RATHNAVEL SUBRAMANIAM COLLEGE OF ARTS AND SCIENCE

(AUTONOMOUS) SULUR
SCHOOL OF BUSINESS MANAGEMENT
INSURANCE PRINCIPLES AND PRACTICE
UNIT II

INSURANCE

Life Insurance
Life insurance (or commonly life assurance, especially in the Commonwealth) is a contract
between an insured (insurance policy holder) and an insurer or assurer where the, insurer
promises to pay a designated beneficiary a sum of money (the "benefits") in exchange for a
premium, upon the death of the insured person. Depending on the contract, other events such
as terminal illness or critical illness may also trigger payment. The policy holder typically
pays a premium, either regularly or as a lump sum. Other expenses (such as funeral expenses)
are also sometimes included in the benefits.
Life policies are legal contracts and the terms of the contract describe the limitations of the
insured events. Specific exclusions are often written into the contract to limit the liability of

the insurer; common examples are claims relating to suicide, fraud, war, riot, and civil
commotion.
Life-based contracts tend to fall into two major categories:

Protection policies designed to provide a benefit in the event of specified event,

typically a lump sum payment. A common form of this design is term insurance.

Investment policies where the main objective is to facilitate the growth of capital
by regular or single premiums. Common forms (in the US) are whole life, universal
life, and variable life policies.

Definition of 'Assurance'
Coverage of an event that is certain to happen. Assurance is similar to insurance (and
sometimes the terms are interchangeable) except that insurance protects policyholders from
events that might happen.
Insurance vs Assurance
Insurance and Assurance sounding similar; the words insurance and Assurance are
commonly used by companies selling financial products. The two terms Insurance and
Assurance are very confusing in financial world. When it comes to choosing financial
products from insurance companies to safeguard interests of a person or an object, many
companies prefer to use the word assurance as against insurance used by others. The person
concerned is more interested in knowing the details of the policy rather than terminology, and
hence it doesnt really matter whether the policy refers to itself as assurance or insurance.
These terms are irrelevant if the cover is right for the person or the object.
Insurance
If we look up in a dictionary, the word Insurance refers to means of guaranteeing protection
of an object or a person, or a guarantee against loss or damage. People getting this insurance
or protection have to pay premiums or instalments monthly or yearly to the company which
undertakes to pay in the event of loss or damage or death. There are various types of
insurance products available in the market such as health insurance, life insurance, home
insurance etc. In fact, companies have been insuring everything under the sun these days,
even body parts such as breasts, legs, denture and voice are being insured.
In life insurance alone, there are policies that provide cover only and the family of the person
receive the amount in the event of death of the person and nothing if he survives the period of
the policy. But majority of people go for insurance policies of limited time period where they
receive the amount proposed along with bonus that has accrued at the end of the term of the
policy.
Assurance

Assurance, according to dictionary means making someone feel comfortable with a decision
and clearing his doubts. If you are assuring someone, you are instilling confidence in him.
When a person takes life assurance policy, he gets a cover for his entire life, no matter when
his life ends. Every premium that he pays to the company adds to the value of the policy, ands
when this added up value equals the death benefit that the person has been assured, the policy
is said to have matured. In life assurance, a person can choose to cash out his policy anytime
he so desires.
Difference between Insurance and Assurance
Both insurance and assurance are financial products offered by companies operating
commercially but of late the distinction between the two has increasingly become blurred and
the two are taken to be somewhat similar. However, there are subtle differences between the
two which are as follows.
Insurance policy refers to protection against an event that might happen whereas assurance
policy refers to protection against an event that will happen. This means that insurance policy
is taken to prevent a risk or provide cover against a risk while assurance policy is taken
against an event that is definite.
Assurance policies are undertaken by people knowing that their death is certain. They keep
on paying premiums knowing that their heirs will receive a big amount whenever they die.
Company issuing assurance policy is assured of the death of the person and also that it has to
pay the amount whenever the person dies. Because of this assurance factor, such a policy is
called assurance policy.
In case of insurance policy, the company pays the amount to the dependants of the person if
all the premiums have been paid on time and the person dies within the duration of the policy.
In most of the cases, the person does not die within the term of the policy, hence it is called
life insurance.

