Insurance Products

Definition of Insurance

Insurance is the pooling of fortuitous (causeless: having no cause or apparent cause) losses by transfer of such risks to insurers, who agree to indemnify insured (s) for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk.

Ref : American Risk & Insurance Association

Basic characteristics of Insurance

Pooling of losses Payment of fortuitous losses Risk Transfer Indemnification

Basic Characteristics of insurance

Pooling is the spreading of losses incurred by the few over the entire group, so that in the process, average loss is substituted for actual loss.

A fortuitous loss is one that is unforeseen and unexpected and occurs as a result of chance

Risk is transferred from the insured to the insurer, who is in a stronger financial position to bear the loss

Indemnification means that the insured is restored to his / her approximate financial position prior to the occurrence of loss

Requirement of an Insurable Risk There must be a large no. of exposure units The loss must be accidental or unintentional The loss must be determinable or measurable The loss should not be catastrophic The chance of loss must be calculable The premium must be economically feasible

Benefits of Insurance

Indemnification of Loss ( Life Insurance) Reduction of worry and fear (Health Insurance,

House hold Goods Insurance) Source of Investment Funds ( ULIP) Loss Prevention ( Marine / Transit Insurance) Enhancement of Credit ( Home Loan

Insurance) Tax Exemption ( Health insurance)

Fundamental Principles of Insurance The Principle of utmost good faith (Transparency) The Principle of Insurable Interest ( Insured Must have an

interest in the property insured) The Principle of Indemnity ( Make good loss suffered ) The Principle of Contribution ( In case of multiple

insurance, sum of all claims can not be more than loss suffered)

The Principle of Subrogation( Insurance company after settling the claim, can recover from the person who caused the loss)

The principle of proximate cause ( How to settle the claim if the loss has been caused by more than one factors some of which are not insured)

Insurance Products

Life Insurance Products Health or Medical Insurance Products Property & Liability Insurance Insurance of Household Goods Marine or Transit Insurance Vehicle Insurance

Life Insurance

Benefits of Life Insurance

Protection for family Protection from Creditors Vehicle for Savings Tax Benefits

How Much Life Insurance One Needs ?

Human Life Value Approach Multiple Earnings Approach Need Based Approach – Assessing

Economic Needs, Family Income, Existing Investments, Available Resources, Resources Needed for Maintaining a desired Life Style

Capital Retention Approach

How Much Life Insurance One Needs? Human life value is defined as the present

value of the family’s share of the deceased breadwinner’s future earnings

Multiple Earning Approach is a method of capitalization of annual earnings of the insured. Multiple could be 5, 7, 8 or 10 based on the interest and inflation rate scenario

Needs based Approach takes into account various family needs including survival needs that must be met if the family head ( policy holder) should die less the existing value of assets / investments

Capital Retention Approach takes into account capital needed to provide income and later to be distributed to heirs after death of insured

Some Thoughts

Insurance is a subject matter of solicitation

Insurance involves theory of large numbers

Insurance has to weed out the theory of adverse selection

All life insurance policies include incontestability clause

Insurance is a subject matter of Solicitation 'insurance is a subject matter of solicitation', which

essentially means that insurance has to be requested or asked for, not sold.

To fully understand the meaning of this cryptic phrase, take a look at the wording of any insurance policy that has been issued by an insurance company to a customer. Every insurance policy says that the insurance company is providing you insurance against a risk on YOUR request/solicitation, i.e. the company agreed to sell you its insurance policy after you solicited or asked for such a sale. In legal terms, insurance is a product that should not be pushed by a seller, but should be pulled by a buyer. That doesn't happen in real life, though.

Incontestability Clause

The incontestability clause states that after the policy -- whether it be term or whole life -- has been in force for a certain length of time, the company can no longer contest or void it except for nonpayment of premiums.

Types of Life Insurance Products

Term Insurance Pure Endowment Whole Life Policy Endowment Assurance Universal Life Insurance Variable Life Insurance

Term Insurance

The objective is the family to get a lump sum assured amount in the event of untimely death of the family head / bread earner. If the insured survives till the end of the selected period, nothing is payable. Term Insurance policy can be issued for 5, 10, 15 or 20 years. It is a policy with low cost (premium). These are required when the coverage is required for a stipulated period like tenure of a home loan. The cost (premium) varies with the age of the insured and the proposed tenure of policy coverage.

