Insurance

Introduction To
Insurance

What will we learn?
What is Insurance

Purpose and need of Insurance

How Insurance works

The Human Asset

Insurance Of Intangibles

The business of Insurance

Insurance as a social security tool

Role of Insurance in economic
development

Advantages of Life Insurance

What will we learn today ?
Classification of Insurance
Life Insurance
Life
Insurance
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Non-Life
Insurance
Protection
against
Death
Diseases
Disability
Protection against
Theft
Fire
Loss In Transit
Accidents
Illness in case
of Live stock
What is insurance?
Risk: The potential to loose life or asset
value against events that are not
systematic in time, but can happen.
Insurance is the economic protection
of a life or an asset against a risk.
What is Insurance
Insurance is concerned with the
protection of the economic value of
assets

Every asset has a life span and
must be replaced before that, so
that the value or income is not lost

However adverse situations arise
when the asset gets lost before its
replacement has arrived

Insurance is the tool that helps in
reducing the impact of such
adverse situations

Purpose and need of
Insurance
Assets need to be insured because
they might be destroyed by perils
and are thus exposed to risk

Perils are events where as risks are
losses

Risk primarily means the possibility
of loss or damage

However if the loss does occur,
Insurance helps to reduce the
adverse economic effects of the
situation
Purpose and need of
Insurance
Thus risk is related to uncertainty and
Insurance is only relevant if there are
uncertainties

Thus Insurance does not protect the
assets against peril

However in case of loss of the asset,
Insurance compensates for the
economic loss related to it

Therefore only anticipated financial
losses can be insured against

Life Insurance the role it plays.

Mental Peace
Security & Stability
Planning of Future
Investment
Self Reliance
Tax benefit
Security in investment
Security against loans.

When a coin is tossed many times,
the possibility of the outcome being
either heads or tails is 50%.
The more number of times we observe
a particular event, the more likely it is
that our observed results will
approximate the true probability that
the event will occur.

Same is applicable in insurance.

Law of large numbers
How Insurance works
Insurance primarily works on the
concept of sharing of losses

Individuals / entities are grouped
depending on the risks they share

Insurance thus reduces the burden
of economic loss on one and
spreads it into smaller manageable
losses on all

The principles of Insurance are:
It is difficult for one to bear the total
loss of the risks he is exposed to
Perils should take place in a random,
accidental manner

How Insurance works
Sharing of losses is usually
proportional to the risks each
individual of the group is exposed to

The share could be collected either
Pre - Peril or Post - Peril

Insurance companies generally collect
the share pre - peril and create a fund,
which would finance the losses

The share per person (when share is
collected pre - peril) is based on
certain assumptions
The Human Asset

Every human being is an income
generating asset

The assets that every human being
possesses are:
Manual labour
Professional skills
Business acumen

The human asset may be lost in the
event of:
Premature death
Illness
Disability
Accidents

The Human Asset
Insurance is the tool that
compensates for the economic loss
incurred by the family in the
unfortunate event of the loss of the
human asset

Insurance also come in handy in the
event of the human being Living Too
Long

Insurance companies are termed as
Insurers

The business of Insurance generally
entails:
Grouping individuals with common
insurance interests (SHARING OF
RISKS)
Collecting share of loss from each
one of them (PREMIUMS)
Pay out compensations to those who
have suffered (CLAIMS)

In India, insurance business is
grouped under two heads:
Life
Non - Life
Fire
Marine
Miscellaneous

Premiums are calculated on the
expectations of possible losses

Premiums are calculated after
analysis of past occurrences and
applying the Law Of Large Numbers
over them

Premium calculations are also based
on the probability of the risk
happening

Thus the business of Insurance is
based on the concept of Sharing Of
Losses

The Insurer assumes the position of
the Trustee managing the common
fund and ensures that no individual /
entity takes undue advantage of the
facility

The decision to allow entry into the
group involves the process of
Underwriting of the risk

Premiums to be charged also depends
on underwriting

Role of Insurance in
Economic Development
Investments are essential in economic
development

Savings create investments

Life Insurance companies are great
mobilisers of savings of individuals
and entities

These savings can further be
channeled as investments for
economic development

Role of Insurance in
Economic Development
Investments are generally into:
Govt. related securities
Infrastructure
Miscl.

However the Life Insurers must have a
sound investment philosophy aimed
at benefiting the society at large

Business and trade also benefit
immensely through Insurance
Advantages Of Life Insurance
Life Insurance has no competition

The fund available from Life Insurance
is actually the amount one wished to
accumulate at the end of the savings
period

Thus in Life Insurance, the terminal
fund is secured from the very
beginning

The saving have to be accumulated to
this fund till the end of the term

Thus Life Insurance has no substitute

Principles of Life
Insurance

What will we learn today
Life Insurance Contracts

Principle of Utmost Good Faith

Insurable Interest

Principle of Indemnity

Different Risks

Needs and Insurance

In India all contracts are governed
under the Indian Contract Act, 1872.

