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UNIT-1 LIFE INSURANCE BASIC PRINCIPLES

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INDIAN INSURANCE SECTOR

The three phases

Phase I (1918-1972)

Phase II (1956-2000)

Phase III (After 2000)

245 Life insurance companies (pvt)

107 General insurance Companies (Pvt)

All Pvt Life insurance cos

Nationalized & LIC emerged in 1956. All General Insurance Cos nationalized one cos with 4 subsidiaries emerged.

Opened for private sector.

16 life & 16 gen insurance cos emerged apart from existing public sector units

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INSURANCE INDUSTRY IN INDIA

IRDA April-2000

Public Sector

Private sector

Life LIC Post office insurance

General GIC & its 4 subsidiaries

Life 16 Cos

General 16 Cos
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TYPES OF INSURANCE

Life insurance

Non life insurance

General insurance

Miscellaneous insurance

Marine insurance Fire insurance Personal accident insurance

Fidelity guarantee insurance Crop insurance Burglary insurance Flood insurance

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ROLE & FUNCTIONS OF INSURANCE

Primary Providing protection Collective risk bearing

Secondary Preventing losses Covering larger risks with small capital Helps in the development of larger industries

Others Risk Free trade Medium of earning foreign exchange Is a savings and investment tool

Evaluating risk
Provide Certainty

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LIFE INSURANCE DEFINED

A contract of life insurance is that in which one party agrees to pay a given sum on the happening of a particular event contingent upon the duration of human life, in consideration of the immediate payment of a smaller sum or certain equivalent periodical payments by another. ..Bunion

Life insurance business is the business of effecting contract upon human life insurance acts

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SALIENT FEATURES OF LIFE INSURANCE

1. Instrument of savings

2. Provides social security

3. Risk coverage starts from the date of accepting of proposal. 4. Beneficiary nominee/ legal heir stands to gain 5. Policy can be assigned / mortgaged. 6. Policy holders can seek loan against the policy 7. Certain policies cover up for treatment to serious ailments 8. Money can be set aside for childrens education/ marriage 9. Provision for old age.

10. I T benefits

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POLICY SPECIFICATIONS
A life insurance contract will specify

Sum assured

Term

Premium

Mode of payment of premium

Premium paying period

Participation in profits
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ADVANTAGES

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Marketable & Liquid

Encourages compulsory savings & forces thrift

Superior to an ordinary Easy settlement & protection Savings plan with tax relief against creditors

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MODERN CONCEPT OF LIFE INSURANCE

Economic principle Risk suffered by few is spread over large number of people who face the same risk. Spread of risk is the economic principle of life insurance

Actuarial principles Fixing the contribution or premium Everyone should contribute premium commensurate with the risk he brings to the fund.

Legal principles Establishing relationship between individual & the fund. Relevant law of land will have to be abided to establish legally acceptable understanding , relationships & mutual understanding.

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SCIENTIFIC BASIS OF LIFE INSURANCE

Shared risk Law of large numbers Predictable mortality Invested assets Fair & accurate Risk selection

Principle of shared risk works when law of large numbers is applied. Larger the group less impact on the death of an individual. Though it is not possible to predict an individuals death, tracking & recording data about health , lifestyle & mortality trends can give insurer a reasonable information about life expectancies. This data is recorded in mortality tables. Once this is known, the insurance companies can predict the number of people who may die in a given Year & can calculate the premium rates. The premium is invested for earning income . The projected income is factored into premium. A % of assets is set aside in company reserves to reduce the impact of unexpected events. Insuring people of good health. Every insurance policy coverage is with reasonable risk

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LAW OF LARGE NUMBERS

The principle of risk sharing works only when the law of large numbers Is operational This is a scientific principle which states that larger the group lesser the impact of death of one member of the group. A group with just few hundred members will not work. The base will be fragile.

Hence larger the group , successful will be the insurance business

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ECONOMIC BASIS OF INSURANCE

Threats / risks for economic stability a. Physical & mental disability due to accident or disease. b. Retirement from active work c. Death

Three ways to ensure economic stability

1. Social security scheme of the government for BPL categories. 2. Group effort (group life/ general/ health schemes) 3. Individual effort
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VARIOUS ECONOMIC USES OF INSURANCE

In the event of the untimely & premature death of bread winner 1. Financial security to the family 2. Potent savings instrument 3. Education for children / marriage for daughters 4. Repay the outstanding of housing loan

5. Financial independence at old age in case of survival of the person

6. Insuring debtors in case of business organizations if the debtor dies .

7. Insuring the life of partners to pay to the legal heirs & ensure that the amount in business is retained.
8. Group insurance for employees .
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HUMAN LIFE VALUE (HLV)

Proposed by Late S S Hubner in 1924. HLV is one segment of the general theory of human capital. People are important element of national wealth The productive superiority of technically advanced countries is due to Human capital Human life is subject to loss due to premature death, temporary disability , total disability & retirement. The purpose of life insurance is to protect the family in the event of any effect on the earning potential of the individual. HLV is the measure of the actual future earnings of an individual. It is the capitalized value of an individuals net future earnings (after maintenance expenses)
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TYPES OF INSURANCE POLICIES

All the plans of insurance are a combination of both term insurance element & pure endowments element in different proportions. These two elements (Term & endowment ) are the basic building blocks of all Life insurance products. Thus life insurance products can be divided on the basis of the following 1. Duration of the policy 2. Methods of premium 3. Participation in profits 4. Number of lives covered. 5. Methods of payment of the sum.