Term Insurance

It is similar to property or liability insurance. This provides risk coverage only for the term selected

If there is no provision for automatic renewal, the insured can take a fresh policy at a fresh cost (applicable at that age level) subject to this being permitted based on status of his/her health

There are two types of term policies- Renewable and Convertible

Term Insurance Renewable Term Policy meets a valid need of

insured as it protects his/ her insurability. Convertible Term Policy offers an option to the

policy holder to convert a term policy into a whole life or endowment policy without producing evidence of continued insurability. Such conversion is allowed during the period of term insurance and effected for the then “attained age” or “original age”. These policies are useful for young persons getting started with their career. They can pay a low premium of a term policy during initial period and then change over when their salary increases

Term Insurance

There is possibility to have increasing and decreasing term insurance. Decreasing Term Insurance is used for home loan where the balance declines with repayment

In case of increasing Term policy the sum assured increases by a certain percentage or by a fixed amount periodically

Pure Endowment Under pure endowment, there is accumulation

of savings for a specific purpose (daughter’s marriage, higher education of child) . Here the lump sum amount is payable only if the insured survives till the end of the selected period. If the insured dies during the period, nothing is payable.

A pure endowment policy is seldom issued However, a combination of features of a term

policy and a pure endowment policy gives rise to several life insurance products. These two are the basic building blocks

Whole Life Insurance

The whole life policy covers the risk up to the death of the insured, whenever it occurs. It is some times called “term insurance for the longest term”

There are two types of Whole life Policies – Pure Whole life Policy and Limited Payment Whole life Policy

In Pure Whole Life Policy, the premium is payable through out life, while in the second case up to attaining an age of 60 or 70

Whole Life Policy

Premium for pure whole life policy is lower than limited payment whole life policy for obvious reasons.

The whole life policy can have a convertible feature allowing it to be converted to an endowment assurance policy. This is suitable for young service entrants who can pay a low premium during initial years and then move on to an endowment assurance policy when their salary increases without any prove of the continued insurability.

Endowment Assurance Policy

This is the most popular policy, in which the insurer agrees to pay the insurance money in the event of death of the insured during the endowment term and to pay the insurance money in the event the insured survives till the end of the endowment term. This is a combination of features of term policy and pure endowment policy.

This operates as a combination of gradually decreasing term plan plus an gradually increasing investment ( pure endowment).

Endowment Assurance

Investments gradually accumulate as a “reserve” on an accelerated fashion and this reserve with the term insurance value add up to the “face value” of the policy

Premium rates are usually high compared to whole life policy. However if the term of endowment is very long, then the premium is usually only marginally higher.

Universal & Variable Life Insurance These have potential to accumulate cash value In case of Universal Life insurance, investment

is done by the insurer assuring a minimum guaranteed return

In case of Variable Life insurance, the insured will have a choice of the way the cash value is to be invested.

When premium is paid, the insurer deducts a charge and invests the net either as an universal investment or as a variable investment stated above.

Universal Life Insurance

An attractive feature of this policy is that the insured can vary his / her annual death benefit and annual premium

The insured can also partially surrender the policy and take loans against the cash value of the policy

He / she can add up cash portion of the policy by making increasing investment

Normally there is a guaranteed return applied to the policy

Variable life Insurance

It is a form of whole life insurance, where a portion of premium goes to the term life insurance part, a part for the administrative expenses of the insurer and the balance goes towards the investment or cash value.

The insured decides how and where to invest the cash value of investment

Unit Linked insurance plans This is a capital market linked insurance plan The premium payable consists of two parts,

viz., 1. risk premium 2. Investment premium While risk premium takes care of providing

security to the family in case of premature death of the policy holder, the investment premium is invested to grow and provide a reasonable return.

Investment could be made in a secured fund, a risk fund or in a balanced fund or in a suitable combination of all of these three

Switchover from one fund to other is also allowed

Group Life Insurance It is a type of insurance that provides life

insurance on a group of people in a single master contract. Physical examinations are not required, and certificates of insurance are issued as evidence of insurance

Most group life insurance are in the form of low cost term life insurance which provide protection to employees during their working career with an organization

It is up to 1 to 5 times the annual salary of the employee or a fixed amount decided by the employer for a particular class of employees.

Other Features of Life Insurance Beneficiary (nominee clause) : Insured has to select a

primary beneficiary and a contingent beneficiary Survival Clause : If primary beneficiary survives but dies

later to the insured in the same accident, he gets the sum Suicide Clause : Policy becomes void if the insured

commits suicide within a stipulated period, usually 1 year Surrender Value : Value payable if the premium payment

is discontinued midway. Usually surrender value is zero up to first 3 years of payment period.

References

For knowing specific insurance products – see the websites of respective Insurance Companies

Also See

www.policybazar.com www.ezinearticles.com, www.apnaInsurance.com etc

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