Wednesday, June 25, 2008
LIFE INSURANCE PLANS
Life Insurance companies offer a variety of schemes or ‘plans’ to suit the needs of customers. These plans may be broadly classified into traditional plans, and market-linked plans. In the traditional plans the collected premium is utilized by the company to generate income, part of which it distributes to policy holders as bonus, while in market –linked plans the premium is invested in the stock market as per the wishes of policy holders and generally yield better returns to them. Under these two categories there are different types of plans. These are; 1) pure life insurance plans, 2) children’s plans, 3) retirement plans, and 4) health & hospitalization plans. Some of these plans may have both traditional and market-linked policies.
Traditional plans
Life insurance plans have two basic elements, ‘death cover’ and ‘survival benefit’. Under death cover, benefits are paid on the death of the insured person within a specified period, called the ‘term’. Under survival benefit, sums are paid on survival of the insured over the term. Plans which provide only death cover are called ‘term assurance’ plans. No payment is made if the insured does not die within the period. Plans that provide only survival benefits are called ‘pure endowment’ plans, under which no payment is made if the insured dies within the specified period. In both these plans no payment is made if the specified contingency does not happen. All traditional plans are combinations of these two basic plans. Some of these are listed below;
1) Term assurance plan. An amount specified as the ‘sum assured’ is paid on the death of the insured within the term. If death does not occur, no payment is made. The sum assured (SA) may be kept constant throughout the period or may be made to increase/decrease during the period. It is the cheapest of all insurance plans.
2) Endowment plan. The SA is paid on survival to the end of the term or on death earlier.
3) Whole life policy. The SA is paid on the death of the insured, whenever it happens. It is a term assurance plan plus an endowment plan with an unspecified period.
In both endowment plan and whole life policy, the premium is generally payable throughout the term. Premium may also be made payable for a shorter period. Such policies are called limited payment policies. If the limited period is only one year, then a single premium is paid at the start of the policy.
4) Convertible plans. Insurance policies which can be changed from the existing plan to another plan within its term. There may be restrictions on when such changes may be made. For example, a convertible whole life plan may be changed to an endowment plan. If the option is not used at the specified time, the original plan will continue.
5) Joint life policies. Plans where two or more lives are covered under one policy. Such policies are applicable to married couples or business partners. The SA is payable on the death of any of the insured persons during the term, or at the end of the term. It may also provide for payment of SA on death of one of the insured during the term, and coverage of the other person till maturity, without payment of further premium.
6) Money back policies. Policies where a part of the SA is paid at specified intervals within the term and the balance paid at maturity. For example, in a 20 years policy, 20 % of the SA may be paid at 5years intervals, and the remaining 40 % paid at maturity. This helps the insured to get periodic returns with full coverage throughout the entire term. This is actually a combination of a term assurance plan for the full term plus a number of endowment plans for the partial payment for the various time intervals.
7) Salary saving schemes (SSS). Employees may join such schemes wherein the premium is deducted from the salary of the employee by the employer and transferred to the insurance company every month. Because of less administrative expenses involved in the servicing of such policies, insurance companies charge a reduced premium than in a regular policy.
All these policies may be ‘with profit or without profit’. Policies with profit are entitled to receive the bonus declared by the company out of its profit every year. They are also called participating policies. Policies without profit are non-participating and are not eligible for bonus. The premium for such policies is somewhat lower than that for participating policies. With profit policies are popular because the bonus received is generally more than the extra premium paid.
Traditional plans
Life insurance plans have two basic elements, ‘death cover’ and ‘survival benefit’. Under death cover, benefits are paid on the death of the insured person within a specified period, called the ‘term’. Under survival benefit, sums are paid on survival of the insured over the term. Plans which provide only death cover are called ‘term assurance’ plans. No payment is made if the insured does not die within the period. Plans that provide only survival benefits are called ‘pure endowment’ plans, under which no payment is made if the insured dies within the specified period. In both these plans no payment is made if the specified contingency does not happen. All traditional plans are combinations of these two basic plans. Some of these are listed below;
1) Term assurance plan. An amount specified as the ‘sum assured’ is paid on the death of the insured within the term. If death does not occur, no payment is made. The sum assured (SA) may be kept constant throughout the period or may be made to increase/decrease during the period. It is the cheapest of all insurance plans.
