CHAPTER 1

INSURANCE BACKGROUND

The evolution of insurance dates back as early as the commencement

of trade between two countries in England, specially between the European
countries. During the transportation of goods, there were chances of the ship
being drowned in the rough sea conditions or attacked by the pirates, leading
to a huge loss to the party sending the goods. The traders of England devised
a way whereby the loss of goods would be compensated by every trader
putting in some amount as per their financial strength so that a single party
may not be the loser. This is the earliest concept of insurance. This concept
is taking shape for the last 300 years, yet in India the first insurance
company was established in 1818 with the advent of Europeans, mainly to
provide insurance for the European windows. The name of the company was
Oriental Life Insurance Company.

Insurance is a mechanism that ensures an individual to thirve on

adverse consequences by compensating the individual, his/her loss
financially. Every individual in the world and all activities connected with
him/her, be it life, profession, business, travel or any other pursuits are
subject to unforeseen and uncalled for hazards or dangers. The benefits that
an individual enjoys in his life by owning a car or a house or a factory can be
snatched by sudden accident which can render even the individual immobile,
and his family vulnerable. At this critical juncture, only insurance help him
not only to survive but recover his loss and continue his life in a normal
manner, which would otherwise be unthinkable.

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 PURPOSE AND NEED OF INSURANCE

Life is full of uncertainties and insurance is based on uncertainties and

if there are no uncertainties about the occurrence of a disaster, the concept of
insurance will cease to exist. The concept of insurance is very simple.
People who are in a similar trade and are exposed to the same risks,
congregate and come to an agreement that if any individual member suffers
a loss, then the loss will be shared by others and minimized in order to
enable the individual member recover from the loss and cover his ground.
Now, tangible as well as intangible assets are insured, because they run the
risk of becoming non-functional through a disaster or an accident.

The concept of insurance has been extended beyond the coverage of

tangible assets. Exporters run the risk of importers in other country
defaulting as well as losses due to sudden fluctuation in the currency
exchange rates, economic policies turmoil. These risks are now insured.

Similarly, human life is also an income-generating asset and this asset

can be lost through an unexpectedly premature death due to some accident
or disease or the asset can also be made non-functional through some
disabilities. In the case of such unforeseen mishaps, insurance becomes
essential to help those who are dependents to maintain their life in a normal
and regular manner. In conclusion, one can safely say that the purpose of
insurance be it life or non-life is to transfer the financial loss to the insurance
company who spreads it over to the policy holders.

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 CHAPTER 2

LIFE INSURANCE
HISTORY OF LIFE INSURANCE

The first two decades of the twentieth century saw lot of growth in
insurance business. From 44 companies with total business-in-force as
Rs.22.44 crores, it rose to 176 companies with total business-in-force as
Rs.298 crores in 1938. During the mushrooming of insurance companies
many financially unsound concerns were also floated which failed
miserably. The Insurance Act 1938 was the first legislation governing not
only life insurance but also non-life insurance to provide strict state control
over insurance business. The demand for nationalization of life insurance
industry was made repeatedly in the past but it gathered momentum in 1944
when a bill to amend the Life Insurance Act 1938 was introduced in the
Legislative Assembly. However, it was much later on the 19th of January,
1956, that life insurance in India was nationalized. About 154 Indian
insurance companies, 16 non-Indian companies and 75 provident were
operating in India at the time of nationalization. Nationalization was
accomplished in two stages; initially the management of the companies was
taken over by means of an Ordinance, and later, the ownership too by means
of a comprehensive bill.

The Parliament of India passed the Life Insurance Corporation Act on

the 19th of June 1956, and the Life Insurance Corporation of India was
created on 1st September, 1956, with the objective of spreading life

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insurance much more widely and in particular to the rural areas with a view
to reach all insurable persons in the country, providing them adequate
financial cover at a reasonable cost.

LIC had 5 zonal offices, 33 divisional offices and 212 branch offices,
apart from its corporate office in the year 1956. Since life insurance
contracts are long term contracts and during the currency of the policy it
requires a variety of services need was felt in the later years to expand the
operations and place a branch office at each district headquarter. Re-
organization of LIC took place and large numbers of new branch offices
were opened. It may be seen that from about 200.00 crores of New Business
in 1957 the corporation crossed 1000.00 crores only in the year 1969-70, and
it took another 10 years for LIC to cross 2000.00 crores mark of new
business. But with re-organization happening in the early eighties, by 1985-
86 LIC had already crossed 7000.00 crores Sum Assured on new policies.

Today LIC functions with 2048 fully computerized branch offices,

100 divisional offices, 7 zonal offices and the Corporate office. LIC’s Wide
Area Network covers 100 divisional offices. LIC has tied up with some
Banks and Service providers to offer on-line premium collection facility in
selected cities. With a vision of providing easy access to its policyholders,
LIC has launched its SATELLITE SAMPARK offices. The satellite offices
are smaller, leaner and closer to the customer. The digitalized records of the
satellite offices will facilitate anywhere servicing and many other
conveniences in the future. LIC continues to be the dominant life insurer
even in the liberalized scenario of Indian insurance and is moving fast on a
new growth trajectory surpassing its own past records. LIC has issued over

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one crores policies during the current year. It has crossed the milestone of
issuing 1,01,32,955 new policies by 15th Oct, 2005, posting a healthy
growth rate of 16.67% over the corresponding period of the previous year.

From then to now, LIC has crossed many milestones and has set
unprecedented performance records in various aspects of life insurance
business.

Some of the important milestones in the life insurance business in India

are:

1818: Oriental Life Insurance Company, the first life insurance company on
Indian soil started functioning.
1870: Bombay Mutual Life Assurance Society, the first Indian life insurance
company started its business.
1912: The Indian Life Assurance Companies Act enacted as the first statute
to regulate the life insurance business.
1928: The Indian Insurance Companies Act enacted to enable the
government to collect statistical information about both life and non-
life insurance businesses.
1938: Earlier legislation consolidated and amended to by the Insurance Act
with the objective of protecting the interests of the insuring public.

1956: 245 Indian and foreign insurers and provident societies are taken over
by the central government and nationalized. LIC formed by an Act of
Parliament, viz. LIC Act, 1956, with a capital contribution of Rs.5
crores from the Government of India.

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 In the financial year 2005-06, LIC has grown at 30.68%. In respect of
number of lives insured, LIC has shown a growth of over 152%. In respect
of number of schemes, LIC has a growth of 2%. LIC's market share in
number of individuals covered and number of policies stands at 77% and
81%, respectively.

DEFINATION OF LIFE INSURANCE

“Life insurance is a contract that pledges payment of an amount to the

person assured (or his nominee) on the happening of the event insured
against.”

Right time to buy life insurance

Buying Life Insurance cannot ever be compared with other investment

decisions since it is very much in contrast with those stock market
investments where you wait for the right time to buy and sell. Neither is this
like receiving tips on particular scrip doing well in the market and holding
great future prospects.

Buy life insurance at the earliest. This is because the future is always
uncertain. Just as buying insurance is a necessity so also buying insurance
early in life is important too. With proper financial planning one can work
out as to how much money an individual is entitled to after the end of a
particular term. A policy that will fulfill your child's future educational
needs would have to be timed appropriately so that he receives the policy
amount at that time when he needs it the most.

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 By taking a policy early in life you not only benefit in forking out a
lower premium amount but also make a wise decision as far as insuring risks
to yourself and your family is concerned.

The contract is valid for payment of the insured amount during:

1. The date of maturity, or

2. Specified dates at periodic intervals, or
3. Unfortunate death, if it occurs earlier.

Among other things, the contract also provides for the payment of
premium periodically to the Corporation by the policyholder. Life insurance
is universally acknowledged to be an institution, which eliminates 'risk',
substituting certainty for uncertainty and comes to the timely aid of the
family in the unfortunate event of death of the breadwinner. By and large,
life insurance is civilization’s partial solution to the problems caused by
death.

Life insurance, in short, is concerned with two hazards that stand

across the life-path of every person:

 That of dying prematurely leaving a dependent family to fend for

itself.
 That of living till old age without visible means of support.

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Mission

"Explore and enhance the quality of life of people through financial

security by providing products and services of aspired attributes with
competitive returns, and by rendering resources for economic
development."

Vision

"A trans-nationally competitive financial conglomerate of significance

to
societies and Pride of India."

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 OBJECTIVES OF LIFE INSURANCE

• Spread Life Insurance widely and in particular to the rural areas and to
the socially and economically backward classes with a view to reaching
all insurable persons in the country and providing them adequate
financial cover against death at a reasonable cost.

• Maximize mobilization of people's savings by making insurance-linked

savings adequately attractive.

• Bear in mind, in the investment of funds, the primary obligation to its

policyholders, whose money it holds in trust, without losing sight of the
interest of the community as a whole; the funds to be deployed to the
best advantage of the investors as well as the community as a whole,
keeping in view national priorities and obligations of attractive return.

• Conduct business with utmost economy and with the full realization
that the moneys belong to the policyholders.

• Act as trustees of the insured public in their individual and collective

capacities.

• Meet the various life insurance needs of the community that would arise
in the changing social and economic environment.

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• Involve all people working in the Corporation to the best of their
capability in furthering the interests of the insured public by providing
efficient service with courtesy.

• Promote amongst all agents and employees of the Corporation a sense

of participation, pride and job satisfaction through discharge of their
duties with dedication towards achievement of Corporate Objective.