Insurance Policy

Assurance Policy

protection against an event that

might happen

Protection against an event that is

definite

In life insurance,
the dependants receive the policy
if all premiums paid on time and
the person dies within the
duration of policy.

In life assurance, a person can

choose to cash out his policy
anytime he so desires.

Essential features of LifeInsurance

The insurance has the following characteristics which are, generally, observed in case of
life, marine, fire and general insurances.
1. Sharing of Risk:
Insurance is a device to share the financial losses which might befall on an individual or his
family on the happening of a specified event. The event may be death of a bread-winner to
the family in the case of life insurance, marine-perils in marine insurance, fire in fire
insurance and other certain events in general insurance, e.g., theft in burglary insurance,
accident in motor insurance, etc. The loss arising nom these events if insured are shared by all
the insured in the form of premium.
2. Co-operative Device:
The most important feature of every insurance plan is the co-operation of large number of
persons who, in effect, agree to share the financial loss arising due to a particular risk which
is insured. Such a group of persons may be brought together voluntarily or through publicity
or through solicitation of the agents.
An insurer would be unable to compensate all the losses from his own capital. So, by insuring
or underwriting a large number of persons, he is able to pay the amount of loss. Like all
cooperative devices, there is no compulsion here on anybody to purchase the insurance
policy.
3. Value of Risk:
The risk is evaluated before insuring to charge the amount of share of an insured, herein
called, consideration or premium. There are several methods of evaluation of risks. If there is
expectation of more loss, higher premium may be charged. So, the probability of loss is
calculated at the time of insurance.
4. Payment at Contingency:
The payment is made at a certain contingency insured. If the contingency occurs, payment is
made. Since the life insurance contract is a contract of certainty, because the contingency, the
death or the expiry of term, will certainly occur, the payment is certain. In other insurance
contracts, the contingency is the fire or the marine perils etc., may or may not occur. So, if the
contingency occurs, payment is made, otherwise no amount is given to the policy-holder.
Similarly, in certain types of life policies, payment is not certain due to uncertainty of a
particular contingency within a particular period. For example, in term-insurance then,
payment is made only when death of the assured occurs within the specified term, may be

one or two years. Similarly, in Pure Endowment payment is made only at the survival of the
insured at the expiry of the period.

5. Amount of Payment:
The amount of payment depends upon the value of loss occurred due to the particular insured
risk provided insurance is there up to that amount. In life insurance, the purpose is not to
make good the financial loss suffered. The insurer promises to pay a fixed sum on the
happening of an event.
If the event or the contingency takes place, the payment does fall due if the policy is valid
and in force at the time of the event, like property insurance, the dependents will not be
required to prove the occurring of loss and the amount of loss. It is immaterial in life
insurance what was the amount of loss at the time of contingency. But in the property and
general insurances, the amount of loss as well as the happening of loss, are required to be
proved.
6. Large Number of Insured Persons
To spread the loss immediately, smoothly and cheaply, large number of persons should be
insured. The co-operation of a small number of persons may also be insurance but it will be
limited to smaller area. The cost of insurance to each member may be higher. So, it may be
unmarketable.
Therefore, to make the insurance cheaper, it is essential to insure large number of persons or
property because the lesser would be cost of insurance and so, the lower would be premium.
In past years, tariff associations or mutual fire insurance associations were found to share the
loss at cheaper rate. In order to function successfully, the insurance should be joined by a
large number of persons.
7. Insurance is not a gambling:
The insurance serves indirectly to increase the productivity of the community by eliminating
worry and increasing initiative. The uncertainty is changed into certainty by insuring property
and life because the insurer promises to pay a definite sum at damage or death.
From a family and business point of view all lives possess an economic value which may at
any time be snuffed out by death, and it is as reasonable to ensure against the loss of this
value as it is to protect oneself against the loss of property. In the absence of insurance, the
property owners could at best practice only some form of self-insurance, which may not give
him absolute certainty.
Similarly, in absence of life insurance, saving requires time; but death may occur at any time
and the property, and family may remain unprotected. Thus, the family is protected against
losses on death and damage with the help of insurance.