2) Endowment plan. The SA is paid on survival to the end of the term or on death earlier.
3) Whole life policy. The SA is paid on the death of the insured, whenever it happens. It is a term assurance plan plus an endowment plan with an unspecified period.
In both endowment plan and whole life policy, the premium is generally payable throughout the term. Premium may also be made payable for a shorter period. Such policies are called limited payment policies. If the limited period is only one year, then a single premium is paid at the start of the policy.
4) Convertible plans. Insurance policies which can be changed from the existing plan to another plan within its term. There may be restrictions on when such changes may be made. For example, a convertible whole life plan may be changed to an endowment plan. If the option is not used at the specified time, the original plan will continue.
5) Joint life policies. Plans where two or more lives are covered under one policy. Such policies are applicable to married couples or business partners. The SA is payable on the death of any of the insured persons during the term, or at the end of the term. It may also provide for payment of SA on death of one of the insured during the term, and coverage of the other person till maturity, without payment of further premium.
6) Money back policies. Policies where a part of the SA is paid at specified intervals within the term and the balance paid at maturity. For example, in a 20 years policy, 20 % of the SA may be paid at 5years intervals, and the remaining 40 % paid at maturity. This helps the insured to get periodic returns with full coverage throughout the entire term. This is actually a combination of a term assurance plan for the full term plus a number of endowment plans for the partial payment for the various time intervals.
7) Salary saving schemes (SSS). Employees may join such schemes wherein the premium is deducted from the salary of the employee by the employer and transferred to the insurance company every month. Because of less administrative expenses involved in the servicing of such policies, insurance companies charge a reduced premium than in a regular policy.
All these policies may be ‘with profit or without profit’. Policies with profit are entitled to receive the bonus declared by the company out of its profit every year. They are also called participating policies. Policies without profit are non-participating and are not eligible for bonus. The premium for such policies is somewhat lower than that for participating policies. With profit policies are popular because the bonus received is generally more than the extra premium paid.
Tuesday, June 24, 2008
PRINCIPLES OF LIFE INSURANCE
Insurance is achieved through a contract between the insurer and the insured. This contract is called a ‘policy’. Under this contract, the insurer promises to pay to the insured or his heirs a certain sum of money if a specified contingency happens within a specified period. In return, the insured agrees to pay a predetermined amount called ‘premium’ either as a lump sum or as small installments over a period.
Any legal contract must have the following essentials; a) offer and acceptance, b) consideration, c) capacity to contract, d) meeting of minds, e) legality of purpose, f) capacity of performance, and g) intention to create legal relationship. Accordingly, a person who is interested in getting life insurance for himself or for others economically related to him sends in a proposal which the insurer scrutinize and accepts or rejects. The consideration involves the premium and the sum to be paid by the insurer as ‘claim’ to the insured. The proposer must be legally eligible to enter into a contract, i.e. He must be above 18 years of age and of sound mind. Similarly, the insurer must be capable of paying the claim when required. Besides these, life insurance contracts are subject to two additional principles, viz, the principle of utmost good faith, and the principle of insurable interest.
In commercial contracts each party can verify the correctness of the statements of the other party. In life insurance this is not true. Most of the facts relating to health, habits, personal history, family history etc, which form the basis of the contract, are known only to the proposer and not to the insurer. So it is essential that the proposer truthfully reveals all the personal details of the insured before a policy can be issued. So a life insurance policy is a contract of utmost good faith. The law dictates that the proposer make a full disclosure to the insurer, and in the event of failure to do so, the policy will become void ab initio.
All risks are not insurable. The purpose of insurance is to compensate, partially, the loss, and not to make profit out of the loss. So speculation or betting is not allowed. This is ensured by the principle of insurable interest. The proposer must have a stake in the well being of the person insured, and could suffer a loss if the risk occurs. He must be in a relationship with the insured, whereby he benefits from the safety and well being of the latter. For example, one has unlimited insurable interest on his own life. Similarly, he has insurable interest in the lives of his wife, children, employee/ employer, debtor or business partner. Parents can take life insurance policies on the lives of their children, but the policy must be transferred to the offspring as he/she attains 18 years of age. Hence, insurable interest must exist at the beginning of the policy, but is not necessary at the time of claim.