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 BENEFITS

 Death Benefit:

On the death of the Life Assured, Sum Assured together with the
Guaranteed Additions and terminal additions, if any, become payable.
20% of such benefit amount shall be paid in lump sum and the balance
amount shall be utilized to provide an annuity of 15 years certain and for
life thereafter on the life of the handicapped dependant. The annuity rates
are guaranteed for this purpose.

If the handicapped dependant predeceases the Life Assured during

the premium paying term of the policy, the contract ceases and the Life
Assured will have the option of either keeping the policy for a reduced
paid-up Sum Assured or receive the refund of premiums.

 Maturity Benefit:

Since this is a whole of life plan there will be no maturity benefit.

 Supplementary/Extra Benefits:

These are the optional benefits that can be added to your basic plan

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for extra protection/option. An additional premium is required to be paid
for these benefits.

Other benefits

 Aid To Thrift:

Life insurance encourages 'thrift'. It allows long-term savings since

payments can be made effortlessly because of the 'easy installment'
facility built into the scheme.(Premium payment for insurance is
monthly, quarterly, half yearly or yearly).

 Liquidity:

In case of insurance, it is easy to acquire loans on the sole security

of any policy that has acquired loan value. Besides, a life insurance
policy is also generally accepted as security, even for a commercial loan.

 Protection:

Savings through life insurance guarantee full protection against

risk of death of the saver. Also, in case of demise, life insurance assures
payment of the entire amount assured (with bonuses wherever applicable)

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whereas in other savings schemes, only the amount saved (with interest)
is payable.

 Tax Relief:

Life Insurance is the best way to enjoy tax deductions on income

tax and wealth tax. This is available for amounts paid by way of premium
for life insurance subject to income tax rates in force. Assesses can also
avail of provisions in the law for tax relief. In such cases the assured in
effect pays a lower premium for insurance than otherwise.

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 NEED FOR LIFE INSURANCE

• Protection against Loss of Income:

The primary purpose of life insurance is to provide replacement of
income to the family and dependence on premature death of the bread
winner.
• Regular savings:
Life can also be used as regular saving cum protection, plan for
meeting long term financial goal like son’s education, daughter’s life etc.
while savings through other instruments an individuals does not get the
benefit of protection along with saving.
• Investment
Unlike regular savings products, investment. Products are regularly
lump sum investment, where an individual makes a one time payment.

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These are long term investment providing protection against investment risk
and aimed to give long term return.
• Retirement:
Provisions for ones own later years become increasingly necessary
especially in a changing culture and social environment. One can buy a
suitable insurance policy, which will provide periodical payments in the old
age.
• Loan cover:
Through insurance can provide protection against outstanding loan
liability in the event of death.

ESSENTIAL FEATURES OF LIFE INSURANCE

1. ELEMENTS OF VALID CONTRACT: Contract of life insurance

has the essential elements of a general contract, since the life
insurance contact is a contract, as defined in the Indian Contract Act.
A valid contract of life insurance comes into existence where the
essential elements of agreement are present.

2. INSURABLE INTEREST: a person cannot insure life of another

unless he has an insurable interest in it. The risk against this policy is
the death of the insured. A person has unlimited insurable interest in
his own life. A surety has insurable interest in the life of the principal
debtor to the extent of his claim. In life insurance the insurable
interest must exist at the time of the contract of insurance.

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3. UTMOST GOOD FAITH: Insurance contracts, however, are
contracts uberrimae fidei that is one base on utmost good faith or the
contract of utmost good faith. The insured is bound to disclose all the
material facts and figures known to him but unknown to the insurer.
Every fact which is likely to influence the mind of the insurer in
deciding whether to accept the proposal or in fixing the rate of
premium is material for this purpose. Similarly, the insurer is bound to
exercise the same good faith is disclosing the scope of insurance
which he is prepared to grant. In life insurance, age, income,
education, occupation, health, family size etc.are some examples of
material facts that should be disclosed at the time of entering into the
contract.
4. WARRANTIES: Warranties are an important feature of life
insurance contract. Warranties are the basis of the contract between
the proposer and insurer. If any statement, whether of material or non-
material facts and figures are untrue the contract shall be null and void
and the premium paid by him may be forfeited by the insurer. The
policy insured will contain that proposal and the personal statement
shall form part of the policy and be the basis of the contract.

5. ASSIGNMENT AND NOMINATION: Both assignment and

nomination are essential of life insurance policy. Assignment of a life
policy means transferring the rights of the assured in respect of the
policy holder to the assignee. In the case of the nomination, a person
is merely named to collect the amount to be paid by the insurer on the
death of the assured.

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6. CAUSE IS CERTAIN: In life assurance policy, the insurer has to
pay the insured amount one day or other because the death of the
assured or his reaching a particular age is certain to happen.

7. PREMIUM: The premium is the price for the risk of loss undertaken
by the insurer. In the case of the insurance, premium is usually
required to be paid in cash and advance payment of the premium is a
condition precedent to the creation of a binding contract of insurance.
The amount of premium for payment of insured is paid monthly or on
annual installment for a certain period. In life insurance, the premium
is calculated on the average rate of mortality and the fixed periodical
premium may continue either until death or for a specific number of
years. Premium is payable till the maturity of the policy.

8. TERMS OF POLICY: An insurance policy specifies the

terms and conditions or period of time, it covers often the nature of
risk against which insurance is sought, determines the period or life of
the policy. A life insurance policy may cover a specified number of
years or the balance of the insured life.

9. RETURN OF PREMIUM: Premium is the consideration for

the risk run by the insures, and if the risk insured against is not run,
then the consideration fails, the policy does not attach, and as a
consequence the premium paid can be recovered from the insurer. The
general principle applicable to the claim for the return of the premium
is that if the insurers have never been on the risk, they cannot be said
to have earned the premium. But where the insurance is avoided by

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 the insurers on the ground of breach of warranty the premium can
only be recovered if it is shown there was breach ab initio.

CHAPTER 3
CLASSIFICATION OF LIFE INSURANCE POLICIES

Life insurance is a contract providing for the payment for sum of

money to the person assured or failing him, to the person entitled to receive
the same, on the happening of certain events. The LIC came into existence
with the objectives of assurance of

(a) family protection

(b) provision for old age
(c) tax concession
(d) housing loans
(e) loans advanced for educational purposes and
(f) donations to charitable institutions.

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 To meet the above said objectives, various types of life insurance
policies are being issued by the Life Insurance Corporation of India.

• INDIVIDUAL LIFE INSURANCE:

Individual life insurance policies were issued as Term Assurances.

The insured person pays a small premium to get death risk cover for a period
of one year on his life. If the insure person does not die within the insured
period, the premium paid by him will not be refunded because even though
he has not died, some other persons from his group would have died, for
whom the company is required to pay the death claim.
The Life Insurance Policies can be divided on the basis of:

• Duration of Policies

• Methods of Premium Payments

• Participation in Profit

• Number of Lives Covered

• Method of Payment of Sum Assured.

From the above basis the following are Life Insurance Policies classified
further into:
• Policies According to Duration:

(1) On the basis of Duration Policies:

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 (a) Whole Life Policies
(b) Limited Payment Whole Life Policies
(c) Convertible Whole Life Policy.

(2) On the basis of Term Insurance Policies:

(a) Temporary Assurance Policy

(b) Renewable term Policies
(c) Convertible Term Policies

(3) On the basis of Endowment Policies:

(a) Pure Endowment Policy
(b) Ordinary Endowment policy
(c) Joint Endowment Policy
(d) Double Endowment Policy
(e) Fixed Term (Marriage) Endowment Policy
(f) Educational Annuity Policy
(g) Triple Benefit Policy
(h) Anticipated Endowment Policy
(i) Multi-purpose Policy
(j) Children’s deferred Endowment Assurance.

• On the basis of Premium Payment:

(a)Single Premium Policy

(b)Level Premium Policy

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• On the basis of Participation in Profit:

(a)Without profit Policies or Non-Participating Policies

(b)With Profit Policies or Participating Policies.

• On the basis of the Number of Persons Assured:

(a) Single Life Policies

(b) Multiple Life Policies
(c) Joint Life Policies
(d) Last Survivorship Policy.
• On the basis of Method of Payment of Policy Amount:

(a) Lump sum Policies

(b) Installment or Annuity Policies

POLICIES ACCORDING TO DURATION

1. On the basis of Duration of Policies:

(a) Whole Life Policies:

Under this policy the premium is payable for 35 years or till age
go whichever is more. The policies where the premium is payable

21
 throughout the life of the assured is called the Whole Life Whole
Term Policy. This is the cheapest policy because the premium rate is
lower. It is useful to the dependent of the assured against his/her death
and to provide for payment of Estate Duty.

(b) Limited Payment Whole Life Policies:

The policy where the premium is payable is limited to a certain

period is called as Limited Payment Whole Life Policy. Under this
plan, the premium rate is higher. Premiums are payable for a selected
period of years or on the death of the assured whichever occurs
earlier. This is suitable form of life assurance for family provisions.
(c) Convertible Whole Life Policy:

This policy is issued by the corporation on the basis of duration.

The basic object of this policy is to convert a Term Assurance Policy
into Whole Life or Endowment Assurance Policy without having
further medical examinations of the assured. The rate of premium and
terms and conditions are the same as applicable to the new policy. If
the policy is converted into an Endowment Assurance with profits,
policy participates in profits from the date of conversion, and the
bonuses will be at the rate applicable to Endowment Assurance. If the
policy is converted into an Endowment Assurance with out profits, the
policy is not entitled to any bonus.

