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2. Insurance and Life Insurance in differentperspectives Legal aspects of Life Insurance business inIndia Principles of insurance and theirapplications to Life Insurance Important types of Life Insurance2 3. What Is Insurance ?It is a tool in the management of risks a device through which the risks faced by the individuals are pooled together and thereby all the members of pool will share the losses suffered by a few individuals. 3 4. Transferring the risks from the individuals to thepool reduction of the overall risk faced by thepool Social tool as a social safeguard against thelosses expected to be suffered due tounexpected events by a few members of thesociety Commercial or legal tool where a third partydoes this activity of pooling of risks and sharingof losses with a commercial interest 4 5. Kenneth Black (Jr.) and Harold Skipper (Jr.)have defined insurance under two differentperspectives :Economic Perspective Insurance is afinancial intermediation function by whichindividuals exposed to a specified contingencyeach contribute to a pool from which coveredevents suffered by participating individuals arepaid. Individuals purchase the right to collectfrom the pool if the insured contingencyoccurs. Insurance then is a contingent claimcontract on the pools assets. 5 6. Legal Perspective Insurance is an agreement (the insurance policy orinsurance contracts), by which one party, calledthe policy owner, pays a stipulated consideration,called premium, to the other party called Insurer inreturn for which the insurer agrees to pay adefined amount of money or provide a definedservice if a covered event occurs during the policyterm. 6 7. What Is Life Insurance ? It is a contract in which the Insurer, inconsideration of a certain premium, either in alump sum or in any other periodical payments, inreturn agrees to pay to the assured, or to theperson for whose benefit the policy is taken, astated sum of money on the happening of aparticular event contingent on the duration ofhuman life. 7 8. Essential Features : It is a contract relating to human life The contract provides for payment of lumpsum money The amount is paid at the expiration of acertain period or on death of a person.8 9. In India, Life Insurance business is defined under Section 2 (11) of Insurance Act, 1938, which reads : Life Insurance business means the businessof effecting contracts of insurance upon humanlife, including any contract whereby thepayment of money is assured on death (exceptdeath by accident only) or the happening ofany contingency dependent upon human lifeand any contract which is subject to paymentof premium for a term dependent on human lifeand shall be deemed to include the grantingof :9 10. Disability and double or triple indemnity accidentbenefits, if so provided in the contract ofinsurance; Annuities upon human life; and Superannuation allowances and annuitiespayable out of any fund applicable solely to therelief and maintenance of persons engaged orwho have been engaged in any particularprofession, trade or employment or of thedependents of such persons. 10 11. The insurance contracts, which deal withdisability, accidental death alone, sickness etc.are excluded from the purview of life insurance. However, life insurance contracts can havebenefits payable on the accidental death ordisability of the persons insured as additionalbenefits on the basic life insurance contracts.11 12. Essentials of a Valid Contract Offer and acceptance Consensus ad idem(meeting of the minds) Parties competent to contract Consideration Legality of purpose12 13. Principles of Life InsuranceSpecial Features of Life Insurance Contracts Insurable Interest : The object of insurance should be lawful. The person proposing for insurance must have interest in the continued life of the insured and would suffer pecuniary loss if the insured person dies. This is known as Insurable Interest.13 14. In Life Insurance the presence of insurableinterest is essential at the time of effecting theContract of Insurance. If there is no insurable interest, the contractbecomes wagering and hence illegal. Every individual has unlimited insurable intereston his/her life. Husband has insurable interest on the life of hiswife and vice versa14 15. The creditors have insurable interest on thelives of debtors to the extent of indebtedness. Business partners have insurable interest in thelives of other partners to the extent of theirfinancial interest in the partnership Employers have insurable interest in the lives ofemployees who are key to the profitability of thebusiness.15 16. Doctrine of utmost good faith In Life Insurance contracts, a very highdegree of good faith is required to existbetween the parties to the contract, viz., theinsurer and the insured. This is called theprinciple of utmost good faith (Uberrimafides) It is the duty of the proposer to disclose thematerial information for proper