Any legal contract must have the following essentials; a) offer and acceptance, b) consideration, c) capacity to contract, d) meeting of minds, e) legality of purpose, f) capacity of performance, and g) intention to create legal relationship. Accordingly, a person who is interested in getting life insurance for himself or for others economically related to him sends in a proposal which the insurer scrutinize and accepts or rejects. The consideration involves the premium and the sum to be paid by the insurer as ‘claim’ to the insured. The proposer must be legally eligible to enter into a contract, i.e. He must be above 18 years of age and of sound mind. Similarly, the insurer must be capable of paying the claim when required. Besides these, life insurance contracts are subject to two additional principles, viz, the principle of utmost good faith, and the principle of insurable interest.
In commercial contracts each party can verify the correctness of the statements of the other party. In life insurance this is not true. Most of the facts relating to health, habits, personal history, family history etc, which form the basis of the contract, are known only to the proposer and not to the insurer. So it is essential that the proposer truthfully reveals all the personal details of the insured before a policy can be issued. So a life insurance policy is a contract of utmost good faith. The law dictates that the proposer make a full disclosure to the insurer, and in the event of failure to do so, the policy will become void ab initio.
All risks are not insurable. The purpose of insurance is to compensate, partially, the loss, and not to make profit out of the loss. So speculation or betting is not allowed. This is ensured by the principle of insurable interest. The proposer must have a stake in the well being of the person insured, and could suffer a loss if the risk occurs. He must be in a relationship with the insured, whereby he benefits from the safety and well being of the latter. For example, one has unlimited insurable interest on his own life. Similarly, he has insurable interest in the lives of his wife, children, employee/ employer, debtor or business partner. Parents can take life insurance policies on the lives of their children, but the policy must be transferred to the offspring as he/she attains 18 years of age. Hence, insurable interest must exist at the beginning of the policy, but is not necessary at the time of claim.
Monday, June 23, 2008
LIFE INSURANCE
A human being is an income generating asset, besides many other things, to his family and dependents. His capacity to generate income depends upon his education, professional skills, managerial abilities, entrepreneurship etc. The value of the asset is measured in terms of the income generated. Human asset can be lost through unexpected death, sickness or disabilities caused by accidents. Accidents may or may not happen, but death is certain; only its time is uncertain. Premature death stops the means of life of his dependents, and hence has to be protected against. Accidents or unexpected illness my again impair the person’s ability to earn and necessitate extra expenditure of medical bills etc. Even retired people who had made plans for steady income 20 or 30 years back find that inflation and changes in life style have made their income too inadequate. In all such cases life insurance is the only way to ensure protection.
Life insurance is a means of social security. In modern societies social security to the population is provided by the governments or by themselves. If the bread winner of a family dies or disabled, his family will become destitute unless the government provides social security to them. Life insurance provides at least partly to this eventuality and lessens the burden of the state.
Life insurance plays a significant role in the economic development of the country. Life insurance companies collect huge amounts of money as premium from their policy holders. This money, after setting apart a part for payment of claims, is generally invested in various economic activities like infrastructure development, health care, housing, power generation etc.
The major benefits of life insurance may be summarized as below. 1) Life insurance is the only way of protection of families from risk. All savings or investments give back the sum we have saved plus interest. But insurance pays a sum one wishes to have at the end of the savings period of 20 or 30 years. The final fund is secured from the very beginning and we pay for it in small amounts over the years. This assured fund is not affected by inability to pay due to death or disability. Hence there is no substitute for life insurance. 2) Life insurance is the only way to safeguard against the unpredictable risks of the future. 3) The value of human life is much greater than the value of properties or savings. Only insurance can preserve it. 4) Life insurance surpasses any other savings or investment in terms of security, marketability or stability of value. 5) Life insurance helps people live financially improved lives.
Life insurance is a means of social security. In modern societies social security to the population is provided by the governments or by themselves. If the bread winner of a family dies or disabled, his family will become destitute unless the government provides social security to them. Life insurance provides at least partly to this eventuality and lessens the burden of the state.