2. On the basis of Term Insurance Policy:

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 This policy provides the protection of death risk cover. Term
Insurance Policies issued usually for a shorter period are treated as
temporary contracts. Term assurance provides for payment only in the event
of life dropping before a certain date or age. This type is frequently adopted
as collateral security for a loan.

(a) Temporary Assurance Policy:

This policy is issued by the Corporation on the basis of Term

Insurance Policy. This plan is designed to cover the risk against life
assured for a period of less than two years. The sum assured will be
payable only in the event of the life assured’s death. Occurring within
the selected period from the commencement of the policy. A single
premium is required to be paid at the outset. Rates are fixed where of
per thousand sum assured are given alongside.

(b) Convertible Term Policies:

This plan of assurance is designed to meet the needs of those

options to convert it into Whole Life or Endowment Assurance
Policy. Premiums are payable for selected terms of years or until
death if it occurs within this period, but they may be limited to a
shorter term of years, if so desired. The sum assured shall be payable
only in the event of death of the life assured or at the end of maturity
period whichever is earlier.

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 The main object of this policy is the life assured under this plan,
has an option to convert the policy, provided it is in full force, into
either a Limited Payment Life Policy or an Endowment Assurance
Policy without having to undergo fresh medical examination, at
anytime during the specified term except the last two years.

For instance, the convertible term insurance plan can be

converted into an endowment or whole life type contract at the end of
the selected term of 5, 6 or y years. During this period this is treated
as a term assurance. The assured is expected to exercise his choice of
conversion before two years of expiry of term, so as to obviate
adverse selection. Selection against the insurer during last two years.
If no option is exercised, the assurance comes to end at the end of the
selected term.

(c) Renewable Term Policy:

Renewable Term Policies are issued on the basis of term of

assurance. This plan of assurance is renewable at the end of the
selected term for an additional term period without having to undergo
fresh medical examination. Premiums are usually quoted according to
the age attained at the time of renewal.

3. On the Basis of Endowment Policies

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 This is a popular policy issued by the Life Insurance Corporation of
India. The basic objectives is that the policy for the sum assured becomes
matured on the policy holder’s death or on his attaining a particular age
whichever is earlier . The period for which the policy is taken is called as
Endowment period. The premium under this policy is a little higher as
compared with term assurance. This policy is useful to the family in case of
a sudden death of the policy holder.

Endowment policies are of many types. The important endowment

policies are as follows:

(a) Pure Endowment Policy:

Under Pure Endowment Policy the sum assured is payable on

the policy holder surviving to the maturity date. The sum assured is
payable in the event of death within the term of policy. In the event of
death in the first and second year of policy the benefit will be limited
to 80% to 90% of the premiums paid respectively. This is the best
form of life assurance for audit and child. The basic aim of this policy
is not only providing protection against risk of death but also
encouraging investment.

(b) Ordinary Endowment Policy:

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 This policy provides a fund for family provision and
investment. The sum assured is payable to the policy holder for a
specific term of years either on the assured’s death or on his survival
to the stipulated term i.e. until the maturity date. Premium are payable
throughout the life time of the assured or for a selected period of years
or until prior death of the life assured.

(c) Joint Endowment Policy:

This policy is designed to cover the risk on the two or more

lives under a single policy. The sum assured shall becomes payable on
the maturity of the policy or on death of either of the two lives assured
whichever is earlier. This policy is useful to partners of a firm and for
husband and wife in a family. Partnership firms usually go in for such
policies to provide for the return of the capital of the deceased partner.

(d)Double Endowment Policy:

Under this policy, premium is payable throughout the life term

of the assured or for a selected period of years or until prior death of
the life assured. This is the best form of life assurance; the insurer
agrees to pay the assured double the amount of the insured sum on the
expiry of the term or on the death of the life assured whichever is
earlier.

(e) Fixed Term (Marriage) Endowment Policy:

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 This plan is designed to meet the needs of the provision relating
to marriage of any one of the family members of the policy holder.
Under this plan the sum assured together with profits shall be payable
at the end of the maturity or on the death of the life assured whichever
is earlier. Premiums are payable for the selected terms of the policy or
till death of the life assured if it occurs during the selected term.

(f) Educational Annuity Policy:

This plan provides for a sum assured to be kept aside to meet

the educational expenses of children. Under this plan, the sum assured
together with profits is payable to the insured at the end of the
selected term either in lump sum or in ten half yearly installments at
the option of the life assured/ nominee/ beneficiary. Premiums are
payable for the selected term of the policy or till death of the life
assured if it occurs during the selected term. This policy will be issued
to persons aged not less than 18 years and not more than 60 years at
entry. The policies will be issued for minimum term of 5 years and
maximum term of 25 years subject to maturity age of 70 years. The
minimum sum assured under this plan will be Rs.10, 000.

(f) Triple Benefit Policy:

This plan is most suitable for housing loan purpose. Under this
plan the benefits availing the policy holders on death of the life
assured during the term of the policy is thrice the basic sum payable
or on survival to the date of maturity, only the basic sum assured is

27
 payable. Premiums are payable for the selected term of the policy or
till prior death of the life assured. As per the method of calculation,
paid up value will be the same as a Whole Life limited payment and a
Pure Endowment Policy.

(g) Anticipated Endowment Policy:

Under this policy the sum assured will be payable on the basis
of behalf of the sum assured paid before the death of the policy
holders and the balance of the sum assured is payable at the end of the
maturity date. In the event of the death of the assured before the
attainment of the term period, full lump sum assured amount is
payable to the policy holders. Premiums are payable during the
selected term or till death if earlier.

(h) Multi Purpose Policy:

This form of life insurance not only makes provision for the
family of the life assured in the event of his death but also to meet the
needs of a person in old age. It is also useful to meet the expenses
relating to family and provision for education and marriage of his
children. Premiums are payable during selected period of years r until
prior death of the life assured. Several purposes are fulfilled under one
single policy which is called Multi Purposes Policy.

(j) Children’s Deferred Endowment Assurance:

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 This policy is designed to meet the expenses relating to
children’s education and marriage. Policies under this plan are issued
on lives of both male and female children who have not completed 18
years. This is an Endowment Assurance Policy; it provides the
protection of risk from the date of commencement of policy or from
the deferred date to the date on which the policy emerges as claimed
by the death of child or its survival to a stipulated date. This is the
cheapest form of life insurance because of low rate of premium. The
main object of this policy is to cover the risk against the life of
children on behalf of their parents and guardian.

4. On the basis of Premium Payment:

The following important policies are issued by the corporation on the

basis of premium payment.

(a) Single Premium Policy:

Single Premium Policy is useful to those who desire to provide

the whole premium in one installment at the time of taking the policy.
Single Premium Policy becomes matured on the assured’s death or on
his attainment of selected term whichever occurs earlier.

(c) Level Premium Policy:

29
 Unlike single premium policy, under this policy premiums are
payable on a regular basis for selected term or till prior death. It is
useful to those persons having regular earnings. Premium is lesser as
compared to a single premium policy. The sum assured becomes
payable if the assured reaches a particular age or on the assured’s
death whichever is earlier.

5. On the basis of Participation in Profits

Policies issued on the basis of participation in profits are as follows:

(a) With Profit Policies or Participating Policies:

With Profit Policies are also termed as Participating Policies.

Unlike Non-participating Policies, Participating policy holders are
entitled to get the share of profits or bonus or benefits or paid up
facilities as per the terms and conditions of the Corporation. The sum
assured with profits shall become payable to the insured at the end of
the maturity or in the event of death if earlier.

(b)Without Profit Policies or Non-Participating Policies:

Under this policy, sum assured will become payable without

any paid up facilities to the insured at the end of the selected term or
on the death of life assured if earlier.

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6. On the basis of the Number of Persons Assured:

Important policies on the basis of Number of Persons assured

are as follows:

(a) Single Life Policies:

This policy is designed on the basis of number of persons

assured. Single Life Policy covers the risk on one individual; it may
be issued on one’s own life or on other’s life. The policy amount is
payable to the insured on attaining a selected term or on the death of
the life assured whichever is earlier.

(b)Multiple Life Policies:

Multiple Life Policies is a policy issued on the basis of the

number of persons assured. The Multiple Life Policies may be Joint
Life Policies and Last Survivorship Policies. Unlike Single Life
Policy, Joint Life Policy covers the risks of more than two individuals.
The sum assured is payable at the time of maturity or on the event of
the death of the first assured whichever is earlier. This policy is useful
to partners of a firm or on the lives of husband and wife of a family.
Under Last Survivorship Policy, the sum assured shall be payable at
the last death of assured or on the attaining a selected term if earlier.

7. On the basis of Methods of Payment of Policy Amount

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 On the basis of Methods of Payment of Policy amount, the
policy may be:

(1) Lump sum Policies:

Lump sum Policies are designed by the corporation on the basis

of methods of payment of policy amount. Under this policy the sum
assured shall be payable in a lump sum to the policy holders at the end
of the maturity date or on the sum assured’s death whichever is
earlier.

(2) Installments or Annuity Policies:

This is a plan of assurance designed to provide a large amount

of risk cover on payment of a premium which is comparatively a
small amount. Under this policy the full amount is not payable in
lump sum but the insured amount is payable to the assured by
periodical installments for a selected period of terms or till the death
of the assured.

