Insurance Material

Course Name:
Life Insurance and Products
Subject Code:
1
CONTENTS
Unit No. TITLE Page

No.
1. An Introduction to Insurance 1-24
2. Insurance Planning
3. Insurance Contracts and their Elements
4. Plans of Life Insurance
5. Group Insurance
6. Other Insurance plans
7. Insurance Documents and Policy Conditions
8. Distribution System and Products
Appendix A – Suggested Reference Books
Appendix B – Glossary
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Unit 1: An Introduction to Insurance
Structure
1.1 Introduction
Objectives
1.2 Meaning and Definition of Insurance
1.3 Nature and Characteristics of Insurance
1.4 Importance of Insurance
1.5 Functions of Insurance
1.6 Classification of Insurance
Self Assessment Questions I
1.7 Life Insurance
1.8 Importance of Life insurance
1.9 Factors affecting Life Insurance
1.10 Development of Life Insurance
Self Assessment Questions II

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1.12 Summary
1.13 Terminal Questions
1.14 Answers to SAQs and TQs.
1.1 INTRODUCTION
In the new economic reality of globalization, insurance companies face a dynamic

global business environment. Radical changes are taking place owing to the
internalization of activities, the appearance of new risks, new types of covers to
match with new risk situations and unconventional and innovative ideas on
customer service. The existing insurers are facing difficulties from non-traditional
competitors that are entering the retail market with new approaches and through
new channels. The basic premise of globalization is opening up of new service
markets to provide the developing countries with new opportunities for the
expansion of trade and economic growth. This chapter is an attempt to briefly
highlight the developments that are taking place in the insurance industry in India.
Objectives
After completing this unit, you will be able to:
• Explain the meaning and objectives of insurance.

• Analyze the factors affecting insurance.
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• Describe the development of life insurance.
1.2 MEANING AND DEFINITION OF INSURANCE
Business of insurance is related to the protection of the economic values of assets.

Every asset has a value. The asset would have been created through the efforts of
the owner. The asset is valuable to the owner, because he expects to get some
benefits from it. The benefit may be an income or something else. It is a benefit
because it meets some of his needs. In the case of a factory or a cow, the product
generated by is sold and income generated. In the case of a motor car, it provides
comfort and convenience in transportation. There is no direct income.
Every asset is expected to last to last for a certain period of time during which it
will perform. After that, the benefit may not be available. There is a life-time for a
machine in a factory or a cow or a motor car. None of them will last forever. The
owner is aware of this and he can so manage his affairs that by the end of that
period or life-time, a substitute is made available. Thus, he makes sure that the
value or income is not lost. However, the asset may get lost earlier. An accident or
some other unfortunate event may destroy it or make it non-functional. In that case,
the owner and those deriving benefits there from, would be deprived of the benefit
and the planned substitute would not have been ready. There is an adverse or
unpleasant situation. Insurance is a mechanism that helps to reduce the effect of
such adverse situations.
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Definitions of Insurance
“Insurance is a cooperative form of distributing a certain risk over a group of

persons who are exposed to it” - Ghosh and Agarwal.
“Insurance is a contract in which a sum of money is paid to the assured as

consideration of insurer’s incurring the risk of paying a large sum upon a given
contingency”. - Justice Tindall.
“Insurance may be described as a social device whereby a large group of

individuals, through a system of equitable contributions, may reduce or eliminate
certain measurable risks of economic loss common to all members of the group”
- Encyclopedia Britannica.
“Insurance has been defined as a plan by which large numbers of people associated
themselves, to the shoulders of all, risks attach to individuals”
- Magee D.H.
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“Insurance may be defined as a social device providing financial compensation for
the effects of misfortune, the payments being made from the accumulated
contribution of all parties participating in the scheme”
- D.S.Hansell.
1.3 NATURE & CHARACTERISTICS OF INSURANCE
Nature of Insurance
Sharing of Risks: Insurance is a co-operative device for division of risk which

may fall on individual or his family on the happening of some unforeseen events
such as sudden death of earning member, marine perils in marine insurance, fire in
fire insurance and theft in case of general insurance.
Co-operative Device: Large numbers of persons share loss arising due to a

particular risk. No doubt that insurance is a co-operative device.
Valuation of Risk: Before the insurance contract is entered into the evaluation of
risk is made by which premium is calculated which forms the basis of insurance
contract.
Payment made on contingency: The insurer is bound to pay to insured when

certain contingency arises. The happening may be due to death, fire, marine perils
etc.
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Amount of Payment: The amount of payment depends on the value of loss
occurred due to the particular provided insurance is there up to that amount.
Large Number of Insured Persons: To make the insurance cheaper it is essential

to insure a large number of person’s property.
Insurance is not Gambling: In Insurance, uncertainty is covered into converted

into certainty because the insurer promises to pay a definite sum at damage or
death.
Insurance is not charity: Charity is given without consideration but insurance is

not possible without premium and thus insurance is not charity.
Characteristics of Insurance
• It is a contract for compensating losses

• Premium is charged for Insurance contract.
• The payment of Insured as per terms of agreement in the event of loss.
• It is a contract of good faith
• It is a contract for mutual benefit
• It is an instrument of distributing the loss of few among many.
• The occurrence of the loss must be accidental
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• Insurance must be considered with public policy
1.4 IMPORTANCE OF INSURANCE
Insurance provides security against loss of a given contingency. A sense of security

removes tension and fears. It stimulates more and better work. The insurance
provides adequate amount to the dependents at the early death of the property
owner to pay off the unpaid loan. The insurance assists the family and provides
adequate amount at the time of need. Systematic saving is possible because regular
premiums are required to be compulsory paid. Life Insurance is a best media of
saving. In India, the Insurance policies carry a special exemption from income tax
and excise duty. All the needs of the individual such as family needs, old age
needs, re-adjustment needs, special needs are helped by insurance for meeting
requirements and necessary needs.
Insurance provides against loss of human wealth. Loss of damage of property can
also be indemnified by the insurance company. As insurance provides protection
against loss of property, if any such damage arises, the assets can be replaced
without loss of production. Thus, Economic development of the country is not
affected. Adequate capital from insurance company accelerates production cycle
in the country. Economic growth of the country is assured and the process of
growth is accelerated which is essential in a country like India where the
population is increasing very fast. In the form of premium the Insurance Company
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gets lot of money supply from the public which insurance corporation put into
production. Thus the money which would have come into circulation might have
gone for productive purposes.
1.5 FUNCTIONS OF INSURANCE
(A) Primary Functions:
1. Provision of certainty of payment at the time of loss. The element of

uncertainty is reduced by better planning and administrations. The insurer
charges premium for providing certainty. Life without risks and
uncertainties is unthinkable. Man encounters risks of various types since the
inception of civilization. Minor risks can be ignored but the major risks
cannot be ignored and their avoidance is desirable. One of the ways or
techniques of meeting the risk and loss prevention is insurance. It removes
all uncertainties and the assured is given certainty of payment of loss.
2. Provision of protection. Another function of the insurance is to provide

protection against the probable chances of loss. The insurance cannot check
the happening of risk in future but it can surely provide for losses to the
assured by charging premium.
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3. Risk sharing. Risk is uncertain and therefore, the loss arising from the
risk is also certain. All business concerns face the problem of risk. If the
concern is big enough the handling of risk becomes a specialized function.
Risk and insurance are interwoven with each other. Insurance is the outcome
of the existence of various risks in our day to day life. It does not eliminate
risks but it reduces the financial loss caused by risks. It spreads the whole
loss over a large number of persons who are exposed by a particular risk.
(B) Secondary Functions:
1. Prevention of Loss. Prevention is always better than cure. Prevention of

loss is by far the best solution to the problem of risk. It is the most effective
and cheapest method to avoid the unfortunate consequences. For example
fire can be prevented by having the fire resistant construction, observing
safety instructions, installation of automatic sparkler system etc. similarly,
automobile accidents can be minimized and life span can be prolonged by
better roads, better lights and better traffic regulations by providing better
medical facilities. But sometimes prevention of protection is not possible
and effective. When prevention fails other methods must be adopted. The
insurance joins hands with those institutions which are actively engaged in
preventing the losses of the society. Reduction in loss causes lesser payment
to the assured and so more saving is possible which will assist in reducing
the premium. Lesser premium invites more business and more business in its
turn results in lesser share to the assured. Reduced premiums stimulate more
business and better protection to the insured.
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2. Provision of capital: Insurance provides capital to the society there is a
great need for huge amount of capital for planned development of a country.
The accumulated funds are invested in providing proper infrastructure and n
investing in productive channel. The insurance companies are rendering
positive help in the development of trade, commerce and industries of a
country though different schemes of investments. A country’s natural
resources can be exploited with the long term ad huge amounts of
investments by the insurance companies. The development of Australia and
Canada has resulted due to the assistance given by the sun Life Insurance
Company of Canada and the National Mutual Insurance Association of
Australia. In India since nationalization, the Life Insurance Association of
Australia. In India since nationalization, the Life Insurance Corporation has
been playing an important and spectacular role in socio-economic
development.
3. Improvement of efficiency: The Insurance eliminates worries and

miseries of losses as death and destruction of property. A care free person
can devote his energies for better achievement of goals. It improves not only
his efficiency but the efficiencies of the masses are also advanced.
4. Ensuring welfare of the society: “Insurance is a saga of service and

security.” Security of life and property given by it brings peace of mid to
the insured’s. The investment of L.I.C in welfare schemes like electricity,
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housing water supply, agriculture, agro industries and industrial estates has
solved many pressing problems in India. The expansion of the held of
insurance and industrialization automatically lead to better scope.
1.6 CLASSIFICATION OF INSURANCE
Classification of insurance business has evolved over the centuries as insurance has
developed, depending upon the nature and type of business. The various types of
covers have been grouped into several classes. These classifications have come
about by practice within insurance companies, and by the influence of legislation
controlling the transacting of insurance business. Two broad divisions of
insurance business have developed into:
a) Long-term and
b) General or non-life insurance business, which is mainly short term

mostly one year.
Long-Term: Long-Term insurance business refers to life, industrial life, insured

pensions and permanent health insurance business which are normally issued for
long periods-running into several years or even for whole of life time of the
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insured. In this context, life business is referred to as ordinary life business to
distinguish it from industrial life business.
General or non-life insurance business: Policies under general insurance

business, also referred to as non-life insurance business, are normally issued for
twelve months or shorter durations. Recently long-term agreements have made an
entry into this type of business but the duration does not normally exceed five
years.
Self Assessment Questions I:
1. Business of insurance is related to the protection of the ___________ values of

assets.
2. Insurance contract is a contract for _________ benefit.
3. The _________ in India carry a special exemption from income tax and excise
duty.
4. Insurance is a saga of service and ____________.

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1.7 LIFE INSURANCE
Life insurance is the business of affecting the contracts of insurance upon human
life, including any contract whereby the payment of money is assured on death or
the happening of any contingency dependant on human life and any contract which
is subject to the payment of premiums for a term dependant on human life.
Characteristics of Life Insurance:
• In life insurance, unlike in general insurance, the promise has to be

redeemed sooner or later. No claim is to be paid on a fire insurance policy, if
there was no fire during the term of the policy. But the holder of a life
insurance policy will have to be paid earlier, if he dies. Or later if he
survives the term.
• The amount payable on a claim arising in life insurance is not in doubt. It is

as mentioned in the policy. The amount payable in a claim arising in general
insurance depends on the extent of damage, and has to be determined
through surveys and assessment.
• Most of the claimants have not suffered a loss. They are survivors, asking
for fulfillment of a promise in circumstances which are not tragic.
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• Claimants of death benefits are people different from the ones who had
taken out the policy, and perhaps know little about the circumstances and
conditions under which the policy was taken and had been looked after.
• Almost all polices are long-term ones. Most of the polices are for term of 15
years or more. There could even be terms of 40 years or more.
1.8 IMPORTANCE OF LIFE INSURANCE
Security and safety: In case of life insurance payment is made when death occurs
or the term of insurance is expired. In other words, insurance as security is
provided against the loss of a given contingency.
Peace of mind: A sense of security removes all tensions and fears. It stimulates
more and better work. By means of insurance much of the uncertainty that centres
round the modern life may be eliminated.
Protects mortgaged property: The insurance provides adequate amount to the

dependents at the early death of the property owner to pay off the unpaid loan.
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Eliminates savings: In the event of death of the bread winner of the family or
destruction of property, the family suffers a lot. The insurance assists the family
and provides adequate amount at the time of need.
Encourages savings: Systematic saving is possible because regular premiums are

required to be compulsorily paid. Unlike bank deposits the deposited insurance
premiums cannot be withdrawn. Life Insurance is the best media of saving.
Provides profitable Investment: The elements of investment, i.e., regular saving,

capital formation and return of the capital are observed in life insurance. In India,
the Insurance policies carry a special exception from income tax and estate duty.
Fulfils the need of a Person: The needs of a person may be divided into (i)
Family needs, (ii) Old age needs, (iii) Re-adjustment needs, (iv) Special needs
including needs for education, marriage settlement of children etc. (v) Clean up
funds for ritual ceremonies, payment of taxes etc. Insurance helps for meeting
requirements and necessary needs.
1.9 FACTORS AFFECTING LIFE INSURANCE
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A life insurance policy is an agreement between you and your insurance company.
An agreement cannot take place without the consent of both the parties involved in
the contract. You will be charged premiums based on how you are rated on several
pre-determined factors - "Health" being one of the major factors.
Out of the many factors analyzed during the underwriting process, the health of the
applicant attracts special attention. Medical examinations are carried out to learn
more about your medical profile. We have thrown some light on certain health
related aspects taken into account by the insurance company before granting life
insurance coverage. Learn how health and life insurance are related and why the
words "Better Health, Lower Rates" are so meaningful!
Your age is also a factor in the cost of life insurance. If you want to attract lower
insurance premiums then you might consider insuring yourself at a younger age.
The premiums go up as we age. But if you buy that policy today, you will lock in
that premium rate for length of the term - 10, 15, 20 years. A woman's life
expectancy is longer than a man's. Thus women may pay a lower premium.
Insurance companies will check your existing medical records and conduct new
medical tests in order to focus on certain specific areas to ascertain your insurance
cost. These tests would include checking your cholesterol level, blood pressure,
among other things. Your basic build, in the form of Height: Weight ratio shall
also be calculated at the time of these tests. If the results are not according to the
pre-defined standards set by the Insurance Company then you could be charged an
extra amount of premium.
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Health disorders such as asthma, sleep apnea, heart disease, a family history of
certain illnesses, coupled with other factors could increase your cost of insurance.
Our society is suffering from a high rate of health disorders such as alcoholism and
excessive smoking. Insurance companies will verify your alcoholic consumption
and smoking patterns to calculate the life insurance premium. Although, insurance
companies do not clearly define ‘heavy alcohol consumption’, excessive
consumption of alcohol and smoking could result in higher premiums.
Your occupation also has an impact on your health and consequently your life
expectancy. Insurance companies do adjust their premium rates for those who have
extraordinary occupations considered "risky" such as scuba diving, mountain
climbing, parachuting, piloting a plane, and others.
In brief, insurance companies would take into consideration all the possible
information that directly or indirectly affects your life or well being before
finalizing your insurance premium.
1.10 DEVELOPMENT OF LIFE INSURANCE
The early development of life assurance was closely linked with that of marine
insurance. The first life assurers were marine insurance underwriters, who started
issuing policies on the life of a merchant, master and the crew of the ship, sailing
along with the goods. If a ship was captured, the insurer paid the ransom needed to
secure release of the captain and the sailors. Life assurance policies were granted
during the reign of Queen Elizabeth these early contracts took the form of
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temporary assurance covering the life assured for a short period only. These were
issued by private individuals known as underwriters who formed Mutual assurance
associations which were in a way, self-insurance clubs. They issued annuities and
pensions for a fixed period or for life to provide relief to widows on the death of
their husbands. The first recorded life policy was issued on 18th June, 1583. 8D.
For which some sixteen underwriters were responsible. However this first policy
was subject to a dispute over payment because the policy-holders died within 11
months of issuing the policy. The underwriters contended that the policy periods of
twelve months” related to lunar months, which has expired. Happily, the court
ruled that payment must be made.
It was in the eighteenth century that societies began to be formed with the object of
granting life assurances. The amicable society (1705), the Equitable Life
Assurance society (1762) the Westminster society (1792) were some important
societies. The application of the mortality tables in 1755 by Dodson and societies.
The application of the mortality tables in 1755 by Dodson and the introduction of
actuarial science revolutionized the whole concept of life insurance. As the life
assurances became better known, a practice grew up of speculating in lives,
particularly of well-known people, like kings, national leaders or prisoners
particularly, if charged with an offence that would call for capital punishment upon
conviction. The premiums varied with their reputation and state of health. If
persons of this category fell seriously ill, a huge amount of insurance was written.
In order to put an end to this speculation, with its attendant evils, an Act called the
“Life Assurance Act” (commonly known as the Gambling Act) was Passed in
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1774. It prohibited all insurance on lives except those satisfying insurable interest
requirements.
During the early years of the nineteenth century a large number of life assurance
companies were formed a large number of companies failed and many of them
preferred to amalgamate their business. In order to stabilize the business further,
Life Assurance Companies Act, 1870 was passed. Further Acts were passed in
1871 and 1871.
The above legislation was repealed by the Assurance Companies Act, 1909, which
was applied to all classes of insurance business. Later on, various acts were passed
to meet the growing needs of the industry and to protect the insured. Some of these
acts are: Industrial Assurance Act, 1923, Assurance Companies Act, 1946,
Insurance Companies Act, 1958 and the Companies Act, 1967
1. Risk is uncertain and therefore the loss arising from the risk is also ________.
2. ____________ is the best media of saving.
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3. The elements of investment are regular saving; ___________ and return of the
capital are observed in life insurance.
1.12 SUMMARY
The basic premise of globalization is opening up of new service markets to provide

the developing countries with new opportunities for the expansion of trade and
economic growth. In the new economic reality of globalization, insurance
companies face a dynamic global business environment.
Business of insurance is related to the protection of the economic values of assets.
Large numbers of persons share loss arising due to a particular risk. No doubt that
insurance is a co-operative device. Insurance provides security against loss of a
given contingency. A sense of security removes tension and fears. Insurance
provides against loss of human wealth. Loss of damage of property can also be
indemnified by the insurance company.
Functions of insurance are classified as primary functions and secondary functions.

Primary functions include provision of certainty of payment at the time of loss,
provision of protection & risk sharing. Secondary functions include prevention of
loss, provision of capital, Improvement of efficiency and ensuring welfare of the
society.
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Life insurance is the business of affecting the contracts of insurance upon human
life, including any contract whereby the payment of money is assured on death or
the happening of any contingency dependant on human life and any contract which
is subject to the payment of premiums for a term dependant on human life.
1.13 TERMINAL QUESTIONS
1. Give the meaning of insurance and explain the nature and characteristics.
2. Explain the functions of Insurance.
3. What if a life insurance contract? Explain the importance of life insurance

contract.
4. Explain the factors affecting Life & Health consumption.
5. Explain the development of life insurance in India.
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SAQ I:
1. Economic
2. Mutual
3. Insurance Policy
4. Security
SAQ II
1. Certain
2. Life Insurance
3. Capital Formation
Terminal Questions
1. Refer 1.2 & 1.3
2. Refer 1.5
3. Refer 1.7 & 1.8
4. Refer 1.9
5. Refer 1.10 & 1.11
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NOTES
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Unit 2: Insurance Planning
Structure
2.1 Introduction
Objectives
2.2 Human Life Approach
2.3 Needs Approach
2.4 Capital Needs Approach
2.5 Life Insurance Planning
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2.5.1 Steps in Life Insurance Planning
2.6 Basis of Premium rate calculations
2.7 Factors to be considered in life insurance policy
2.8 Importance of Insurance selection
2.9 Criteria for Insurance Evaluation
2.12 Summary
2.14 Answers to SAQs and TQs
Human Life Approach
The human life value is defined as, “The present value of the family's share of the
deceased breadwinner's earnings”. This approach crudely measures the economic
value of a human life.
The human life value method simply calculates the present value of all earnings of
the breadwinner that would have gone to the dependents. The amount of these
earnings would be the estimated amount earned from work or other sources, minus
the amount that would be paid in taxes, and minus the amount that the
breadwinner would keep for himself.
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While the human life value method is one way to calculate the amount of life
insurance needed, it is not very valuable. It makes more sense to calculate the
amount that the financial dependents will need rather than what they would have
gotten if the breadwinner had lived.
The human life value can be measured by the following steps:
a. Estimate the individual's average annual earnings over his or her productive
lifetime.
b. Deduct federal and state income taxes, Social Security taxes, life and health
insurance premiums, and the costs of self-maintenance.
c. Determine the number of years from the person's present age to the
contemplated age of retirement.
d. Using a reasonable discount rate, determine the present value of the family's
share of earnings for the period determined in step c.
The use of a lower discount rate in calculating the human life value will produce a
higher human life value for the individual.
3.3 Needs Approach
The needs approach can be used to determine the amount of life insurance to own.
After considering other sources of income and financial assets, the various family
needs are converted into specific amounts of life insurance.
The needs calculation would involve estimating and providing a fund for all known
expenses, and paying off all debt; then determine the amount of financial need
after all debts have been paid off. It can be paid as a lump sum or as income using
a capital retention approach.
The advantages of the needs approach are as follows:

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• It is a reasonably accurate method for determining the amount of life
insurance to own after family needs are recognized.
• Other sources of income and financial assets are considered.
• Possible inadequacy of present life insurance is quickly recognized.
• The needs approach can also be used to recognize needs during a period of
disability or retirement.
The disadvantages of the needs approach are as follows:
• The family head is assumed to die immediately, which is unrealistic.