A contract is 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

A contract must have the following
essentials:
Offer and acceptance
Consideration
Capacity to contract
Consensus ad idem
Legality of Object or purpose
Capability of Performance
Intention to create legal relations
Insurance is a specialised type of
contract. It is subject to two additional
principles to make it a valid contract:

Principle of Utmost Good Faith
Principle of Insurable Interest
Principle of Utmost Good
Faith
Principle of caveat emptor does not
apply to life insurance contract.

It is the responsibility of both the
parties to disclose all material
information relating to the contract.

Faith
As the underwriter knows nothing and
the man who comes to him to ask for
insurance knows everything, it is the
duty of the assured to make a full
disclosure to the underwriter without
being asked, of all material
circumstances. This is expressed by
saying that it is a contract of utmost
good faith.- Rozanes v.s. Bowen case.
Faith
A material fact is a fact which would
influence the mind of a prudent
insurer in deciding whether to accept
a risk for insurance and on what
terms

Some examples:
Age
Height & Weight
Occupation
Smoking / Drinking Habits
Medical History & surgeries etc.

Faith
There are certain circumstances which
need not be disclosed. They are:

Facts of law
Facts of common knowledge
Facts which lessen the risks
Facts which could easily be
discovered
Facts which a survey should have
revealed
Facts covered by policy conditions

Faith
Breach of principle of utmost good
faith arises due to Misrepresentation
or Non Disclosure. It should be:

Substantially false
Concerned with facts which are
material to the subject matter of
insurance
Calculated to induce other party to
enter into contract on its own terms

Faith
Sec 45 of Insurance Act gives rights to
the insurer to cancel the contract if:

Less than two years have passed of
the contract
Proposer intentionally discloses
untrue statements in the proposal
form

Insurable Interest
Insurable interest means that the
proposer must have a stake in the
continuance of the subject insured
and could suffer a loss, if the risk is
not covered through insurance

The insured must be in a relationship
with the subject of insurance whereby
he benefits from its safety, well being
or freedom from liability and would be
prejudiced by its loss, damage.

The risk insured against must not be
speculative nor subject to the control
of the insured.
Insurable Interest
Relationships defined in Insurable
Interest

Person has unlimited insurable
interest in his/ her own life
Husband & wife
Employer & Employee
Creditor & Debtor
Partners
Surety & Principal Debtor
Company & employee
Insurable Interest
In life insurance policies, insurable
interest must exist at the inception of
the policy.

In marine insurance, insurable
interest is a must at the time of claim.

In all other insurances, insurable
interest must exist at the time of
inception as well as the time of claim
Principle of Indemnity
Insurance cannot be used to make
profit

Insurance must place the insured in
the same financial position as it was
before the loss, not better

Principle of Indemnity does not apply
to life insurance policies.
Different Risks
Two basic kind of risks Death & Old
Age.

Risk can be managed in three ways:
Risk Prevention or Avoidance
Risk Retention
Risk Transfer

Insurance is a mechanism of Risk
Transfer
Needs and Insurance
Different people have different needs.

Different needs of individuals that can
be taken care with insurance are:

Protection of Standard of living of
family
Future expenses on children
education, marriage etc.
Continuance of business
Substitute income during old age or
disabilities.

Human Life Value
Propounded by : Solomon S.
Huebner (1882-1964)

HLV is the present value of the total
income of the individual, which is
lost to the family in the event of his
untimely death.

Premiums &
Bonuses

What is premium
Risk, Net & Pure Premium
Loadings
Level Premium
Office Premium
Extra Premium
Calculation of Age
Premium Calculation
Life Fund
Actuarial Valuation
Bonus

Actuarial Basis of Life
Insurance
Definition:
Actuarial is a specialized branch of
statistics, which takes into account a
number of factors to come to figure, which
is called as premium. This premium is the
amount, which each life assured has to pay
for the sharing in the collective risk pool.

What is Premium
It is the consideration that a
policyholder pays in a life insurance
contract.

It may be one time or payment made
in regular intervals.

Calculation of premium is based on
highly complex actuarial & statistical
principles.
Basis of Premium Calculation

a) Mortality
b) Income on investment
c) Expenses
d) Contingency factor

Insurance
The cost to meet the risk of death for
one year at a particular age is called
as Risk Premium.

Actual premium charged may be
higher in case survival benefits need
to be paid.

All Premiums collected are not
utilised in claim payments.

A certain part is used to provide risk
cover and the rest is invested and
earns interest.

Premium worked out after taking into
account the interest, is called Net
Premium or Pure Premium

Loadings
Any additions made to the pure
premium are called Loadings.

Administrative expenses on the policy
is one of the loadings.

Loadings can also be made for
unexpected contingencies &
fluctuations.

There could be a loading for with
profit policies to keep into account
the bonuses paid out on these
policies.
Level Premiums
Insurers spread risk premium on a
uniform basis throughout the term of
the policy.

Such uniform premium is called as
Level Premium.