8. Other Policies

(a) Money Back Policy:

32
 This type of policy provides money back at regular intervals
before the policy expires. For example:, on a 15 years policy, one
gets 20percent of the sum assured after five years, another 20
percent on the expiry of another five years and the balance at the
end of 15 years. In case death of the sum assured occurs during the
2 years, the full sum assured is paid irrespective of installments
already paid. Thus, the policy gives money in hand plus insurance
cover. Premiums are payable for the selected term of years or till
death if it occurs within that period. The bonus additions to the
policy will be reckoned on the full sum assured and are payable at
the end of the selected term of years or at the life assured’s death,
if earlier. No loan will be granted under this policy.

(b)Sinking Fund Policy:

Such policy is taken with a view of providing for the payment

of liability or replacement of an asset.

Special plans

(I) Jeevan Shree: This plan also refers to “an exclusive policy for
exclusive people”. Under this plan, the maximum sum assured is 5
lakhs. Hence, it is specifically suited to high- income groups.
Basically an endowment plan with flexibility in premium paying
term including single premium. The investment will be so
managed as to ensure of guaranteed and loyalty additions-higher
liquidity.

33
(II) Capital Redemption Assurance: This plan provides for payment
of a sum of money on a specified date in exchange for periodical
premiums. There is no life assurance element and they are
independent of the duration of human life, the main factor being
accumulation of interest. In other words, to secure a capital sum to
replace a wasting asset such as machinery or leasehold property.

(III) Jeevan Aadhar: specially designed for the benefit of specific type
of handicapped dependents. This is limited payment whole life
policy with guaranteed additions at the rate of Rs.100/- per 1000
sum assured per annum, where the claimant is paid party in lump
sum and party in the form of an annuity. Full Income Tax benefit
under the section 80DD up to a premium of Rs.40, 000 per annum.
Minimum age entry at 60 years. Minimum sum assured is Rs.
50,000 premium payment term is 10, 15, 20, 25, 30 and 35.

(IV) Policies For Women: Women, now a days are free to take life
assurance policies. However, some specially designed policies suit
their needs in a unique manner; the synopsis of some these policies
are as follows:

A. Jeevan Sathi is also known a Life Partner plan where the husband and
wife are covered under this endowment policy, which gives the following
benefits.

34
  On maturity, provided both are alive, full sum assured with bonus

is paid.
 On the death of one of the assured during the period of the

policy, basic sum assured is paid to the surviving partner, who is

not required to pay any further premiums.
 The surviving partner remains covered for the full sum assured.

If she/he dies, then the sum assured is paid to the nominee, but
this is before the maturity date.
 The surviving partner will be paid sum assured with bonuses if

he survives till the maturity date. Hence this policy gives a

comprehensive family protection.

B. Jeevan Sukanya is highlighted by the following points.

 Only female child aged between 1 to 12 years is covered

in this plan.
 Band is automatically covered under the policy after
marriage.
 Risk of the child starts either after 2 years of taking the
policy or not before the age of 7, whichever is early.
 Premium paying period is 20 years minus age at entry.
 On surviving the age of 20, the life assured receives the
sum assured as survival benefit and the policy continues to cover
the life assured till maturity date when vested bonus will be paid
only. If life assured dies before maturity, sum assured with
bonuses will be paid.

35
 (IV) BIMA Nivesh: A single premium savings/ investment oriented
plan of assurance with compounding guaranteed addition to the
sum assured at the rate of 6 percent available in 5 years and 10
years terms. The scheme accepts premium for minimum sum
assured of Rs.25, 000 and the upper limit, touches the sum of Rs.
50 lakhs.

(V) Key-Man Insurance: it is an insurance taken by a company on the

life of important employee-key-man of the company- against
financial loss that may occur from the employee’s premature death.
Under this plan, key-man can be an expert, a Technocrat, a
Director, a shareholder and an Executive. The key-man may be
defined as an employee whose death would result in a financial
loss to the company. There can be any number of key man in a
company.

Eligibility:

(1) The key-man is holding less than 51% shares in the company
(2) Key-man and his family is holding less than 70 percent shares in
the company.
(3) Key-man is matriculate.
(4) Age at entry is less than 50 years.

Salient Features:

(1) Company will be the proposer for key-man insurance.

36
 (2) Term allowed is 10 to 15 years subject to retirement age or service
contract.
(3) Key-Man Insurance is restricted to 10 times of key-man’s Annual
compensation package. Annual package include: Salary + perquisites.
National value of perquisites will be taken at 30% of Gross Annual
Salary.
(4) Double Accident benefit, extended permanent disability benefit and
term riders benefits are not allowed under key-man insurance policy.

Advantages of Key-Man Insurance

(1) The company is protected against the financial loss in the event of
key man’s death.
(2) The company is able to create an asset for itself in the form of
premiums paid and added bonus.
(3) It generates confidence, sense of security and loyalty in the minds of
key-men.
(4) It can be given as security to bankers; it is guarantee to the creditors.

Group Insurance Schemes

LIC offers life insurance protection under group policies to

various groups such as employer-employees, professionals co-operatives,
weaker sections of society etc. it also provides insurance coverage to people
under certain approved occupation at subsidized rates under social security

37
groups schemes. Besides providing insurance coverage which provide
funding of gratuity and pension liabilities of the employers.

The main features of the schemes are low premium, simple

insurability conditions such as employee not being absent from duty on
grounds of ill health on the date of entry, and easy administration by way of
issue of a single master policy covering all the employee/ members,
premiums are based upon age. Combination of members, occupations and
working conditions of the group. However, there are certain conditions as to
minimum group size and the maximum participation to make the scheme
viable. The standard schemes offered by LIC are as follows:

(1) Group Term Insurance Schemes: Employer-employee groups may

be offered group insurance schemes providing uniform or graded
cover. These groups may also be offered schemes covering
outstanding housing loans and outstanding vehicle advances granted
by an employer to its employees. Group insurance schemes providing
uniform cover can be granted to associations of professionals,
members of co-operative banks, welfare funds, credit societies and
weaker sections of society.

(2) Group Insurance Scheme in lieu of EDLI: The employees Deposit

Linked Insurance scheme is applicable to all establishments and
undertakings contributing employees provident fund under EPF and
MP Act 1952, with effect from 1-8-1976; The scheme provides for an
insurance cover to an employee, which is linked to his balance in the
PF Account, subject to a maximum of Rs.35, 000.

38
(3) Group Gratuity Scheme: Gratuity is a statutory liability of most of
the employers which accrues to an employee for every year, of service
put in by him. As the liability accrues every year, from the point of
view of sound accounting practice year, it is desirable to provide for
this liability before the profits are determined. The Group Gratuity
Scheme provides a scientific method for funding gratuity as the
premiums are based on actuarial principles. The attractive features of
the scheme is the life insurance cover to every employee, his
dependents become entitled to substantially higher benefits.

(4) Voluntary Retirement Scheme (LIC’s Plan): The VRS benefits to

employees generally provide for payment of an annuity which ceases
at the national retirement age. The LIC has evolved plans by which
the VRS requirements of employees can be taken care of.

(5) Group Leave Encashment Scheme: This plan is designed to provide

for employers to meet the liability of leave encashment facility
available to employees in annual books of accounts. Under this plan,
caver of a flat sum assured has also been provided to employees. The
scheme shall be administered by the employer.

(6) Group Savings Linked Insurance Scheme: This plan offers

insurance cover together with a savings element. The contribution
under this scheme is deducted from the monthly salary of the member.
The scheme is allowed to selected employer-employee groups such as
public sector corporations and reputable companies in public and

39
 private sectors who keep accurate records of their employees. Under
this scheme, out of the contribution received in respect of each
employee, a portion is utilized for the insurance cover and the
balance, known as contribution for savings, is accumulated till exit at
an attractive rate of interest, which at present is 10% p.a. The savings
contribution is returned with interest at the time of retirement, or exit
by other mode.

 Life Insurance policy can be utilized for:

 Final expenses resulting from death

After an individual's untimely death, his survivors and heirs are

entrusted with the responsibility of conducting his last rites according to
customs and traditions as propagated by religion. Almost all religious sects
follow certain rules that need to bidden regardless of the social
circumstances.

As it is, the deceased individual's family members are likely to be

emotionally devastated by their loss. And if they are saddled with monetary
expenditure resulting from the death of their family member, their condition
might become dangerously unstable.

Thankfully, the proceeds from the deceased's insurance policy will

more than provide for the final expenses and rituals associated with the
funeral. At least this way, the deceased's family is absolved from the shame
and sacrifice that might be expected of them after their family member's
death.

40
  Guaranteed maintenance of lifestyle

As long as there is a steady and assured supply of income, an

individual's family and dependants are able to keep a self-professed standard
of living. The family's eating and drinking habits, entertainment and lifestyle
expenses are maintained at a certain level during their earning member's
lifespan.

In case of the unexpected death of the earning member, his or her

family will be hard-pressed in trying to arrange for funds that would assist
them in maintaining the standard of living that they've grown accustomed to.
After all, no one really likes to make sacrifices, despite their miniscule fiscal
value. And this is exactly where the proceeds from insurance will prove
extremely useful for the family members. They will be able to maintain their
standard of living without making any sacrifices whatsoever.

 Replacement of income

Most families in India depend on the earnings of the breadwinner to

sustain their existence. Routine day-to-day expenses like provisions and
ration supplies, milk, newspapers, medical bills and general maintenance are
normally met through a regular supply of income.

Additionally the income also provides for any outstanding payments

arising from rent, loans or mortgages. These liabilities have to be minimized
by making payments at regular intervals. In case there is a default in
payments, there are chances of legal intervention and repossession of the
utility made available. And having to do without a service that the family

41
has grown accustomed to can prove to be severely detrimental to their
metaphysical and social well being.