• Life insurance planning is required, which may be complex and difficult to
understand.
• The family needs must be periodically evaluated to determine if they are still
appropriate as family circumstances change.
• The needs approach ignores inflation in its simplest version.
3.4 Capital Needs Approach
The Capital Needs Analysis method is used by most insurance agents/planners and
at most financial-planning Web sites. Chartered life underwriters (CLUs) know the
method as the Human Life Value Concept or the Human Capitalization Method. A
variation of this method is used in litigation to compute the present value of the
insured's future income, minus personal expenses, to indemnify survivors for lost
net earnings.
Like the earnings-multiple method, the Capital Needs Analysis method projects the
income the insured will earn between now and retirement and discounts these
flows.
But this procedure goes further; it calculates the net contribution of the insured to
the family's living standard by subtracting the insured's present values of future tax
payments and living expenses from his or her present earnings. The net
contribution of the insured is then compared with today's spending needs of
potential survivors. Such a needs analysis incorporates factors such as mortgage
payments, other household expenses and special expenditures.
But the Capital Needs Analysis method raises several concerns:

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• If the household sets a spending target too high for survivors, the method will
generate a larger amount of life insurance than is appropriate. This will cost
the household too much in life insurance premiums. If the spending target is
set too low, the recommendation would leave the household underinsured.
• Decisions about buying insurance, spending and saving money are

interrelated and need to be jointly determined. The amount of life insurance
purchased affects the amount of premiums paid, which affects the
household's affordable living standard, which influences how much life
insurance the household needs. To properly calculate this, a complex
mathematical procedure is needed, which this method does not employ.
• Third, unless future tax payments are calculated accurately on a year-by-year

basis, they can easily be overstated or understated, which would throw off
the calculation of the amount of life insurance needed.
• For married couples, tax payments are generally made via a joint return. This
makes distinguishing each spouse's individual taxes difficult to determine.
And again, without an accurate calculation of future tax responsibility, the life
insurance needs analysis will not be reliable.
Self Assessment Questions-1
(Fill in the blanks)
a. _________ is the average number of years that a person can expect to live.
b. __________ Approach crudely measures the economic value of a human life.
c. The ________ approach can be used to determine the amount of life insurance
to own.
3.5 Factors affecting life and health insurance consumption
A life insurance policy is an agreement between you and your insurance company.
An agreement cannot take place without the consent of both the parties involved in
30
the contract. You will be charged premiums based on how you are rated on several
pre-determined factors - "Health" being one of the major factors.
Out of the many factors analyzed during the underwriting process, the health of the
applicant attracts special attention. Medical examinations are carried out to learn
more about your medical profile. We have thrown some light on certain health
related aspects taken into account by the insurance company before granting life
insurance coverage. Learn how health and life insurance are related and why the
words "Better Health, Lower Rates" are so meaningful!
Your age is also a factor in the cost of life insurance. If you want to attract lower
insurance premiums then you might consider insuring yourself at a younger age.
The premiums go up as we age. But if you buy that policy today, you will lock in that
premium rate for length of the term - 10, 15, 20 years. A woman's life expectancy is
longer than a man's. Thus women may pay a lower premium.
Insurance companies will check your existing medical records and conduct new
medical tests in order to focus on certain specific areas to ascertain your insurance
cost. These tests would include checking your cholesterol level, blood pressure,
among other things. Your basic build, in the form of Height: Weight ratio shall also
be calculated at the time of these tests. If the results are not according to the pre-
defined standards set by the Insurance Company then you could be charged an
extra amount of premium.
Health disorders such as asthma, sleep apnea, heart disease, a family history of
certain illnesses, coupled with other factors could increase your cost of insurance.
Our society is suffering from a high rate of health disorders such as alcoholism and
excessive smoking. Insurance companies will verify your alcoholic consumption and
smoking patterns to calculate the life insurance premium. Although, insurance
companies do not clearly define ‘heavy alcohol consumption’, excessive
consumption of alcohol and smoking could result in higher premiums.
Your occupation also has an impact on your health and consequently your life
expectancy. Insurance companies do adjust their premium rates for those who have
31
extraordinary occupations considered "risky" such as scuba diving, mountain
climbing, parachuting, piloting a plane, and others.
In brief, insurance companies would take into consideration all the possible
information that directly or indirectly affects your life or well being before finalizing
your insurance premium.
(State whether ‘true’ or ‘false’)
a. An agreement cannot take place without the consent of both the parties involved
in the contract.
3.6 Life Insurance Planning
The insurance contract is providing for payment of a sum of money to the insured
person or to the person entitled to receive the same, on the happening of some
event or damages. The family need for bread, clothing and housing are met out by
the regular income of the family head. His sudden death will disturb the family for
necessaries of life. Uncertainty of death is inherent in Human life. It gives rise to the
planning or preliminary protection against the financial losses arising from death.
Thus insurance is an institution which eliminates such risks and substitutes
certainty.
While planning for an insurance product, the insured must get clear cut knowledge
of various advantages and needs of insurance.
Some needs are temporary; others are permanent. As temporary needs are
eliminated, the total amount of life insurance can be reduced. Most people have the
following needs:
• Final expenses, which include funeral expenses and unpaid medical bills.
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• A debt retirement fund to retire all debt, including mortgages, credit card
bills, and auto loans. Being debt-free will allow a family to live with less
income.
• An income fund provides an income to the surviving members of the family,
which would be especially helpful if the surviving spouse would have to stay
at home to care for children, or to pay for their care while the surviving
spouse works.
• An education fund to pay for the future education of children. The cost for a 4
year college education can easily be more than 1 Lakh, and this will no doubt
continue to increase, probably faster than inflation as it has in the past.
• An estate preservation fund may be desirable for those with substantial
estates that may incur high attorney fees, court costs, and taxes.
(Fill in the blanks)
a. An _____________ fund may be desirable for those with substantial estates that
may incur high attorney fees, court costs, and taxes.
b. ________________ is an institution which eliminates such risks and substitutes

certainty.
3.7 Summary
Life expectancy is the average number of years that a person can expect to live. For
people with a given life expectancy, half will die before then and half will die
afterward. If someone dies early, then they may leave behind a family or other
financial dependents that depended on the decedent's income.
A life insurance policy is a valued insurance policy that pays a specified amount to
the beneficiary, when the insured dies. A beneficiary can be a person, business,
trust, or estate.
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Three approaches to determine the amount of life insurance:
• Human life value approach

• Needs Approach
• Capital Needs Analysis
Uncertainty of death is inherent in Human life. It gives rise to the planning or

preliminary protection against the financial losses arising from death. Thus
insurance is an institution which eliminates such risks and substitutes certainty.
Unit 3: Principles of Life Insurance
Structure:
3.1 Introduction
Objectives
3.2 Meaning of Valid Contract
3.3 Essentials of a Valid Contract
3.4 Insurance Contract
3.5 Nature of Insurance Contract
3.6 Principle of Utmost Good Faith
3.7 Material Fact
3.8 Principle of Insurable Interest

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3.9 Summary
3.1 Introduction
Insurance is based on certain principles which form the foundation of an insurance

policy. These principles have evolved over the decades. While in several countries,
some of them may be adopted after modifications, to provide for better service
levels, most of the basic principles would generally still hold good. In many
countries also, Insurance is slowly evolving into a financial instrument, especially
for large businesses and it would remain to be seen as to how far this aspect can
really be taken to. This chapter is an attempt to explain the essentials of contract
and the underlying principles of life insurance.
Objectives
After completing this unit, you will be able to:
• Explain the meaning and essentials of a valid contract.

• Describe the nature of insurance contract.
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• Discuss the principles of life insurance.
3.2 Meaning of Valid Contract
A contract may be defined as an agreement between two or more parties to do or to

abstain from doing an act, and which is intended to create a legally binding
relationship. This could be summarized as ‘an agreement designed to have legal
consequences’.
According to Indian Contract Act, “An agreement enforceable by law is a

contract”, which satisfies the following essential elements:
(i) Agreement (offer and acceptance)

(ii) Legal Consideration
(iii) Competence to Contract
(iv) Legal object
(v) Certainty
(vi) Possibility of performance
(vii) Writing and registration.
3.3 Essentials of a Valid Contract
A simple contract has to have all the following elements present in order it to be
enforceable:
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a) The intention to create legal relations;
b) Offer and acceptance;
c) Consideration;
d) Capacity to contract;
e) Certainty of terms;
f) Consensus ad idem [a genuine meeting of mind];
g) Legality of purpose;
h) Possibility of performance.
In India, the relevant law is The Indian Contract Act, 1872.
3.4 Insurance Contract
Like any other contract the contract of insurance must fulfill all the essential
elements of contracts as laid down in the law of contract of Indian Companies Act,
1872. Insurance is a contract between two parties whereby one party called insurer
undertakes, in exchange for a fixed amount of money on the happening of a certain
event. At the same time the Insurance Contract must fulfill certain other elements
relating exclusively to insurance which are known as Fundamental Principles.
The insurance contract involves:

(a) The elements of general contract.
(b) The elements of special contract relating to insurance.
The special contract of Life insurance involves the following principles:
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1. Insurable interest
2. Utmost good faith
3. Material Facts
3.5 Nature of Insurance Contract
The contract of insurance is called an allegory contract because it depends upon an

uncertain event. For example, if a house is burnt down or the ship is stranded, the
insurer will pay the value of it. At first sight this would seem to be a wagering
transaction, the insurer betting with the assured that his house will not be burnt or
his ship will not sink and giving him the odds of its value against the premium. It
is due to this uncertainty that Lord Mansfield described insurance ‘as a contract on
speculation’.
According to the modern view, however, insurance contracts are not speculative or
wagering contract. Insurance is not merely a gamble on an uncertain future. It is a
perfectly valid contract for the assured is only, indemnified for his loss and he does
not gain by the happening of the event insured against, he does not make a profit of
his loss. While in a wager no insurable interest is present, in insurance the assured
must have an insurable interest on the subject matter insured. Therefore, although
insurance is an allegory contract depending upon an uncertain event, it is not a
wagering or a speculative contract nor is it a gamble on an uncertain future.
A contract of insurance is entered as soon as the insurance company accepts, the

premium after the proposal being accepted. The following essential elements are
deemed to be fulfilled after the acceptance of the premium by the insurer. The
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more important conditions or elements known as fundamental principles must be
satisfied for a valid insurance contract. Following are the essentials of a contract
which should be fulfilled:
1. Agreement: It involves both offer and acceptance at the same time. Filling
up of a proposal form by the proposer is an offer and the notice of
acceptance of the proposal by the insurer is a valid acceptance of insurance.
2. Legal Consideration: To every contract there must be some legal or lawful

consideration. In insurance, payment of premium is the valuable
consideration in return to get a lump sum on the happening of the event.
3. Competence to Contract: If the insured person is of sound mind and has

attained majority (18 years of age) he is said to be competent to enter into an
agreement or contract. Also he must not have been debarred by any law to
which he is subject to enter into agreement. An insurance policy taken on a
minor’s life by his legal guardian will constitute a valid contract.
4. Legal Object: The object of contract must be lawful. It must not be illegal,
immoral or opposed to public policy. Thus the object of insurance must be
lawful. The assured should pay his premium in time and in turn, the insurer
should pay the assured amount at the time of loss or maturity without
causing any unnecessary hardship for the assured. The intention of both the
parties must be a holy one.
5. Certainty: An agreement must not be vague, loose and uncertain. The

terms and conditions must be clearly understood by both. If the proposer
39
turns out to be an illiterate, the insurer must analyze or make the terms and
contracts clear to him. Otherwise, there will be no mental accord. In
insurance the terms and conditions are deemed to be understood as the
proposer gives an understanding on the proposal form. The insurance
company issues a printed policy document which contains all the terms and
conditions of insurance contract.
6. Possibility of Performance: The agreement must be capable of being

performed. A promise to do an impossible thing cannot be enforced. In
insurance contract there is every possibility of its performance. The insurer
must be able to pay the money on happening of the event. The insured is
expected to make regular payment of premium; otherwise it would defy the
meaning of the insurance plan.
7. Writing and Registration: The contract law requires certain formalities of

writing and registration etc. For insurance the agreements must be in
writing, properly signed, stamped and registered. These formalities are
fulfilled as the proposer makes his proposal through a printed form, duly
signed by him. The insurer issues the original policy document, properly
signed and stamped.
1. An agreement enforceable by law is a _ _________.
2. According to the modern view the insurance contracts are not speculative or
_________ contract.
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3. ________ involves both offer and acceptance at the same time.
3.6 Principle of Utmost Good Faith
Insurance contracts are based upon mutual trust and confidence between the
insurer and the insured. Hence, they are said to be uberrimae fidei, i.e., of the
utmost good faith. Utmost good faith in insurance means that each party to a
proposed contract is legally obliged to reveal to the other party all information
which would influence the other’s decision to enter the contract, whether such
information is requested or not.
Though the insurance contract are subject to good faith and are based upon mutual
trust and confidence, it is not possible to apply any doctrine or caveat emptor (let
the buyer beware) because of the fiduciary nature of insurance. The information
necessary for the parties to assess the contract adequately cannot be ascertained as
with contracts of sale where the buyer before contracting to purchase anything
must satisfy himself as to the nature and quality of goods he needs.
“A positive duty voluntarily to disclose, accurately and fully, all facts material to
the risk using proposed, whether requested or not”.
Thus one of the important basic principles of insurance is known as 'utmost good
faith'. The Insurance contract being a promise to pay in the case of a peril operating
is a unique type of contract between the Assured and the Insurer.
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Very often, the Insurer has to rely only on the description and details filled in the
proposal form. The Insurer has no way of verifying these details and after an
insured peril has operated, the subject matter of the insurance may very well have
gone up in smoke or washed away. Therefore any mis-description,
misrepresentation or blatantly false declarations made by the Assured would result
in the Insurer paying wrong claims.
Obviously, in the longer term no Insurer can survive payment of wrong claims or
charging of wrong premiums for the risk. Such payment of claims also imposes a
burden on the rest of the premium paying community, since ultimately claims have
to be paid out of the premium pool.
It is therefore an implied condition or principle of insurance that the Assured be

required to make a full disclosure of all material particulars within his knowledge
about his risk.
However today, especially with imminent privatization, it would be logical to

expect that insurers would attempt to become increasingly more customer friendly
and provide risk survey and assessment, appraisal, etc. services, directly or through
brokers, surveyors, etc. Whether these factors may dilute this principle and to what
extent remains to be seen. Our opinion yet would be that the Assured knows his
business and risk best and whenever in doubt, must attempt to disclose that
particular aspect.
A corollary to this would be that even after taking out an insurance policy, during
its validity period, if there are any alterations or changes to the business or risk -
say alteration of process or storage of any hazardous material - which increases the
42
risk, the Assured must inform the Insurer of the same and get their acceptance for
the same. At times, additional premium payment may be required.
If it is found that an Assured has not disclosed or attempted to conceal any material
aspects of the risk, the Insurer would obviously be entitled to avoid any payment of
claims or monies under the Policy.
If it is found that the Assured had misrepresented any aspect of the risk, then the
Insurer would again obviously be entitled to avoid any payment of claims or
monies under the Policy. However, in certain cases of misrepresentation, where the
effect may only have been increased premium, it is possible that the Insurer may
partly pay the claim.
3.7 Material Fact
The definition of Material Fact is:
Every circumstance is material which would influence the judgment of a prudent

insurer in fixing the premium or determining whether he will take the risk.
There has been some criticism of the use of the term ‘prudent underwriter’ and
there has been a tendency to substitute ‘reasonable underwriter’ in applying the
rule. In some quarters it has been suggested that the view of the ‘reasonable
insured’ rather than a ‘reasonable underwriter’ should be the test of whether a fact
is material or not. However, it is not a question of whether the proposer regards
the matter as material or even whether the insurer regards a fact as material. The
test will be a view of a prudent or reasonable underwriter.
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FACTS WHICH MUST BE DISCLOSED
Those facts, which must be disclosed, are any circumstances which would
influence the insurer in accepting or declining a risk or in fixing the premium or
terms and conditions of the contract.
The fact must be material at the date at which it should be communicated to the
insurer. A fact which was immaterial when the contract was made, but becomes
material later on need not be disclosed. There is one exception to the rule and it
occurs when there is a policy condition requiring continuous disclosure. This
would be an usual condition to find in most general insurance policies. The
categories of facts which must be disclosed are:
a) facts which show that the particular risk represents a greater exposure than
would be expected from its nature or class;
b) external factors which make the risk greater than would normally be
expected;
c) previous losses and claims under other policies;
d) any declinature or special terms imposed on previous proposals by other
insurers;
e) the existence of other non-indemnity policies such as life and accident;
f) Full facts relating to the description of the subject matter of insurance.
Some examples of such facts are
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a) Fire Insurance: The construction of the building, the nature of its use, fire
detection and firefighting equipment.
b) Theft insurance: The nature of stock, its value and the nature of security
precautions.
c) Motor insurance: The type of car, whether it has been specially adapted,
details of regular drivers.
d) Marine insurance: Cargo insurance-the terms of sale, mode of carriage,
whether containerized.
e) Life insurance: Age, previous medical history, occupation, smoking/drinking
habits.
f) Personal accident insurance: Age, height, weight, previous medical history,
occupation.
These are only examples and not exhaustive. In all classes of insurance there will
be a need to have details of previous loss experience and all facts which the
proposer is reasonably expected to know. As an example, a landlord should know
the nature of occupancy of his property by his tenant.
FACTS WHICH NEED NOT BE DISCLOSED
There are some circumstances which are material but it is not necessary to
disclose. The areas concerned are:
a) Facts of law: Everyone is deemed to know the law;

b) Facts of common knowledge: An insurer is deemed to know about such
things as the strife in any part or normal processes within a particular trade;
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c) Facts which lessen the risk: the existence of an alarm system for a theft risk
or sprinkler for fire risk;
d) Facts which could reasonably be discovered: This occurs where an insurer
has bean put on inquiry by, for example, a statement on a proposal form.
The most common example of this would be where a proposer inserts a
phrase ‘see your records’ instead of completing fully the previous claims
history;
e) Facts which a survey should have revealed: If an insurer carries out a survey
then any material facts which are clearly visible, or which any reasonable
surveyor would enquire about do not need to be disclosed by the proposer.
However, the proposer is not permitted to conceal material matters from the
surveyor;
f) Facts covered by policy conditions: These would be facts, which it is
superfluous to disclose because of an express, or implied warranty e.g. that
burglar alarms are regularly maintained.
3.8 Principle of Insurable Interest
The second principle of insurance is that the subject-matter of the insurance must
be of insurable interest. This means that the insured stands in such relation to the
subject-matter of insurance that he suffers loss by its destruction or damage and is
benefited by its safety, or existence. An insurable interest is “an interest of such a
nature that, if the event insured against takes place, the insured might suffer a
financial loss. If the happening of the event insured against cannot cost the insured
money, then there is no insurable interest.” Thus insurable interest means
proprietary or monetary interest. It is the legal right to insure as an insurance
46
policy does not cover property, but relates to the insured’s interest in the property.
In every contract of insurance, the law regards possession of an insurable interest
in the subject-matter of insurance to be a necessary pre-requisite. The insured
must own either own part or whole of it or he must be in such a position that injury
to it would affect him adversely.
For example, a man who insures his scooter against accident has insurable interest
in it because he uses it for official and non-official visits and is thus benefited from
its existence. If the scooter is damaged or is totally lost, it would cause him
financial or pecuniary loss. He will have to incur huge expenses on its repairs, if it
is damaged, or has to replace it, if it is totally lost, or will have to pay hire of
alternative modes of transport. Similarly, a person has insurable interest in the
house he lives in. A businessman has insurable interest in the goods he deals in. A
person has insurable interest in his own life. A wife has insurable interest in the
life of her husband. A creditor has insurable interest in the debtor. The partners
have insurable interest in the lives of one another. To be valid the insurable
interest must be recognized as such under the law in operation in the country. It
must satisfy the following conditions:
(i) There must be a physical object (life or limb or property) which is

subject to risk and the risk can operate on such object and cause
damage or destruction.
(ii) There must be a potential liability (death of a pedestrian by a motor
car) and this must be caused by the operation of the insured risk or
by the happening of an event which is insured.
(iii) The subject-matter of insurance must be the physical object or
potential liability.
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(iv) The insured must be in a legally recognized relationship with the
subject-matter of the insurance, whereby he benefits from its
continued safety or the absence of liability and is prejudiced by its
damage or destruction, or the creation of liability.
Self Assessment Questions II (State whether True or False)
1. Utmost good faith in insurance means that each party to a proposed contract
is legally not obliged to reveal to the other party all information which
would influence the other’s decision to enter the contract, whether such
information is requested or not.
2. If the happening of the event insured against cannot cost the insured money,
then there is no insurable interest.
3. Facts of common knowledge need not disclosed to the insurer as material
fact.
3.9 Summary
A contract may be defined as an agreement between two or more parties to do or to

abstain from doing an act, and which is intended to create a legally binding
relationship.
Like any other contract the contract of insurance must fulfill all the essential
elements of contracts as laid down in the law of contract of Indian Companies Act,
48
1872. At the same time the Insurance Contract must fulfill certain other elements
relating exclusively to insurance which are known as Fundamental Principles.
Utmost good faith in insurance means that each party to a proposed contract is
legally obliged to reveal to the other party all information which would influence
the other’s decision to enter the contract, whether such information is requested or
not.
Material Fact is every circumstance which would influence the judgment of a