From the company's point of view, the life insurance is essentially non-speculative; in fact, no
other business operates with greater certainties. From the insured point of view, too,
insurance is also the antithesis of gambling. Nothing is more uncertain than life and life
insurance offers the only sure method of changing that uncertainty into certainty.
Failure of insurance amounts gambling because the uncertainty of loss is always looming. In
fact, the insurance is just the opposite of gambling. In gambling, by bidding the person
exposes himself to risk of losing, in the insurance; the insured is always opposed to risk, and
will suffer loss if he is not insured.
By getting insured his life and property, he protects himself against the risk of loss. In fact, if
he does not get his property or life insured he is gambling with his life on property.
8. Insurance is not Charity:
Charity is given without consideration but insurance is not possible without premium. It
provides security and safety to an individual and to the society although it is a kind of
business because in consideration of premium it guarantees the payment of loss. It is a
profession because it provides adequate sources at the time of disasters only by charging a
nominal premium for the service.

Objectives of Life Insurance Policies

1. As Income Replacement
In the event of your death, your family will lose their financial support especially if you are
the major bread-winner of the family. When you die, you lose the wages as well as the
retirement savings contributions which you would get. he role of the life insurance here
serves as an income replacement which would get your family to move on with their lives
without any financial stress.
2. House mortgage and Debt payoff
Life insurance can be applied to pay off your mortgages, credit card debts or any other types
of debts , which will definitely become a burden for your family if you have no plan to settle
them after you are gone.
3. Children Education fees
If you have children who will be in college in the next 10-20 years, then planning on how you
can leverage Life insurance coverage for part of your children's education needs, or all of
them are essential. Bear in mind that education is very crucial for anyone in this society. It is
the one last thing which you should help your children with if while you still can.
4. Emergency Fund

Emergencies include health and medical expenses, layoffs, retrenchments which are not
planned. Life insurance is definitely a great savior here in time of emergencies and critical
situation
5. Charitable Giving
If you don't have any family or any debt obligation, you can always use your permanent life
insurance for some great means of yours such as charitable giving. Identify those charity
organizations which you would like to make contributions to and identify them as your
beneficiaries.
6. Final Expenses for yourself
These can be those final expenses which need to be taken care of even after you are gone
from this world. Such as the charges for your funeral and Burial arrangement, your large
medical or nursing home bills during the last 2-3 months of your life if you are dying with
serious illness. Life insurance is a fine candidate as far as these unexpected bills is concerned.

Other objectives
The important objectives of LIC are as follows:
(i) To mobilise maximum savings of the people by making insured savings more attractive.
(ii) To extend the sphere of life insurance and to cover every person eligible for insurance
under insurance umbrella.
(iii) To act as trustees of the insured public in their individual and collective capacities.
(iv) Promote all employees and agents of the LIC, in the sense of participation and job
satisfaction through discharge of their duties with dedication towards achievement of LIC
objectives.
(v) To ensure economic use of resources collected from policy holders.
(vi) To conduct business with utmost economy and with the full realization that the money
belong to the policy holders.
ASSIGNMENT
Assignment of insurance is an agreement in which a person signs over all rights in a policy to
another person or business. Benefits and proceeds are also assigned.
NOMINATION
Nomination is a right conferred on the Life Insurance policyholder to appoint a person
or persons to receive the policy monies in the event of the policy becoming a claim by death.
Any policyholder, who is a major and the life insured under a policy, can make a nomination.

You would definitely want to ensure that your loved ones can access the funds quickly. With
a nomination, the policy moneys can be disbursed much faster.
Nominee
A nominee is the person designated by the policyholder to receive the proceeds of an
insurance policy, upon the death of the insured.