It also prevents adverse selection of
the policyholders.
Office Premium
Premium arrived after loading the
pure premium is called as Office
Premium.

This is the premium mentioned in the
promotional brochures of the insurer.

Rebates or discounts are given by
different insurers over the mode of
premium payment.

Similarly rebates may also be given
on policies with Larger Sum
Assureds.

These adjustments may be in
percentage terms like add or
subtract 2.5% or in simple numbers
like add or subtract Rs. 1.00 .

Office Premium
Extra Premiums
Extra premiums are charged in case
riders opted for.

Extra premiums may also be charged
for underwriting decisions.
Example: For health reasons or jobs
which involve high risks.

These are added to standard premium
otherwise chargeable.
Calculation of Age
Premium will be charged on the basis
of the age of the Life Assured.

Insurers prefer to admit the age at the
commencement of the policy.

Methods to calculate the age:
Age Next Birthday
Age Last Birthday
Age Nearest Birthday

Calculation of Ages
Lets take an Example to understand
this:

If Life Assured birthday was 30
th
Jan
1974 and todays date was 30
th
Sept
2004 then the Life Assureds age is 30
years & 9 months, then age accordingly
will be:

Age Next Birthday 31 years
Age Last Birthday 30 years
Age Nearest Birthday 31 years.

Premium Calculation
Step 1 : Find out the Tabular Premium

Step 2 : Deduct adjustment for Large
Sum Assured

Step 3 : Make adjustment for mode of
payment of premium.

Step 4 : Add Extras. Riders or any
others if applicable.

Step 5 : Multiply by Sum Assured

Step 6 : Calculate base on the mode
opted for.
Life Fund
Insurance is a long term contract and
thus profit if any, is determined only
at the end of contract.

Level premiums implies that part of
the premium collected in any year, is
meant to cover higher risk of the
future years.

Hence all income from life insurance
business is kept aside in a Life Fund
to meet the liabilities under the life
insurance policies.

Mortality:
the probability of the insured dying in
any given year.
Mortality Table:
Indicates the rate of Mortality at a
given age which is merely the
probable proportion of persons who
would die during that year of age.
Assessmentism
Premiums paid are sufficient to meet
the claims arising in that particular
year. Every year the premium goes
on increasing as the mortality at that
age increases.
Level Premium
same premium is charged all
through the term which is the
mathematical equivalent of the
increasing premiums payable year
after year
Insurance
Interest:
Returns on investment that is
expected to be earned by the
investment of premiums.
Insurance
Expenses
The third important element in the
computation of premiums is the
loading included in the premium rates
to provide for the operating expenses of
the insurer.

Insurance
Contingency:
Small loading for covering
contingencies and fluctuations is also
included in the premiums
Insurance
Bonus
Policyholders who opt for
Participating or With Profit policies
would be entitled to bonus

Reversionary bonus added to the Sum
Assured could be either simple or
compounded.

Terminal Bonus may also be declared
for policies which have continued for a
longer term.
Reversionary Bonus.

Addition to the face amount declared at the
end of the year.
Part of the Insurers Surplus.

Types of Reversionary Bonus

Simple Reversionary Bonus
Compound Reversionary Bonus
Forms of Surplus
Participation
Special Reversionary Bonus

A company may declare part or all of a
reversionary bonus as special i.e., in addition to
any regular reversionary bonus that it is giving.

Forms of Surplus
Participation
Forms of Surplus
Participation
Tontine Bonus System.
Surplus is reserved only for those
policyholders who survive a period of
years.

Contribution Bonus System.
Under this system, the divisible surplus is
allotted to policyholders taking into
account the contribution each policy
makes towards surplus.
Interim Bonus.
At the time of valuation the actuary
recommends a rate of interim bonus
payable for all those policies, which
may result into claim by death or
maturity before the results of the next
valuation are available.
Final (Additional) Bonus popularly
known as Terminal Bonus.
This benefit is payable on policies
which are in force for the full sum
assured for a minimum period of 15
years, before resulting into claim by
death or maturity.
Forms of Surplus
Participation
Life Insurance
Products

Basic Products
With Profit & Without Profit Policies
Joint Life Policies
Convertible Plans
Children Plans
Variable Insurance Plans
Unit Linked Insurance Plans
Industrial Assurance Plans
Salary Savings Scheme Plans
Riders
Annuities
Plans for Handicapped

Basic Products
A Plan can provide a benefit of a
Death Cover

Survival Benefit is providing the
benefit being paid on the survival of a
specific period.

Plan providing only death cover are
called Term Assurance plans.

Plans which provide only survival
benefits are called Pure Endowment
plans.
Basic Products
Whole Life Policy
A term assurance plan with an
unspecified period where Sum Assured is
paid on death.