prudent insurer in fixing the premium or determining whether he will take the risk.
An insurable interest is “an interest of such a nature that, if the event insured
against takes place, the insured might suffer a financial loss.
1. Write a short note on a valid contact with its essentials.
2. Give the meaning of Insurance Contact and explain the nature of it.
3. Discuss about the principle of utmost good faith.
4. What are Material facts? List out the facts which have to be disclosed and
which need not be disclosed.
5. Explain the principle of insurable interest.
8.8 Answers to SAQs & TQs
SAQ I:
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1. Contract
2. Wagering
3. Agreement
SAQ II:
1. False
2. True
3. True
TQs
1. Refer 3.2 and 3.3
2. Refer 3.4 and 3.5.
3. Refer 3.6
4. Refer 3.7
5. Refer 3.8
NOTES
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Unit 4 Plans of Life Insurance
Structure:
4.1 Introduction
Objectives
4.2 Understanding the Needs Levels
4.3 Types of life insurance policies
4.3.1 Whole Life Assurance
4.3.2Endowment Assurance
4.3.3Term Assurance
4.4 Other Life Insurance Plans
4.4.1 Money Back Policy
4.4.2 Family Income Assurance
4.4.3 Guaranteed Triple Benefit Policy
4.4.4 Limited payment plans
4.4.5 Participating Plans
4.4.6 Convertible Plans
4.4.7 Joint Life Policies
4.4.8 Children’s Plan
4.4.9 Variable Insurance Plans
4.5 Plans covering handicapped
4.6 Policy Rider s
4.7 Accident Benefits & Permanent Disability Benefits
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4.8 Summary
4.1 Introduction
Life insurance products are usually referred to as ‘plans’ of insurance. These plans
have two basic elements. One is ‘death cover’ or ‘risk over’, which provides for
the benefit being paid on the death of the insured person within a specified period.
The other is the ‘survival benefit’, which provides for the benefit being paid on
survival of a specified period.
Plans of insurance that provide only death cover are called ‘term assurance’ plans.
Those that provide only survival benefits are called ‘pure endowment’ plans. If the
insured does not die within the specified period, no payment is made under a term
assurance plan. Similarly, if the insured dies within the specified period, no
payment is made under a pure endowment plan. Both these are like fire insurance
polices. If the specified contingency does not happen, the policy holder does not
get anything from the insurer.
4.2 Understanding the Needs Levels
Life Insurance is intended to classify and mitigate the adverse financial

consequences that may follow because a person does not live long enough or
because he lives too long enough or because he lives too long. Every possible
53
adverse consequence that requires to be taken care of constitutes a need for
insurance.
The needs of people for life insurance can be classified as under:
Stage 1 Family: Protection of the interests of the family against loss of
income resulted because of the death of the bread-winner.
Stage 2 Children: Provision for higher education, marriages,
Start-in life.
Stage 3 Old age: Post- retirement income for self and family/dependants.
Stage 4 Special Needs: Disability, accidents, expenses for treatment of
diseases. Loss of income as a result of sickness.
Stage 5 Avoiding the loss of wealth (assets) due to depreciation or inflation.
Generally, all these needs exist simultaneously, but not n the same measures, for
all persons. The variations between people will depend on the ages, size of families
and dependants and the nature of other properties and incomes. Insurance plans of
various kinds are designed to meet these one plan alone may not meet all the
needs. All the needs can be met through a judicious mix of plans.
4.3 Types of life insurance policies
All insurance plans are combinations of these two basic plans. A term assurance
plan with an unspecified period is called a ‘whole life policy’ under which the sum
54
assured (SA) is paid on death whenever it may occur. A term assurance plan along
with a pure endowment plan, when offered as a single product is called an
Endowment Assurance plan, under which the S.A. is paid on survival of the
specified period or on earlier death. A term assurance plan with a pure endowment
plan of double the value is called a Double Endowment Assurance plan, under
which the amount payable on survival is double Endowment Assurance plan, under
which the amount payable on survival is double the amount payable on death, what
is called money back or Anticipated Endowment policy, under which. Say 20% of
SA is paid on survival every five years and 40% on survival of 20 years and full
SA on death at any time within the 20 years, is effectively a combination of a term
assurance plan for 20 years for full SA and 4 different pure endowment plans (20%
SA for 5 years. 20% SA for 10 years. 20% SA for 15 years and 40% SA for 20
years).
A plan of assurance will have the following features. By making changes in these
features or adding and combining some of them, any number of plans can be
developed.
• Who can be insured? The various possibilities are (i) individual adults (ii)
children (minors) (iii) two or more persons jointly under one policy.
• What can be the SA? Some plans stipulate a minimum SA. There are
maximum limits also for certain benefits, like accident benefits.
• In what contingency would the SA be payable? Could be on death or on
survival.
• When would the SA be payable? On the contingency happening or some
other dates.
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• How would the SA be payable? Could be in one lump sum of in
installments.
• What would be the term (duration) of the policy? This determines the period
during which the specified event should occur for the SA to be payable.
Some plans provide for benefits even beyond the term.
• When would the premium be payable? Variations are in the frequency of
payment (monthly), quarterly, half-yearly or yearly), as well as the period
during which it is payable. Some plans provide for premiums to be paid for a
period less than the term.
• Does the SA increase? This can happen because of participation in surpluses
and bonus additions or because of guaranteed increases in S.A.
• Does the SA reduce? This can also happen, if the plan is to meet reducing
liabilities under a mortgage.
• Are there additional benefits? These, also called supplementary benefits,
may be provided by way of riders, in addition to the basic covers.
The same plan may be called by different names by insurers. The variations,
between insurers are plenty. It is not possible to give details of all the plans offered
by all the insurers, mainly because insurers make changes in their offers or
practices from time to time. Even if a reference is made to a plan of any particular
insurer, the accuracy of the information is not to be taken for granted.
4.3.1 Whole Life Assurance
A whole life policy is one which is taken to cover the entire or whole period of life
of the assured. The policy money becomes payable to the beneficiary on the death
of the life assured.
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L.I.C. issues the following usual forms of whole life policy:
Ordinary whole life policy: Under this policy, premium is payable throughout the
life time of the assured and the policy money shall be payable after his death. If
payment of premium ceases after at least three year’s premium have been paid, a
fix paid-up policy for such reduced actually paid bearer to the number stipulate for
in the policy will be automatically secured, provided the reduced sum assured
including bonus is not less than Rs.250 such reduced paid up as has already been
declared on the policy, will remain attached thereto.
The minimum amount for which a policy will be issued under this plan is Rs.1, 000
and the mode of payment of the premium shall be yearly or half-yearly except
under salary saving schemes.
Limited Payment Whole Life Policy: In this type of policy, the life assure is
required to pay premium for a fixed period from 5 to 55 years or up to the
attainment of a certain age particularly up to retirement. The assured is required to
pay premium for a selected period of years or until his death if it occurs within the
period. The life assured shall have the satisfaction of knowing the maximum
amount he will be required to pay, no matter how he lives. If he survives the period
of selected to pay, selected number of years no further premium is required to be
paid. But the assured sum becomes payable only after his death.
With profits limited payment polices do not cease to participate in the profits after
completion of the premium paying period but continue to share in the periodical
bonus distributions until the death of the life assured. This is a better form of life
57
assurance for family provisions, since it enables the assured to pay all the
premiums during the productive years of life.
Single Premium Whole Life Policy: This is an extreme form of limited payment
life insurance. The total amount of premium payable is paid in one lump sum by
the assured. The policy is not so popular but is purchased for investment purposes.
It suits those persons who get windfall income like lotteries etc. and who can
afford such singe payment.
Convertible whole Life Assurance Policy: This policy is suitable to young man
who is on the thresh-hold of his career and has prospects of increase in income
after some time. The object is to provide maximum insurance protection at
minimum cost at the same time to offer a flexible contract which can be altered
into and Endowment Assurance at the end of 5 years from the commencement of
the policy by which time it is expected that there would be a rise in income and he
would be in a position to pay more premium. The minimum sum assured is Rs.5,
000 and the maximum age at the entry is 45 years.
4.3.2Endowment Assurance
The Endowment Policy is that where policy money shall be payable to the assured
person upon attaining a certain age on the event of early death to his nominee.
These policies are more popular than whole-life policies due to the following
advantages:
• Compulsory savings: It is a method of compulsory savings. A vast majority

of people never save a rupee even though they get good incomes because of
58
extravagant habits. For such people this type of policy turns out to be a
means of forcing thrift.
• Old Age Provision: These policies are meant to benefit the policy holder
under self-benefit scheme as he is able to beget some fund from the
insurance company if he services. If the policy matures, say at 70 years of
age of an assured, it serves as an excellent method of savings a large amount
in old age.
• Accumulation of Fund: The specific assured sums collected after the

exposing of the endowment period may well be utilized for higher education
or marriage of children.
Types of Endowment Policies:
• Ordinary Endowment Policy: single or ordinary Endowment Policy

provides an ideal combination of both family prodigious and investment.
The amount becomes payable on the expiry of the endowment period or at
any time before maturity in case of death of the assured. The assured is
required to pay premium throughout the term or for a specified period or till
death.
• Double Endowment. Under this policy, double the amount of sum assured
is payable if the assured survives the policy. It the assured dies during the
endowment period, only the sum assured is payable a higher rate of premium
is charged under the policy. The payment of premium is continued until the
endowment period or death which ever is earlier.
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• Pure Endowment Policy: The sum assured is payable on the life assured
surviving the endowment term. This policy suits those who have no
dependents and want to enjoy the money by themselves. This type of policy
is not very popular. Under pure Endowment with Return policy the sum is
payable if the policy holder services the endowment period. If he dies
earlier, then his nominee shall receive the premium so far paid minus the
first year premium.
• Anticipated Endowment of Money back Policy: Anticipated policies are

issued with profits by the L.I.C. for the terms of 12, 15, 20, 25 years only.
The main feature of the money back policy is that a number of installments
of 20% of the sum assured are payable in cash or at certain intervals to the
assured and the balance at maturity. In the event of death of the assured
before the endowment term, full sum assured shall be payable without any
deduction of payment made earlier. The plan is of special interest to those
who feel the need for lump sum besides desiring to provide for their old age
and family. No loan is granted under this policy and the minimum amount
for which a policy is issued is Rs.5, 000.
• Triple Benefit Endowment Policy: This Policy is also known as perfect

protection or family protection policy. Under this policy, the rate of
premium is higher. In this policy are combined special features of whole life
limited payment and a pure endowment. It is issued for a fixed period of 15,
20 or 25 years. Benefits given ahead are guaranteed in the policy.
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(i) 15% to 25% of sum assured is payable upon death of the assured
and until the end of endowment period each year regularly to the
family as a provision.
(ii) Sum assured shall also be payable in addition to the above
provision at the end of the term of insurance.
(iii) In case of the assureds’ survival upon the expiry of the

endowment period the sum assured shall be payable. Besides, an equal
amount also becomes payable after death.
• Marriage Endowment Policy: As a special class of endowment policy, it

enables the parents to provide funds for the marriage of their children. The
premium is paid till the death of the policy holder or for an agreed period,
but the policy matures after the expiry of the endowment period. If the
expires during the currency of the term the assured is given an option to
substitute the name of another child as beneficiary or to accept total premier
contributed so far minus the first year’s premium.
• Educational Endowment Policy: The policy aims to finance the education

of the children whether or not the parents are alive after the endowment
period. Premium is paid up to the death of the life assured or for an agreed
period whichever is earlier. Instead of payment the assured sum in a lump
sum, it is spread over ten half-yearly installments starting from the date on
which the policy matures substitute another child in the place of late child.
Provision for school fees can be made by made by effecting an endowment
policy, on the life on the parent with the sum assured, payable in
installments over the period of schooling.
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4.3.3Term Assurance
Term assurance is temporary contracts, which provide basic death risk cover. This
is the cheapest form of life assurance, since as the description suggests, it is only
for a certain period of time and the policy money is payable on death during the
term of time and policy money is payable on death during the term of the policy.
On expiry, the policy has no value. Normally, the policyholder does not receive
any benefit on survival to the end of the stipulated term but he will have enjoyed
the protection for death occurring during the policy period. The whole life policy
in effect is a term insurance policy without the limitation of a period. In India,
return of premiums is allowed in the event of survival of the policy holder to the
end of the term. No doubt, a higher premium would be payable to cover the
additional survival benefit.
The term insurance policy can be secured by paying a single premium at the start
or by an annual premium covering the risk for one year at a time (which is called
renewable term insurance) or by a level premium payable over the period chosen
when it is called level premium payable over the period chosen when it is called
level premium term insurance. These polices do not generally have surrender or
loan values.
• Increasing Term Assurance:

Because of inflation, a term, assurance with a level sum assured gives a
reducing amount of real cover as the value of money declines year by year
and consequently. Attempts are made to combat this by providing term
assurance policies with some form of escalating sum assured. The premium
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would be of level amount payable throughout the term. The renewable term
and convertible term policies as also index-linked polices which like the sum
assured to an index like the cost of living index meet the need for increasing
insurance cover.
• Decreasing Term Assurance :

Term assurance of this type has a sum assured which reduces each year or
even each months, by a stated amount decreasing to nil at the end of the
term. It is normally used to cover a reducing debt, such as the capital
outstanding on a house purchaser mortgage, with the sum assured being
linked to the reduction in the capital outstanding under the loan. Although
the sum assured decrease, the premium remains constant.
4.4 Other Life Insurance Plans
4.2.1 Money Back Policy
Money Back policy plan is an excellent plan with good return on

reinvestment, best suited for businessmen and professionals. Money is
available at regular intervals in future to meet the specific expenses such as
children's education or marriage. At the same time, the policy provides
insurance protection for the family as well as old age provision.
Features
• A policy where lump sum amounts are paid to the life assured at periodic
intervals on survival.
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• In case of death of the life assured within the term, the total sum insured
is paid to the nominee, irrespective of earlier survival benefits.
• Bonus is payable under this scheme.
• Premiums are to be paid regularly to get survival benefits.
• Premiums cease at death or on expiry of term whichever is earlier.
• This plan can be availed of for terms 20 or 25 years .
4.4.2 Family Income Assurance
This policy offers payment to the life assureds’ dependents of an agreed

income until the expiry date of the cover. The payment of benefit
commences on the death of the life assured and would be payable till the
expiry of policy. Thus, it is a type of decreasing term assurance where the
benefit is payable over a period rather than as a lump sum. Family income
benefit may be added to a whole life or endowment policy or may stand on
its own.
4.4.3 Guaranteed Triple Benefit Policy
Guaranteed Triple Benefit Policy

4.4.4 Limited payment plans
All plans other than term assurance plans are variations of the whole life and
Endowment plans. The premiums would normally be payable till the SA
becomes payable, that is, till a claim arises. It is possible to limit the
premium-paying period for a shorter period. Such polices would be called
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limited payment polices if the limited period is only one year. A ‘single’
premium polices for whole Life and Endowment plans are rare, but are
offered a person who pays a single premium, probably has a larger need for
tax benefits, rather than insurance. Persons, who expect that their
professional earnings may not continue for a long time, unlike regular office
workers, may prefer limited payment policies. Performing artistes and even
professionals working abroad, run this risk. Sometimes, officers servicing in
the defense forces may retire before they reach the normal retirement age of
55 or more.
4.4.5 Participating Plans
Both whole life and endowment policies can be made participating in profits
at the option of the policy holder. These are also called ‘with profit’ polices.
These policies would be entitled to bonuses declared after every valuation.
The methods of bonus additions are dealt with in another chapter.
Term assurance plans are normally not issued as participating polices,

mainly because they were issued for short periods of one year. But insurers
have begun to insure term assurance plans for long duration of 30 or 40
years, with uniform premium during the entire period. Under these
circumstances, they do not vary from whole Life policies. The option of
participating in profits is available in such cases.
4.4.6 Convertible Plans
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Convertible plans of assurance are plans, which provide, in its terms and
conditions, that it can be changed to another plan after, or within, a certain
period after commencement. For example, a convertible term Assurance
plan can be converted into a whole life policy or an endowment policy,
within a period specified in the original plan. This period specified in the
original plan. This period may be ‘not later than two years before the expiry
of the original term., in other words, if the original term insurance cover is
for 6 years, the option to convert should be exercised before the end of the
fourth year. In some plans, the option can be exercised at any time, but
before age 60. A convertible whole life plan can be converted into an
Endowment plan. If the clause says that the option has to be exercised at the
end of say, 5 years, it will have to be done during the fifth year. But before
the sixth year begins. If the option to convert is not exercised, the policy will
continue on the original terms.
The advantage of such convertible plans is that, when the right of conversion
is exercised, there would be no further underwriting decision to be made.
There would be no medical examination at that time. So, even if the insured
has an adverse medical condition at that time, the policy of his choice will
not be denied to him. Such polices are usually taken by persons in the early
stages of their careers, who expect their financial conditions to improve
soon, but would not like to delay the benefits of insurance till then.
4.4.7 Joint Life Policies
Two or more lives can be covered under one policy. Such policies usually
cover married couples or partners. The SA is paid on death of any of the
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insured persons during the term or at the end of the term. Some plans also
provide payment of S.A. on the death of one life and the policy is continued
to cover the second life till maturity without payment of further premium.
In the case of joint life insurance:

• A Joint life declaration is necessary to create a joint interest in the
policy.
• In case of partnership insurance, the partnership deed will be
examined to ascertain the nature of financial interest of each partner.
• Each life will be underwritten separately.
• Bonuses accrue on the single basic SA only.
4.4.8 Children’s Plan
Insurance can be taken on the lives of children, who are not majors. The
professional will have to be made by a parent or a guardian.
In these plans, risk on the life of the insured child will begin only within
when the child attains a specified age. Practices vary widely. The time gap
between the date of commencement of the policy and the commencement of
policy and the commencement of risk is called the ‘Deferment period’. If the
child s 6 years old when the policy is taken and insurance is to begin when
the child is 15 years old, the deferment period is 9 years. The date on which
the risk will commence, at the end of the Deferment period, is called the
‘Deferred Date’ the deferred date will be a policy anniversary. Ages are
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reckoned as next birthday, nearest birthday or last birthday, as per the
practice of the insurer.
There is no insurance cover during the deferment period. If the child dies
during the deferment period, the premiums will be returned. Risk will
commence automatically on the deferred date, without any medical
examination. The main advantage of these plans is that the premium would
be relatively low (age of the child at commencement) and cover will be
obtained irrespective of the sate of health of the child.
These policies have conditions whereby the title will automatically pass on
to the insured child, on his attaining the age of majority. This process is
called vesting. The policy anniversary corresponding to age of majority, or
any later date as may be chosen; of the insured child is the ‘vesting date’.
After vesting, the policy becomes a contract between the insurer and the
insured person.
The vesting age cannot be earlier than 18. This is because there cannot be a
valid contract with a minor. The deferred date and the vesting date need not
be the same.
With regard to the deferred date, various options are available. In some
plans, children between the ages of 5 and 12 are insured, with risk
commencing at age 12. In some other plans. Policy can commence when the
child is some other plans, policy can commence when the child is between I
and 12 years old an risk will commence 2 years after policy commences, but
not earlier than age 7.
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In a plan offered by the LIC the insurance is taken on female children. The
risk cover is extended to the husband three months after the insured child
gets married or one month after intimation of marriage or on attainment of
age 20 by the life assured, whichever is the latest. The sum assures is paid a
survival benefit on the latest. Te sum assured is paid as survival benefit on
the deferred date, and again on the death of the life assured before maturity,
but there is no survival benefit on maturity.
4.4.9 Variable Insurance Plans
A common objection to life insurance is that the returns are not good.
Although life insurance is not an investment and the criterion of return or
yield is inappropriate, the concern is real, particularly in the context of
inflation. The sum assured, considered adequate today, may have a much
lower value on maturity, after say 20 or 25 years. This applies to all types of
savings and not only to life insurance. In the case of stocks, the return or
appreciation is looked upon as compensation for such losses.
The unit trust of India linked insurance plan (1971) this plan is designed for
any resident in India between the ages of 12 and 55 planning to save
between Rs.6000 and Rs.75000, to be contributed in half-yearly or annual
installments over a period of 10 or 15 years. Persons over can go in for a 10
year plan. No medical examination is necessary. A small part of the
contribution examination is necessary. A small part of the contribution is
utilized for providing life cover and the balance is invested in units. In case
69
the person dies before the end of the plan period, the legal heirs will be
entitled to the units to his credit and the amount of the insurance cover.
The money back type of polices help the policy holders to some extent. The
lump sums paid periodically, without affecting the amount of insurance
cover, can be invested. Insures have also developed innovative plans to deal
with this problem. Broadly, the technique was to combine a term insurance
plan with an investment plan. For example, one may collect a sum of
Rs.10000 from a prospect aged 30, use whatever is required to support a
term insurance cover of his choice, say Rs200, 000 and put the balance in an
investment portfolio like to mutual fund. Policy holder would have an option
as to the fund in which he would like his investment to be. The options
would be, as in mutual funds, growth funds, income funds, bonds,
technology stocks, etc. regular statements from the insurer would indicate
the growth of each of these funds and the policy holder would have a choice
of shifting from one to another. Such shifts would be done at certain costs,
like 9.1% or so.
Unit – Linked polices offered in India by the LIC under the brand name
bima plus, is a plan of this nature. It offered a choice of three funds (secured,
balance and risk) with different risk profiles, depending on the different
pattern of investment in equities, debts and liquid assets. The policyholder
was allocated units, which were valued every week.
Such plans, also called ‘unbundled’ were very popular in the years when the
stock market was booming. However, when the reverse trend happened, the
effects of loss of capital could not be avoided. The security offered by the
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traditional insurance plans seemed more attractive. Some plans offered a
minimum guarantee (of return). But at times of falling interest rates, the
floor (guaranteed) levels could not be sustained and the insurers were
compelled to replace existing plans with new ones that guarantee at owner
levels. This had happened in 2002 with some of the L.I.C.s plans some of
them that guaranteed returns were withdrawn.
4.5 Plans covering handicapped
Physically handicapped persons are insured. Extras are charged in some cases like,
loss of both arms, deaf in both ears, blind in both eyes, etc. partially handicapped
persons are mostly accepted without extra premium except in certain plans. These
details will have to be gathered from the company’s underwriting departments.
4.6 Policy Rider
A rider is a clause or condition that is added on to a basic policy providing an

additional benefit, at the choice of the proposer. For example, a provision that in
the event of death of the life assured by accident, in the event of death of the life
assured by accident, the SA would be double can be a rider on an Endowment
policy. This rider can be added on to a policy under any plan. The option to
participate in valuation surplus can also be offered as a rider. The additional
premium for the rider of Double Accident Benefit is a constant figure, not
depending on age or the underwriter’s decision. But that is not so with regard to all
riders.
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Insurers find it convenient to have a small number of basic, plans, with riders being
offered as options, so that effectively the prospect has a number of options, to
choose from each plan can be taken with any one or more of the riders. 5 basic
plan and 7 riders, effectively provide 200 or more options. Many riders can be
added or removed at the will of the policyholder, thus allowing him a lot of
flexibility. Such options enable customization of the product.
Some of the riders being offered by insurers in India are mentioned below:
• Increased death benefit, being twice or even more the survival benefit.
• Accident benefits allowing double the SA if death happens due to accident.
• Permanent disability benefits, covering loss of limbs, eyesight, hearing,
speech, etc.
• Premium waives which would be useful in the case of children’s assurance,
if the parent dies before vesting date or in the case of permanent disability
and sickness.
• Dreaded disease cover, providing additional payments (in or in
installments), if the life insured requires medical attention because of
specified conditions like cancer, cardiac or cardiovascular surgeries, stroke,
kidney failure, major organ transplants, major burns, total blindness caused
by illness or accident, etc.
• Guaranteed increase in cover at specified periods or annually.
• Cover to continue beyond maturity age for same SA or higher SA.
• Option to increase cover within specified limits or dates.
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As per the regulations made by the IRDA in April 2002 and amended in October
2002.
• The premium on all the riders relating to health or critical illnesses shall not
exceed 100% of the basic premium of the main policy.
• And the premium on all the other riders put together should not exceed 30%
of the basic premium.
This virtually puts a limit n the number of riders that can be offered with any
policy. It is possible that this limit of 30% may be changed from time to time.
4.7 Accident Benefits & Permanent Disability Benefits
With regard to Accident Benefit and Disability benefit proof will have to be
obtained to ensure that the necessary conditions have been satisfied for payment of
those benefits. The conditions would be:
• The death or injury was caused by outward, violent and visible means.
• The death was solely and directly and independently of all other causes,
from the accident
• The death occurred within 120 days or such other period as may have been
stipulated in the policy.
The exclusions, when accident benefit would not be payable are:
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a) When the death is caused by intentional self-injury, attempted suicide,
insanity, immorality or while under the influence of intoxicating liquor,
drugs or narcotic substances.
b) When the death is due to accident when the life assured was engaged in
aviation or aeronautics other than as a bonafide passenger in an aircraft
licensed to carry passengers.
c) When the death is caused by injuries resulting from riot, civil commotion,
rebellion, war, racing hunting, mountaineering scuba diving, bungee
jumping , para gliding, river rafting, etc.
(e) When the death is a result of committing any breach of law.
(e) When the accident resulting in death arises from employment of the life
assured in military service, police duty.
There is maximum limit of SA up to which accident benefit is made available; the

