Life Insurance Basics

Life Insurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a designated beneficiary a sum of money upon the occurrence of the insured individual's or individuals' death or other event, such as terminal illness or critical illness. In return, the policy owner agrees to pay a stipulated amount (at regular intervals or in lump sums). There may be designs in some countries where bills and death expenses plus catering for after funeral expenses should be included in Policy Premium.

The value for the policyholder is derived, not from an actual claim event, rather it is the value derived from the 'peace of mind' experienced by the policyholder, due to the negating of adverse financial consequences caused by the death of the Life Assured.

Parties To Life Insurance Contract:

The parties to a life insurance policy are the following parties, the insured, the beneficiary, the owner and the insurer.

The Insured is the person on whom the life insurance is based.  Their life is the one that is insured.  If they die, or if anything happens to the person that is covered by the insurance then the policy pays out.

 The beneficiary is the person, or persons, who are paid the money if the event happens.  They are the people who will suffer otherwise if the person dies and the monetary compensation is designed to protect them.

The owner of the life insurance policy is the person who pays the premiums and is responsible for keeping up payment of the policies.  Usually this person is the insured, as they want to take care of the family for which they are the bread winner.

Life Insurance Premium and Bonus:

“Premium” is the name given to this consideration  that the policy holder  has to pay  in order to Secure  the benefits offered by  the insurance  contract .it can be looked upon as a  price of insurance policy , where ,In a  contract of insurance , the insurer promises  to pay to the policy holder   a specified sum of money ,in the  event of specified  happening.

Bonus usually refers to a non-guaranteed benefit added to life insurance policies. A company will usually have a lot of discretion over the level of bonuses it allocates to contracts. Once allocated, bonuses may or may not be reversed by the insurer in case the contract is terminated early. When a traditional life insurance product mentions ‘with profit policy’ or ‘participating policy’, it simply means the policy and thereby the policyholder is eligible to receive a bonus. A bonus is declared out of the surpluses determined after actuarial valuation of the assets and liabilities of the life insurance company. In other words, surpluses (bonus) reflect the profitability of the life insurance company.

Types Of Life Insurance Policies:

Endowment Policy: This policy combines risk cover with the savings and investment. If the policy holder dies during the policy time, he will get the assured amount. Even if he survives he will receive the assured amount.

Money Back Policy: Money Back Policy is to provide money on the occasions when the policy holder needs for his personal life. The occasions may be marriage, education, etc. Money will be paid back to the policy holder with the specified duration.

Whole Life Policy: As the name itself says, the policy holder has to pay the premium for whole life till his death. This policy doesn't address any other needs of the policy holder. The premium and death benefit you quoted at your policy's start remain the same throughout the policy's life.

Term Life Policy: It is a type of policy in which the benefits can be incurred only after the death of the insured, provided that the death occurs within a specified time period.If the insured dies during the term, the death benefit will be paid to the beneficiary.

Joint Life Policy: Joint life insurance policies are similar to endowment policies as they too offer maturity benefits to the policyholders, apart from covering risks like all life insurance policies.

Group Insurance Policy: Group insurance offers life insurance protection under group policies to various groups such as employers-employees, professionals, co-operatives.

Annuities: Annuities are just opposite to life insurance. A person entering into an annuity contract agrees to pay a specified sum of capital (lump sum or by instalments) to the insurer. The insurer in return promises to pay the insured a series of payments until insured's death. Generally, life annuity is opted by a person having surplus wealth and wants to use this money after his retirement.

Principles Of Life Insurance

Consideration: The insured’s consideration is the first payment of premium and then after that the continuing payment of premium. The insurer’s consideration is the offer to pay out the sum insured if the life insured was to die during the policy period.

Consensus of agreement: The parties basically must be in agreement about what they are contracting for at the time the agreement comes into force.

Insurable interest: The life insurance proposer, the person taking the policy out, must have an ‘insurable interest’ in the Life Insured.

Capacity to contract: Both parties must be able to contract. Minors under the age of 18 years are restricted by the Family law Reform Act 1969. Minors under the age of 18 can enter into a contract but subject to certain restrictions the contract cannot be enforced against them. That is why most insurers will not issue a policy to someone under the age of 18.

Offer and acceptance: One party makes an ‘offer’ and the other party accepts that offer without qualification. If the acceptance is qualified it simply becomes an alternative offer.

Understanding Life Insurance - Costs, Insurability and Underwriting:

The insurer (the life insurance company) calculates the policy prices with intent to fund claims to be paid and administrative costs, and to make a profit. The cost of insurance is determined using mortality tables calculated by actuaries. Actuaries are professionals who employ actuarial science, which is based in mathematics (primarily probability and statistics). Mortality tables are statistically-based tables showing expected annual mortality rates. It is possible to derive life expectancy estimates from these mortality assumptions.

The three main variables in a mortality table have been age, gender, and use of tobacco.