Endowment Policy
A plan under which the Sum Assured is
paid on survival of the specified period or
on earlier death.
Basic Products
Double Endowment Assurance Plan
A plan under which the amount payable
on survival is double the amount
payable on death

Anticipated Endowment Policy
Also known as a Money Back plan
where a certain percentage of the sum
assured is paid within the term in
installments and the entire Sum Assured
is payable on death.
Basic Elements
A plan can be developed by changing ,
adding & combining features.

Who can be insured?
What can be the Sum Assured?
Contingency in which the SA will be
payable
When would the SA be payable?
How would the SA be payable?
What would be the term of the policy?
When would the premium be payable?
Does the SA increase or reduce?
Are there additional benefits?
Some Popular Plans
Decreasing Term Assurance
Appropriate as a collateral to cover
outstanding loans in mortgage
transactions

Marriage Endowment Policy
Endowment Policy which only stipulates
the date of which the Sum Assured is
paid to take care of the childs marriage
expenses

Term Assurance with Return of
Premium
A plan which pays back all the premiums
on the survival of the term.
With Profit or Without
Profit Policies
Without Profit or Non Participating
policies are not entitled to bonuses
declared after valuations.

With Profit or Participating policy
are entitled for bonus & hence slightly
higher on the premium.
Joint Life Policies
Two or more lives covered under one
policy.

SA is paid on death of any of the
insured person during the term or at
the end of the term.

In case of joint life insurances:
A joint life declaration is necessary
In partnership insurance, partnership
deed is essential .
Each life will be underwritten
separately.
Bonus accrue on the single basic SA
only.
Convertible Plans
Plans which in their terms &
conditions, make provision for it to be
changed into another plan.

The change is allowed within a certain
period after commencement.

If option to convert is not exercised
then policy will continue on original
terms.

Eg: Convertible Term Assurance Plan
can be a converted into a Whole Life
or an Endowment Policy.
Children Plans
Proposal for Insurance on children
lives made by parent or guardian

Deferment period is the time gap
between the date of commencement
of a policy and risk commencement
date in a policy.

No cover in Deferment Period, only
premiums returned on death.The
policy automatically passes on to the
child on him attaining age of majority.

Certain plans in LIC for female
children also extend the cover to the
husband on marriage.
Variable Insurance Plans
Unit Linked Insurance Plan introduced
by UTI for people between the ages of
12 and 55.

Out of the contribution made, a small
part used to purchase life cover &
balance invested in units.

In case of death, legal heirs will get
the units along with the insurance
cover.
Unit Linked Insurance
plans
A combination on term insurance plan
with an investment plan.

Contribution collected from the
policyholder to give him a cover of his
choice.

The balance is put in an investment
portfolio like a mutual fund.

Different kind of funds available for
investment with different risk profiles.
Eg.: Income, Balanced & Growth
Funds.
Industrial Assurance
Plans
Designed for workers with low
incomes.

Policies are issued for small Sum
Assured, with weekly premiums.

Agents remunerated differently for
these plans.

Introduced earlier as Janata policies,
but didnt gain much popularity in
India.
Salary Savings Scheme
Policies
The insurer arranges with the employer
to deduct the premium from the salary
of the worker& remit it to the insurer
every month.

The employer makes the deduction on
the basis of authority letter signed by
the employee.

The scheme benefits all:
Policyholder, as it makes premium
payment easy.
Insurer, it ensures no default in the
payment of premium.
Agent, as the chances of lapses are less
& he can be assured of renewal
premiums
Riders
Rider is a clause or condition which
can be attached to basic policy.

Rider gives cover for additional risks
faced by a policyholder.

Riders provide greater options to the
policyholder.
Rider
Examples:

Accident benefit which double the
Sum Assured on accidental death.
Permanent Disability benefits
covering loss of limbs, eyesight etc.
Premium waiver in a children policy in
case of death of parents death.
Dreaded Disease cover providing
additional payment in cases which
require medical attention.
Option to increase cover within
specified limits or dates
Guaranteed increases in cover at
specified periods or annually.
Riders
As per IRDA regulations:

Premiums on all health or Critical
Illness Riders shall not exceed 100%
of the basic plan premium

Premiums of all other riders put
together should not exceed 30% of
the base plan premium.
Annuities
Annuities are regular periodical
payments made to a person after
retirement.

A person pays a specified sum in
return of a promise from the insurer to
make series of payment till he is alive.

Hence annuities are a reverse of life
insurance.

Generally no underwriting done for
annuity plans.

Annuity can be purchased for lives of
two or more persons.

Annuities
Annuity can be paid monthly,
quarterly, half- yearly or annually.

Annuity can be made payable as:
Life Annuity
Annuity paid for the lifetime of the
annuitant

Joint Life Annuity
Annuity paid for the lifetime of the
annuitant or his spouse whichever is
longer

Annuity certain
For a fixed number of years annuity
payment fixed such that even in case
of annuitant death then in specified
term, annuity paid to the nominee

Annuities
Immediate Annuity
Annuity commences immediately after
the contract concluded.
Annuitant pays a lump sum purchase
price for the annuity.