L.I.C. had fixed it at Rs.5 Lakhs. This limit is not on a single policy but on all
polices together on a single life some companies have limits up to Rs.10 Lakhs.
The rules of each insurer have to be checked.
Permanent Disability Benefit:
Payment of the Double Accident Benefit is part of the settlement of the death
claim. Settlement of the disability benefits however, is different. It is neither a
death claim nor a maturity claim. The policy does not end with this settlement.
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In case of permanent disability, the benefits provide for in the policy are of the
following kind.
(a) An additional sum equal to the SA, payable in installments over a

specified period of years say, 10 years.
(b) The future premiums are waived.
(c) In case of claims (death or maturity) with the specified period, the
remaining disability benefit installments have to be paid along with the
claim.
The maximum limit of and the exclusion clause are the same as under accident
benefit. The interpretation of disability can pose some problems. The policy
conditions define disability in physical terms, viz. loss of light of the eyes,
amputation of both the hands at or above the wrist, or amputation of both the legs
at or above ankles. Etc. it is also stated that disability must be total and permanent
and such that the life assured then or in future, would not be able to do any work,
occupation or profession to earn or obtain any wages, compensations profit. The
most restrictive interpretation would be that the life assured is unable to follows his
own occupation, the broader interpretation would be that the life assured is unable
to follow his own profession or occupation or any other occupation in keeping with
his education, training and experience. For example, if another is an organization
may be able to take up a manual job but not a job in the office due to disability, he
may be considered eligible for disability benefit.
4.8 Summary
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Life insurance products are usually referred to as ‘plans’ of insurance. These plans
have two basic elements. One is ‘death cover’ or ‘risk over’, which provides for
the benefit being paid on the death of the insured person within a specified period.
The other is the ‘survival benefit’, which provides for the benefit being paid on
survival of a specified period.
All insurance plans are combinations of these two basic plans:

• A term assurance plan with an unspecified period is called a ‘whole life
policy’ under which the sum assured (SA) is paid on death whenever it may
occur.
• A term assurance plan along with a pure endowment plan, when offered as a
single product is called an Endowment Assurance plan, under which the
S.A. is paid on survival of the specified period or on earlier death.
A whole life policy is one which is taken to cover the entire or whole period of life
of the assured. The policy money becomes payable to the beneficiary on the death
of the life assured.
The Endowment Policy is that where policy money shall be payable to the assured
person upon attaining a certain age on the event of early death to his nominee.
Term assurance is temporary contracts, which provide basic death risk cover.
This is the cheapest form of life assurance, since as the description suggests, it is
only for a certain period of time and the policy money is payable on death during
the term of time and policy money is payable on death during the term of the
policy.
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Money Back policy plan is an excellent plan with good return on reinvestment,
best suited for businessmen and professionals. A policy where lump sum amounts
are paid to the life assured at periodic intervals on survival.
Convertible plans of assurance are plans, which provide, in its terms and
conditions, that it can be changed to another plan after, or within, a certain period
after commencement.
A rider is a clause or condition that is added on to a basic policy providing an
additional benefit, at the choice of the proposer.
SAQs:
1. a. Master Policy
b. Group Superannuation Scheme
c. Gratuity
2. a. True
b. False
Terminal Questions
1. Refer 5.2.1
2. Refer 5.2.3
3. Refer 5.3.1
4. Refer 5.6.1
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5. Refer 5.6.2
NOTES
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Unit 5: Group Insurance
Structure:
5.1 Introduction
79
Objectives
5.2 Group Insurance
5.2.1 Meaning
5.2.2 Group Insurance in India
5.2.2 Features of Group Insurance
5.2.3 Group insurance Vs Individual Insurance
5.3 Types of Group Insurance
5.3.1 Group Gratuity Schemes
5.3.2 Group Superannuation schemes
5.4 Other Group Schemes
5.5 Social Security Schemes
5.6 Annuities
5.6.1 Nature of Annuities
5.6.2 Classification of Annuities
5.7 Summary
5.1 INTRODUCTION
Group Insurance is a plan of insurance that provides cover to a large number of

individuals under a single policy called the “master policy”. The individuals
covered under the master policy are not parties to the contract. The individuals
80
covered under the master policy are not parties to the contract. The contract will be
between the insurer and the body that represents the group of individuals covered.
This body may be the employer, who is interested in obtaining benefits for his
employees through insurance. The body may be association of individuals through
whom the collective interests of the individuals are safeguarded, like a trade or
professional association. A bank or financier can make arrangements through a
group policy to protect his interests against defaults accruing because of the death
of the debtors. Thus sometimes it is referred to the instrument of “mass insurance”.
This chapter is an attempt to explain the group insurance, different types of group
insurance and annuities.
Objectives:
After studying this unit you will be able to:

• Explain the meaning of group insurance
• Understand the different types of group insurance
• Describe the concept annuities and different types of annuities
5.2.1 GROUP INSURANCE
As discussed earlier, group insurance is a plan of insurance, which provides cover

to a large number of individuals under a single policy called the “master policy”.
The insurance contract is with the body that represents the individuals, the
employer or the association. Because the contract is with the body, that body is the
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policyholder. Here individuals are the beneficiaries. The amount and terms of
insurance are negotiated by the policyholder and not by the individual
beneficiaries. The benefits will be determined on bases that apply uniformly to all
the individuals.
The premium will be paid to the insurer by the policyholder, who may, or may not,
collect the same from the individuals concerned. If the individuals contribute to
the premium, that may be either full or partial. In varies employer schemes, the
entire premium is paid by the employer. Sometimes, employees are made to
contribute part of the cost. If the premium is collected from the individuals
concerned by an employer, the premium may be deducted from their salaries. That
does not make this a policy under the Salary Savings Scheme, because of two basic
differences. One is that the ownership of the policy is with the employer and not
the employee. Secondly, the extent of cover and the terms are determined by the
employer and not by the individual.
As many persons are covered under one single contract, the administrative costs
are low. Because the coverage is not at the choice of the individual concerned, the
chance of an adverse selection is low. Therefore, the rules of medical examination
are more liberal in the case of group insurance policies.
5.2.2 GROUP INSURANCE IN INDIA
In India the development of group insurance has taken place since that of the early
1960s. Before which the group insurance business was very little. Originally,
group insurance was restricted to employer-employee groups only. Since then the
scheme has been extended to cover different groups, provided they are identifiable
82
by homogeneous common attributes like profession, membership of a cooperative
society, etc. The number of persons covered by group insurance policies is
increasing at a faster rate than the individuals policies. New insurers find that they
can reach larger numbers of people easier through group insurance.
Group insurance schemes are used by the Government, as instruments of social

welfare. Social security is a concern of Governments in all countries. But the
dimensions of social security vary considerably. In some advanced countries, the
entire living expenses of elderly persons are borne by the state as a social measure.
In some countries, benefits paid by the state during unemployment are more than
the salaries of the employed. Social welfare measures are generally administered
by Governments out of funds generated through levies and taxation.
Administration costs of these schemes have been increasing over the years and
Governments have found it expedient to use insurance companies to pursue these
objectives. Insurers are seen as the natural instruments to take over these
functions, because life insurance business has a powerful social dimension.
In India, the operations relating to social welfare are comparatively at an

elementary level. The group insurance schemes of the L.I.C provide insurance
cover of small amounts like Rs. 5000 or so, to the poorer sections of society like
landless agricultural laborers, handloom workers, rickshaw pullers, village artisans,
etc.
5.2.3 NATURE OF GROUP INSURANCE
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Insurance of Group: In group insurance scheme, live covers in granted to a
number of persons under one contract while individual insurance is between an
individual and the corporation. It is single contract covering many lives in a group
which is considered as a whole.
Group Selection: Under a certain limit called “Free Cover Limit” life cover is
granted without medical examination. Group Selection is aimed at obtaining a
group of individual lives which contain reasonable average cross-section of risk
from which practicable rates of morality could be expected. The group must have
sufficient large individuals at different risks.
5.2.4 GROUP INDURANCE VS INDIVIDUAL INSURANCE
In the case of individual insurance, the contract is between the insurer and the
individual policyholder. The individual decides whether he should be insured, for
how much and under what plan. The individual pays the premium and has the
right to seek termination or alteration of the contract. In the case of group
insurance, the contract is with the employer or with the group / association. A
single master policy is issued covering all the members. The individuals covered
under the master policy are not parties to the contract. They are only the
beneficiaries. The amount and terms of insurance are negotiated by the employer
or group, and apply on a uniform basis to all members.
The premium has to be paid by the employer or group to the insurer. The members
covered under the policy may be required to contribute to the premium. Whether
they contribute at all or not, or the extent of the contribution, are internal matters
concerning the group. The insurer is not concerned. The policy contract is not
affected.
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Group insurance is provided only to groups, which have been formed for reasons
other than obtaining the insurance coverage. Entry into and exits from the groups
will have to be for reasons unrelated to the insurance cover. Employees join or
leave an organization for reasons unrelated to the insurance cover provided by the
organization. So also with trade unions or other vocational associations like beedi
workers or rickshaw pullers.
The master policy will stipulate the extent of insurance cover available to each
member. The member will not have a choice about the extent of this cover. That
would have been fixed on the basis of some objective criterion, like the earnings,
the seniority. The position occupied, the age, etc. The member will also have no
choice as to whether he should be covered by the scheme or not. Entry will be
compulsory on certain conditions being satisfied.
When a group insurance scheme is being introduced for employees for the first
time, it is customary to allow existing members an option to join the scheme or opt
out. The option is important if the member has to contribute to the premium or if
he has to forego some other benefit in lieu of coverage. For example, pension
benefits being introduced through a group plan may be in partial modification of
existing Provident Fund arrangements. An employee may prefer to stay with the
Provident Fund benefit.
The option is normally allowed only for existing members. The option will have to
be exercised within specified time limits. Those who do not exercise the option to
join may never be allowed to enter later. However, all those who become
members of the organization subsequent to the commencement of the group cover,
85
may not be allowed such an option. They would be entitled to the benefits of the
group cover on fulfilling certain conditions, like having completed a specified
period of membership.
Individuals are not separately evaluated on risk factors. Underwriting is based on

an assessment of the group as a whole. Insurance cover up to certain limits is
given to all without either medical examination or stringent evidence of
insurability. Minimum requirements like ‘active-at-work’ and ‘no medical leave
for the last six months’ could be the simple conditions of eligibility. The
assumption is that when an individual has no choice of being covered on the
amount of coverage, there can be no adverse selection of risk. In that case, the
normal average should apply. Only exceptions have to be looked for, like having
taken medical leave or having been absent for long periods.
There has to be a single administrative organization, able and willing to act on

behalf of the group. Normally, this would be the administrative office of the group
acting through an authorized official. A group may consist of several members,
often hundreds, sometimes thousands. It is not possible for the insurer to deal with
each of them. That is why there has to be a specified authority to deal with the
insurer and remaining responsible to the members. He would normally be an
official like the Personnel Officer of the company or Secretary or President of the
Association. A trust may be formed for the purpose of paying to, and receiving
moneys from, the insurer, for further distribution to appropriate members.
The premium is received in one lump sum from the group covering the entire
group. The costs of administration would naturally be low. Therefore, the
premium charged in group policies tends to be lower than in the case of individual
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policies. The benefit of lower costs of administration will be available only if the
group is of a certain minimum size. Normally, 25 persons may be considered
reasonable.
The premiums charged on a group policy vary from year to year. This is because
of the new entrants into the scheme as well as exits due to retirement, death, etc.
The premiums will also be changed according to the mortality experience of the
group. In case of favorable experience, premiums charged may be brought down.
Or the surplus that emerges may be passed on to the members of the group, by way
of reduction in the premium payable in the following year. This system is called
‘profit-sharing’.
5.3 TYPES OF GROUP INSURANCE
Initially the LIC had offered three major Group Term Insurance Schemes, to
employers covering employee benefits. These were the Group Insurance Scheme
(Term), Group Gratuity Scheme and Group Superannuation Scheme or Group
Pension Scheme. Over the last forty years, many other schemes were introduced,
pursuant to new legislations or changes in Government policies. LIC was the
Government instrument for implementing social welfare schemes.
The Group Term Insurance Scheme is a term insurance scheme renewable every
year. This is the simplest and cheapest of the schemes. A fixed sum is paid on the
death of a member covered under the scheme. This scheme is found useful by
employers, to help employees who die young, without having accumulated enough
savings. Trade Unions, professional groups and industry associations also find it
convenient to help their members, as the premium rates would be much less than if
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the individual members were to take individual insurance cover themselves. In the
case of beedi workers, coir workers, rickshaw pullers, weavers, etc. They would
have very little to fall back upon in case of early death. Also, debts could place
severe burdens on their heirs. A term insurance could mitigate such hardships to a
large extent. The amount of cover is fixed as either uniform for everybody or
related to earnings, as a certain multiple.
Group term insurance schemes would be appropriate also to cover the liabilities of
members who have availed of house building loans or vehicle loans. Public
limited companies can take such policies covering their employees. Finance
companies providing loans for housing or cards or for setting up business, can take
policies covering the dues from their debtors. The total coverage every year would
be equal to the total outstanding from the debtors, which will reduce to the extent
of repayments and increase according to new loans.
Group term insurance, being a low-cost insurance providing only risk cover, is
suitable for providing social security schemes to the economically weaker section.
This may be a necessity in developing countries.
5.3.1 GROUP GRATUTUITY SCHEME
Group Gratuity Schemes are related to gratuity payments. Gratuity is paid to

employees who retire or die and also to those who resign, after having put in
specified periods of minimum service, usually 15 years. The Gratuity Act passed
in 1972, makes the payment of gratuity obligatory. Many organizations had been
paying gratuity even before the enactment of the Gratuity Act. They sometimes
pay more than what the Act requires. However, several employers, particularly the
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smaller ones, regarded gratuity as additional cost and liability, in the absence of a
law compelling gratuity payment.
The amount of gratuity is usually related to years of service and the salary last
drawn. It would be something like salary multiplied by the number of years of
service. While this may be reasonable in the case of those who retire after long
years of service, it could be a small sum for the families of those who die young.
Both salary and the years of service would be small.
METHODS OF MEETING GRATUITY LIABILITY
Once the employer’s liability is accepted, either because of legislation or because

of employees’ service condition, the employer has to provide funds to pay the
gratuity amount when it becomes due. He can arrange to meet the liability in any
one of the following ways:
(a) He may make the payment as and when it falls due, out of current
revenues. This is called “pay as you go” method.
(b) He may create an internal reserve in the books of accounts equal to the
estimated liability.
(c) He may set up a Gratuity Fund as an irrevocable trust. The trustees will
manage the investments of the fund comprising of the contributions, and
make payments of gratuity out of the fund.
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(d) He may set up a Trust Fund as above and the trustees may enter into a
Group Gratuity Scheme contract with an insurer.
Payment of gratuity from current revenues is against prudent business policy. The
gratuity liability will vary from year to year depending upon the number of
employees to be paid and their seniority in terms of service and salary. The
revenues may not be able to sustain such variable burdens every year, particularly
if the business performance is sluggish. The employees run the risk of default or
delays. If, on any year, the impact of gratuity is unusually heavy, it will eat into
the profits and affect the company’s capability to sustain dividend payments to
shareholders. The effect on the ‘bottom line’ may be interpreted unfavorably by
the investing public. Therefore, this method is not preferred.
As for the method (b) above, the internal reserve set up by the organization is a
mere accounting provision in the books and does not become a separate fund. It is
not possible to prevent the company from using it for its current requirements.
Therefore, this method is not protected from the weakness of method (a) although
it has some merit, if the management is strict and disciplined.
The other two methods providing for creation of separate trusts safeguard the funds
for making gratuity payments. The difference between the two is that in method ©
the funds are retained and managed by the trustees while in method (d) the funds
are paid to and managed by the insurer.
Group Gratuity Schemes with the insurer have the following advantages.
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(a) The trustees may not have as much expertise in the investment of funds
as the insurer may have
(b) The insurer, with its massive portfolios, is in a better position to secure
maximum benefit from the market, in terms of protection from
fluctuations as well as better spread, than an individual trust with its
relatively small portfolio can do
(c) The benefit of the group term insurance, given by an insurer will ensure
that families of employees dying early get the same gratuity as if the
employee had completed the full term of service.
(d) The insurer has actuarial skills to evaluate the adequacy of the fund from
time to time.
5.3.2 GROUP SUPERANUATION SCHEME
A pension is a regular payment received after one has retired from active life. This
is a necessity for all persons. Many employers provide for pensions for their
employees. The Group Superannuation Scheme is offered to employers in order to
facilitate the funding and disbursement of pensions.
Pensions are payable to employees who retire from service on attaining the age of
superannuation or retirement. It is paid as long as the employee lives. It may also
be paid to the spouse of the employee, as long as the spouse lives. Pension may
also be paid to the dependents of those who die while in service. It is not easy to
determine the liability of the employer on account of the pension’s payable,
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because it depends on how long the employees or their spouses live. The manner
of funding for pensions becomes an important issue.
As in the case of gratuity, pension benefits can also be funded in four different
ways. The last method, of funding with an insurer is the best method for the same
reasons as discussed earlier. The employer can set up a trust fund for provision of
pensions. The trustees can enter into a group superannuation scheme with the
insurer, whereby, like the group gratuity fund, the responsibility of administering
and managing the fund is passed on to the insurer. The insurer will provide
actuarial, legal and taxation assistance to the trustees. A group term insurance
scheme can be arranged along with the superannuation scheme, whereby the
pension benefits can be much higher, even in case of premature death.
There are considerable tax advantages both to the employer and the employee, in
both gratuity and pension arrangements. The advantages are conditional on the
gratuity scheme or the superannuation scheme being approved by the Income Tax
Authorities. When the schemes are drawn up with the help of the insurers, the
approvals come easier.
5.4 OTHER GROUP SCHEMES
Group Savings-Linked Insurance Scheme, offered by the L.I.C. to select employer-

employee groups, like quasi-government bodies, public sector corporations and
reputed companies in the private sector, who keep accurate records of their
employees. The scheme provides that the contributions are made by the members.
The same is deducted from the salaries and remitted to the insurer. A portion of
this contribution is utilized for insurance cover and the balance, known as the
contribution for savings, is accumulated at a guaranteed rate of interest. In case of
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death during service, the insurance cover is paid. The term insurance cover is
decided for the scheme as a whole on the basis of the age distribution of the
members.
Another scheme being offered by the L.I.C. is the Group Insurance Scheme in lieu
of Employees’ Deposit Linked Insurance Scheme (EDLI). The EDLI is applicable
to all establishments and undertakings contributing to the Employees’ Provident
Fund under the EPF and MP Act, unless exempted under that Act. The Act
empowers the Central Provident Fund Commissioner to exempt an employer from
EDLI, if he opts for a Group Insurance Scheme of the LIC, which is more
beneficial to the employees. The scheme provides for better benefits to the
employees in the form of higher insurance cover.
5.5 SOCIAL SECURITY SCHEMES
Social security is a concern in all countries throughout the world, although the
dimensions of social security vary considerably. In some advanced countries, the
entire living expenses of elderly persons are borne by the State as a social measure.
In some countries, unemployment doles are more than salaries of the employer. In
some countries, medical care is free. Most of the social welfare measures are
administered by the Government out of funds generated through levies and
taxation. However, Governments are finding it difficult to administer these
schemes. Insurers become the natural instruments to take over these functions. In
India, of course, the operations relating to social welfare are comparatively at an
elementary level.
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In India, group term insurance cover is made available to poorer sections of society
like landless agricultural laborers, handloom workers, rickshaw pullers, village
artisans, etc. with the help of social security fund. In case of death of any member
a prescribed sum, say, Rs. 5000 is paid to the dependants. This amount is doubled
if the death is by accident. The premium is financed either wholly or partly, by the
Central Government. Other weaker sections of society like co-operative milk
producers, tailors, barbers, masons, carpenters etc. are also covered by Group
Social Security Schemes.
1. Self Assessment Questions.

