“Insurance is a contract between insurer and insured. In return of consideration, insurer promises to pay a specific amount on happening of a specific event.”
Insurance provider known as insurer and the person whose life in the policy is insured is known as insured. Premium paid/ being paid for the sum assured / risk cover (Specific amount) is stands for consideration, specific amount (sum assured) is payable only on happening of event specified buyer of Policy is called Proposer
Insurance works on the mechanism of transfer of risk. When an individual transfer his risk to insurer, insurance takes place. When an insurer transfers his risk beyond his bearing capacity to another insurer, Re-insurance take place. Insurer is the customer in the activity of Re-insurance.
MARKETING OF INSURANCE
Insurance is marketed through direct or indirect marketing system. When there is no middleman between insurer and insured at the time of taking place of insurance contract, it’s known as direct marketing system Internet system is the latest development of direct marketing. When the person like organisation/ individual agent/corporate agent/ insurance broker are there, its known as indirect marketing. Insurance agent represent insurer where as broker represent a customer but remunerated both by the same i.e. insurer. Insurance Agent represents one insurer at one time whereas broker represents more than one, having variety of products under one roof.
Uncertainty of happening or not happening of event likely to cause damage/loss is called risk. Risk common to all and beyond one’s control is pure risk and risk affecting specific individual locality, community and circumstances is called particular risk.
Risk measurable in momentary value is known as financial risk. Pure, Particular and financial risks are insurable risks. Speculative and certain risks are non insurable risks. Best way to manage the risk is transfer of risk i.e. insurance.
POOLING OF RISK
With pooling of risks an insurance company pools the premium collected from individuals to insure. Similar risk can only be pooled in one’s pool i.e. for life and health insurance, two different sets of pools if maintained.
LAW OF LARGE NUMBERS
Helps the insurer to determine its premium table based on expected death claims.
PERIL AND HAZARDS
Specific event which might cause a loss in known as peril and hazards are factors that affect the happening of peril. Example: – smoking to lungs cancer.
Moral hazards refer to habits and hobbies and state of mind i.e. smoking, drinking, car/horse race and fraud etc. Physical hazards refer to physical illness/disability etc.
ESSENTIALS OF INSURANCE CONTRACTS: – Offer/acceptance
Acceptance should must be voluntary without any influence. conditional acceptance is known as contra offer. Consideration is the price of insurance cover. Two special features of insurance contract that make it a special contract are principal of utmost good faith and principal of insurable interest.
PRINCIPAL OF UTMOST GOOD FAITH
Insurance contract is based on data’s submitted by proposer proposer is supposed to provide correct information at the time of making insurance contract wrong information by proposer made the insurance contract void.
Principle of utmost good faith also applies at the time of reinstatement of policy lapsed whereas at the time of deposit of renewal premium no need of following principal of utmost good faith as contract stand already in force.
PRINCIPAL OF INSURANCE INTEREST
To prevent the misuse of insurance, under insurance act it’s a statutory requirement that proposal should have interest in the person / subject to be insured. There is no written definition of insurable interest in written act. Only circumstances refer its existence. A person has infinite insurable interest in his own life .spouse, parents, children, creditor – debitor, partners, employers – employee has insurable interest in one another to the extent of loss / damage likely to be occurred to one because of death of opponent policy procured by the employer on the life of its specific employee is known as key man insurance policy and on life of large number of its employee is group insurance policy. While underwriting group insurance policy, underwriter consider the average age of the group. Lack of insurable interest made the contract null & void. In life insurable contract Insurable Interest must be at the time of commencement, in mossing Insurable Contract the time of claim at both times in Non-Life Insurance contract.
PRINCIPAL OF INDISPUTIBILITY CLAUSE (SEC.45)
Because of principle of utmost good faith insurer has right to terminate the contract and even forfeit the premium deposited by the proposer in case of wrong information/facts found in proposal form within first 2 years of commencement of insurance contract and the insurer has no right to raise dispute. Facts not disclosed or concealed should be material facts.