Difference between assignment and nomination

The difference between assignment and nomination are
1. On assignment of life policy, all the right of the policy holder passes to the assignee.
Nomination does not deprive the insured of his disposing power over the policy. Nomination
gives the nominee a bare right to collect the policy money in the event of his death.
2. Assignment can be effected either on the policy itself or by a separate deed. Nomination is
made by endorsement on the policy. Nomination cannot be made by noting it on any piece of
paper other than the policy itself.
3. Assignment is irrevocable. Nomination can be cancelled or changed.
4. On assignment, the property in the policy passes to the assignee. Nomination confers on
the nominee the right to receive the insurance money but does not provide for the title or the
ownership of the money. A nominee gets only a beneficial interest in the policy.
5. Assignment of a life policy may be with or without consideration. But nomination is made
without consideration.
6. Attestation is required in case of assignment. But no attestation is prescribed in the case of
nomination.
7. In case of assignment, money under the policy shall be paid to the assignee but in case of
nomination, the money will be paid to the nominee if he survives the assured.

LIC
Life Insurance Corporation of India (LIC) is an Indian state-owned insurance group
and investment company headquartered in Mumbai. It is the largest insurance company in
India with an estimated asset value of 1560482 crore (US$250 billion).[2] As of 2013 it had
total life fund of Rs.1433103.14 crore with total value of policies sold of 367.82 lakh that
year.
The company was founded in 1956 when the Parliament of India passed the Life
Insurance of India Act that nationalised the private insurance industry in India. Over 245
insurance companies and provident societies were merged to create the state owned Life
Insurance Corporation.
Objectives of LIC


Spread Life Insurance widely and in particular to the rural areas and to the socially
and economically backward classes with a view to reaching all insurable persons in the
country and providing them adequate financial cover against death at a reasonable cost.

Maximize mobilization of people's savings by making insurance-linked savings

adequately attractive.

Bear in mind, in the investment of funds, the primary obligation to its policyholders,
whose money it holds in trust, without losing sight of the interest of the community as a
whole; the funds to be deployed to the best advantage of the investors as well as the
community as a whole, keeping in view national priorities and obligations of attractive return.

Conduct business with utmost economy and with the full realization that the moneys
belong to the policyholders.

Act as trustees of the insured public in their individual and collective capacities.

Meet the various life insurance needs of the community that would arise in the
changing social and economic environment.

Involve all people working in the Corporation to the best of their capability in
furthering the interests of the insured public by providing efficient service with courtesy.

Promote amongst all agents and employees of the Corporation a sense of

participation, pride and job satisfaction through discharge of their duties with dedication
towards achievement of Corporate Objective.
Role of LIC
1) Largest Insurance Company in India-55 percent share in 2009,monpoly for 50
years,insurance is not an option but necessity in current times
2) Largest institutional investor
3) Provides expenses of Central government-24.6 percent of the expenses of the central
4)
5)
6)
7)
8)

govt
Maximum types of schemes which touch every aspect of life-40+ schemes
Covers different economic sections of the society
Largest insurer in rural areas
Help in Channelizing Money of NRI's through schemes-Currency Policy
One of the biggest Employer-8 zonal Offices and 101 divisional offices locatedin

different parts of India, at least 2048 branches,1.2 million agents

9) Non-inflationary source of funds for the government
10) Funds to Private sector
11) Contribution to national GDP- In 2006, LIC created huge surpluses and contributed 7
percent to the national GDP.
12) Social service with profit

Private sector insurance companies

1. Life insurance companies

Public Sector

Life Insurance Corporation of India

Private Sector

AEGON Religare Life Insurance

Aviva India

Bajaj Allianz Life Insurance

Kotak Mahindra Old Mutual Life Insurance

TATA AIA Life INSURANCE

Relaince Life Insurance

Star Union Dai-ichi Life Insurance

HDFC Standard Life Insurance Company Limited

IDBI Federal Life Insurance

IndiaFirst Life Insurance Company

Birla Sun Life Insurance

Max Life Insurance

ICICI Prudential Life

2. General insurance companies

Public Sector

United India Insurance Comp. Ltd.

New India Assurance comp. Ltd.

National Insurance Company

[[The Oriental Insurance Company]

[[Mishra insurance company]

Private Sector

ICICI Lombard

IFFCO Tokio

Liberty Videocon General Insurance Co Ltd

Reliance General Insurance

Royal Sundaram

Tata AIG General