a. Group Insurance Plan which provides cover to a large number of
individuals under a single policy called the _______________.
b. __________ is offered to employers in order to facilitate the funding and
disbursement of pensions.
c. Group Gratuity Schemes are related to ___________ payments.
5.6 ANNUITIES
The risks in human life arise out of both dying too early and living too long. The
concerns of living too long, are acquiring great importance. Longevity is
increasing. The number of old persons is increasing considerably in almost all
countries. In 1960, 5.3% of the population was over 65 years in age. In 1990, this
has gone up to 6.2% and by 2020, it is estimated that 8.8% of the world population
will be over 65 years. More than 43% of all persons in the world aged 75 or older,
will be in just 4 countries China, India, US and Japan. The number of people in
India aged 60 or more was 1.9 Crores in 2002. It is expected to be 18 Crores by
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2025. The demographic change in the form of increased proportion of older
persons in the total population has implications-both socially and economically.
Most of the old persons have no earnings. Their main source of income is the
savings accumulated during working life. Most of them may find the savings
inadequate and may continue to be working. Those who have been working in
reputed organizations or Government may receive pension. In India, about 90% of
employees are in the informal sector, without any retirement benefits. Most of the
older men and almost all elderly women are dependent on others, mostly children.
If the persons are poor, the problems are worse, because the children themselves
may be poor. A survey has shown that 6% of the elderly did not have any
surviving children. Widespread migration of young adults disrupts the traditional
support for older people.
The problems of old people are not related only to shortage of money. Even if well
off, they may be
• Sick, needing someone to be with them all the time
• Physically weak (not ill), not able to attend to all their personal needs, within
the home and outside
• Unable to manage a home on their own and therefore, wanting to share

accommodation
• Lonely, without companions and without the identity of being usefully

engaged.
On the other hand, the life expectancy at age 60 has increased and is expected to
rise to more than 20 (from its existing level of 17) in the next thirty years. This
means that more elderly parents will spend more years, depending on fewer
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children. The situation is much worse if their financial situation is not adequate. A
whole new discipline of study called “Gerontology” deals with the issues of old
age.
There are four ways of providing the required support for persons after they cross
the stage of active life. The first is the Joint Family System. From the early period
of civilization the responsibility for taking care of the older members of the family
was on the younger members. They were all living under one roof. However, the
joint family system is gradually disappearing due to successive partitions of
agricultural lands over generations, lack of opportunities to earn in one village or
town and the younger people moving out to distant places in search of jobs. Fewer
children, weakening of bonds and increasing independence in outlook are also
other significant factors contributing to joint families giving way to nuclear (small)
families.
The Government plays a role in many developed countries. Social security

schemes have been evolved with the active contribution of the Government to
provide for the retirement benefits for workers. Besides, health insurance benefits
are also made available to older citizens. With increasing longevity, the cost of
these benefits is required to be met by the younger working people contributing by
way of taxes, and it is increasing. Even the Governments of developed countries
are finding it difficult to make budget provisions. In less developed countries, the
Governments cannot afford to provide social security benefits. Even those who
try, have schemes which are woefully inadequate, compared to needs.
The third source for providing financial assistance to the people after retirement is
the employer. Due to the pressures from trade unions as well as enlightenment of
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the employers, employees are being provided with support after they cease to
work. Group Term Insurance, Group Gratuity Schemes, Group Superannuation
Schemes and Group Savings Linked Insurance Schemes have become popular.
Employers contribute substantially to such schemes.
Even if employers provide adequately, there are some limitations. Such benefits
can be arranged only for salaried permanent employees and not for temporary or
contract employees. Employee turn-over poses difficulties in the continuation of
superannuation benefits. With increasing competition, the employers are careful
about cutting costs and provision of employee benefits in the form of Group
Superannuation, may become more employee-contributed and not employer-
subsidized.
Businessmen and professionals have to make their own arrangements for the days
when they may not be in a position to work actively. Individuals have to make
their own arrangements for old age provisions. This is likely to be the future
pattern because of the increasing numbers of self employed. The arrangements
have to be firm and assured. Annuity policies meet these needs and are expected
to become more and more popular. In some developed countries, the percentage of
annuity policies to the total life insurance sold is as high as 40%.
“Annuity may be defined as the payment of amounts periodically during the life
time of the annuitant in consideration of the payment of an agreed sum to
insurance company” - By W.A Dins dale
5.6.1 THE NATURE OF ANNUITIES
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The Annuity is called the “up-side-down application of the life insurance
principle”. When a person purchases a life insurance contract he agrees to make a
series of payment (premiums) to the insurer in return for which the insurer agrees
to pay a specified sum to the beneficiaries, in case of death of the life assured.
When a person buys an annuity contract, he pays the insurer a specified capita
sum, may be in installments, in return for a promise from the insurer to make a
series of payments to him as long as he lives. This is the basic principle and has
been simplified for the sake of illustration. There are variations which we will
examine when we discuss classification of annuities.
Annuity, in its simplest form, provided for a single payment of premium by the
annuitant and a promise that the insurer will pay a given amount periodically, to
the annuitant, during his lifetime, starting immediately or from a future date. No
part of the premium paid was returnable on death. Since the annuity was payable
only up to death, we can say that under a life insurance contract, the insurer starts
paying upon the death of insured and under an annuity contract, the insurer stops
paying upon the death of the insured.
Annuity also is, like life insurance, a risk-sharing plan, based upon a group of
insured of the same age. The risk here is of living too long. The contributions are
made by all and the insurer applies the law of large numbers to the experience of a
group of annuitants. The contributions of a large number of individuals are pooled
and each member is paid an annual or monthly amount. Thus, the capital is used
for paying out annuities.
Difference between Annuity and Insurance
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1. Insurance is a polling arrangement whereby a group of individuals make
contributions that the dependents of the unfortunate few, who die each
year, may be indemnified for the loss of the bread winner’s income. On
the other hand, Annuity is pooling arrangements whereby those who die
prematurely and do not need further cover make a contribution so that
those who live beyond their expectancy may receive more income from
their contribution alone would provide.
2. Life insurance policy protects against the absence of income in the event
of premature death or disability, whereas the annuity (policy) protects
against the absence of income on the part of those affected with undue
longevity. These two are extreme forms that assume protection to two
unfortunate groups. “One dying too soon and the other living too long.”
5.6.2 CLASSIFICATION OF ANNUITIES
A. By Commencement of Income:
1. Immediate Annuity.
2. Annuity Due.
3. Deferred Annuity.
B. By Number of Lives Covered:
1. Single Life Annuity.

2. Multiple Life Annuity.
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C. By Mode of Payment of Premium:
1. Level Premium Annuities.

2. Single Premium Annuities.
D. By Disposition of Proceeds:
1. Life Annuity.
2. Guaranteed Premium Annuity.
A. Annuity by Commencement of Income
1. Immediate Annuity: It commences immediately after the end of the first

income period. For example, if the annuity is to be paid annually then
the first installment will be paid at the expiry of one year. In half yearly
annuity the payment will begin at the end of six months. The annuity can
be paid either yearly, half yearly, quarterly or monthly. The purchase
money of consideration is in single amount. Evidence of age is asked for
at the time of entry. It helps to obtain a larger income that can be secured
from the yield of investments. This form of contract is of special interest
to persons without dependents and it provides maximum possible
consistent income.
2. Annuity Due: Under it the payment of installment starts from the time of
contract. The first payment is made as soon as the contract is finalized.
The premium is generally paid in single amount though it can be paid in
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installments as in the case of deferred annuity. The annuity due contract
is beneficial for actuarial valuation.
3. Deferred Annuity: In it the payment of annuity starts after a deferment

period or at the attainment of a specified age by the annuitant. It can be
issued to male or female lives. The female lives are generally able to
avail lesser amount due to their higher longevity as compared to male
lives after certain age. The Corporation does not require any medical
examination but only proof of age. The premium may be paid as a single
premium or in installment. Generally, the deferred annuity is sold on
level premium. The payment of premium continues until the stated date
for commencement of the installments or until prior death of the
annuitant. The premium may be returned without interest at the death.
The deferred annuity can be surrendered for a cash amount or cash option
at the end of or the deferment period. The surrender value is only95
percent of the premium before deferment period. No surrender value is
payable after the deferment period.
This annuity is useful to those who desire to provide a regular income for
themselves and their dependents after the expiry of a specified period.
B. Annuity By Number of Lives Covered
1. Single Life Annuity: Under it one single person is contracted. It is most

beneficial to those who have no dependent and want to use all the saving
during lifetime.
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2. Multiple Life Annuities: In it more than one life is contracted. It is of
two types:
(i) Joint Life Annuity. Here payment of annuity stops at the first
death.
(ii) Last Survivor Annuity. Here payment continues up to the death of
the last person of the group.
C. Annuity By Mode of Payment of Premium
1. Level Premium Annuities: For the level premium annuity, the annuitant
can deposit some amounts periodically so that at the end he can get
sufficient amount of annuity in equal installments. During the
accumulation period, i.e., before commencement of the payment of
annuity he is given option to get the surrender value in cash or to get the
paid-up values reduced in proportion to the premium paid to the premium
payable. At the death of the depositor the beneficiary can get the
surrender values or premiums paid whichever is higher.
2. Single Premium Annuities: The annuity is purchased by payment of

single premium. Generally the life insurance amount is utilized for
purchasing this annuity.
D. Annuity By Disposition of Proceeds
1. Life Annuity: It offers a regular income to the annuitant throughout his

life time. No payment is made after his death. If the annuitant dies
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before receiving all the amounts of the purchase price he is at a loss. But
if he survives for a longer period than expected, he is benefited by this
annuity.
2. Guaranteed Minimum Annuity: In it payment up to a period is
guaranteed by the insurer. If the annuitant dies before the specified
period, annuity will continue up to the unexpired period. This annuity
may be of two types:
(i) Immediate Annuity with Guaranteed Payment. It is issued to

safeguard the loss in case of early death of the annuitant. Here
payment for a fixed number of years will continue irrespective of
death. Sometime, instead of continuing the annuity payments after
the death of the annuitant the difference of the purchase money and
annuity installments already paid is returned as a lump sum to the
nominee. The corporation issues this type of annuity where
payments are guaranteed for 5, 10, or 20 years and thereafter up to
life. It means the payments will certainly be made up to this period
whether the annuitant is alive or dead within this period and if the
annuitant survives after period, he is paid the annuity up to his
survival.
(ii) Deferred Annuity with Guaranteed Payment. During the
deferment period there is no difference between this annuity and
ordinary deferred annuity. After deferment period, the payment
under this annuity continues for a fixed period say 5, 10, 15 or 20
years and up to life thereafter. This policy guarantees refund of
cash value of the balance of annuity where the insurer promises to
pay a lump sum to the beneficiary or to the annuitants’ estate, the
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difference, if any, between the total of annuities received before
the annuitants’ death and the purchase price.
2. Self Assessment Questions (Identify True or False in the following)

a. Annuity is periodical payment of amounts.
b. Multiple life Annuity covers a single life.
5.7 SUMMARY
Group Insurance is a plan of insurance that provides cover to a large number of

individuals under a single policy called the “master policy”. Group insurance
schemes are used by the Government, as instruments of social welfare.
Initially the LIC had offered three major Group Term Insurance Schemes, to
employers covering employee benefits. These were the Group Insurance Scheme
(Term), Group Gratuity Scheme and Group Superannuation Scheme or Group
Pension Scheme.
Group Gratuity Schemes are related to gratuity payments. Gratuity is paid to

employees who retire or die and also to those who resign, after having put in
specified periods of minimum service, usually 15 years.
The Group Superannuation Scheme is offered to employers in order to facilitate

the funding and disbursement of pensions. Pensions are payable to employees who
retire from service on attaining the age of superannuation or retirement.
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The Annuity is called the “up-side-down application of the life insurance
principle”. Annuity means a fixed sum of money paid to a person yearly as
income during lifetime.
1. What is group insurance?
2. Explain the concept of “individual insurance Vs Group insurance”.
3. Write a note on group gratuity insurance.
4. Give the meaning of Annuities and explain the nature of annuities
5. Explain the classifications of annuities.
SAQs:
1. a. Master Policy
b. Group Superannuation Scheme
c. Gratuity
2. a. True
b. False
Terminal Questions
1. Refer 5.2.1
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2. Refer 5.2.3
3. Refer 5.3.1
4. Refer 5.6.1
5. Refer 5.6.2
NOTES
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Unit 6: Other Special Needs Plan
Structure:
6.1 Introduction
Objectives
6.2 Health Care Plans
6.3 Critical Illness Plans
6.4 Health Insurance Riders

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6.5 Claim Procedures
6.5.1 Maturity Claims
6.5.2 Survival Benefits
6.5.3 Death Claims
6.5.4 Early Claims
6.6 Salary Savings Schemes
6.7 Married Woman’s Property Act
6.8 Industrial Life Insurance
6.9 Summary
6.1 Introduction
Social Security is a concern in all countries throughout the world, although the
dimensions of social security vary considerably. Apart from the regular plans there
are so many other insurance plans which include health care plans, health
insurance plans, critical illness plans. Thus this chapter is an attempt to explain the
special needs plans such as health care plans, health insurance plans and critical
illness plans. We will also discuss about the claim settlement procedure and other
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plans such as Industrial Insurance plans, Married Women’s Property Act and
salary savings scheme.
Objectives:
• Discuss the about the various health care and health insurance plans.
• Explain the procedure of claim settlement.
• Bring out the importance of other special need insurance plans.
6.2 Health Care Plans
Purpose of buying a health insurance may differ from person to person still the
primary aim of health insurance is securing medical protection for self and family
members. Health insurance provides you protection for unforeseen medical
expenses.
• With the help of health insurance you can even afford to obtain costly
specialized medical services.
• You can use health insurance facility even for paying your regular medical
services.
• It provides you comparatively high quality medical services, which
otherwise you would not have been able to afford, of a coordinated health
plan.
• It keeps you free from financial worries during your sickness.
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• Health insurance provides you the financial assistance during sickness,
means when you need the money most.
• It is more beneficial when your family is considerably larger and need
medical treatment frequently.
• Health insurance is most advisable to those who have number of dependents
because you pay comparatively lesser premium which is surely worth paying
when considered the expenses you would have to pay to your physician.
• Money acquired through Health insurance is not subjected to income tax so
you get the tax-free money.
Another benefit you get is that you acquire the treatment at comparatively lower
cost as health insurance agencies pay lower prices to health providers. If you were
to obtain the same treatment at your own you might have to pay more amounts to
doctors.
6.3 Critical Illness Plans
A Critical Illness plan means you can insure yourself against the risk of serious
illness in much the same way as you insure your car and your house. It will give
you the same security of knowing that a guaranteed cash sum will be paid if the
unexpected happens and you are diagnosed with a critical illness.
The purpose of a critical illness plan is to let you put aside a small regular amount
now, as an insurance against all this happening. The statistics speak for themselves
and if you become a part of them at least you will be sure that lack of money won't
add to your problems.
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It is an insurance policy to cover to some of these critical illnesses like cancer,
coronary artery bypass surgery, kidney failure, multiple sclerosis, major organ
transplant, stroke, Paralysis, Primary Pulmonary Arterial Hypertension.
6.4 Health Insurance Riders
6.5 Claim Procedure
The operative clause of a life insurance policy states that the insurer will pay to the
policyholder or nominee or such other person as may have a right to it, certain
sums of money on the happening of specified events. When such events happen,
the insurer has to fulfill the promise of making the payments. A demand on the
insurer to fulfill its promise, as per the terms and conditions of the policy, is called
a ‘claim’. When a claim is being settled, the insurer is redeeming the promise
made in the policy. The real service of insurance is at the time of payment of the
claim. In a year, the claims paid out on life insurance policies by the LIC would be
approximately Rs. 12000 Crores on more than 76 Lakhs policies, of which
approximately Rs. 2000 cores would be on account of death claims. The other
insurers would have experienced only death claims. While any one of those claims
could be for a sizeable amount, the total would be small compared to the payments
of the LIC.
Claims may arise because of
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(a) Survival up to the end of the policy term, which is the date of maturity
(Maturity claims)
(b) Survival up to a specified period during the term (Survival benefits)
(c) Death of the life assured during the term (Death claims)
6.5.1 MATURITY CLAIMS
A maturity claim is payable as per the terms of the contract, at the end of the term
of the policy, if the life assured lives up to that date. It includes the SA and any
other guaranteed additions plus vested bonuses. Any debt or charge under the
policy, like loans, outstanding premium (due but not paid), etc will be deducted. If
the policy remains paid up (automatically or on request), the paid up value, which
will include the vested bonus as on that date, will be the claim amount.
Settlement of maturity claims is usually free from complications relating to title, as

policy moneys are paid only to the policyholder. The nominee is irrelevant in the
case of maturity claim. In case the policy is absolutely assignee. There could be
some difficulties, if the policyholder dies after the date of maturity, but before the
maturity proceeds are paid out. In some cases, there could be litigations involving
the policy proceeds.
Insurers generally initiate action on their own, well in advance of the maturity date.
The attempt would be to ensure that the policyholder receives the claim cheque on
the date of maturity. The discharge form would be sent to the policyholder with a
request to return the same duly stamped, signed and witnessed along with
(a) The policy document for cancellation

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(b) Proof of age, if age is already not admitted (does not happen these days)
(c) If there is an assignment executed on a separate stamped paper, the document
of assignment
If there is a loan subsisting, the policy document would already be with the insurer,
as the policy has to be assigned in favor of the insurer before getting the loan.
The discharge voucher will show the gross amount of claim, the deductions, if any,
and the net amount payable. The gross amount normally consists of the basic SA
or paid up value, the vested bonus and interim bonus payable, any deposit lying in
the said policy account and return of excess premiums collected, if any. For
example, the extra premium for double accident benefit was lowered by the LIC, a
few years back, but it was decided to refund the excess premiums at the time of
settlement of claim.
The deductions from the gross amounts normally consist of loan amount,
outstanding interest on the loan, unpaid premium, if any, (monthly in respect of
salary savings scheme policies) and any other charges. An example of a charge
would be the X-charge debit, which the LIC imposes when the renewal premium
paid is less than the correct amount. Instead of keeping the lesser amount in
deposit and asking for the balance premium, the amount is straightaway adjusted
and renewal premium, the amount is straightway adjusted and renewal premium
receipt issued, after debiting the balance amount needed to an X-charge account.
Of course, this facility is used only to meet very small shortfalls. The X-charge
account is verified at the time of claim and the total outstanding amount is
deducted from the gross claim amount.
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If at the time of claim the original policy document is not found, the procedures
required for issue of duplicate policy may not be gone through in full. Insurers
may be willing to settle the maturity claim on the basis of an indemnity bond
unless the circumstances warrant more caution.
6.5.2 SURVIVAL BENEFITS
The Money Back type plans promise payment of part of the SA at intervals, during
the term of the policy. As in the case of maturity claims, the specified amounts are
paid on the due dates, after deduction of the outstanding loan interest, outstanding
premium, X charge, etc. on receipt of the discharge voucher duly stamped, signed
and witnessed. The originally policy document is endorsed to record the fact of
payment and then returned to the policyholder.
If the policyholder dies after the due date, but before settlement of claim, the rights
for that survival benefit vest in the estate of the deceased policyholder. The claim
amount is then payable to the legal heirs of the policyholder. The insurer may
settle the claim on the basis of an indemnity or ask for a declaration of title from
appropriate judicial authorities. Wills have to be probated.
6.5.3 DEATH CLAIMS
Death claims are classified into two categories viz., (a) Early claims and (b) Non
early claims. Claims arising within two years of the date of commencement or
revival or reinstatement, are termed as ‘Early death claims’ or ‘Premature death
claims’. Claims arising more than two years after the date of
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risk/revival/reinstatement or non-early claim. Early claims are looked upon with
some suspicion and are processed differently.
The death of the life assured has to be intimated in writing to the insurer by the
nominee, assignee, a relative of the life assured, the employer, agent or
development officer. Particulars like policy number, name of the life
assured/policyholder, the date of death, the cause of death and the relationship of
the informant to the deceased are to be mentioned in the intimation. These
requirements are relevant mainly to make sure that mistakes of wrong identity do
not happen and that the insurer does not take action on the wrong policy.
Once the insurer is satisfied about the genuineness of the intimation, the status of
the policy is verified and the requirements are called for. In respect of non-early
claims, the normal requirements would be
(a) The policy document, together with any deeds of assignment
(b) Claimant’s statement giving the details of the cause of death, nature of last
illness, treatment, burial or cremation, etc.
(c) Certified extract from death register maintained by the Municipality, the local
board or any other competent authority
(d) Proof of title of claimant
If the duration of the policy at the time of death is more than 3 years and the title of
the claimant is clear, the discharge voucher may be sent along with the call for
115
requirements. This is done to expedite settlement, although strictly, the discharge
voucher cannot be prepared without satisfaction that the reported death is indeed
the death of the life assured.
If the policy has been validly assigned or the nomination is subsisting at the time of
death, no further proof of title is necessary. In case there is no valid nomination or
assignment, the claimant will have to produce satisfactory evidence of title to the
estate of the deceased from a competent judicial authority. The authority may be
the Administrator General or a court to grant either a succession of certificate or
probate of a Will. The size of the estate in question is relevant to determine the
appropriate authority and nature of title.
Waiver of Evidence of Title
Procurement of succession certificate or probate of will, takes time. In case of

