CHAPTER – 6
WHAT LIFE INSURANCE INVOLVES
Life Insurance Business Components
Assets – any physical or non-physical thing which has value i.e. Can measured in terms of money is known as Asset. Every human being has a value which can be determined and is termed as Human Life Value (HLV). HLV helps to determine how much insurance one should have for full protection.
E.g. Mr. Mahesh earns Rs.120000 per annum and spends Rs.24000 on himself. Therefore net earnings for family in case of Mr. Mahesh‟s death is Rs.96000 per annum. Suppose rate of interest is 8% then HLV = 96000/ 0.08 = 12,00,000.
- Risk – there are various types of risk involved for a human being such as dying too early; living too long; living with Disability.
- Indemnity – in the occurrence of an event, the procedure to assess the loss and pay the compensation for this loss is known as Indemnity.
- Level Premium – it is a premium fixed in such a manner that it does not increase with age but remains constant throughout the contact period
- Principle of Risk Pooling – it works on the principle of mutuality. Here premium collected from various people is collected in same pool for same risk and used for same kind of risk-claim. Under no circumstances money collected under one risk pool is used for another pool. Mutuality is one of the important ways to reduce risk in financial markets, the other being diversification. The two are fundamentally different.
Contract – taking insurance involves getting into a contract. Here the contract is between the Insurer (Insurance company) and Insured (Policy holder).