Life insurance plays a significant role in the economic development of the country. Life insurance companies collect huge amounts of money as premium from their policy holders. This money, after setting apart a part for payment of claims, is generally invested in various economic activities like infrastructure development, health care, housing, power generation etc.
The major benefits of life insurance may be summarized as below. 1) Life insurance is the only way of protection of families from risk. All savings or investments give back the sum we have saved plus interest. But insurance pays a sum one wishes to have at the end of the savings period of 20 or 30 years. The final fund is secured from the very beginning and we pay for it in small amounts over the years. This assured fund is not affected by inability to pay due to death or disability. Hence there is no substitute for life insurance. 2) Life insurance is the only way to safeguard against the unpredictable risks of the future. 3) The value of human life is much greater than the value of properties or savings. Only insurance can preserve it. 4) Life insurance surpasses any other savings or investment in terms of security, marketability or stability of value. 5) Life insurance helps people live financially improved lives.
Saturday, June 21, 2008
BASICS OF INSURANCE
Insurance is the protection of the economic value of assets. Asset, in insurance, is something which benefits the owner; the benefit may be monetary or otherwise. Asset has a limited period of usefulness, beyond which it may have to be replaced. Assets are likely to be destroyed through accidental occurrences like fire, floods, earthquake or breakdown. These occurrences are called perils. Possibility of damage or loss due to perils is called risk. Insurance is a mechanism to reduce the effect of premature damage of assets through perils in cases where there are uncertainties in the risk involved. If a risk is certain, then the asset cannot be insured. Insurance does not protect the asset, nor does it prevent the loss. It only tries to reduce the impact of the risk on the owner by partial compensation of the loss. Only economic consequences can be insured. Non-economic losses, like the loss of affection of a parent, loss of leadership of a manager, etc cannot be insured.
Insurance is a business of sharing. People who are exposed to similar risks come together and agree that if any one of them suffers a loss, the others will share the loss and compensate the person who lost. Thus risk is spread among the community and its impact on one is reduced to smaller, manageable impacts on all. To be workable, the loss must be due to perils which occur in accidental, random manner and not be deliberate creation of the insured person. Also, the manner of sharing the loss must be determined beforehand. The likely share, determined on the assumption of an average possibility of loss, is collected in advance, either in a lump sum at the time of admission to the group or as periodic payments. In reality, the group is the group of persons holding a particular type of ‘insurance policy’ issued by a company for which each person pays a ‘premium’ depending upon his/her risk profile. On the occurrence of the stipulated loss, the affected person gets compensated through his/her ‘claim’.
Insurance is a business of sharing. People who are exposed to similar risks come together and agree that if any one of them suffers a loss, the others will share the loss and compensate the person who lost. Thus risk is spread among the community and its impact on one is reduced to smaller, manageable impacts on all. To be workable, the loss must be due to perils which occur in accidental, random manner and not be deliberate creation of the insured person. Also, the manner of sharing the loss must be determined beforehand. The likely share, determined on the assumption of an average possibility of loss, is collected in advance, either in a lump sum at the time of admission to the group or as periodic payments. In reality, the group is the group of persons holding a particular type of ‘insurance policy’ issued by a company for which each person pays a ‘premium’ depending upon his/her risk profile. On the occurrence of the stipulated loss, the affected person gets compensated through his/her ‘claim’.
Friday, June 20, 2008
Life Insurance
Insurance is a social activity where a group of people with common perception of risk come together and agree to share among themselves the loss of any one of them. Risk is the possibility of damage to life or property by accidents or natural causes. Risk involved may vary from person to person, but the group agrees to cover the monitory losses in return to prior contributions in proportion to the risk involved. Inanimate objects have values which may be assessed rather accurately, but the life of a person cannot be assigned a specific monetary value. Hence, life insurance tries to partially cover the loss of income arising out of the loss of life. In practice, a life insurance company sells policies to interested people, collect their contributions as premia, and pay compensation as claim.
In
The purpose of writing this blog is to explain the insurance scenario in
Subscribe to:
Posts (Atom)