Under life insurance contract insurer is supposed to suffer loss or to pay claims on death of insured as such facts that has direct impact on death probability of proposer are material facts for insurer.
Age, height, weight, proposer’s self or family health history etc are known as material facts. Facts of common knowledge, legal facts, and facts immaterial for underwritten have no impact on insurance contract.
PRINCIPLE OF INDEMINITY
Stands for compensation only to extent of loss occurred to insured. Its primary motive is to prevent customers from making profit from insurance activity. Principle of indemnity implies only to non-life insurance contracts i.e., non life insurance contracts are known indemnity contracts. Life insurance contract carry its own value as such it is known as value contract.
Before entering into contract, insurer wants to make assessment of risk likely to be occurred because of death claims of insured. An official known an underwriter is appointed to assess the death probability of insured/proposer. Medical used for making assessment is known as medical underwriting. Assessment of risk without medical is known as non medical underwriting.
Proposer/ insured carrying normal risk charged with standard rate of premium otherwise extra premium is charged with the consent of proposer. Person who process of making risk assessment is known as under writing.
In case medical of proposer/ insured reveal risk but expected to decrease with passage of time not more than thirty percent of term of the policy proposed, underwriter keep lien but only with the consent of proposer.
Lien is specified in schedule part of policy document and runs for the part of term of policy whereas clause runs throughout the policy term.
An official with specified qualification assigned to determine the premium table is known as actuary.
RISK PREMIUM/NET PREMIUM
Premium based on mortality rate is known as risk premium. It increases with increasing age of insured. Risk premium after adjusting interest expected to earned by the insurer on the amount of risk premium is known as net premium
Bonus is declared by actuary after actuarial evaluation. Higher surplus, higher rate of bonus lower surplus, lower rate of bonus. Bonus is calculated on amount of sum assured irrespective of amount of annual premium and term of policy .bonus are of simple , revisionary and compounded nature. Bonus is declared only for participating on with profit policies.
Terminal bonus declared at the end of term of policy bonus declared during the year before final valuation is known as interim bonus stands valid till declaration of final bonus.
TIME VALUE OF MONEY
Money changes its value with the passage of time because of inflation. It should be kept in mind while planning for retirement or other long term plans and to access the actual return of investment expects in future.
Term insurance plan provides only death claim on death during term of the policy i.e. only for person requiring protection without saving. Its special plan for insurance protection and home loan repayment needs.
Pure endowment insurance plan: –
Provides only maturity claim .no death claim. Only saving with no protection.
Endowment plan: –
Provides Death as well as maturity claim i.e. protection plus saving.
Money back plan: –
Periodical payout during term without lodging claim and full sum assured with bonus on death.
Insurance cum investment plans premium is invested in the market by insurer according to choice of proposer; proposer is responsible for upward or downward of its fund value whereas proposer has choice to switch his fund from one fund to another fund. Frequent switching is not recommended as it enhances investment risk. To have tax rebate under income tax act 1961 proposer has to buy insurance cover at least 20 % (5 times) of annual premium.
ANNUITY / PENSION PLANS: –
These plans are specially to insure income in non earning age having feature of immediate annuity, deferred annuity and guarantee – annuity etc. Specific amount / premium are paid during pre-specified term known as accumulation phase .Funds accumulated during accumulation phase is known as pension purchase fund. Maximum 1/3 rd part of fund can be withdrawn as cash withdrawal called commutation of pension.
Pension amount is fixed on annual basis that’s why it is known an annuity whereas annuity may be received on monthly, quarterly, yearly or half-yearly basis. Amount received on commutation of pension is tax free but pension amount is taxable under income tax act 1961. Pension purchase fund may be raised with one insures and pension may be purchased from another insurer is known as open market option. This facility enhances the range of benefit to proposer.