The proceeds from insurance if invested wisely can support the

insured's family members and dependants for the remainder of their lives
with relative ease and in creature comfort.

 Mortgage or liquidation payments

These days, people tend to constantly compete within their peers and
social groups with regards to their lifestyles and related expenses. The
spending pattern is governed by advertising and credit facilities offered by
numerous financial institutions.

Since liquid funds are available at a very marginal rate from various
financial institutions, people go forth and borrow without a care being
seduced by the "Buy now, Pay later" philosophy. They are able to make the
installment payments from their regular sources of income and sustain a
standard of living that would have been beyond their means under ordinary
circumstances.

As long as income is flowing in on a regular basis, there is no cause of

concern. But in case of any default in payments, the lending company will
obviously initiate legal proceedings. Legal proceedings initiated by a
corporate body against an individual can have devastating consequences on
the individual's social and economic status. And the only salvation from

42
such painful ignominy comes from the proceeds due to the insured's family
thanks to his or her insurance policy.

The funds that will be obtained from the insurance company will
provide a buffer that will curtail any impending calamity before it can come
close enough to cause any real damage.

CHAPTER 4
ASSIGNMENT OF LIFE POLICIES

MEANING AND PROCEDURES

In life insurance policies, the term assignment indicates that it is

a method of transferring rights of the assured in respect of the life policy to
another party or assignee or a third party. According to the Insurance Act
1938 under Section (38) provides the following procedures as laid down:

(1) A transfer or assignment of life insurance can be made either by an

endorsement on the policy itself or by executing a separate
instrument. It must be signed by the assignor or by his duly authorised
agent and attested by at least one witness. The endorsement or transfer
must specify the facts of assignment.

43
(2) On valid assignment, a written notice must be given to the insurer
together with a certified copy of the endorsement or instrument. Only
then the assignment or transfer becomes complete and effective on the
insurer.

(3) The date on which the notice of assignment or transfer is delivered to

the insurer regulates the priority of all claims between an assignee and
a third person. If the policy has been assigned to more than one
assignees the priority of the claims of the assignee shall be governed
by the order in which the notice to the insurer is delivered.
(4) On the receipt of the notice referred to above, the insurer shall record
the fact of such transfer or assignment together with date thereof, and
the name of the transferee or assignee. The insurer shall on the request
of the person who gave the notice, grant a written acknowledgement
of the receipt of such notice on payment of a fee not exceeding one
rupee.

(5) From the date of the receipt of the notice the insurer shall recognize
the transferee or the assignee named in the notice as the only person
entitled to the benefits named under the policy and such a person shall
be subject to the liabilities and the equities to which the transfer or
assignor was subject at the time of the transfer or assignment.

(6) Conditional assignment has been held to be valid. Thus, an

assignment in favour of a person made with the condition that it shall
be operative or that the interest shall pass, to some other person on the

44
 happening of specified event during the life time of the person whose
life is insured is valid.

NOMINATION OF LIFE POLICY

The holder of a life policy has the right to nominate any person to
whom the insured money shall be payable in the event of the death before
the maturity of the policy, it is called as Nomination. The person to be
nominated is called Nominee. Nomination can be made at the time when
policy is taken. In the case of nomination, a person can nominate only on the
insurance of his own life. Thus, a policy holder of insurance is entitled to
make a nomination. The assignee or transferee of a policy can not do this.
Nomination can be changed or cancelled any number of times by the insured
before the policy matures for payment under notice to the insurers.

According to Section39 of the Insurance Act, the following provisions

are madder regarding nomination by policy holder.

45
• The nomination in order to be effectual, by incorporating in the text of
the policy or by an endorsement on the policy itself and
communicated to the insures who shall register it.
• The policyholder is entitled to receive from the insurer an
acknowledgement of having registered a nomination or a cancellation
or change thereof.
• When a policy is transferred or assigned any nomination made in that
policy automatically stands cancelled.
• Where the policy matures for the payment during the life time of the
person whose life is insured, or where the nominee dies before the
policy matures for payment, the amount is payable to the policy
holders or his heirs or legal representatives.
• Where the nominee survives the person whose life is insured, the
amount shall be payable to the nominee.

Surrender Value

The term surrender value refers to the amount of money which the
insurer agrees to pay, in case the assured decides to surrender his policy
before its maturity. It is said that the policy holder wishes to surrender his
policy to the insurer and gives up his claim on it. Surrender of policy
indicates termination of the contract of insurance. The amount of surrender
value is calculated on the basis of actual premium paid and the number of
years the policy has been alive. Surrender value increases with each payment
of premium.

46
 According to LIC a policy acquires surrender value only after the
payment of two or three years premium. Thus, the policy is required to have
run for three years before it acquires surrender value. In this regard some
insurance companies guarantee a minimum surrender value of 40% of the
total premium paid.

Paid Up Value

If a policy holder discontinues the payment of premium after at least

two years premiums have been paid and subsequent premium is not paid, the
policy does not become void but continues as a paid up policy. According to
Insurance Act it is defined as the policy paid up for an amount bearing the
same proportion to the amount of original sum assured which the number of
premiums paid bears to the total number of premiums payable under the
policy as a whole, the policy with this reduced amount is called “Paid Up
Policy”.
In the case With Profit or Participating policy it is assured that bonus
or profits will be added to the paid up value but future gains or profits are
not entitled to such policy.

Days of Grace

Insurance company allows certain days after the stipulated period of

insurance during which the insured can pay the premium to renew or
continue the policy. LIC allows fifteen days of grace from the due date to
pay monthly premiums and thirty days of grace for the payment of quarterly,
half yearly, and yearly premiums.

47
 A life insurance policy creates a continuing risk and it merely lapses if
the premium is not paid. Death of the insured during the days of grace makes
the insurance company liable to pay the money due under the policy.

Revival or Discontinued or Lapsed Policies

When the premium is not paid within the days of grace, the policy
lapses. It may be revived during the life time of the life assured. It can be
revived within a period of five years from the due date of the first unpaid
premium and before the date of maturity.

Loans on Policies

Where a policy has a surrender value, it also has a loan value, and
assurance companies usually lend 95% of the surrender value, keeping the
balance of 5% as margin for a year’s arrears of interest. The loan may be
repaid at the convenience of the borrower. In case it is not repaid it keeps
alive with interest accumulation, to be deducted from the policy money. It
can be payable by the insurers either on its final surrender or on its maturity.
This is the best investment that an insurance company can make, as there is
never any danger of the money being lost.

Proof of Age

48
 In life insurance the age of the life to the assured is important because
premium and annuity rates are based on age attained at inception of the
contract. It is particularly important in endowment policies wherein the
money is payable to the assured on attaining a certain age. The insurer may
require proof of age to be furnished at the time of proposal itself or at any
time after the issue of the policy. The evidence may be a birth certificate or
any family record of document.

Proof of Death

In case of policies at death, the death of the insured has to be proved.

The usual proof is a death certificate and a declaration as to the identify of
the person described in such certificate. Death may be proved by direct
evidence or by death certificate or by evidence of prolonged absence or
other facts from which the fact of death may be properly infeared. In case of
death in foreign country, the death certificate and the declaration of the
medical practitioner who attended with the attestation of the Indian consul is
require. Death is presumed where it is shown that a person who went abroad,
or disappeared, has not been heard of for seven years nor has he
communicated with those he would have communicated when alive.

49
 CHAPTER 5
CLAIMS

A life insurance contract is a long-term contract. The contract is

entered into when the insurance company issues the First Premium Receipt.
It ends with the settlement of claim by the insurance company or when the
policy matures/ lapses. A claim is the natural culmination of the promise
made by the insurance company at the time of entering the contract. This
promise wad that the insurance company would pay a stipulated sum assured
on the happening of the insured event or contingency.

50
 A Claim refers to the demand for the commitment made by the insurer
at the time of entering into the contract. For Term Insurance or Whole Life
Policies, the claim has to be paid on death of the insured. For Endowment
Policies, the claim has to be paid on death or maturity.

The claim settlement is thus the final obligation of the insurer. It is

called the ‘discharge of contract by performance’. The efficiency of any life
insurance company is measured by how effectively it handles the settlement
of claims.

The two different kinds of claims are:

(A) Maturity Claims:

Maturity claims are payable in the case of endowment policies. These

claims are paid out as follows.
1. The insurer normally intimates the assured in advance.
2. The following documents are required by the insurer to the date
of maturity-

• Original policy document.

• Age proof

• Deed of assignment, if it exists.

51
 • Discharge voucher completely filled in.

3. On receipt of the filled and stamped discharge voucher along

with the policy document, the claim amount is paid by an
account payee cheque.

(B) Death Claims

In the case of term or whole policies, the sum assured is payable on

death. In this case, the claims are paid out as follows-

1. The passing away of the assured has to be communicated to the

insurer in writing giving details like policy number, name of the
assured, cause of death, date of death and relationship of the
informant to the deceased. The intimation should definitely be
from a concerned person and the identity of the deceased
should be established to get the claim.

2. The following documents would be asked for by the insurer-

a. Original policy document

b. Deed of assignment
c. Proof of age
d. Certificate of death
e. Legal evidence of title, if the policy is not nominated or
assigned

52
 f. Form of discharge executed and witnessed.

If the person dies within 3 years of the commencement of policy, the

following additional things may be asked for:

a. Statement from a person who had attended the last rites

and seen the dead body
b. Statement from last medical attendant stating illness and
line of treatment
c. Certificate from the hospital in case of hospitalization
d. Statement from the employer, in case the deceased was
employed, giving particulars of leave.