The insurance company receives the premiums from the policy owner and invests them to create a pool of money from which it can pay claims and finance the insurance company's operations. The majority of the money that insurance companies make comes directly from premiums paid, as money gained through investment of premiums can never, in even the most  ideal market conditions, vest enough money per year to pay out claims. Rates charged for life insurance increase with the insurer's age because, statistically, people are more likely to die as they get older.

Given that adverse selection can have a negative impact on the insurer's financial situation, the insurer investigates each proposed insured individual unless the policy is below a company-established minimum amount, beginning with the application process. Group Insurance policies are an exception.

This investigation and resulting evaluation of the risk is termed underwriting. Health and lifestyle questions are asked. Certain responses or information received may merit further investigation.Underwriters will determine the purpose of insurance. The most common is to protect the owner's family or financial interests in the event of the insured's demise. Other purposes include estate planning or, in the case of cash-value contracts, investment for retirement planning. Bank loans or buy-sell provisions of business agreements are another acceptable purpose.

Importance Of Life Insurance

Well, through life insurance, you can make sure your family is protected, even in the event of your death. Consider it your last act of love and kindness that you can perform.

Protecting Your Family: A life insurance policy would protect your loved ones financially and help them keep their present lifestyle without much interruption

Investment : If you decide to purchase an investment type of insurance, called a whole life insurance policy, part of your premium will go to an account that can be accessed later. This can be used as a savings instrument to accumulate substantial wealth or it can be used in an emergency, such as a serious illness or disabling injury.

Protecting Assets: You may have real and personal property that you would not want to go to ruins if you should pass away. With a life insurance policy, you can protect a home, or any other property for which you have an outstanding loan or tax bill or which requires significant upkeep.

Leaving A legacy: People who purchase a life insurance policy may also be interested in leaving a legacy behind by donating the proceeds of their policy to a particular school or an organization.

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HISTORY OF INSURANCE IN INDIA

(Ref: Ref: IRDA/GEN/06/2007)

In India, insurance has a deep-rooted history. It finds mention in the writings of Manu ( Manusmrithi ), Yagnavalkya (Dharmasastra ) and Kautilya ( Arthasastra ). The writings talk in terms of pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine. This was probably a pre-cursor to modern day insurance. Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade loans and carriers’ contracts. Insurance in India has evolved over time heavily drawing from other countries, England in particular.

1818 saw the advent of life insurance business in India with the establishment of the Oriental Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the Madras Equitable had begun transacting life insurance business in the Madras Presidency. 1870 saw the enactment of the British Insurance Act and in the last three decades of the nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay Residency. This era, however, was dominated by foreign insurance offices which did good business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard competition from the foreign companies.

In 1914, the Government of India started publishing returns of Insurance Companies in India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and non-life business transacted in India by Indian and foreign insurers including provident insurance societies. In 1938, with a view to protecting the interest of the Insurance public, the earlier legislation was consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for effective control over the activities of insurers.

The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a large number of insurance companies and the level of competition was high. There were also allegations of unfair trade practices. The Government of India, therefore, decided to nationalize insurance business.

An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector.

The history of general insurance dates back to the Industrial Revolution in the west and the consequent growth

of sea-faring trade and commerce in the 17th century. It came to India as a legacy of British occupation. General Insurance in India has its roots in the establishment of Triton Insurance Company Ltd., in the year 1850 in Calcutta by the British. In 1907, the Indian Mercantile Insurance Ltd, was set up. This was the first company to transact all classes of general insurance business.

1957 saw the formation of the General Insurance Council, a wing of the Insurance Associaton of India. The General Insurance Council framed a code of conduct for ensuring fair conduct and sound business practices.

In 1968, the Insurance Act was amended to regulate investments and set minimum solvency margins. The Tariff Advisory Committee was also set up then.

In 1972 with the passing of the General Insurance Business (Nationalisation) Act, general insurance business was nationalized with effect from 1st January, 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on January 1sst 1973.

This millennium has seen insurance come a full circle in a journey extending to nearly 200 years. The process of re-opening of the sector had begun in the early 1990s and the last decade and more has seen it been opened up substantially. In 1993, the Government set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector.The objective was to complement the reforms initiated in the financial sector. The committee submitted its report in 1994 wherein , among other things, it recommended that the private sector be permitted to enter the insurance  industry. They stated that foreign companies be allowed to enter by floating Indian companies, preferably a joint venture with Indian partners.

Following the recommendations of the Malhotra Committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market.

The IRDA opened up the market in August 2000 with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the power to frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000 onwards framed various regulations ranging from registration of companies for carrying on insurance business to protection of policyholders’ interests.

In December, 2000, the subsidiaries of the General Insurance Corporation of India were restructured as independent companies and at the same time GIC was converted into a national re-insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in July, 2002.

Today there are 24 general insurance companies including the ECGC and Agriculture Insurance Corporation of India and 23 life insurance companies operating in the country.

The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together with banking services, insurance services add about 7% to the country’s GDP. A well-developed and evolved insurance sector is a boon for economic development as it provides long- term funds for infrastructure development at the same time strengthening the risk taking ability of the country.

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