Deferred Annuity
Annuity starts after the lapse of a
specified period.
Purchase Price can be paid in lump
sum or in regular installments during
the deferment period.
In case of death in Deferment period,
all the premiums paid are returned
back.
Plans covering
Handicapped
Physically handicapped persons are
insured.

Extras can be charged in case of
special cases.

Partially handicapped persons are
mostly accepted without extra
premiums.

Policy Conditions

Introduction to Policy Conditions

Age

Days of Grace

Lapse and Non Forfeiture

Paid Up Value

Keeping policy in force

Extended term insurance

Policy revival
What will we learn today?
Assignment

Nomination

Surrender and loan

Foreclosure

Alterations

Indisputability of policy

MWPA policies

Restrictions
Policy conditions generally related
to the:

Obligations and rights of the policy
holder

Terms and conditions of the policy

Policy Conditions
Age
The correct age of the LA is important
for:

Calculation of premium

Underwriting of risk

Policy can be declared as void by the
insurer on grounds of wrong
declaration of age

Standard Age Proofs:
Certified extract from municipal
records

Certificate of baptism

Certified extract from family bible if it
contains DOB

Certified extract from school / college
records

Certified extract from service register
of employer

Passport

Identity card issued by Defence Dept.

Marriage certificate issued by Roman
Catholic Church
Age
Non Standard Age Proofs

Horoscopes

Self declaration by affidavit

Elders declaration

Village Panchayat certificate

Age
Days Of Grace
Premiums must be paid within the Due
Date by any of the normal modes of
payment

However insurers allow a grace period
for the payment of premiums. Premiums
paid within the grace period are
considered to be paid on time.

The days of grace for the various modes
are:
30 days for yearly, half yearly, and
quarterly modes of premium
15 days for monthly mode

Premium not paid within the days of
grace causes the policy to lapse.

Days of Grace
Death benefit is paid in case the LA
dies during the days of grace

In practice the renewal premium
receipt is usually issued subject to the
clearance of the cheque / demand draft.

Death claims during the clearance
period is subject to the decision of the
insurer.

Premiums are also collected in banks,
and the date of deposit at the bank is
considered as the date of premium
payment

Premium not paid within due date or
days of grace leads to the
termination of the policy called a
Lapse

No claims are entertained on a
lapsed policy and all premiums are
forfeited

However the Insurance Act does not
allow for such forfeiture of premiums

The safeguards to policy holders in
terms of premium defaults are called
Non Forfeiture provisions

Lapse and Non Forfeiture
The various Non Forfeiture options
are:

The policy holder is eligible to get the
Surrender Value which has to be
stated in the policy conditions (any
policy acquires a Guaranteed
Surrender Value post 3 years of full
premium payment)

Making the policy Paid Up

Keeping the policy in force through
premiums advanced from the
Surrender Value

Providing Term Insurance Cover from
the Surrender Value
Lapse and Non
Forfeiture
Paid Up Value is calculated as:

= No. Of Premiums Paid X [SA]
No. Of Premiums Payable

In general terms Paid Up Value is the
proportionately reduced SA to the
proportionate number of premiums
paid and is effective from the date of
the premium default.

Most Insurers define a minimum
amount that must be acquired as
Paid Up Value. In case the Paid Up
Value is less than this amount, this
particular non forfeiture clause
would not be applicable.

Paid Up Value
(First Non Forfeiture Option)
The policy remains effective

The bonuses already vested remains
unaffected

However a Paid Up Policy does not
participate in bonuses and thus all
further bonuses (vested or interim)
are stopped.

Premiums are not required to be paid
for a policy which has become Paid
Up

All future benefits (if any) would now
be related to the reduced Paid Up
Value

Paid Up Value
(First Non Forfeiture Option)
The option allows for a lapsed policy to
be kept in full force by notionally
advancing the premium as a loan from
the surrender value

This is possible only till the total
premiums advanced is not more than
the surrender value

Also the computed surrender value
would continue to increase with each
premium advanced and treated as paid

Keeping Policy In Force
(Second Non Forfeiture Option)
At the stage at which the surrender
value is insufficient to advance a full
premium, the said policy is finally
determined and any residual
surrender value is paid to the policy
holder.

Some insurers also offer the Paid Up
option
Advantages: (From Surrender Value
Advancing)

Insurance cover remains intact

Policyholder can pay defaulted
premiums as and when he / she is in a
position to do so (till the surrender
value is not exhausted)

The interim failure to pay premiums
has no effect on the policy

If its a participating policy, the
entitled bonuses would be added
This option provides for an extended
term insurance cover

The lapsed policy is converted into a
single premium term insurance for
the full SA of the policy

The term of this new policy would be
for such a period as the net surrender
value would purchase, at the LAs age
at the time of lapse of the policy

However the surrender value does not
increase with each new advancement
of premium

Extended Term Insurance
(Third Non Forfeiture Option)
This is because the premium now is
towards a term insurance cover
without a savings component

