attains the vesting age. General Insurance General life insurance could be classified into: Fire Insurance Marine Insurance Motor Insurance Health Insurance Miscellaneous Insurance

Fire Insurance It is a comprehensive policy. Covers the risk of loss due to fire. Movable and Immovable property having monetary value is covered under fire insurance policy. Marine Insurance Covers the risk arising from and incidental to marine operations related to cargo, hull, etc. Marine Insurance policy is broadly classified into: Marine hull insurance 4

Related to insurance of hulls Marine cargo insurance Related to insurance of goods in transit from one place to another

Motor Insurance Insurance related to motor vehicle. Third Party Insurance It is mandatory for all vehicles in India to have third party insurance. Example: If you were to crash into another car and the accident was deemed to be your fault, then your liability to the driver of the other car would be covered. This cover will come from the premium that you pay. Health Insurance Individual Mediclaim This policy seeks to reimburse the expenses incurred by the insured for hospitalization/ domiciliary hospitalization arising out of illness/ accident. Miscellaneous Insurance Agriculture insurance o Crop Insurance o Cattle insurance o Pump set insurance Travel policy insurance

Bancassurance
This is the distribution of insurance products through the branches and multiple communication channels of a bank that include ATM, tele banking and internet banking.

Distinguishing characteristics of Insurance Contract

Principal of indemnity Insurance contracts are generally based on the principle of indemnity. As per this principle, the insured should be in the same financial position after the settlement of claim as he was immediately prior to the loss. Life insurance is an exception. Since the value of human life cannot be assessed, life insurance policies are not strict policies of indemnity. Rules of Insurable Interest For an insurance contract to be valid, the proposer should have insurable interest in the subject matter of insurance. Insurable interest implies that the proposer should benefit financially by the continued existence of the insured property/life or should be put into financial loss by the loss/damage/death of the subject matter insured. 5

Subrogation Subrogation is the legal substitution of one person in anothers place. Subrogation means stepping into the shoes of another person. In insurance it implies if the insured has any rights against third parties, the insurer on payment of the claim takes over these rights. In insurance, subrogation gives the insurer the right to collect from a third party, any rights which the insured has against such a third party, after paying the insureds claim(s). A typical case of subrogation arises in automobile insurance claims. Suppose Satish is responsible for the collision of his car with Rahuls car. Rahul may sue Satish for damages or he may collect money from his own automobile insurance. If he chooses to collect money from his own insurance, his insurance company will be subrogated to his right to sue Satish (insurance company replaces Rahul). Rahul cannot collect money for his loss both from his insurer and from Satish. Subrogation does not exist in life insurance because life insurance is not a contract of indemnity. Thus, if Mr. Rahul Kumar is killed by his neighbors negligence, Mrs. Kumar may collect whatever damages a court will award for her husbands wrongful death. She may also collect the life insurance proceeds. The life insurer is not subrogated to the liability claim and cannot sue the negligent party. Utmost Good faith In all legal contracts, it is essential that the parties to the contract exercise good faith. However, in insurance the emphasis is on utmost good faith which should be exercised by the insured. As the insured alone has complete information about the subject of insurance, he should reveal all the facts to the insurer. In case of breach of this condition the contract becomes void. Aleatory Contract Aleatory contract is a contract wherein the performance of one or both the parties is based on the occurrence of an event. Such insurance contracts may be a boon to one party but create a major loss for the other. Contract of Adhesion The wordings of the insurance policy are written by the insurer and the insured either accepts the contract in full or rejects it but cannot modify it.