In case of unnatural death, the concerned reports like panchnama, post

mortem report, etc, would be required.

3. The claim amount is payable to the nominee or assignee. In

case no nomination or assignment is done by the assured, legal
evidence of title like succession certificate is required.

The insurer makes the payment of the claim after ensuring that the
claim is valid. In cases where death has occurred within 2-3 years of the
policy’s commencement or revival, the insurer conducts investigations to
rule out the possibility of foul play or suppression of evidence.

53
 PREMIUMS

Premium is the price paid by the insured for purchasing the insurance
policy, i.e. the plan and term of assurance for the sum assured chosen by
him/her.
The premium has got to be paid by the insured person at the
commencement of the policy and at regular intervals as specified in the
contract.

54
 Normally the insurance companies publish tables of premium rates.
These tables give us the tabular premium. The tabular premium is arrived at
as follows-

1. The RISK PREMIUM is first calculated. This is the amount required

to meet the risk of death for given age for a period of one year.
2. The NET PREMIUM is then calculated, taking into account the
interest component.
3. When we consider the provisions for administrative expenses,
unexpected contingencies, and fluctuations, we get the OFFICE
PREMIUM.
4. Modifications are made, considering the various factors which might
affect the premium computation. This gives us the TABULAR
PREMIUM.

The calculations of premiums to be charged on different insurance

policies become a complex one due to various factors. For example, it is
expected that out of 1000 people of a specified age group, one is likely to die
within one year, and then the mortality rate at that age would be Rs.1/1000
i.e. 0.1%. The risk premium chargeable for persons at that age would be Rs.
1 for every Rs.1000 of the sum assured. If the person belonging to the above
group also suffers from some health problems, then the premium amount
chargeable will be more than Rs. 1 for every Rs. 1000 of sum assured.
Other complications include the fact that a person becomes more risky
as his age increases i.e. the risk factor keeps increasing along with increase
in age. However, the premium to be charged in each period has to be kept
constant. Hence, a higher premium is charged in the early years. This higher

55
premium earns interest so as to compensate for the increased risk in the latter
years.
Thus, the risk premium charged should be after taking into account
the factors like the health, habits and age of the insured. This amount is
decided upon by the actuary.
Premium amounts also get affected if the payment is made in a
monthly, quarterly, half-yearly or yearly manner. Where the premiums are
payable on half-yearly or yearly mode, there is saving in administrative costs
as compared to the quarterly or monthly mode. Moreover, in the yearly
mode, the insurer can utilize this amount the entire year and earn interest on
it. Hence, the usual practice is to allow rebates on half-yearly and yearly
mode of payments. For monthly mode of payments, by the same logic, extra
loading is to be charged to cover up the additional administrative expenses
involved.

The actuary decides on the end premium to be charged to the

customer, after considering 4 factors, like,

1. MORTALITY

Mortality is the probability of the insured dying in any given year.

The actuary uses mortality tables and interprets the data to project the future
most accurately for the type of contract being proposed. The risk premium is
calculated taking the mortality rates into consideration.

2. INVESTMENT

56
 As all premiums received by the insurer are invested and the insurer
expects to earn interest on the investments the actuary makes assumptions
about the future rate of interest and allows for it in the premium charged.

3. EXPENSES

Life insurance offices have various operating expenses including

agent training and recruitment, commission, staff salaries, office
accommodation, office stationary, etc. All these have to be paid for out of
the premiums collected. Hence, every premium has to carry a proportion of
these costs. These expenses are allowed for with a loading that is applied on
the premium life.

4. CONTINGENCY

There are some assumptions made in the fixing of premiums, for

example, assumptions on mortality rates based on the mortality tables. A
contingency margin is added on to the premium so that the company can
continue to meet its obligations towards policy-holders even if the actual
experience turns out to be worse than the assumptions used in pricing. The
combination of the mortality factor and the interest gives us the NET
PREMIUM. Loading for expenses and adding contingency to get the overall
premium rate to be charged, is known as the GROSS PREMIUM.

Premium calculation

57
 The insurer grants life insurance to the life assured on the basis of the
information supplied through documents like proposal form, medical repots.
Based on this information, the insurer underwrites the life of the insured at
an appropriate rate of premium. The premium charged has to be appropriate
to the risk involved.
Before the actual calculation of premiums, one needs to understand
the various factors which affect the calculation of the amount to be paid as
premium:
• Type of Policy: Different types of policies have different benefits and
different circumstances under which the benefits become payable. The
expected cost of these benefits, based on the risk of claims, helps
determine the amount of premium.
• Age: As discussed earlier, age has a bearing on the risk of death. The
risk of death increases with age. Therefore, the premium rate usually
increases with age.

Calculation of age-
There are 3 different ways of calculating age.
Mr. Seth is a proposer for life insurance on 13-7-2002. his date of
birth is 3-9-1970.
Date of proposal 13.07.2002
Date of birth 03.09.1970
Difference 10 10 31

1. His age nearer to his birthday is 32 years.

58
 2. His age last birthday is the number of completed years of age i.e. 31
years.
3. His age next birthday is 32 years.
An insurer may follow any of the above 3 methods for calculation of
age for the purpose of premium calculation.

• Term of the Policy: For savings plan like endowments, the longer the
term, the lesser the Tabular premium, other things being equal. For
pure protection plans like term insurance, the longer the term, the
higher the tabular premium, other things being equal.
• Additional Benefits: Where the client selects additional benefits e.g.
double accident benefit or extended permanent disability benefit along
with the basic plan, there will be an additional charge.
• Sum assured: Higher the sum assured, higher is the premium
charged.
• Mode of payment of premium: The premium paid per year for
annual premiums will be lower than the sum of premiums paid per
year for policies with more frequent premium payments like quarterly,
half-yearly.
CHAPTER 6
LIFE INSURANCE UNDERWRITING

Concept of Underwriting:
Underwriting in life insurance presents more problems than other
areas, as the subjective factor is more manifest. The principles Ubberrimae

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Fides has all the more importance in this areas as the insurer has absolutely
no opportunities to know the past history and in some cases the present
condition, unless the proposer present voluntarily discloses several traits. As
such, it is important that the proposer present a comprehensive and realistic
picture of his or her health status and other relevant areas so that risk
projected by him or her is commensurate with the premium that he or she is
going to pay. In the long run, the pooling of risk should be as close to the
expected result as possible so that the premium setting does not deviate
largely for the ultimate results.

The concept of pooling in life insurance has already been discussed in

detail. Those who take life insurance policy pay their contribution in this
pool. All claims are paid out of those pools. It is the fundamental duty of the
life insurance company to administer this pool in order to maintain the
equity amount the different classes of policyholder, it is necessary that each
policyholder contributes according to the risk he or she transfer to the
common fund. Of one person is allow to pay less than his or her share, it
means that the other persons will have to bear extra burden in order to
maintain the solvency of common fund. Unless the fund is solvent, it
becomes impossible to maintain all claims.
Further, underwriting deals with probabilities rather than certainties
and essential that these probabilities which eventually go into the final
reckoning while calculating the premium, are as close to reality as can be in
this respect again, the proposer should give as many details as are deemed
necessary to present a true and correct picture of his or her condition. It
would be impossible for an underwriter, to make a perfect estimate of the
risks, unless the proposer positively contributes towards that ardous task.

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 It therefore, becomes the task of every life insurance company to
assess the risk it wishes to accept and on basis fix a fair and equitable
premium payable by the applicant. This possible only if the company
carefully selects and classifies the risk it assumes. The process through
which the life insurance company decides whether an application received
by it can be accepted at standard rate premium or on different terms for
rejected is called underwriting. It is otherwise called ‘Selection and
Classification of Risk’. while selection represent the first part viz., decision
to accept a proposal, classification of risks represent the second part viz., the
term on which the proposal can be accepted.

Different classes of Lives and Standard of Classification or

Risks:

Purpose of Selection:

When any group of individual of the same age is considered, a great

majority of them are found to be ‘normal’. Still a few would have an

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impaired health or face unusual risks because of occupation etc. a
knowledge and understanding of the various factor which influence morality
enables the company not only to select applicants but also classify them into
different group depending on the rate of the morality they are likely to
present. The main purpose of this process is to be determine the rate of
premium payable by the prospect for a risk presented by him to the company
and accepted by the company. Those lives to whom the company can offer
the same premium rates as mentioned in their in the Premium Table are
called Standard Lives. All other lives are called Sub-standard Lives that is
a. Lives subject to higher than normal morality and who can be
accepted at term different from those offered at Standard Lives
b. Those risk which the company cannot accept, otherwise called as
Declined Lives.

Each company sets its own underwriting standards. These is mainly

depend upon the rate of the morality assumed by the company a constructing
the premium rates table. The life insurance company must established
exceptions within which applicants will be regarded as normal and hence
insurable at standard rate of premium. Applicants who fall beyond these
limits will be considered sub-standard and subject to higher rates or will be
declined. In addition to the establishing the limits of various classes of risk,
the company must adopt selection and classification procedure that will
permit the placing of applicants for life insurance into proper categories.

There is one more complication. An applicant’s decision regarding

insurance may be based more on his knowledge or suspicion about his
condition of health than the company’s knowledge. Naturally, the applicant

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 will decide on the most favorable basis open to him. This tendency is know
as ‘adverse selection’ or ‘anti selection’. This will be present whenever an
individual has freedom to buy or not to buy. To choose the plan and amount
of insurance, and to continue or discontinue a policy. The underwriting
procedures should attempt to screen out such applicants and classify them
appropriately. The process of underwriting should thus attempt to protect the
company against such adverse selection.