The process of appointing person/persons to receive claim i.e. in the case of permanent absence i.e. death of insured is called nomination. Minor can also be nominated as nominee Appointee is must in case of minor nominee. Appointee’s consent is must. Nominee may be more than one i.e. no limit on number of nominee without specifying their shares, Nominee may be changed anytime, Nominee stands only till the maturity date of policy. Nominee has no ownership, right on the proceed received as the death claim. Ownership lies with the legal heir’s only life insured can nominate nominee.
Insurance policy is considered as part of proposer’s property and like his other property proposer is free to get policy assigned to another one as a collateral security of loan cases or otherwise. Right/ Titles of policy are transferred to the assignee. Assignment is of 2 types i.e. Absolute and Conditional.
Absolute assignment reverts only on re-assignment from assignee’s end whereas conditional assignment reverts on happening of conditional event.
Non deposit of renewal premium with in time specified insurance policy / contract stands lapse & discontinuity of insurance policy lapse policy can be revived by paying pending premium and good health evidence.
Principle of utmost good faith applies at the time of revival as revival bring fresh contract between insurer and insured under natural law of justice to prevent insurers to put the proposer to financial was in case of non deposit of premium because of financial hardship is policy goes into paid up value. During paid up sum assured under the policy reduced to paid up value. Policy is going on without premium installment without other benefits like bonus etc.
In case proposer desire to get his fund value before maturity dates the only way is to surrender the policy and get contract terminated. Surrender value is based on paid up value and duration of term after which policy is surrendered Paid up or surrender is permissible. Only for policies paid and survived at least for three years.
Surrender value is to be paid within 30days. Minimum surrender value is 35% of the premium paid excluding first year premium. Fore-closure stands compulsory surrender by insurer in case of non-repayment of loan.
COOLING OF PERIOD
In case proposer is not agreeing with the features of plans mentioned in policy document has right to get his amount / premium refunded within 15day from the receipt of policy document. This period is known as free look period.
A form used to make proposal for entering into insurance contract. Proposal form is basis of the insurance contract. Under writer is to convey his decision on proposal form within 15 days of its receipt. On acceptance, first premium recipe is issued that is an evidence of commencement of insurance contract/ risk cover
An evidence to the contract entered between insurer and insured / proposer having different parts lien is specified in schedule part, Ombudsman’s in information part, declaration in preamble part etc. Policy is attested by authorised official of insurer. Stamp duty is paid under insurance.
DEATH CLAIM: – Within 30 days from receipt of complete claim, any additional information or documents can be called for within 15days Death claim within first 3 year of policy called early death claim, Authorise insurer with the right of investigation maximum within 180days. In case of delay of claim payment interest @ simple interest plus 2% extra is payable. In death certificate is primary document and for death certificate issuance dead body should must have been seen by someone otherwise insured is considered as missing and only court can declare him died after 7 years. For natural calamities, air crashes, war between two countries insured is presumed to be died without dead body on certification from authority concerned.
MATURITY CLAIM: – Within 30 days from the maturity date of policy term.
SURVIVAL CLAIM: – Survival claims are periodical claims without happening of death of insured or maturity of policy term irrespective of lodging formal claim.
VOID CONTACTS / VOIDABLE CONTACTS
Insurance contacts lacking statutory requirements like non-existence of insurable interest or fraud on the part of parties to the contract are void contracts. Insurance contract with miss-representation is voidable contract.
Riders attach additional benefits to base policy. Riders premium can never be more than 307 of premium of base policy. Once the riders benefit is happened rider is terminated whereas base policy runs as it is. Riders sum assured can never be more than sum assured of base policy.
Motivating the policy holders to surrender their existing policies or to stop further premium to procure the new one policy without considering their interest is called churning. Its unethical practice on the part of an advisor. Higher the sales targets, higher the churning rates. Churning is neither in interest of insurer or proposer. Advisor goes for churning only with motive of extra income.