assessment ofrisk by the insurer 16 17. All the required information for theassessment of risk is known only to theproposer and the insurer has no knowledgeof the risk The proposer may not be having technicalknowledge about the insurance products,the benefits, pricing aspects etc. and hencewill have to rely upon the insurer to ensurethat the terms of the contract are fair andequitable.17 18. Doctrine of AdhesionThe terms of the contract are most of the times fixed by one party (the insurer) and with minor exceptions, must be accepted or rejected in total by the other party (the proposer).18 19. Principle of Indemnity Insurance contracts other than life insurancecontract are contracts of indemnity in the sensethat the amount payable by the insurer in caseof the contingency stated in the policy occurringis limited to the loss that the insured will suffer. The insurance contract promises to keep theinsured indemnified against the financial lossthat he would suffer on account of thehappening of the event. 19 20. Main Types Of Life InsuranceWhole Life Insurance Intended to provide Life Insuranceprotection over ones lifetime providesfor payment of the assured amount uponthe insureds death regardless of when itoccurs.20 21. The payment of assured sum is a certainty; only the time of the payment of the assured sum is an uncertainty Ordinary Whole Life Insurance Limited Payment Whole Life Insurance Convertible Whole Life Insurance 21 22. Endowment Insurance Benefits under the policy paid on the deathof the life insured during the selected term oron his survival to the end of the term. Normal durations ranging from 10 to 30 yearsor more; shorter term policies ranging from 3to 10 years Single premium endowment insurance policies Money Back or Cash Back or AnticipatedEndowment Insurance Policies22 23. Term Insurance Insurance protection for selected term only incase the insured person dies during the term, thebenefits are payable. In case of his survival till the end of selected term,the policy normally expires without any benefitbecoming payable May be regarded as temporary insurance premium for term insurance is relatively low. 23 24. Annuities Series of periodic payments Annuity provider (insurer) agrees to pay the purchaser of annuity (annuitant) a series of regular periodical payments for a fixed period or during someones life time. 24 25. Group Life Insurance There are groups of people who sharesomething in common and are connectedby some underlying similarity likeoccupation, profession, employment, socialpurposes or even entertainment can have asimilar need for life insurance which can bemet by a single insurance contract. 25 26. These categories of products thatcover the risk of a contingencydependent on the life of a group ofpersons, come under the group lifeinsurance.26 27. Conventional GroupsEmployer Employee GroupsCreditor Debtor GroupsAssociations of Self-employed Professionals 27 28. Non-conventional Groups Co-operative Societies Trade Unions Welfare Associations Non-government Organisations Voluntary Associations Charitable Trusts, etc. 28 29. Life Insurance ProductsTwo groups viz. Packaged Products benefits under such products are pre-definedand customer has to choose the plan that isclosest to this requirement Ability of the agent to explain the different plansis important factor Most of LICs products fall under this category29 30. Non-packaged Products products with certain basic features like Endowmnet or Money-back. the customer to choose as per his needs and then expand it by rider benefits accident cover, critical illness cover, disability benefits, hospitalisation cover etc. cater to niche market and have profit potential.30 31. Basic Elements :(a) Risk coverage to provide lump sumamount to the family in the event ofuntimely death of the breadwinner Term Insurance or TemporaryInsurance.(b) Savings lump sum amount ispayable only if the insured survives tillthe end of the selected period; if deathoccurs during the period of insurance,nothing is payable PureEndowment.31 32. Term Insurance : a contract for limited number of years payment only if death occurs duringthe term low cost / high risk coverage stricter underwriting rules andrestrictions renewable feature and convertiblefeature increasing or decreasing TermInsurance32 33. Whole Life Insurance Risk coverage for the death of the insured- whenever itmay happen No fixed term Variations Pure Whole Life Premium payablethroughout the life of the insured till death. Riskcoverage for duration of life amount payable on death Limited Payment Whole life Premium payable forlimited / shorter period or till death if earlier riskcoverage throughout life Premium rate is low than Term Insurance Provide permanent protection at moderate cost Convertible Whole Life Plan33 34. Endowment Assurance The insurer agreesto pay the insurance money in the event of death of the insured during endowment termto pay the insurance money in the event