Factors of insurability

The need to treat all policy openers equitably and to maintain

solvency of Thwe Company as a whole need not be over emphasized. Life
insurance companies, therefore, carefully consider a number of significant
factors when each application for insurance is presented; the information by
the company relating to these factors enables it to determine the extent of
risk involved. These factors are called as ‘factor of insurability’.

1. Age: Age is an important factor because the rate of premium depends

upon the age of the applicant. The probability of death increases as the
person grows older. Hence, the company almost always insists upon a proof
of age at the time of application itself. In respect of policies on the lives of
minors, proof of age is insisted upon at the time of application itself, because
one of the essentials of a valid contract is that the life assured should be of a
major. Any contract entered into with a minor is void ab initio.
If age is not registered at time of application, but a proof is
subsequently submitted, it is possible that the age may prove to be

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 higher or lower than what was declared at the time of application.
Based on the actual age, the company will have the discretion in such
cases to modify the application, it can be submitted later; but
settlement of a claim under the policy will be subject to proof of age
being submitted.
Life Insurance Corporation of India accepts several types of
proof of age some of which are standard and some non-standard.
Usually the standard proof of age are Municipal Birth Certificate,
School/College Certificate and a Certified extract from service record
in respect of applicant who is an employment of Government, Quasi-
government or Public sector Undertakings. Where such standard proof
are not available, non-standard proofs like self-declaration are also
accepted. But certain restriction as regards plan, term of assurance,
maximum sum assured, and maximum maturity age are imposed.
There is an additional premium is payable by the applicant in such
cases.

2. physical condition: Physical condition means the condition of health

etc. of the proposer at the time of proposing life insurance, the

company should satisfy itself that the applicants is in a good physical
condition. Predicted future morality of an applicant depends upon the
abnormalities present in one or more important system of the body-
digestive, respiratory, cardiovascular-reneal, genitor-urinary etc
system. When there are indications of any abnormalities, further
examination may be necessary before the application can be accepted.

3. Occupation: Occupation hazards may increase risk in different ways.

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a. Risk of accident to professionals as pilots, auto-racers,
electrical high tension line men, and those working in great heights.
b. Risk of health to workers in chemical factories, who are
exposed to toxic gases, fumes, etc, underground drainage workers in mines,
workers in textile/cotton mills, who are exposed to cotton dust.
c. Risk of both accident and health to workers in underground
mines.
d. Risk of environmental hazards to workers in entertainment and
liquor trades.
Occupational risk have declined in importance as a factor
affecting life insurance underwriting because of increased attention to
job safety and working conditions. Rating have either been estimated
or reduced in many occupations. LIC of India has a chart of
occupational hazards, but it removed all occupational extras up to
Rs.4 per thousand sum assured under all its life insurance plans.
5. Females lives: Females lives or be treated separately for underwriting
purpose, because they bear children and are born to diseases peculiar
to their sex. Insurable interest is another factor to be considered.

6. Personal history: The applicant’s health background will have a

bearing on his expected morality. History of chronic diseases is
necessary do not completely leave the system and have permanent or
long after-effects. Actual diseases on the other hand, have generally
no after-effect expect making the system weak for a short period.
Apart from these, there could be history of surgeries or accidents. All
these have an effect on the longevity of an individual.

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 Personal insurance history is equally important. How much life
insurance the applicant is already carrying is a moot point. If an
applicant, who already has a large amount of life insurance in force
with one or more companies, again comes up request for new
application is not justified by the present income and finance.

CHAPTER 7
REINSURANCE

Reinsurance is a means by which an insurance company can protect

itself against the risk of losses with other insurance companies. Individuals
and corporations obtain insurance policies to provide protection for various
risks (hurricanes, earthquakes, lawsuits, collisions, sickness and death, etc.).
Reinsurers, in turn, provide insurance to insurance company. Reinsurance
arrangements are made from the central office in the LIC.

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Functions

There are many reasons an insurance company will choose to reinsure

as part of its responsibility to manage a portfolio of risks for the benefit of
its policyholders and investors.

Risk transfer
The main use of reinsurance is to allow the ceding company to assume
individual risks greater than its size would otherwise allow, and to protect
the cedant against catastrophic losses. Reinsurance allows an insurance
company to offer larger limits of protection to a policyholder than its own
capital would otherwise allow.

Income smoothing
Reinsurance can help to make an insurance company’s results more
predictable by absorbing larger losses and reducing the amount of capital
needed to provide coverage.

Surplus relief
Reinsurance can improve an insurance company's balance sheet by
reducing the amount of liabilities, and thereby increasing surplus. Surplus =
assets less liabilities, is roughly the same as shareholder equity on a balance
sheet of a non-insurance company.

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 Arbitrage
The insurance company may be motivated by arbitrage in purchasing
reinsurance coverage at a lower rate than what they charge the insured for
the underlying risk.

Retrocession

Reinsurance companies themselves also purchase reinsurance and this

is known as a retrocession. They purchase this reinsurance from other
reinsurance companies. The reinsurance company who sells the reinsurance
in this scenario are known as “retrocessionaires.” The reinsurance company
that purchases the reinsurance is known as the “retrocedent.”

This process can sometimes continue until the original reinsurance

company unknowingly gets some of its own business (and therefore its own
liabilities) back. This is known as a “spiral” and was common in some
specialty lines of business such as marine and aviation. Sophisticated
reinsurance companies are aware of this danger and through careful
underwriting attempt to avoid it.

It is important to note that the insurance company is obliged to

indemnify its policyholder for the loss under the insurance policy whether or
not the reinsurer reimburses the insurer. Many insurance companies have
experienced difficulties by purchasing reinsurance from reinsurance
companies that did not or could not pay their share of the loss.

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 In a 50% quota share the insurance company could then be left with
half the premium and the entire loss. This is a genuine concern when
purchasing reinsurance from a reinsurer that is not domiciled in the same
country as the insurer.

CHAPTER 8
PRICING & CHANNELS OF DISTRIBUTION

PRICING OF LIFE INSURANCE

Pricing of insurance product is a complex task as premium rates to be

charged depend upon variety of factors namely, expected losses, operating
expenses, income from investments and profit margin of the insurance
company. Actuaries employed by the insurer calculate and determine the

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premium rates to be charged for different policies and from people of
different age.

If the premium charged is very low, the company would not be able to
collect sufficient amount to pay claims, bear expenses and earn some profit.
On the other hand, excessively high premium charged will result in loss of
prospective clients of the insurance company because company may lose the
prospective insurer to its competitors in the market.

Pricing also depends on the market forces of demand and supply of

insurance products. Pricing refers to the methods used to calculate rate of
premium to be charged on insurance products. Premium is a price for which
the insurer is willing to accept the risk. The payment of premium by the
proposer is acceptance of the price charged by the insurer for providing the
life insurance cover.

PRICING OBJECTIVES
The following are the objectives kept in mind while deciding upon the
pricing of various insurance products:

I. ADEQUACY OF RATES

The premium rates fixed by the insurance company should be

adequate in order to pay the benefits promised to the policyholders and
meet all the operating expenses. In other words the rates charged must be
sufficient to collect the premium incomes the insurance company required

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 to pay various operating expenses, to pay the claims and at some profit
margin. Insurers do conduct periodic reviews to assess whether the initial
premium levels established are equitable and not too high i.e. adequate.

II. FAIRNESS AND RATE EQUITY

The insurance rates must be fair and equitable. The rates

charged to the policyholders with the same expected losses and other
costs should be equal. This is known as rate equity. It means that the
insurance company should charge premiums in accordance with the
expected payment of benefits and expenses. The rates must be same for
homogenous groups and must not be same for heterogeneous groups (say
of different age groups).
If the two individuals of different ages, say one 25 years and
other 50 years intend to purchase same policy for the same time period
with same terms, the insurer will be charging the higher rate of premium
from the person who is 50 years old as there is comparatively higher
death probability of the older client.
In the case of the young person of 25 years the company cannot
associate very high death probability. If there are two persons of the same
age who want to take same policy with same terms and conditions but
one person is chronically ill, the insurer must charge them different rates
as the ill person has higher probability of dying at a certain age (so
should be giving higher premium).

III. REASONABLENESS

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 The rates of the premium charged to the policyholders should
not be too high because it will lead to loss of insurance business to the
competitors in the industry. Charging excessive premium is therefore
unfair to the customers.

IV. SIMPLICITY

The premium rates charged should be simple to understand and

should not change very frequently.

LIFE INSURANCE PRICING ELEMENTS

1. Rate of death of large number of insured persons.

2. Administration cost and other expenses of the insurer.
3. Income from investment of premium.

I. RATE OF DEATH OF LARGE NUMBER OF INSURED PERSONS:

The mortality rates depend on the age, occupation, life style,

and medical history of the insured. The premium rates charged are
calculated on the basis of rate of deaths of very large number of persons
insured, i.e., the past experience of large number of cases is taken into
consideration before deciding on mortality rate.

II. ADMINISTRATION COST AND OTHER EXPENSES OF THE

INSURER:

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 Every insurer incurs certain expenses or administrative costs
related to the service provided. The administration cost incurred may
depend on frequency of payment of premium and the volume of records
kept. If the premium is paid annually, cost is lesser as compared to
quarterly and half yearly or monthly payments.