death claims, there could be an urgent need for money. Easy liquidity is the
benefit of a life insurance policy. The claimant could be in mental and financial
stress. In order to facilitate the claim settlement, even when there is no nomination
or assignment, insurers agree to waive strict legal proof of title and pay the claim
on the strength of an indemnity bond. While doing so, they try to confirm that
(a) There is no dispute, among the heirs or relatives, as regards the title to the
policy moneys
(b) The deceased has not left a will or any other estate besides and insurance
policy / policies, for which evidence of title may be required to be obtained
from a court.
(c) The amount payable for waiving title under all policies is not very large.
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Depending upon the amount payable, the claim may be paid to all the natural heirs
on the basis of a joint discharge and indemnity bond. The natural heirs vary
depending upon the religion of the deceased. For example, as far as Hindus, Sikhs
or Jains are concerned, the widow, mother, sons and daughters, sons and daughters
of each predeceased daughter, form the natural or Class I heirs. The implications
of personal laws and local custom have to be verified.
If any of the aforesaid heirs is a minor, the natural guardian (the father and in case
of fathers’ death, the mother), will have to sign the indemnity bond and the
discharge voucher on behalf of the minor. In case the amount payable is small, the
insurer may also waive the indemnity bond.
6.5.4 EARLY CLAIMS
It is assumed that a person, who is accepted by the underwriter as good for life
insurance, is not likely to die within 2 years. Therefore, when an early claim
occurs, there is need to make sure that there was no attempt to defraud. Enquiries
are made to confirm, that there was no suppression of information at the time of
proposal. This is done both to ensure genuineness of the claim and to safeguard
the interests of the community of the policyholders.
Therefore, in the case of early claims, additional requirements are called for, as
follows
(a) Statement from the last medical attendant giving details of last illness,
previous history and treatment
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(b) Statement from the hospital, in case the deceased life assured had received
hospital treatment
(c) If death was due to accident or unnatural causes, certified copies of post-
mortem report, police inquest report and magistrate’s / coroner’s verdict.
(d) Details of cremation or burial, place, time, witnesses, etc.
(e) Statement from the employer about the leave, if any taken by the life
assured on grounds of sickness
Enquiries are made about the life assureds’ state of health prior to the
commencement of the policy. Enquiries are made from the deceased’s neighbors,
colleagues or partners in business, employer, and doctors in the locality. The
decision to admit the claim, is taken on the information gathered during enquires
and the evidence collected.
The insurer can deny liability under an early claim on the ground that material
information had been suppressed at the time of proposal, irrespective of its
importance in underwriting. Thus a misrepresentation, even if it is not to influence
the decision of the risk, is adequate to repudiate liability, if the claim arises by
death within two years. However, insurers do not repudiate the contract only on
grounds of misrepresentations. The courts also interpret the life insurance contract
more liberally, in favor of the claimants. In many countries now, there are legal
provisions prohibiting the insurers from repudiating claims, unless it can be
established that the misrepresentation was deliberate and made with a view to
secure undue advantage.
In India, Sec.45 of the Insurance Act, 1938 provides that, after two years from the
date of the policy, the insurance company cannot question the contract unless
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certain conditions are fulfilled. The Supreme Court of India, in the case Mithoulal
Nayak vs. Life Insurance Corp. of India, (AIR 1962) summarized the three
conditions as follows:
(a) The information in question must be on a material fact required to be

disclosed
(b) The suppression must be fraudulently made by the policyholder and
(c) The policyholder must have known at the time of making the statement, that
it was false or that it suppressed facts, which it was material to disclose.
The onus of proving that these three conditions are satisfied is on the insurer.
Thus, the repudiation of a death claim is done by insurers only after obtaining valid
evidence in support of the fact of suppression. Such evidence is not easy to come
by. In the case of frauds involving large amounts, there would be organized efforts
to conceal or destroy evidence.
Self Assessment Questions
1. Settlement of ___________is usually free from complications relating to title, as

policy moneys are paid only to the policyholder.
2. The claim amount is then payable to the __________ of the policyholder.
3. Easy liquidity is the benefit of a ___________ policy.
6.6 Salary Savings Schemes
The SSS is intended to help salary earners. Many of them find it difficult to cope
with the multiple demands on their monthly incomes. The immediate requirements
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will get priority over insurance premiums. Ultimately, the defaults may continue
and the policy will lapse.
In order to avoid such contingencies, the SSS provides for deduction of the
premium every month from the salary. The employee gets his salary only after
deduction of premium. The employer sends to the insurer all premium deducted
from all employees in one lump sum. The employee does not have to bother about
paying the premium to the insurance office. The deduction becomes compulsory
like Income Tax, Provident Fund and other statutory deductions. Life Insurance
premium becomes a first charge on his salary. He adjusts his living to his net
income.
The insurer benefits because the payment of the premium is assured, as long as the
employee is in service. The procedures of accounting become simple because
there is only one transaction for all the employees under one employer. This
advantage is lost if the number of employees under one employer is very small.
Therefore, the SSS is made available only if there is a minimum number of say, 15
employees. There is no maximum limit.
Because of the assured receipt of premium, lapsations are almost zero. Lapsations
can still happen if the salary in a month is less than the premium payable because
of absence without salary or some other reason. Such instances may be few, but
may need more effort for verification and correction.
Problems may occur also is the employee is transferred to different departments or

locations and the instructions about deductions are not conveyed. This can be
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avoided if the insurer is prompt in reconciling the remittances received from the
employers.
Since the lapsations of SSS policies is expected to be low and the cost of service is
also low, the premium on a SSS policy is not calculated in the way the monthly
mode premium is normally calculated. The extra-load on the monthly mode of
premium payment is waived in the case of SSS policies. The premium is
calculated as if the mode is yearly and then divided by 12.
SSS policies are issued only after the employer has agreed to make deductions
regularly from the salaries of the employees and remit the premiums to the insurer.
The employee has to authorize the employer to deduct the premium from his
salary. Such letters of authority are collected along with the proposal for insurance
and are sent to the employer by the insurer, after the proposal has resulted into a
policy, with details of policy number and amount of premium.
The insurer’s administrative procedures and the employer’s procedures have to

match, if the system has to function smoothly. When the insurer sends a demand
list to the employer, listing out the deductions to be made, the names must be
arranged in the order in which the employer will find it most convenient. The list
cannot be in policy number order, as that is irrelevant to the employer. The names
may have to be listed department-wise or code number-wise or rank-wise as the
employer would like. If the employer has many departments, even separate
demand lists may have to be provided for each department.
There will be a gap between the time the policy is completed and the time advice
for premium deduction is sent to the employer. To cover this time gap, usually the
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first two monthly premiums are collected with the proposal and the machinery is
set in motion for collecting the third monthly premium onwards through the SSS.
Even though arrangements are made with the employer for deduction of premium
from the salaries, it is understood that the responsibility for keeping the policy in
force is entirely that of the policyholder and not that of the employer. There is no
contract with the employer as in the case of Group Insurance Schemes. If the
premium is not deducted for any reason, the employer is not liable for any
consequences. The employee, who is the policyholder, has to ensure that the
policy is kept in force.
SSS differs from other policies only in respect of the method of payment of
premium. The facility is available only if (i) the employee is the policyholder as
well as the life insured and (ii) the installment monthly premium is at least Rs. 30.
An added advantage of the SSS is that there is a group pressure to buy life
insurance, making the job of an agent slightly easier. The resistance would be less
and the relationship with the group can be strong.
6.7 Married Woman’s Property Act
Section 6 of the Married Women’s Property Act 1874 (M.W.P.Act.), provides that
a policy of insurance effected by any married man on his own life and expressed
on the face of it to be for the benefit of his wife, his wife and children, or any of
them, shall be deemed to be trust for the benefit of his wife, his wife and children,
or any of them, according to the interests expressed, and shall not, so long as any
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object of the trust remains, be subject to the control of the life insured, or his
creditors, or form part of his estate.
The salient features of the MWP Act provisions are as follows:
(a) A ‘married man’ includes a widower or a divorced man and the term ‘children’
includes sons, daughters, both natural and adopted
(b) The beneficiaries under M.W.P. Act policies can be (i) the wife alone, (ii) any
one or more children, (iii) the wife and any one or more children jointly.
(c) A Non-Mohammedan can provide that the beneficiaries should be the named
parties and that the benefit should go to them jointly or to the survivors or survivor
of them. In this case, only the surviving beneficiary or beneficiaries would be
entitled to the moneys on a claim arising.
(d) He can also specify equal shares or specify unequal shares. If any beneficiary
dies before the policy becomes a claim, that share would go to his legal
representatives
(e) He can make a trust in favor of his wife and children as a class. Thus, under
such a policy, the benefit, on the death of the life assured, would go to the person
who becomes a widow at that time and those children by any marriage and
whenever born, who survive him.
(f) A Mohammedan proposer cannot take out policies for the benefit of the wife
and children as a class. They must be named and must be existing on the date of
the policy. If two or more beneficiaries are involved, the respective shares of the
different beneficiaries must be mentioned.
(g) The life insurance policy under M.W.P. Act must be on the life of a married
man, and taken out by himself. Thus, joint life policies or Children’s Deferred
Assurance policies cannot be taken under M.W.P. Act.
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(h) The proposer, who desires to affect the assurance under the M.W.P.Act, is
required to complete an Addendum. A trustee has to be appointed. The proposer
who appoints the trustee, may reserve the power to revoke the appointment of
trustee and appoint another.
(i) No loan can be granted under a M.W.P. Act policy unless the proposer had
while appointing the trustees specifically authorized the trustees to obtain loan on
the policy. The trustees cannot surrender the policy.
6.8 Industrial Life Insurance
Industrial life insurance is intended mainly for workers with small incomes. The
cover is usually small, less than $500 in U.S.A. Premiums are collected at short
intervals, generally weekly, from the residence or the workplace of the insured.
The choice of plans, in general is the same as in the ordinary branch, but term
insurance is not offered, except as a combination with other plans.
Because of the facility for collection of premium personally from the insured, the
cost of administering industrial insurance is higher than that of the ordinary
business. Mortality rates and lapse ratios also tend to be higher than in the
ordinary branch.
The industrial life insurance agent is assigned the duty of collecting premiums
from policy holders in a specific area. This area is only for collection of premium,
not for doing business. The premiums due from the area allotted to an agent is
‘debited’ to his account notionally. The debit list may consist of even 1000 or
more policyholders. The list may include persons insured by agents from
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elsewhere. Similarly, some of his policyholders from another area, will find a
place in the debit list of some other agent.
The policyholders are given receipt books individually. The agent has to sign this
book each time he collects the premium. The signature of the collecting is
adequate proof that premium has been paid.
Industrial assurance plans are designed for workers with low incomes. The policies
are issued for small SAs, with weekly premiums. The arrangement is that the
agents will visit the house or place of work of the policy holder every week to
collect the premium. The administrative costs are high. Agents have to be
remunerated differently because they are expected to visit every policy holder
every week, to collect the premium. Both mortality and laps rates tend to be high.
In the U.K. there used to be many more industrial life assurance polices in force
than ordinary life polices. Such policies, introduced in India in the early days of the
L.I.C as ‘Janata’ Polices, did not become popular.

State whether the following statements are true or false.
1. Life Insurance premium becomes a first charge on his salary in Salary Savings
Scheme.
2. Joint life policies or Children’s Deferred Assurance policies can be taken under
M.W.P. Act.
3. Industrial life insurance is intended mainly for workers with small incomes.
6.9 Summary
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Health insurance provides you protection for unforeseen medical expenses. With
the help of health insurance you can even afford to obtain costly specialized
medical services. You can use health insurance facility even for paying your
regular medical services.
The operative clause of a life insurance policy states that the insurer will pay to the
policyholder or nominee or such other person as may have a right to it, certain
sums of money on the happening of specified events.
A maturity claim is payable as per the terms of the contract, at the end of the term
of the policy, if the life assured lives up to that date. Death claims are classified
into two categories viz., (a) Early claims and (b) Non early claims. Claims arising
within two years of the date of commencement or revival or reinstatement, are
termed as ‘Early death claims’ or ‘Premature death claims’. Claims arising more
than two years after the date of risk/revival/reinstatement or non-early claim.
The Salary Savings Scheme is intended to help salary earners. Section 6 of the
Married Women’s Property Act 1874 (M.W.P.Act.), provides that a policy of
insurance effected by any married man on his own life and expressed on the face of
it to be for the benefit of his wife, his wife and children. Industrial life insurance is
intended mainly for workers with small incomes.
1. What are Health Care Plans?

2. Explain the claim settlement procedure
3. Write short notes on Salary Savings Scheme.
4. Explain the Married Women’s Property Act.
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5. Discuss about Industrial Life Insurance.
SAQs:
I a. Maturity Claims
b. Legal Heirs
c. Life Insurance Policy
II a. True
b. False
c. True
Terminal Questions
1. Refer 6.27
2. Refer 6.5
3. Refer 6.6
4. Refer 6.7
5. Refer 6.8
NOTES
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Unit 7: Insurance Documents and
Policy Conditions
Structure:
7.1 Introduction
Objectives
7.2 Insurance Documents and Conditions
7.2.1Proposal and other documents
7.2.2 Prospectus
7.2.3 Medical Examination
7.2.4 Age Proof
7.2.5 Special Reports
7.3 Policy Documents
7.3.1 Needs and Format
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7.3.2 Policy Preamble
7.3.3 Schedule
7.3.4 Attestation
7.3.5 Other Conditions and Privileges
7.3.6 Alterations
7.4 Duplicate Policy
7.5 Summary
7.1 INTRODUCTION
A life insurance policy is a contract. The stakes in the contract are usually large
and those interested in the stakes are many. There could be disputes involving the
insurer and the insured and the beneficiaries of the policy or between the
beneficiaries. These terms will be based on and will relate to statement s and
actions at various times during the course of the policy. These will have to be
proved through documents. Documentation therefore is important in the life
insurance business. This chapter is an attempt to explain the insurance
documentation, need and format of policy document and other conditions and
privileges related to a insurance contract.
Objectives:
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• Discuss about various insurance documents.

• Explain the different policy conditions.
• Describe the concept duplicate policy.
7.2 INSURANCE DOCUMENTS AND CONDITIONS
The life insurance contract is a long-term one, lasting 30 or 40 years. Transactions

may be few and far between. If the premiums are paid without any default and no
changes are made in address, nominations, etc., the policy file may not be opened
till the claim arises. In the absence of proper documentation, it may not be
possible to know the dues and the rights or even the identities of the persons
concerned.
7.2.1 PROPOSAL FORMS AND OTHER RELATED DOCUMENTS
The first and the foremost document in the insurance file is the proposal or
application for insurance. The proposal form in which the application for insurance
are made, is printed by the insurer and made available through agents. Some
companies make the proposal form available through the Internet. The person
proposing for insurance, called the proposer, is required to give details about
himself (name, date of birth, address, and occupation), name and particulars of the
person to be insured, the amount of insurance, the plan and term preferred, mode of
premium, nominee, etc. The proposal form is normally given to the insurer along
with (i) the personal statement of health and habits of the person to be insured,
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filled up by the proposer and (ii) the confidential report of the agent. If medical
examination is required, the personal statement is given to the medical examiner,
which sends it the insurer along with his report of the medical examination.
The confidential report of the agent is significant for the insurer to assess the risk
and the acceptability of the proposal for insurance. This report will contain
information regarding the proposer’s financial position and life styles. Its purpose
is to provide additional data to the underwriter for assessing the risk, particularly
the moral hazard, if any. Sometimes, if the proposal is for a huge amount or the
person to be insured is of advanced age and does not have any insurance on his life
so far, or for some other reason, the insurer may ask for such a report from some
other senior official.
The proposal form is an important document not just because it contains valuable
information, but also the statement in the proposal form constitutes the basis of the
contract. The proposer declares at the end of the proposal form, that the answers
and statements are given by him are true and complete. If any averment is shown
to be untrue, the contract will become null and void ab initio.
If the proposal is filled up in a language which is not familiar to the proposer or if

the proposer is illiterate and can only affix his thumb impression instead of a
signature, someone else familiar with the language, has to declare that he had
explained the contents to the proposer and that the proposer had understood the
same. He is thus bound to the declaration in the proposal and the consequences
thereof. This would be a requirement in countries like India where there are many
spoken languages, other than the business language of the insurer and because the
level of literacy is low.
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It is understood clearly and also explicitly stated in the policy, that the proposal
and its contents is the basis of the insurance contract evidenced by the policy.
Some companies attach the proposal to the policy as part of it. The IRDA
Regulations require that a copy of the proposal should be given to the policyholder
along with the policy. Because it is the basis of the contract, the proposal has
extensive questions on the state of health, habitual and family history of the life to
be insured. The form tends to be quite lengthy.
7.2.2 PROSPECTUS
An insurance contract is issued on the basis of an application called a proposal,

made by the person who wants to insure. That person is called the proposer. The
person to be insured could be different from the proposer, as in the case of parents
proposing for insuring minor children. The proposal is considered and accepted by
the insurer. The application and the documentations have to satisfy the
requirements of a valid contract.
As per Sec.2 (3b) of the Companies Act. 1956, a prospectus is a document inviting
the deposits from the public or inviting offers from the public for the subscription
or the purchase of shares or debentures of a body corporate. In other words, public
companies entering the capital market for funds, offering shares or debentures or
through deposits are expected to issue a prospectus giving details of the business
they are in, their set-up and the various products/services they offer, statements
showing their financial condition, etc. It may be called as an ‘offer at large’, i.e. an
offer made to the public to come forward and invest in the company. The
133
prospectus under the Companies Act has to conform to the strict regulations of the
SEBI as to transparencies, disclosures, objectives, risks, etc.
In life insurance, the prospectus gives complete details about the set up of the
company, the plans of insurance they make available and other general terms and
conditions. The prospectus of the life insurance company is not bound by the
regulations of the SEBI. It is quite simpler in content and in the purpose. In terms
of the IRDA Regulations, the prospectus should state details of the various
insurance plans on offer, the benefit and other terms and conditions, whether the
policy is participating or not participating, the riders available along with that
policy and the scope of the riders. A prospectus is not necessarily a single book
containing all details of all the plans under offer. Some insurers print separate
pages for each plan describing the benefits and obligations and also a summary of
the terms and conditions of the particular policy.
In few countries however, increasingly, public opinion is veering to the view that
life insurance companies should also conform to the requirements of investment
companies that solicit public funds for investment in shares or debentures or
deposits. This is partly the consequence of the boundaries between financial
services becoming blurred. When an insurance plan is offered as partly risk and
partly investment, the latter portion being funded and growing separately in
selected portfolios of investment, the life insurance contract assumes at least partly,
the characteristics of an investment offer, in competition with other finance
companies. In that case, there would seem to be no reason to exempt life insurance
companies from disclosure and prospectus regulations. In this way the argument
runs.
134
Whatever may be the theoretical rationale, the reality seems to be that very few
prospects that decide on purchasing life insurance on the basis of a prospectus.
Dominantly they rely heavily on the advice of the agent.
7.2.3 MEDICAL EXAMINATION
The individual proposed to be insured, is normally subject to medical examination

to determine the state of health and the terms of insurance if agreed upon. The
rigor of the medical examination increases along with that of the age increase of
the person to be insured and the proposed SA. Increasing rigor means more
specialized tests like radiology, sonography, ECG, stress test, lipid profile, etc.
A medical examination process involves some inconvenience to the prospect. To

the doctor an examination for insurance purposes is relatively of a lower priority
than the other patients who are sick and need more urgent attention. Authorized
medical examiners are not too many. The agent and the person to be examined
may have to travel some distance to reach the doctor even in urban centres. In the
rural areas, the problem is more acute. If the proposal is for a large SA, the
distance and the waiting may be more.
Over a period of time, the LIC has adopted a policy of waiving the requirement of
medical examination for persons satisfying certain conditions. Gradually, with the
experience and increase in the base of the insured population, these conditions
135
have been liberalized. A very large number of cases are considered without
medical examination. They are called as non-medical insurances.
Non-medical insurance schemes result in the simplification process of assessing

the risk, reduction of the inconvenience to the parties concerned and saving of
costs to the insurer (medical fee is not to be paid). Dispensing with medical
examination does not mean that the stand of selection is lowered. Non-medical
selection requires a more detailed proposal form and more detailed report from the
agent and other officials. The risk is assessed and accepted on the strength of the
statements in the proposal and personal history forms and on the agent’s
confidential report.
The Non-medical (General) scheme offered by the LIC is applicable to all male
and female lives. The maximum age at which entry is done is 45 years and the
maximum maturity/premium ceasing age is 70 years. The maximum sum assured
permissible varies between Rs. 1 and Rs. 2 Lakhs, which can be on more than one
policy. Professionals may be considered up to Rs. 6 Lakhs. Those above 45 years
may also be considered for lower levels. Normal plans of insurance like
endowment in its various forms, limited payment whole life and convertible whole
life are allowed under this scheme. Female lives have to be literate and have
income of their own. Pregnant women or women with history of miscarriages or
abortion are not eligible. Age proof, if not standard, results in further restrictions
on entry age, maturity age and term.
The Non-medical (Special) scheme which can be availed of by employees working

in Government offices, Quasi-Government offices like Municipalities, District
boards, Local boards etc., State corporations, Government industrial undertakings,
136
Non-Government commercial and industrial undertakings, and reputed institutions
like private colleges and schools which normally insist on medical examination
before recruitment, provide good working environment, give fair remuneration and
maintain leave records. The employee must have completed at least one year
service with his present employer to become eligible for insurance under Non-
medical (Special) scheme.
The maximum sum assured under the Non-medical (Special) scheme for persons
aged not more than 45 years, is as under:
(a) Male lives and first class female lives