Under this option, the policy remains
in full force for the full sum assured
but for a limited period

There is also no maturity benefit
Extended Term Insurance
(Third Non Forfeiture Option)
Revival
Effects of a policy lapse:
Insured loses on the life cover
Reflect the advisors ill efforts in
convincing the insured
Financial loss to the insurer

In order to benefit all concerned,
lapsed policies can also be revived

For policy revival, the following two
conditions are necessary:
All outstanding premiums with
interest are paid
The LA continues to be in good health
By a simple declaration
By an elaborate medical examination

Revival
Proof of good health is not required in
cases of:
Lapsed period is less than 6 months
Lapsed period is less than 12 months
for policies in force for at least 5 years

Some insurers however do not allow
revival of lapsed policies after 5 years

Revival schemes are allowed only if:
On the date of lapse the policy should
not have acquired a surrender value
Period expired after lapse is not less
than 6 months and not more than 3
years
Policy has not been revived before

Revival
Features of a revived policy:

It is a new policy

Plan and term would be the same

Date of commencement is advanced

Original policy is endorsed for the
changes

Differential premium with interest,
needs to be paid along with an
endorsement fee

Revival
Special Revival Scheme:
Arrears for premium is not required to
be paid for the entire lapsed period

Installment Revival Scheme:
Policy holder needs to pay premiums for
a period of six months (in any mode)
Balance arrears is spread through out
the present year and the next two years

Loan cum Revival Scheme
Arrears required for revival are
advanced out of the surrender value of
the policy as a policy loan

Assignment
As per Sec. 130 and 131 of Transfer Of
Properties Act, 1882:
A Life Insurance policy is a property
It represents rights
Forms part of the estate of the LA and
can be:
Sold
Mortgaged
Charged
Gifted
Bequeathed

Assignment is the process of
transferring the rights, titles and
interests of the assignor to assignee
Assignment
Sec. 38 of the Insurance Act 1938
provides for assignment of Life
Insurance policies:
Assignment can be done by policy
endorsement / separate deed
Must be signed by the transferor or his
authorised signatory
Signature must be attested by a
witness
Assignment becomes effective the
moment it is executed
Has to be sent to the insurer along
with a notice

An assignor must always:
Have a title to the property
Be a major
Assignment
Assignment once made cannot be
cancelled / altered

Assignment can be of two types:
Absolute assignment
Conditional assignment: interest in
the policy automatically revert back to
the LA on the occurrence of a certain
condition
Nomination
Section 39 of the Insurance Act, 1938
provides for nomination in a Life
Insurance policy

Accordingly, a LA can nominate
person / persons to whom the death
claim of his / her policy can be
bequeathed post his / her death

A proposer cannot nominate

A nomination has to be endorsed on
the policy document
Nomination
In an assigned policy, the existing
nomination is cancelled

An assignee cannot make a
nomination

Rights of the nominee:
Receive policy money in the event of
death of the LA
Does have any right to the claim
Has a right to give a valid discharge

Nomination
An appointee has to be appointed in
case the nominee is a minor

In case the nominee is a minor and
there is no appointee, the death claim
is paid to the legal heirs of the LA

Nominee can be more then one

If the policy is assigned to the insurer
in lieu of loan, then the nomination is
not cancelled
Nomination
In case the nominee dies before the
execution of the death claim on the LA,
the proceeds goes to the legal heir of the
LA

Nominations does not cease with the
maturity of the policy in cases where
maturity proceeds are paid in
installments

Nominations made post policy
commencement needs to be intimated to
the insurer else they become ineffective

Nominations can also be made jointly by
both LA, in case of a joint Life Insurance
policy
Surrenders and Loans
Surrender of policy voluntary
termination of contract by LA

Amount payable on surrender is
termed the Surrender / Cash Value

Surrender Values / Guaranteed
Surrender Values are made known to
the policy holders by the insurers

Surrender Value is a percentage of the
premiums paid or a percentage of the
paid-up value
Most Life Insurance policies allow the
facility of LOAN

Loans are generally 80% to 90% of the
surrender value

Interest is also charged on the loans

Loan amount may be repaid in part or
full

Interest amount need not be repaid

The un-repaid loan amount and
interest are adjusted with the final
claim
Loan are not allowed in the following
policies:
Term insurance
Annuity policies
Money Back policies
Childrens Deferred Assurance
policies

To avail loan, the policy must be
absolutely assigned to the insurer
(This does not effect the nomination)

Interest is charged on:
Loan amount
Broken period installment

Foreclosure
Foreclosure means writing off the
policy before its actual maturity

When the principal loan amount and
the accumulated interest exceeds the
surrender value of the policy, it
becomes imperative to foreclose the
policy.