III. INCOME FROM INVESTMENT OF PREMIUM:

Premium collected by the insurance company from various

policyholders is again invested and the income earned on the same helps
the insurance company to bear various expenses incurred and benefits
given to policyholders.

CHANNELS OF DISTRIBUTION

Marketing includes all those activities carried on to transfer the goods

and services from manufacturer to the consumer. Marketing mix is a unique
combination of basic ingredients of marketing viz.
1. Product
2. Price
3. Place (channels of distribution)
4. Promotion

It is designed for the best realization of the objectives of marketing

management. In marketing management the term place is used to refer to

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channels of distribution i.e. intermediaries which fetch products/services
from the place of the manufacture to the place of ultimate consumers.

The channel of distribution (place) is an important ingredient of

marketing mix as however useful the product might be and how so ever
suitable its price be, unless and until the products/services are mad available
to consumers at ‘centres of convenient buying’ the consumers will not be
buying the same.

Insurance being a service business requires marketing department to

play a key role in delivery of service. The marketing department conducts
research for identification of target customers, help in maintaining and
promoting the distribution system and also plays an active role in
development of new products. It is the most vibrant department in an
insurance organization since it has to necessarily deal with all the other
department of the organization.

The major task of sales managers in charge of the sales section of

insurance company is the supervision of the sales functions of the branches.
This section is also responsible for spreading awareness among the general
public about the benefits of life Insurance. Sales training section is entrusted
with responsibility for training in product, in selling and sales planning in
the personnel such as development officers and agents.

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 CHAPTER 9
INFORMATION RELATING TO PRIVATE INSURANCE
(Life)
Bank of Punjab (BoP) announced its tie up with the state-owned life
insurance major LICI for distributing the latter’s insurance products. The
Indian Cricket Board will launch a unique insurance policy offered by LICI
for its players wherein their returns would rise by 43 percent annually
compared to an existing benevolent fund.

Vijaya Bank, Punjab National Bank (PNB), the Principal Financial

Group of the US and a leading tyre company have signed a memorandum of
understanding (MoU) and have applied to IRDA for a license for a life

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insurance venture. Private insurance players are targeting Non-resident
Indians (NRIs) as the premiums coming from this segment of society are
huge. Birla Sun Life Insurance Company and SBI Life Insurance are coming
up the special insurance-cum-investment products targeted at NRIs.

The Supreme Court has ruled that an insurance company which has
issued a Third Party (TP) liability policy has to pay compensation to the
victims of a road accident even if the driver of the vehicle which meets with
an accident had a fake driving license.

LIC is looking at extending insurance cover to HIV- infected women

under the Jeevan Bharati plan. The life insurance company will need
national level data on AIDS/HIV infection and relevant statistical
information to take any decision on extending insurance cover to women
affected by this disease. IRDA has granted in principle permission to the
Sahara Group to enter the life insurance business, subject to the latter
fulfilling some regulatory requirements.

In the context of declining interest rates, Senior citizens are awaiting

for the launch of LIC’s pension scheme, guaranteeing an annual return of
9% in the form of monthly pension scheme.

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 Important activities in life insurance companies

 Procuring proposals from prospective buyers of life insurance.

 Scrutinizing and making decisions on the proposals for insurance. The

underwriting department would do this.

 Issuing a policy document. This is the evidence of the insurance

contract. This would incorporate the various terms and conditions of
insurance cover.

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 Keeping track of the performance of insurance contract like timely
payment of renewal premium.

 Attending to various requirements that may arise during the duration

of contract. The example would be nomination, alteration of terms,
change in address, loans etc.

 Investing the premium collected and maximizing the investment

return.(interest on investment)

 Actuarial department deciding on the premium to be charged by the

insurer laying down underwriting guidelines, periodical valuations,
new products and or riders.

CASE STUDY

Enterprise content management at ING Vysya

ING Vysya Life needed to create a customer-centric business model

to understand its customers’ needs. It also needed to streamline operations,

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reduce cost, focus on growing market segments, and provide a wide range of
services. The insurance company therefore decided to stay ahead of the pack
by implementing Enterprise Content Management (ECM). by Kumar
Dawada

ING Vysya Life Insurance Company entered the life insurance

industry in India in September 2001. The liberalisation of the insurance
sector in March 2000 paved the way for not only private players but also
well-known foreign insurers. It had to compete with those companies as well
as LIC which had been around for almost half-a-century.

COST AND SERVICE FACTORS

K R Subramanian, COO, ING Vysya Life feels that in a fiercely

competitive market like life insurance, all players deal in similar products.
They use the same Indian mortality assumptions and pricing. “The only
differentiating factor is cost leadership and efficient service. We have to
issue policies faster and make sure that normal insurance applications are
processed quickly. The Filenet ECM helps measure the actual time in each
segment of activity. We are also able to take insourcing or outsourcing
decisions based on cost. The turnaround time has drastically fallen. Front-
end offices in hundreds of locations can scan applications and papers and
send them to the processing offices by evening. The people sitting there can
feed data and process it. This reduces the processing time by at least eight
hours,” says Subramanian.

CENTRALISED MODEL

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 The paradox of a service industry is that it relies upon standardisation
but requires customisation. “The insurance application forms and papers
were standard but there was a need to know that it was sent by an individual.
Hence, there was a scope for incorporation of unique features and
processing. Parameters were required to route the data intelligently to the
right people,” recalls Subramanian.

ING Vysya Life centralised its operations. “Being a new industry, we

had to get new people, train them and maintain process purity, so it made
business sense to centralise things. The node sending the applications can be
located anywhere. This helped manage the business despite geographical
diversity and complexity of products and processes. The basic infrastructure
laid the foundation for that,” says Subramanian.

CHANGE MANAGEMENT

Implementing a new technology can be painful. So a strategy was

devised to make users suggest technology instead of thrusting a new
technology on them. “The underwriters were asked for suggestions to make
their work easier. Even before the ECM implementation, underwriters had
internally developed an underwriting rating engine working on a crude
workflow. The ECM became a logical extension of that idea on a superior
platform. We followed the Japanese methodology and spent a lot of time on
preparation, thinking, brainstorming, gathering requirements and
understanding the implication of other activities. The requirements were

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then converted into business and technical specifications. Then a prototype
was created to see how comfortable people were with its usage. As the staff
was already IT-savvy the transition was smoother than expected,” confides
Subramanian.

COMPATIBILITY ISSUES

The ING Vysya Life ECM implementation has many value-added

features, which can be enabled as required. This addresses scalability issues.
The company uses Life Asia solution for their transaction processing. It has
been customised internally. In the insurance business, it is necessary to
maintain records for several years because life insurance contacts are long-
term. It is also sensitive and needs reliability. The solution uses satellite
communication for integrating the transaction system with sending messages
to customers about various schemes, information and bank payments.

“The company’s strategy is to use the ECM as a basic system and

plug it into various other systems. The Life Asia system and automated
rating system is already plugging into the ECM. People make the biggest
mistake by going for tight integration. Due to that, they are unable to take
advantage of future developments in technology. Our integration approach is
focussed on getting more information from the transaction processing
system to overflow instead of vice-versa. This is because the transaction
processing system is a labyrinth. When you put data into it, many internal
validations have to be satisfied but this takes a lot of effort which does not

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pay dividends. So, we focussed on integration from the transaction
processing system into the overflow system,” elaborates Subramanian.

About ING Vysya Life

The company has a customer base of over 1,50,000. The headquarters is at

Bangalore. It has a presence in cities like Ahmedabad, Baroda, Belgaum,
Bhopal, Calicut, Chandigarh, Chennai, Kochi, Coimbatore, Delhi, Goa,
Guntur, Gurgaon, Hubli, Hyderabad, Indore, Jaipur, Kolkata, Ludhiana,
Mangalore, Mumbai, Mysore, Nagpur, Pune, Secunderabad, Surat,
Thiruvananthapuram, Vadodara, Vijaywada, and Vizag. It also has over
10,000 advisors working from 46 branches (in 30 cities) and has 1,200 plus
employees.

ROADMAP TO THE FUTURE

“We have a state-of-the-art insurance architecture and are trying to

standardise it in terms of service levels and for compliance with the
Sarbanes-Oxley Act. In insurance the raw material and end product are data.
We will use IT as a strategic tool to provide functional value from sales
automation, for agency remuneration, and customer and agency portals,
which integrate into the transaction system through overflows. We also have
a clear Business Continuity plan (BCP) as a part of BS7799 standards and

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ING security requirements. We are not fully-compliant but are moving in
that direction. We have a Disaster Recovery (DR) site in Hyderabad. The
DR is based on overnight transfer of tapes. We are planning to make it a
warm site in the not too distant future,” reveals Subramanian.

CONCLUSION

The industry is fast becoming customer centric. With more and more
customers demanding innovative insurance solution to their problems,
insurers are competing with each other. Still life insurance products are more
attractive to the investors. The key information regarding investor’s
preference that will guide future life insurance product mangers.

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 Thus, Life insurance today plays a major role in ones life at various
stages. Considering the benefits it offers one cannot but give a thought to
buying an insurance policy at the earliest.

Most important of all insurance provides you with that unique sense
of security that no other form of investment provides. It gives you a sense of
financial support especially during that time of crisis irrespective of the
fluctuations in the stock market.

BIBLIOGRAPHY

 Life Insurance (volume II) ICFAI

 Principles and Practice of Insurance Dr. P.P.Periasamy
 Practice of Life Assurance Insurance Institute of India.

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 WEBLIOGRAPHY

 www.licindia.com

 www.ingvysya.com

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