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IMPORTANT POLICIES
Endowments Assurance Whole life with a. profits b. Limited plan c. Single premium d. Convertible W L plan Childrens deferred Assurance plan

Money back With profits

Mediclaim policy

Group insurance

ULIP

Key man

AssignmentTo study & submit a note on the LI plans with features of different companies
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BASIC PLANS OF LIFE INSURANCE

Term insurance plan

Whole life plan

Endowments plan

Special plans

Unit linked Insurance plans

Assignment
Study in detail the following aspects 1. 2. 3. 4. 5. 6. Combination of term insurance & pure endowment Flexible premium plans Variable annuities Family protection policies Disability income policies ULIP

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STANDARD TYPE OF POLICY DOCUMENT

Heading Operative clause Preamble Proviso

Schedule

Attestation

Conditions & privileges governing the agreement Assignment

Any special clause or endorsement Attached to the policy

To discuss in detail the various aspects as mentioned above

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RIDERS
Add-ons to the basic policy to supplement the cover provided. It can also be set of riders. The most commonly used riders in life policies are

1. Waiver of premium in case of total disability

2. Accidental death & dismemberment Twice the amount of face value. 3. Guaranteed purchase option- Additional cover without any medical checkup. 4. Accelerated benefit riders- An early payment of some portion due to injury/ illness

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ASSIGNMENT- NOMINATION
Assignment is legal transference. It is a method by which a policy holder can transfer his interest to another person.
It can be done by endorsement on the policy/ as a separate deed. It can be conditional/ absolute. Nomination is an act by which the policy holder authorizes another person to receive the policy moneys . The authorized person is nominee.

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ASSIGNMENT & NOMINATION

All rights pass to assignee Entitled to receive the amount in the event of the death of policy holder
Not essential Revocable. Nominee can be changed Gets right to receive the insured amount.

Consideration essential Irrevocable Property in the policy passes to Assignee Assignee has right to sue under the policy

Nominee has no right to sue

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SURRENDER VALUE- PAID UP VALUE

S V is the amount which is payable by the insurer before the maturity date S V is the expression of desire of non continuation of the policy S V represents the present cash value of the policy S V is calculated for each class of policy , premium paid for years for which policy is in force Increases with each premium paid Entitlement of the policy holder Regarding portion of policy amt That bears to the premium till date No such desire

Value payable on assureds death Or at the time of maturity Calculated on the basis of no of years , premium is paid, payable & sum assured with profits Always higher than the S V since it not required to be paid.

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OTHER ASPECTS

Foreclosure
Closing before maturity date. Action taken when two or more installments on loan are due

Days of grace
15 to 30 days is given to the policy holder beyond the due date to make payment of the premium.

Suicide
Liability of insurer is modified & limited in case of suicide. Insurer will not pay the insured amount in some cases though Indian law states that the company cannot avoid payment on the ground of suicide.

Revival
Policy lapses When premium is not paid within grace period. Normally it can be revived within a period of 5 years From the due date of last paid premium.

If principle / interest on the loan is more than S V , the policy will be subject to foreclosure.

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RISK & INSURANCE

Risk is the un certainty of loss

Personal Property Loss due to others failure

Fidelity risk Risk due to ownership or transport vehicle

The pyramid of nature of risk

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CLASSIFICATION OF RISK

Personal

Property

Liability

Others failure

Fidelity

Ownership

Premature death Old age death

Damage / use of The property

Wrong failure to meet committed The obligation Due to Human mistakes effecting others

Dishonesty Of employees

Damage Or Loss to The vehicle

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FEATURES OF RISK MANAGEMENT

Risk management may be defined as identification of risk, analysis of risk & economic Control of the risk Risk management evaluates the risks identified in the risk assessment process , selects & implements the plan of action that are required to control the risk Risk management is vital tool in the modern business / trade/human activities It is not only essential to prevent the risks but also to control & reduce them Risk management leads to maximum social , political & economic development.

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FEATURES OF RISK MANAGEMENT

Risk management helps to 1. Create right corporate policies & strategy. 2. Manage men/ machine effectively 3. Evaluate risk confronted by the business. 4. Effectively handle, spread , monitor & insure the risks 5. Introduce various plans & techniques to minimize the risks.

6. Create risk awareness among the people.

7. Avoid cost , disruption & unhappiness relating to risks.

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OBJECTIVES OF RISK MANAGEMENT

Protecting employees from accidents that might result in death / injury. Due attention given to cost of handling risks. Effective utilization of resources Maintaining good relation with the society & public.

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SCOPE OF RISK MANAGEMENT

Control of loss

Financing of loss

Internal risk control

Extra precautions Reduce level of risky activities

Risk retention & self insurance

Diversification Investment in risk information

Buy insurance policy Contracts

Non insurance risk transfer

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METHODS OF HANDLING RISKS

Prevention Of risk

Reduction Of risks

Shifting/ transferring risk

Acceptance Spreading of Of risk risks

Assignment

Discuss various aspects of the 5 components of handling the risks

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UNIT-1 CONCLUDED

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