After foreclosure, any balance
Surrender Value is returned to the
policy holder after obtaining the
discharge voucher

Foreclosure
Reinstatement of a foreclosed policy
is possible if:
The discharge voucher has not yet
been returned to the insurer
The policy holder has not yet collected
the Balance Surrender Value

Foreclosure also terminates the
nominations in the said policy, and all
future rights and dues are on the legal
heirs of the deceased

Alterations
Alterations may be made on issued
policies

Alterations are allowed to the extent
that it does not increase the risk to
the insurer

Alterations can be:
Simple
Significant
Indisputability Of The Policy
A policy can be declared null and void
because of:
Untrue / incorrect statements
Non disclosure of material facts

However Sec. 45 of Insurance Act,
1938 provides certain safeguards in
cases of unintentional minor
inaccuracies on stated facts:
A policy in force for more than 2 years
cannot be disputed on such grounds
unless on a material matter and
intentionally made fraudulent.
MWPA Policies
Sec. 6 of the Married Womens
Property Act 1874 states:

A married man (LA himself) can
bequeath the benefits of his Life
Insurance policy to his wife, his wife
and children or any of them

The said policy shall be deemed to be a
trust for the benefit of his wife, his wife
and children or any of them

Therefore the policy shall not be in the
control of the LA, his creditors or
become part of his estate, so long as
any object of the trust remains
MWPA Policies
To effect the assurance under the
MWPA:

The LA needs to complete an
addendum

State the beneficiaries and trustees

LA may reserve the right to revoke the
appointment of trustees and appoint
new ones

MWPA Policies
Features of a MWPA policy:

LA has no control over it

Alterations cannot be made

Policy cannot be surrendered

No loans will be allowed

Claim is paid to trustees
Restrictions
Post acceptance and completion of
contract with the insurer,

There are no restrictions on the
lifestyle, habits, occupations of the LA
and changes therein do effect the
contract

However such changes might effect
the revival of the policy in case of a
lapse

Role of an Insurance
Advisor
Essentials For Success

Understand the Sales Process

Servicing The Customer

Ethical Behaviour

An Insurance Advisor is the most
important part in the Life Insurance
distribution channel.

An Advisors role as defined in the
Insurance Act are:

To procure license before functioning
as an Advisor

To be remunerated by commissions on
the premiums that he brings for the
insurer

Introduction
Introduction
The primary functions of a Life
Insurance Advisor are:

Prospect for life insurance buyers

Analyse their needs

Design solutions for them and
persuade hem to buy

Complete all documentation
formalities

Continuance of life insurance policy
also depends on the Advisor to a
large extent

He needs to always remind
customers about renewal premiums

Oversee that nomination formalities
are done

Assist in claim settlement
Introduction
In order to successfully execute the
role as a Life Insurance Advisor, the
person must be:

Well versed with the benefits of the
various plans offered by the insurer
as well as of the competition

Has knowledge about the applicable
laws especially on taxation

Aware of office procedures in
relation to forms and documents

Essentials For Success
Servicing the Customer
The insurers relation with the policy
holder depends on the kind of service
rendered by the Advisor

Client servicing assumes paramount
importance since Life Insurance
contract is a long term commitment

Servicing also included giving premium
reminders to customers and monitoring
the functioning the policy

Adequacy of Life Insurance cover can
also be analysed during these service
calls
Ethical Behaviour
Since Life Insurance contract is a long
term relationship involving the
savings of the insured, trust and
ethics of the Advisor is of paramount
importance

IRDA has specified the Code Of
Ethics in the Agents Regulations

High ethical standards also helps the
Advisor in improved business and
earnings

Ethical Behaviour
Some Examples:

Advisors should also not encourage
suppression of material facts on part
of the customer

The Advisor should disclose all facts
about the product discussed

Always client before self

Legislations

Insurance Act, 1938
Life Insurance Corporation Act 1956
Insurance Regulatory and
Development Authority Act 1999
Consumer Protection Act 1986
Ombudsman
Income tax Act
Married Womens Property Act 1874
Financial Planning and Taxation
Comparisons between Insurance
Products.
Insurance Act 1938
Act contains provisions regarding

Licensing of agents and their
remuneration,
Prohibition of rebates
Protection of policyholders interests.
Expenses of insurers
Use of funds and patterns of
investment.
Maintaining solvency levels
Constitution of Associations and
Insurance Councils.

Insurance Act 1938
Sec 2(5A) defines chief agent who is
not a salaried employee and in
consideration of a premium

Performs any administrative and
organising functions for the insurer.

Procures life insurance business for
insurer by employing or causing to be
employed, insurance agents for the
insurer
Insurance Act 1938
Sec 2(17) defines special agent who in
consideration of a commission:

Procures life insurance business by
employing insurance agents on behalf
of the insurer.

He only procures business through
agents

Does not carry out administrative work
like chief agent

Cannot work in general insurance
business
Insurance Act 1938
Sec 42(A) provides for registration of
chief agents.

Certificates issued after registration
are valid for 12 months and may be
renewed.

Provisions also stipulate the number
of agents that the chief agent or
special agent may employ.

Provisions also include the minimum
business to be done by them.
Insurance Act 1938
The Act vests the IRDA with power to:

Inspect documents

Appoint additional directors

Take over management of an insurer
and to appoint administrators.