(SSLC/Matric passed) - Rs. 8 Lakhs
(b) Commissioned officers in Armed Forces

Falling in Category A-1 - Rs. 10 Lakhs
7.2.4 AGE PROOF
The risk of death is higher as age increases. The likelihood that a person aged 70
will die in the next year is more than that of a person aged 20 years dying within
one year. Age of the proposer, therefore, plays a vital role in assessing the risk of
death and therefore the amount of premium to be charged. Age is considered along
with other features like health, habits, etc., by the underwriter.
Fifty years ago, age-proof was not insisted at the time of accepting the risk.
Premium used to be calculated on the basis of the age as stated in that of the
proposal. It was assumed that the age stated would be, by and large, correct. The
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proof of age could be submitted later during the currency of the policy. The claim
would not be settled without the age having been proved. If the age when proved
was higher, the arrears of difference in premiums was recovered with interest.
This practice proved to be very inconvenient. Delays were caused. Proof of age
was also not easily available, particularly if it were a death claim. At times it was
found that had the correct age been stated, the policy may not have been issued.
For these reasons, proof of age is now-a-days insisted upon at the commencement
itself.
The standard age-proofs acceptable to the life insurance companies are:
(a) Certified extract from Municipal or other records, made at the time of
birth.
(b) Certificate of baptism or certified extract from family Bible, if it contains
age or date of birth.
(c) Certified extract from school or college records
(d) Certified extract from the service register in the case of employees of
Government and Quasi-Government institutions and reputed commercial
and educational institutions.
(e) Passport
(f) Identity cards issued by Defense department in case of defense personnel.
(g) Any other document where date of birth has been proved on the basis of
one of the other standard proofs of age acceptable to the insurance
companies.
Other alternate age-proofs which are acceptable in India are marriage certificate
issued by a Roman Catholic Church, extracts from service records of employers,
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who verify age at the time of recruitment. If standard proofs of age are not
available, then other documents like horoscopes, elder’s declaration, self-
declaration, or certificate by village panchayats are accepted. This is subject to the
discretion of the underwriter, who may not be very strict if he is satisfied that the
risks are not much. He may even charge some extra premium or restrict the terms
to safeguard against the possibility of the correct age being a few years higher than
what is stated.
7.2.5 SPECIAL REPORTS
Besides the proposal form, personal statement, agent’s report, medical examiner’s
report and age-proof, special medical reports may also be called for, if the
following conditions are applicable:
(a) The SA is very high, say Rs. 15 Lakhs or more

(b) The age at entry is very high, say, 60 years or more
(c) The proposer wants insurance cover under a high-risk plan
(d) The normal medical examination discloses some adverse feature
The underwriter has the right and discretion to ask for any additional information
through special reports, if he considers such reports necessary for a fair assessment
of risk. These special reports may relate to medical condition or they may relate to
income, habits, life styles, etc. He may ask for medical reports, even if the
proposal is for non-medical insurance. In the case of key man insurance, the
reports may be to establish that the life assured is indeed a key person and that the
SA proposed represents fairly the value of that person to the enterprise.
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The underwriter arrives at a conclusive decision about the acceptance of the
proposal, after scrutinizing the particulars available in the proposal form, personal
statement, the reports of the officials and the medical reports. He may take the
expert opinion of a medical referee who is a senior doctor familiar with
implications of medical history in life insurance.
The underwriter may decide to accept the proposal as proposed at O.R (Ordinary
Rates) or on modified terms. O.R means that the premium chargeable would be as
per the standard premium tables.
The modifications would be of the following kind.
(a) accepting for a lesser SA than proposed

(b) accepting for a shorter term than proposed
(c) accepting for a different plan than proposed
(d) charging a higher premium than the standard rate
(e) imposing a lien which reduces the insurer’s liability under the policy for
some time, or under some conditions
(f) excluding certain specified risks under the policy
The terms under which the proposal is accepted by the underwriter, will be
conveyed to the proposer. If the acceptance is as proposed and at O.R, the deposit
paid along with the proposal, if adequate will be adjusted as First Premium and the
risk will commence from that time. If the acceptance is on modified terms, the
proposer has to agree to those modified terms. The balance of premium if any will
have to be paid. If all the requirements are fulfilled by the proposer, the First
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Premium is adjusted and the risk commences. The First Premium Receipt is the
evidence of commencement of risk, till the policy document is issued.
The specimens of forms included as Annexure to this course are only specimens.
They may change from time to time. Each insurer will have its own forms. They
will also differ according to the plan of insurance proposed for. But, by and large,
the contents would be the same.

1. The insurance contract is issued on the basis of an application called
____________.
2. Passport is a document considered for ________________.
3. The First Premium Receipt is the evidence of commencement of risk, till the
policy document is issued.
7.3 POLICY DOCUMENTS
The policy document is the main evidence of the insurance contract. It contains
the subject matter and the terms and conditions of the contract. It sets forth the
rights, the duties and obligations of the insurance company and of the policyholder.
All insurance policies are most likely to follow the similar format, because the
format and the wordings have been developed over the years. The wordings may
sound to be too legalistic. Some insurers therefore, issue a small supplement along
with the policy to explain in simple language the main contents of the policy.
7.3.1 NEED AND FORMAT

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The policy document is required to be signed and also stamped as per the Stamp
Act. Otherwise, it cannot be enforced in a court of law. In the case of PLI, the
policy is exempt from stamp duty. Most of the standard terms and conditions are
printed on the document. Special clauses, relevant to a particular contract, are
attached to the policy document and form part of the contract.
It is usual to divide the policy document into the following divisions:
(a) Preamble
(b) Operative clause
(c) Provision
(d) Schedule
(e) Attestation and
(f) Conditions and Privileges
7.3.2 POLICY PREAMBLE
A typical policy document begins with a paragraph, which states in the following
substance:
• That the insurer had received a proposal with a personal statement and the
first installment of premium
• That the insurer had agreed to grant the insurance cover (promise to pay the
sums specified on the occurrence of the events specified) on the terms
stipulated later in the policy document
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• That it is understood and agreed that the basis of the grant of the insurance
cover is the statements made in the proposal and personal statements signed
by the proposer
• That the grant of the insurance cover is subject to the proposed paying the
premiums stated in the policy document on the due dates
This opening paragraph, which is called the Preamble, makes the Proposal and
Declaration signed by the proposer, part of the policy. The truth of the statements
made therein is secured to be warranties. Any untrue averments therein vitiate the
validity of the contract.
The Preamble also contains the ‘Operative Clause’, which has laid down the
mutual obligations of the two parties. The assured has to pay the premiums as
stipulated in the policy. The insurer has to pay the benefits, as promised, on the
happening of the specified events. The benefits will include bonus additions, if
specified.
The payment of benefits is subject to the production of proof:

(i) The happening of the event
(ii) The age of the life assured being admitted and
(iii) The title or right of the person claiming payment being established.
Proof of the tile of the claimant claiming the policy monies is essential so that the
benefits are paid to the person legally entitled to receive payment and competent to
give valid discharge. Otherwise, the insurer will get involved into the disputes
between rival claimants. A person with the title to claim payment is the
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policyholder himself, if he is alive. If the policyholder is not alive, the nominee
under Section 39 of the Insurance Act, or the heirs, if there is no nomination, will
be entitled to receive the benefits. If the policy had been assigned, the title will
pass on to the assignee.
The opening paragraph which is called as the Preamble, also clarifies that the terms
and conditions printed on the policy document as well as endorsements placed on
it, are a part of the policy. This is called the ‘Proviso’, because the contract is
conditional on these terms. What are printed on the document, are the normal
terms and conditions, while the endorsements lay down the special conditions
determined during the underwriting of the proposal, which must have been
conveyed to and accepted by the policyholder.
7.3.3 SCHEDULE
The Preamble is followed by the Schedule of the policy. The Schedule contains
particulars and details as under, which mention the specific details relating to the
insurance contract, of which the policy document is the evidence.
(a) Policy Number

(b) Name, address of the proposer and of the life assured
(c) Date of proposal
(d) Date of birth and age of the life assured
(e) Date of commencement of insurance
(f) Plan and Term
(g) Sum Assured
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(h) Mode of payment of premium viz. yearly, half-yearly, quarterly or
monthly and due dates
(i) Installment premium
(j) Date of last payment of premium
(k) Name of the nominee
(l) Date of maturity
(m) Conditions and privileges not applicable
(n) Additional or special conditions
The Schedule gives all the particulars of the subject matter of the contract. It
identifies the proposal referred to in the Preamble.
7.3.4 ATTESTATION
Attestation is the signature on the behalf of insurer. It will appear at the end of the
first page of the policy. Some insurers prepare a supplementary contract in respect
of the additional benefits provided through the riders. In such case, the
supplementary contract will be attested separately.
7.3.5 CONDITIONS AND PRIVILEGES
The policy conditions and privileges can be classified as follows:
(a) Those which are explanatory in nature, in the sense that they elaborate or
clarify the provisions made in the Schedule of the policy.
(b) Those which limit the scope of the assurance, or restrictive conditions.
(c) Those which add to the benefits of the insurance and provide privileges
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(d) Those which provide extended benefits or supplementary benefits.
The first groups of conditions are intended for information of the insured. For
example, there is a condition which states that in case the premiums are not duly
paid, or in case it is found that any untrue or incorrect statement is contained in the
proposal, personal statement, declaration and connected documents, the policy
shall be void and all benefits will cease and premiums paid forfeited, subject to the
provisions of the Insurance Act, 1938. Again, there could be a clause stating the
notice of assignment or nomination should be submitted for registration by the
office of the insurer. Another clause may clarify that if death takes place, the
unpaid installments of premium for that policy year would be deducted from the
claim amount. This would happen in all case except when the premium is paid on
a yearly basis.
Conditions that limit the scope of the assurance are restrictive conditions. The
restrictive conditions are designed to eliminate certain risks, which are not taken
into account when fixing the premiums. If any such risk is incurred, the assurance
is limited to the payment of the surrender value, or the return of the premiums, or
some proportion of S.A., as the conditions may state.
One common restriction is that no claim would be entertained if the life assured
committed suicide, expect to the extent of a third party’s bonafide beneficial
interest. This restriction operates normally for one year from the commencement
of the policy. In some countries, the suicide clause operates for two years from the
date of issue of policy. In case of female lives not having income of their own,
coverage of suicide risk is sometimes excluded for 3 years. Accident benefit is
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never paid in case of suicide. In some policies, it is laid down that no loans are
payable.
Generally, there is no restriction imposed on account of hazardous occupation but

extra premium is charged to cover the extra risk to which the life assured gets
exposed due to the hazardous occupation, including aviation. Double accident and
disability benefit, however, are not available in the event of death as a result of
accident while the life assured is engaged in aviation, other than as a passenger in a
commercial airline. Some insurers require that change of occupation to be
notified. Failure to do so may invalidate the accident benefits or other benefits
secured through riders.
Foreign travel and residence may also be a restriction in some cases. In India, the
L.I.C. makes the policy free from all restrictions as to travel and residence. Some
insurance companies exclude coverage in the event of death within five years or a
result of war, while traveling outside the country. Insurance policies of the LIC
used to exclude deaths occurring as a result of war. Now, they are made free from
war risk restrictions, expect for double accident benefits.
7.3.1 CONDITION AND PRIVILEGES
The provisions of the contract which are stated in the first page of the policy, if
strictly interpreted, would make the contract very rigid and hard on the policy
holder. For example, premiums are payable when they fall due and failure to pay
premiums on or before the due date, would involve complete forfeiture of the
assurance. The policy conditions provide the following, which reduce the apparent
severity of the contract.
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(a) Days of grace
(b) Revival of lapsed policies
(c) Non-forfeiture regulations
(d) Paid up provisions
(e) Surrender value
(f) Loans
(g) Claim concessions
All the privileges are discussed in detail in the following chapters.
CONDITIONS WITH EXTENDED BENEFITS OR SUPPLEMENTARY

BENEFITS.
These are many benefits which are covered by the riders. These may be
incorporated into the policy document as policy conditions are mentioned as riders,
while the policy document will deal with the standard terms and conditions. In the
case of the LIC, there are separate policy document formats for the following
policies:
• Policies with Accident benefit

• Policies without Accident benefit
• Policies which participate in profits
• Policies which do not participate in profits
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In the case of some insurers, the policy document refers to the additional benefits,
and the benefits as such are detailed in separate forms which are annexure or
addenda to the policy. It is like having separate endorsements.
In the case of one insurer, after the Preamble, the policy is in four parts. The first
part contains the Schedule. Part 2 gives details of the benefits payable (amounts,
relevant event, limitations, exclusions, bonus, guaranteed additions), including the
benefits under the riders. This part also explains the policyholder’s right to
commute or accumulate, in part or in full, the installments payments due to him.
Part 3 details the terms and conditions relating to age admission, lapse, non-
forfeiture, revival, loans, surrender values, assignments, nominations, exclusions
related to suicide and documents required for making claims. Part 4 gives the
amount of Guaranteed Surrender Value.
7.3.6 ALTERATIONS
The policy document embodies the terms of the contract. These terms continue to
operate throughout the currency of the policy unless it is modified by mutual
consent of the parties to the contract, viz the policyholder may desire alterations in
the terms of the contract to suit changed circumstances. For example, the
policyholder may find it difficult to continue the payment of premiums for the
original SA and may like to reduce the SA. Or he may ask for change of mode of
payment of premium.
The types of alterations for which requests are normally made are as follows:
(a) Alteration in plan or term

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(b) Reduction in SA
(c) Change in mode of payment of premium
(d) Alteration in name
(e) Change of the nominee
(f) Removal of an extra premium.
(g) Splitting up of policy into two or more policies
(h) Alteration from without profit to with profit plan or vice versa
(i) Grant of accident benefit
(j) Settlement option of payment of SA by installments
(k) Grant of premium waiver benefit
(l) Correction in policies (generally soon after commencement)
Alterations are considered if the policy is in force for the full Sum Assured (SA).
Alterations are not normally allowed in the first year of the policy, unless they are
by way of correction or changes which do not affect the basic insurance contract,
like change in addresses, change in nominations, etc.
While considering the request for alterations, the insurer tries to ensure that there is
no “adverse selection” against the insurer. That is, the risk should not increase
after alteration. Increased SA, increasing the term, change from endowment to
anticipated endowment plan, are alterations that increase risk. For this reason,
alterations are generally not allowed if they involve change:
(a) To a longer term
(b) Extending the premium paying period
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(c) From one plan of insurance to another that represents increased risk
Some alterations are made by suitable endorsements on the policy itself. A fresh
policy document may be issued if the alterations are of a substantial nature. This
will happen, for example, if the policy has to be split into two or more policies
incorporating the desired alterations.
A fee is usually charged to affect alterations expect in certain cases such as

correction of mistakes. No fee is charged for alteration of frequency of mode of
payment from quarterly to yearly or half yearly mode because such an alteration
reduces the administrative work in servicing the policy. The fee is partly meant to
cover expenses and partly to discourage frequency in alterations.
7.4 DUPLICATE POLICY
During the long duration of the policy term, people may shift residences and
rearrange personal belongings. It is possible that after some years, the policy
document is not found, having been misplaced or lost. Sometimes the document
may also get damaged due to moisture or termites. The loss or damage does not
absolve the insurer of his liability to pay the policy moneys, when the claim arises.
The claim, in such cases, may be paid to the claimant even without the policy
document. But the policyholder might want the document for making an
assignment or for pledging it against a loan. After all, a policy document
represents property.
Insurers issue duplicate policies on the request of policyholders. However, they

are cautious in such matters as they do not like to become parties to any mischief,
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which may be attempted. It is possible that the policyholder may have mortgaged
or assigned the policy to someone else and might report to the insurer that the
document is lost. Such attempts at fraud may be few. Yet precautions are
necessary in all cases. Therefore, enquiries are made to be satisfied that the
reported loss or damage is genuine.
Before issuing a duplicate policy, the policyholder may be asked to advertise in the
local newspaper and / or provide an indemnity bond signed by the policyholder and
a surety. In case the policy is lost by theft, the policyholder will have to file a first
information report with the police authorities and get the final investigation report
of the police.
The costs of issuing the duplicate policy which is including advertisement, stamp
duty, etc. have to be borne by the policyholder.
Though the policy document has clearly showed that it is a duplicate because of a
rubber stamp to that effect or otherwise, it is a good as the original for all practical
purposes.
Self Assessment Question II:
1. The policy document is required to be signed and also stamped as per the
___________________.
(a) IRDA
(b) Indian Contract Act
(c) Stamp Act.
(d) None of the above.
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2. The types of alterations for which requests are normally made are as follows:
(a) Alteration in plan or term

(b) Reduction in SA
(c) Change in mode of payment of premium
(d) All the above.
3. In the case of the LIC, there are separate policy document formats for the
following policies:
(a) Policies with and without Accident benefit

(b) Policies which participate and do not participate in profits
(c) Both (a) and (b)
(d) None of the above.
7.5 SUMMARY
The proposal form in which the application for insurance are made, is printed by
the insurer and made available through agents.
The confidential report of the agent is important for the insurer to assess the risk
and the acceptability of the proposal for insurance.
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A prospectus is a document inviting deposits from the public or inviting offers
from the public for the subscription or purchase of shares or debentures of a body
corporate.
The person proposed to be insured, is normally subject to medical examination to

determine the state of health and the terms of insurance if agreed upon.
The proof of age is now-a-days insisted upon at the commencement itself.

The risk of death is higher as age advances. Premium used to be calculated on the
basis of the age as stated in the proposal.
Special medical reports may also be called for, if the following conditions are
applicable if the
(a) The SA is very high, say Rs. 15 Lakhs or more
(b) The age at entry is very high, say, 60 years or more
(c) The proposer wants insurance cover under a high-risk plan
(d) The normal medical examination discloses some adverse feature
The policy document is the evidence of the insurance contract. It contains the
subject matter and the terms and conditions of the contract.
It is usual to divide the policy document into the following divisions:

(a) Preamble
(b) Operative clause
(c) Provision
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(d) Schedule
(e) Attestation and
(f) Conditions and Privileges
Insurers issue duplicate policies on the request of policyholders. But this is issued
by the insurers by taking various precautionary measures and the cost of issuing
the duplicate policy also have to be borne by the policy holder.
1. What are Insurance Documents?
2. Explain about the proposal form and other documents required to enter
into a insurance contract.
3. Write a short note on

a. Medical Examination
b. Age Proof
c. Special Reports
4. What is a policy document? Explain the need and format of it.
5. What is a Duplicate Policy? Explain the circumstances and conditions under

which Duplicate policy is issued.
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SAQ I:
1. Proposal
2. Age Proof
3 The First Premium Receipt
SAQ II
1. Ans (c)
2. Ans (d)
3. Ans (c)
Terminal Questions
1. Refer 7.2
2. Refer 7.2.1
3. Refer 7.2.3, 7.2.4 & 7.2.5.
4. Refer 7.3 & 7.3.1
5. Refer 7.4
NOTES
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Unit 8: The Distribution System
Structure:
8.1 Introduction
Objective
8.2 Distribution System in Life Insurance
8.2.1 Distribution Scenario in Indian Market
8.2.2 Challenging Scenario of role transformation of intermediaries
8.2.3 Focus on multiple channels
8.3 Insurance Intermediaries
8.4 Remuneration to Agents
8.5 Trends in distribution channels
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8.6 Summary
8.1 INTRODUCTION
With regard to insurance, the last step of the products moving towards consumers
that distribution is an essential part. Distribution System is the relationship
between distribution channels, market segments and also products is very
important.
In insurance marketplace is undergoing a transformation that may eventually lead

to significant changes in how consumers purchase insurance products. A variety of
distribution channels are currently used in this market place and some insurers
utilize a combination of distribution channels. Direct marketing, the agents, banks,
brokers, networks etc. By establishing the successful distribution channel,
insurance companies could largely cover the market and gain the loyalty of
customers, and cut down the cost, so to achieve the competitive advantage among
the competitors. Insurance companies should continuously innovate and integrate
the distribution channel, make them be the part of the occupying market and highly
promoting the development of their own.
While it is true that insurance purchasers today have more options available than
they did five years ago, it is unclear if and when these channels will dominate
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existing insurance distribution channels. There are several obvious factors that
impacts on a channel’s adoption are consumer attitudes and preferences. In
specific, it may be that consumers consider insurance products to be more complex
than originally thought. Consumers still do not view even personal lines insurance
products to be commodity products. This chapter is an attempt to explain the
distribution system in insurance, various insurance intermediaries/channels and
trends in distribution channel.
Objectives:
After studying this unit, you will be able to:

• Explain the distribution system of life insurance in India
• Mention the different types of intermediaries/channels in insurance industry
• Discuss the benefits that remuneration to agents
8.2 DISTRIBUTION SYSTEM IN INSURANCE
It has been years since the Indian life insurance market has opened up, and the
entrants into the market have set up shop in all major cities. The public sector
companies have already established themselves in the market. But there are
multiple challenges faced by these life insurance companies, of which two are
critical:
• Designing of products suiting the market
• Using the right distribution channel to reach the customer
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While the companies have been quite successful in dealing with the first of these
challenges using the existing product features and leveraging the technical know-
how of their partners most are still grappling with the right channel mix for
reaching potential customers.
8.2.1 DISTRIBUTION SYSTEM IN INDIAN INSURANCE MARKET
In present Indian insurance market, the challenge to insurers and intermediaries is