Means continuity of policies. It is opposite to Churning and in the interest of insurer, policy holder and advisor. Higher rate of persistency means higher rate of profit to insurer, higher benefit to policy holder and higher amount commission to advisor. Higher rate of persistency shows customers satisfaction, good services to policy holder from insurer as well as advisor end lower rate of persistency means less lapsation of policies during the year. Lower rate shows contra situation.
An illustration showing specific charges, commission to advisor under the plan and expected growth of funds at the end of the policy term. It is compulsory for sale of ULIP plans. Expected growth can be depicted only@ 6% and 10 % only.
IRDA- Can be approached through toll free number or e-mails
Ombudsman- Twelve in number sitting in different parts of country having recommendatory authority, complainants is not bound to accept its recommendation but insurer has no option. Ombudsman is not a judicial authority. Complainant can approach Ombudsman within 1 year of dispute happened, only up to the value of 20 lacs.
Ombudsman has to make his recommendation within 30 days, and award within 3 months and insurer has to implements his awards with in 15days.
CONSUMER FORUM: – District level- 20 lacs
State level- 20 lacs – 1 crore
National level- More than 1 crore
Consumer forum has judicial authority.
Each & Every insurer is bound to develop grievance redressal management system in his organisation.
To prevent the conversion of black money into white money, AML act prevent deposits of cash payments more than 50,000 in one day.
To have proper where about of investor his ID and residence proof is compulsory.
Child, young unmarried, young married, married with small children, married with old children, per-retirement and retirement age. Life stage determine the need and risks apatite of the person.
WITH CAPITAL / WITHOUT CAPITAL CUSTOMER
Person having inherited property is known as with capital customer and person surviving with his routine earning is without capital customers. With capital customer needs capital appreciation income protection and saving plan.
Income available for saving after expenditure is known as disposable income. With increase in age disposable income is slightly higher.
REAL NEED / PERCEIVED NEED
Actual need are real need and needs based on desire and thought is perceived need. Real need is given priority while making financial planning.
Bank: – FDR / RD / Commutative deposits.
Post Office: TDR / RD
Insurance: – Term insurance for income protection and home loan Repayments etc.
Endowment plans for protection plus saving purpose
ULIP for high income and low liabilities people
Equity / Share market-High risk opposite to bank interest
Bonds – Lower risk, high liquidity.
Mutual funds– For risk diversification with higher liquidity.
Real Estate– For capital appreciation.
Conversion of physical gold to ETF enhance its liquidity
Health Insurance – Individual health insurance or family flotter covering health of
All family members rebate under income tax act is permissible up to 15 K under Section 80D.
Daily hospitalisation plan provide fix amount on daily basis irrespective of actual expenditure.
Minimum sum assured 5 K
Maximum sum assured 50 K for low income group weekly premium facility
Standard age proof that carries age based on evidence i.e. Non standard age proof that carries age based on verbal declaration i.e. certificate of village panchayat etc.
Domicile and sound mind is primary qualification to become insurance
Agent, restricted remuneration and considered as primary underwriter.
FACT FINDING SESSION
To identity client need. Identification quantification and prioritization of needs is process of facts finding.
Advertisement in paper or indemnity bond at the time claim mean policy is lost. Advisors suggestion is professional if it is in the interest of client. In case customer not agree with advisor recommendation, reason should be asked for not going with the recommendation. Shifting of physical gold to ETF enhance liquidity. Lowest priority of client should be marriage and top priority is income protection. Best place to keep emergency funds is bank and M.F Client concentrating on health and estate / inheritance investing planning is in retirement age.
EMI can never be more than 40% of monthly salary to get tax rebate, sum assured should must be five time or more of annual premium. First premium receipt represent date of commencement of contract i.e. risk cover.
Maximum Rebate u/s 80-c one lac only Insurance claims are tax free/ Exempted under IT ACT 1961 u/s 10(10)(D).