Settle disputes between insurers and
intermediaries.

Settle disputes relating to claim
settlement not exceeding Rs. 2000.
Life Insurance Corporation
Act, 1956
Set up LIC as corporate body to
conduct life insurance business.

16 members appointed by Central
Government including Chairman.

Sec 30 gave LIC exclusive privilege to
conduct life insurance business in
India

This privilege ceased as a result of
amendments made in 1999.
IRDA Act, 1999
Insurance Regulatory and
Development Authority Act, 1999

The Act provide for the establishment
of an Authority
to protect the interests of holders of
Insurance policies,
to regulate, promote and ensure
orderly growth of the insurance
industry .

The Act sought to amend the
Insurance Act, 1938, the Life
Insurance Corporation Act, 1956 and
the General Insurance Business Act
,1972

IRDA Act, 1999
IRDA is a corporate body

Advised by Insurance Advisory
committee of not more than 25
members.

Members represent various sectors of
the economy.

It replaces the Controller of
Insurance to administer the
provisions of the Insurance Act.
Consumer Rights
There is a need to protect the interest of
the consumers. The following consumer
rights are said to be basic:

Right to safety
Right to information
Right to choice
Right to be heard
Consumer Protection Act
(COPA), 1986
Assists the consumer in seeking
redressal in:
An easy manner
Least legal procedures
Available at all levels from district to
national
Comprises of non-legal people

Ombudsman
Powers conferred by sub section (1)
of sec 114 of Insurance Act.

Rules framed by Central Government
as Redressal of Public Grievances,
1998.

To resolve all disputes relating to
insurers and policyholders.

The ombudsman receives and considers
complaints relating to:

1. Partial or total repudiation of claims
2. Any dispute regarding premium paid
or payable
3. Dispute on the legal construction of
the policy relating to claims
4. Delay in settlement of claims
5. Non-issue of any insurance
document to customers after receipt
of premium.
Ombudsman
Ombudsman acts as a councilor and
mediator on matters within its terms
of reference.

His decision as to whether the
complaint is fit and proper for being
considered by it or not, shall be final

Complaints shall lie only when the
insurer has rejected the complaint or
no reply has been received within one
month of logging the complaint
Ombudsman
The process is usually fast

Recommendation made within a
month.

Insurer has to comply within 15
days

Can pass awards up to 20,00,000/-

Within 3 months of passing the
award compliance has to be shown
by the complainant

The insurer has to pay the award
within 15 days.

Ombudsman
Savings through life insurance
provides relief from tax liabilities

Any sum received under a life
insurance policy including bonus is
exempted from income tax under Sec.
10 ( 10 D)

Deductions from taxable income to
the extent of Rs 10,00,00 allowed to
premium paid toward plans under Sec
80 C (i)

Income Tax Act
Income Tax Act
Rebate on the amount of income tax
for money paid towards insurance
premium under Sec. 88

Wealth Tax Act exempts life insurance
policies totally, provided premium are
payable for period of 10 years or more

Married Women's Property
Act, 1874

Sec 6 of MWP Act assures that life
insurance policy effected by a married
man is for the benefit for wife and
children only.

It shall be deemed to be a trust which
is not subject to the control of life
assured or his creditors or form a pert
of his estate.
Financial Planning and
Taxation
A good savings plan has the following
features:

It is safe
It is flexible
It has incentives to help save
continuously
It helps in saving tax
It fulfils the financial objectives, even
if one dies
Taxation
An ideal investment scheme has the
following features

Safety
Liquidity
High rate of interest yield
Capital growth
Beneficial to save tax

Taxation
There is not a single investment
which has all the above attitudes

A person should look at investment
which offers solution to his own
personal needs

The best returns should be
determined by the advantage in
investment offers to achieve ones
financial objective
Taxation
Bank offers 3 main types of account
The current account paying no
interest
The savings account paying low
interest
The term deposit account paying
varying rates of interest

Liquidity i.e. ability to withdraw
money is high in current account and
savings bank account

In term deposits amount can be
withdrawn only at maturity or if earlier
at a loss of interest

Taxation
Unit trust and mutual funds
Large number of people pool their
money collectively in a single fund

The funds are managed by
professional managers who invest
this money in capital market

Investments in these funds are
divided into segments called units

One can buy or sell units at the
current market prices
Taxation
Share or equity is direct investment in
the company
They are bought mostly for appreciation
Earnings are neither guaranteed nor high
in short terms
Returns in the form of dividend may or
may not be declared
The share prices are very sensitive and
fluctuate most of the times
Hence the chances of making losses are
as great as the chances of making gains
There are no tax advantages
Taxation
Moderate Low High Life insurance
Moderate/
Low
High Low Shares
moderate Low High Provident fund
Moderate Moderate/
High
High Fixed deposits
with banks
Low High High Saving bank
account
Return Liquidity Safety Type of
Investment

Insurance

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