Two-pronged:
• Building faith about the company in the mind of the client
• Intermediaries being able to build personal credibility with the clients
Traditionally tied agents have been the primary channels for insurance distribution
in the Indian market; the public sector insurance companies have their branches in
almost all parts of the country and have attracted local people to become their
agents. The agents are from various segments in society and collectively cover the
entire spectrum of society. A person who has lived in the locality for many years
sells the products of the insurance company with a local branch nearby. This
ensures the last mile touch point being closer to the customer. Of course, the
profile of the people who acted as agents suggests they may not have been
sufficiently knowledgeable about the different products offered, and may not have
sold the best possible product to the client. Nonetheless, the customer trusted the
agent and company. This arrangement worked adequately in the absence of
competition.
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In present scenario agents continue as the prime channel for insurance distribution
in India, as is the case in most markets, supported by call centers to a small extent.
Almost all the new players follow this model primarily because the regulations for
other channels are yet to be put in place. However there is great excitement in the
industry over the impending broker regulations and companies are planning
possible channels in their enthusiasm to increase volumes.
What have emerged are a much more difficult and evolving market scene with
existing players, more new players coming in, and global marketing practices and
ideas being tested. But none of this has changed the fundamental character of the
market, which we believe will take more time than expected.
8.2.2 THE DISTRIBUTION SYSTEM IN LIFE INSURANCE
Unlike tangible goods like soaps or refrigerators, which are ‘needed’ by people
because they give immediate benefits, very few people feel the need for life
insurance. Not many people understand what insurance is and how it works. Very
few people recognize that the suddenness of untimely death is a real possibility in
their own lives. Someone has to explain to and persuade the prospective buyer that
there is need for life insurance.
Life insurance is not bought by anybody. General insurance is often bought

because there are compulsions under the law (Motor Vehicles Law) or from the
financiers asking for insurance as collateral security. In the case of life insurance,
there is very little compulsion. The tendency is to defer the decision. The
possibility of death is either ignored or not considered imminent. The requirements
of today take priority over the requirements of tomorrow. Even if not absolutely
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essential, the requirements of today seem to be more compelling. Tomorrow never
comes.
Beliefs and cultural or religious backgrounds often interfere with the process of
considering the usefulness of life insurance. There is a tendency to leave
everything to fate, more as an excuse for inaction than as a substantial belief. There
are notions about life insurance not being a good investment (yields are low, the
money after 20 years is worth much less) and so on. By the time someone realizes
himself the need for life insurance, the chances are that he may not be in the best of
health and the insurer may have doubts about the insurability. Life insurance has to
be secured when in the best of health. Otherwise the insurer will refuse to grant the
insurance cover. In this complex milieu, people have to be persuaded that there is
need to be concerned about the future and that life insurance is a necessity, not a
option. Insurance has to be sold.
Those who do the job of meeting, explaining to and persuading people are called
agents. They are the salesmen or intermediaries between the insurer and the public.
Agents have to be licensed under the Insurance Act. A licensed agent can work
with only one life insurer of his choice and is paid commission on the premiums
collected through agency. Sometimes the officers of the insurer may have to do the
selling, along with or without the agent. Another category of intermediary is the
‘broker’. During the rest of this chapter, the word ‘agent’ is used to refer to all
salesman, whether called an agent or insurance advisor or by any other name.
Agents are necessary for the selling life insurance due to the following reasons:
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• Insurance is an idea that has to be explained and its usefulness clarified
personally
• Each prospective buyer has special needs and requires specialized solutions
• Personalized guidance can be given only when there is a live interaction

with the agent
• Significant amount of money is to be set aside immediately and regularly for

a long term in future for a benefit, which is vague and far away.
• The insurer has to access the risk involved in every proposal for insurance
for which the necessary information would include details on personal life
styles, habits, family etc. The agent, who gets to meet the proposer closely,
is in a position to provide some of this valuable information.
In some countries, some of the agents are very experienced and professionally
qualified. Colleges of insurance offer long duration courses, leading to grant of
certificates or degrees, like accountants or company secretaries or architects. There
is also the system of brokers, who are independent not attached with any particular
insurer, canvas business and place the same with insurers on terms that are
standard or even negotiated. Negotiation of terms that is standard or even
negotiated. Negotiation of terms will be necessary, if the needs of the proposer are
unique and not met by the benefits under the standard plans of insurance. A broker
usually does business with more than one insurance company. He collects
commission from the insurer with whom the business is placed and does not charge
the prospect.
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The LIC has about 10 Lakhs agents on its rolls. Some of them are whole time and
some of them are part time. The other companies are steadily adding to their
strength of agents. By the end of the year 2002, all of them together had about one
lakh agents. Agents have to obtain licenses from IRDA, without which they are not
allowed to procure business and to collect commission from the insurer.
The PLI appoints unemployed youth and extra-departmental branch postmasters to

procure business under the Rural PLI. Retired employees of the Posts and
Telegraphs departmental and that of the Railways are employed as field officers,
on commission basis, to procure business. Development officers are fulltime
employees, whose primary duty is to procure business for PLI. None of them have
to be licensed.
Agents do not themselves enter into a contract with the insured. They only sell of
behalf of the insurer. They are remunerated by commission payment. Sometimes
overhead and administrative expenses may be reimbursed. An Agent is allowed to
work for one life insurer and one non-life insurer.
8.2.3 CHALLENGING SCENARIO OF INTERMEDIARIES
Insurance has to be sold the world over, and the Asian Market is no exception. The
touch point with the ultimate customer is the distributor or the producer (as they
are known in certain markets), and the role played by them in insurance markets is
critical.
It is the distributor who is makes the difference in terms of the quality of advice for
165
choice of product, servicing of policy post sale and settlement of claims. In the
Asian markets, with their distinct cultural and social ethos, these conditions will
play a major role in shaping the distribution channels and their effectiveness.
Thus, insurance companies must move from selling insurance to marketing an

essential financial product. The distributors have to become trusted financial
advisors for the clients and trusted business associates for the insurance companies.
This calls for leveraging multiple distribution channels in a cost effective and
customer friendly manner. For example, in the developed markets producers
(brokers and agents) form the major channels of distribution, while the web as a
complementary channel is catching up slowly. According to a Forrester survey,
88% of the Life insurance executives responding identified agents as the primary
channel of distribution.
The distinction of channels in the developed markets are personal distribution

systems and direct response systems.
Personal distribution systems include all channels like agencies of different

models and brokerages, banc assurance, and work site marketing.
Direct response distribution systems are the method whereby the client
purchases the insurance directly. This segment, which utilizes various media such
as the Internet, telemarketing, direct mail, call centers, etc., is just beginning to
grow.
166
1. __________ is the relationship between distribution channels, market segments
and also products is very important.
2. Two critical challenges faced by life insurance companies are __________ and
_________.
3. ____________ includes all channels like agencies of different models and
brokerages, banc assurance, and work site marketing.
8.3 INSURANCE INTERMEDIARIES/CHANNELS.
Though a multi-channel strategy is better suited for the Indian market as well, it is
important to keep in mind that this market is really a conglomeration of multiple
markets. Each of the markets within this conglomeration requires a different
approach.
Apart from geographical spread the socio-cultural and economic segmentation of

the market is very wide, exhibiting different traits and needs. Let us look at the
various insurance distribution channels and the challenges faced by them from
these perspectives.
8.3.1 AGENTS
Today's insurance agent has to know which product will appeal to the customer,
and also know his competitor's products in the same space to be an effective
salesman who can sell his company, the product, and himself to the customer. To
167
the average customer, every new company is the same. Perceptions about the
public sector companies are also cemented in his mind.
The new companies are looking for educated, aware individuals with marketing
flair, an elite group who can be attracted only with high remuneration and the lure
of a fashionable job, all of which may not be possible in this business with its price
pressures and the complexity of selling insurance. Unable to attract this segment,
they have started easing recruitment conditions as against the stringent norms they
had earlier, thereby diluting the process.
While the public sector companies are able to attract agents, they continue to suffer
from high attrition rates due to indiscriminate agent appointment. The most
successful of these companies' tied agents are hardly of the elite variety of
salesman. They are still the neighborhood do gooders -- the postman, the
schoolteacher, and the shopkeeper -- who know the people and are themselves
known in the community. The challenge here is the lack of knowledge of the
competitive market and the inability to do intelligent comparisons with the
competitor's products. Educating and training these agents is a serious challenge
for the insurance company.
The relevance of this kind of agent continues even today as agents are sought or
contacted by families by word of mouth. Insurance companies are advised not to
follow the path of FMCG's/credit card companies, believing that a suited and
booted customer care consultant or financial consultant will necessarily appeal to
the average Indian customer.
168
Another social feature in the market is the considerable respect for age in Indian
society and a belief that an older person knows better. A very young up-market
agent who is a typical salesman may not appeal to a large segment of the middle
class, which is looking for a solid trustworthy person from whom they can buy
insurance.
In this context it might be a rewarding exercise to recruit some older people (who
have taken VRS2 from banks and other financial institutions) to sell some lines of
products like pension plans, annuities etc.
Gender of agents is another relevant feature in the rural context that makes a
difference, especially for the female population. Women to whom the customers
can relate --e.g., nurses, gram sevikas3 -- can target the female segment of the
population more effectively. What is applicable for the rural women and children
health programs and population control programs is equally applicable for
insurance selling also. Max New York Life has adopted a version of this strategy
by appointing gram sahayaks4 to sell and service the rural customers.
With this kind of segmentation of intermediaries the challenge for the insurance
company lies in training and educating these people to become effective sales
persons. But this in no way diminishes the benefits of intermediary segmentation.
8.3.2 BANKS
Banks in India are all pervasive, especially the public sector banks. Can they also
become the foremost channel for distribution of insurance? Banks have become a
predominant channel for selling insurance with a paradigm shift.
169
The major lines of business that can be sold through banc assurance successfully
are term insurance, creditor insurance, and non-life products like Property, Motor
and Personal accident, Homeowners comprehensive insurance etc.
An example is SBI Life, which is waiting for the broker regulation to be put in
place in order to move ahead aggressively with the banc assurance model. One of
their major product lines is creditor insurance, and they have launched their first
creditor insurance product, which covers the liabilities of the creditor in case of
death of debtor. SBI Life is planning a similar product for home loan borrowers of
State Bank of India. This model has high relevance in the Indian context with far-
flung villages where the insurance potential is in volume and not in high per capita
premiums. Some advantages and disadvantages are:
The strategy should be to use multiple banks according to their presence in

different regions. Success would come by using banc assurance where it will be
most effective - i.e., selling simple, cheap products to the masses at a low cost.
This awareness is growing and is evident from the fact that nearly every insurance
company has partnered with one or many banks to implement banc assurance.
8.3.3 BROKERS
With the broker regulation under review and expected any time, this could be the
next hope, especially for the urban market. This will be a new experience for the
insurance customer, accustomed to brokers in financial services, real estate, and
travel and tourism. For historical reasons the image that 'broker' carries in the
170
minds of the customer is not very favorable. Thus the new breed of insurance
brokers faces the challenge of establishing credibility.
The positives are that brokers in the urban arena can attract the elite and the upper
middle class customer. Brokers represent the customer and will sell the products of
more than one company. They seek to determine the best fit for the client and can
effectively address the mind block faced by the public about the various
companies. This is applicable in the case of life insurance for the high-end and
corporate/group segment.
In the non-life segment, broking is not entirely new, as reinsurance brokers were
arranging exotic covers. For individual customers also, with a wide range of
competitive products, the broker can get a good deal. The corporate broking
companies will have to play a prominent role.
If NGOs based in rural areas can be attracted into the rural sector cooperatives
arena, they stand a good chance of succeeding and can help the new players get a
foothold in the rural market. These are the players with the potential to make the
difference, as they have the trust of the people. We envisage scenarios like that in
Bangladesh's micro lending growth and the milk co-operatives7 in Gujarat selling
insurance in addition to milk production and distribution. It would be a new dawn
in Indian insurance distribution! With the right impetus the Indian rural insurance
scenario could be one with high business volume and tremendous growth potential.
ICICI Prudential Insurance and HDFC Standard Life Insurance have already
partnered with NGOs to sell some low cost insurance in rural areas. However, the
challenge lies in establishing regulations that protect the customer and attract the
171
right players into the brokerage market rather than creating another middlemen
segment eroding the premium.
8.3.4 WORK SITE MARKETING
This area needs to be tapped, as in any country one of the biggest markets is
through the worksite. With changes in human resources management polices and
compensation packages, group products or work site products do have a definite
market that cannot be ignored.
Here the advantages would be:
• Captive customer base

• Potential to sell individual insurance and group insurance
• High trust factor
• High hit ratio for the intermediaries
The challenges would be the cost effectiveness, product customization and

efficient post sales servicing, which would determine continued business.
Technology has a key role to play in worksite marketing to ensure cost benefits.
Banks and financial institutions have been successfully marketing credit cards and
other financial products using this channel. If not an identical model a similar
approach can be used for selling insurance.
8.3.5 INTERNET
172
Though India is joining the fast growing breed of net users, using net for
transactions has not yet caught up. Though a few banks provide online banking, the
usage is still a small fragment. The insecurity associated with transactions over the
net is still an inhibiting factor. At present most of the insurance companies have
product information and/or illustrative tools on the web.
We do not see the web evolving into a means for direct selling of insurance in the
current scenario. In the Indian market, where insurance is sold after considerable
persuasion even after face-to-face selling, the selling over the net, which must be
initiated by the client, would take some more time.
While the technology capability is there, improvements in bandwidth and

infrastructure are needed. Also needed are simpler products where auto-
underwriting is feasible. Automobile insurance, one of the segments of insurance
purchased "off the shelf" in India, would be the ideal segment to start with. On the
life side, term assurance for standard lives with simplified
underwriting is a possibility.
These channels by themselves will not be able to overcome the mindset of the
people, but rather can only be enablers for the human channels.
8.3.6 INVISIBLE INSURER
In this model, the insurance company or its representative is not the entity
marketing the products. The insurance cover is sold by an automobile /credit card
company as an add-on product leveraging the brand of the retailer. The risk is
carried by the insurance company, which underwrites it. . Products like creditor
insurance, automobile insurance, and credit card related insurance could be
173
distributed using this channel. This model can be adopted in all market segments
for the lines of business mentioned. It is already prevalent in some areas like credit
card insurance and crop insurance for agricultural loans.
The new players are also attempting this model. The venture of Maruti’s 9 into
insurance by setting up two subsidiaries MIDS10 and MIBL11 to sell automobile
insurance is a case in point. These firms will largely arrange insurance cover for
Maruti's captive customer base. MIDS has been registered as a corporate agent
with an exclusive arrangement with Bajaj Allianz General Insurance, while MIBL
has linked up with state-owned National Insurance Company Limited.
What makes these arrangements attractive is the low distribution cost and captive
customer base. However, repeat business or renewal of business cannot be assured.
In the life segment, group creditor insurance may be the most suitable product for
this channel.
8.4 REMUNERATION TO AGENTS
Persons appointed by an insurer may be remuneration in any of the following

ways:
a. Payment of fixed monthly salary
b. Payment of commission related to the business done
c. Part payment of fixed salary and part payment of commission based on

business done.
174
Commission to agents is specified as a percentage of premiums paid. This
percentage may vary between different plans of insurance. It may also vary from
year to year, high in first year and lower in subsequent years. Commission may be
paid right to the through the term of the policy or may be paid only for a fixed
number of years. In India, provisions exist whereby agents who have performed
certain qualifying levels of business during 10 years of the agency are entitled to
receive commission for the rest of their lives under certain conditions. Commission
is also payable to the heirs after the agent’s death. Bonus commission is also
payable on the first year premium as an incentive for higher performance. This is a
percentage of the eligible first year commission increases.
Agents of the LIC are entitled to term insurance and gratuity benefits. The amount
of term insurance is linked to the average annual commission (renewal) earned in
the three agency years preceding his death. The following other conditions also
have to be fulfilled:
a. The agent should not have completed 50 years on the date of appointment
as an agent.
b. The death must take place before he has completed 60 years of service
c. He must have an insurance policy on his own life for at least Rs.5000 SA
and the policy must have been in force at the time of his death.
d. He must have completed at least 3 years as an agent at the time of his
death.
175
An agent will be eligible for gratuity if he has worked continuously for 15 years or
more and his agency is not terminated due to fraud, conviction on a charge of
criminal misappropriation, criminal breach of trust, cheating or forgery, acting
against the interests of the insurer, offering rebate or giving false information in the
agency application form with a view to defraud the insurer.
The amount of gratuity is related to the renewal commission earned in the last 15
qualifying years preceding the date of claiming gratuity. 180th part of the aggregate
of the qualifying year renewal commission is the eligible rate. Gratuity is
admissible at the eligible rate for each qualifying year for the first fifteen
qualifying years and at half the eligible rate for the subsequent ten qualifying years
subject to a maximum. Gratuity is paid only once in the agency career.
8.5 TRENDS IN DISTRIBUTION CHANNELS
Agency and brokerage systems are not common and contribute maximum share of
life insurance business in the developing countries. The Japanese life insurance
industry depends entirely upon agents. Part-Time agents and lady agents form a
good proportion of the agency force.
In European countries, notably France, Holland, Belgium and Spain distribute on

takes place also through banks. Direct mailing is becoming increasing popular in
developed countries. In a small way, this has started in India. The scope and the
experience are being watched.
Self Assessment Questions II:
176
1. ________ have become a predominant channel for selling insurance with a
paradigm shift.
2. A new experience for the insurance customer is accustomed to ________ in

financial services, real estate, and travel and tourism.
3. Agents of the _______ are entitled to term insurance and gratuity benefits.
8.6 SUMMARY
Distribution System is the relationship between distribution channels, market

segments and also products is very important. The primary channels for insurance
distribution in the Indian market; the public sector insurance companies have their
branches in almost all parts of the country and have attracted local people to
become their agents. The agents are from various segments in society and
collectively cover the entire spectrum of society.
The distinction of channels in the developed markets are personal distribution

systems and direct response systems. Personal distribution systems include all
channels like agencies of different models and brokerages, banc assurance, and
work site marketing. Direct response distribution systems are the method
whereby the client purchases the insurance directly.
Today's insurance agent has to know which product will appeal to the customer,
and also know his competitor's products in the same space to be an effective
salesman who can sell his company, the product, and himself to the customer.
177
Persons appointed by an insurer may be remuneration in any of the following ways
Such as payment of fixed monthly salary, payment of commission related to the
business done and part payment of fixed salary and part payment of commission
based on business done.
Commission to agents is specified as a percentage of premiums paid. This

percentage may vary between different plans of insurance. It may also vary from
year to year, high in first year and lower in subsequent years.
1. Explain the distribution channel of life insurance in India.
2. Discuss the various insurance intermediaries and channels.
3. How is an agent in life insurance remunerated?
8.8 ANSWERS TO SAQs & TQs
Self Assessment Questions:
I. 1. Distribution Systems
2. Designing of products & Right Distribution Channel
3. Personal Distribution Systems
II 1. Banks
178
2. Brokers
3. LIC
Answers to TQs:
1. Refer to 8.2 (inclusive of 8.2.1-8.2.3)
2. Refer to 8.3 (inclusive of 8.3.1-8.3.6)
3. Refer to 8.4
NOTES
179
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Life Insurance and Products

Unit No. TITLE Page

1. An Introduction to Insurance 1-24

3. Insurance Contracts and their Elements

4. Plans of Life Insurance

6. Other Insurance plans

7. Insurance Documents and Policy Conditions

8. Distribution System and Products

Appendix A – Suggested Reference Books

1.2 Meaning and Definition of Insurance

1.3 Nature and Characteristics of Insurance

1.4 Importance of Insurance

1.5 Functions of Insurance

1.6 Classification of Insurance

Self Assessment Questions I

1.7 Life Insurance

1.8 Importance of Life insurance

1.9 Factors affecting Life Insurance

1.10 Development of Life Insurance

Self Assessment Questions II

1.13 Terminal Questions

1.14 Answers to SAQs and TQs.

In the new economic reality of globalization, insurance companies face a dynamic

After completing this unit, you will be able to:

• Explain the meaning and objectives of insurance.

1.2 MEANING AND DEFINITION OF INSURANCE

Business of insurance is related to the protection of the economic values of assets.

“Insurance is a cooperative form of distributing a certain risk over a group of

“Insurance is a contract in which a sum of money is paid to the assured as

“Insurance may be described as a social device whereby a large group of

1.3 NATURE & CHARACTERISTICS OF INSURANCE

Sharing of Risks: Insurance is a co-operative device for division of risk which

Co-operative Device: Large numbers of persons share loss arising due to a

Payment made on contingency: The insurer is bound to pay to insured when

Large Number of Insured Persons: To make the insurance cheaper it is essential

Insurance is not Gambling: In Insurance, uncertainty is covered into converted

Insurance is not charity: Charity is given without consideration but insurance is

• It is a contract for compensating losses

1.4 IMPORTANCE OF INSURANCE

Insurance provides security against loss of a given contingency. A sense of security

1.5 FUNCTIONS OF INSURANCE

(A) Primary Functions:

1. Provision of certainty of payment at the time of loss. The element of

2. Provision of protection. Another function of the insurance is to provide

(B) Secondary Functions:

1. Prevention of Loss. Prevention is always better than cure. Prevention of

3. Improvement of efficiency: The Insurance eliminates worries and

4. Ensuring welfare of the society: “Insurance is a saga of service and

1.6 CLASSIFICATION OF INSURANCE

b) General or non-life insurance business, which is mainly short term

Long-Term: Long-Term insurance business refers to life, industrial life, insured

General or non-life insurance business: Policies under general insurance

Self Assessment Questions I:

1. Business of insurance is related to the protection of the ___________ values of

2. Insurance contract is a contract for _________ benefit.

4. Insurance is a saga of service and ____________.

Characteristics of Life Insurance:

• In life insurance, unlike in general insurance, the promise has to be

• The amount payable on a claim arising in life insurance is not in doubt. It is

1.8 IMPORTANCE OF LIFE INSURANCE

Protects mortgaged property: The insurance provides adequate amount to the