Basics of Life Insurance

BASICS OF LIFE INSURANCE

PROGRAM OBJECTIVES:• State the business of Insurance • Principles of Life Insurance • Different types of Life Insurance products • Calculation of premiums & concept of Bonus • Policy Conditions

• Underwriting • Types of Claims • Role of an insurance agent

Chapter 1

What is insurance ? – Protection of economic value of assets – Mechanism to reduce impact of adverse events on value generating assets

Every one has some assets …….like House, Car etc.

Assets are

Income Generating Example: Factory

For Comfort /Convenience Example: Car

Assets have a specified Lifetime But, It can Be destroyed

Become NonFunctional

Which will cause loss to the Owner

Insurance is a mechanism that helps to reduce the effect of such adverse situations

Purpose & Need ? – PERIL

Perils are uncertainties

– RISK

Damage to asset due to this peril Insurance is a function of UNCERTAINTY

If there is no uncertainty , it cannot be insured

Assets may get damaged due to

Accidental Occurrences Called

Perils

However The damage due to the perils is the is exposed to

Risk the asset

Peril

Cannot be prevented

Damage/ Financial loss

Asset Risk can be insured against

Risk only means that there is a possibility of loss or damage

Insurance Compensates only the financial losses But does not protect the asset against the Peril

Insurance cannot protect the house against the fire

It will however compensate the monetary loss because of the peril

If the loss is not financial, insurance is not possible

How Insurance Works The manner in which the loss is shared can be determined before hand

Contribution

Fund

Compensation

Basis of contribution is “how many” and not “who” will suffer Fortunate Many

Unfortunate Few

Insurance is a risk sharing mechanism

Life Insurance

Human Life is a income generating asset which can be

lost due to premature death OR become non-functional due to an accident or sickness

Death is certain – timing is uncertain

Life insurance does not PROTECT LIFE – it tries to minimize the impact of an untimely death on those dependent on that income

Occurrence has to be random Occurrence has to be Accidental Not the Deliberate creation of the Insured Person

Risk for Human beings

Dying too Early

Living too Long

Economic Loss

In a village there are 400 houses, each valued at Rs 20,000. Every year on an average, 4 houses get burnt, resulting into a total loss of Rs 80,000.

How much should each family contribute to cover its risk?

400 owners come together and contributed Rs 200 each

Fund Fund Size = 400  200

= Rs 80,000

Insurance – The business Insurance companies, called insurers, bring together people with common interests – sharing of same risk Collect a contribution – premium Pay compensation – claims

The insurance company is the trustee – managing the common fund Underwriting ensures that all insured share the same risk & prevents entry of those who do not

Life Insurance is complementary to the state’s efforts in social management…it’s a social security tool

Classification of Insurance business- India Insurance Business

Life Insurance

Covers death and disability

Non- Life Insurance

Fire Covers Fire Related Risks

Marine Covers transport related risks and ships

Miscellaneous Covers liability, fidelity, motor, crop, personal accident, etc.

Law of Large Numbers Premium is based on expectations of losses These expectations are based on studies of occurrences in the past and use of statistical principles called „Law of Large Numbers‟ Law of large numbers – When you toss a coin, the chances of a head / tail coming up is half; the probability of getting heads will be closer to ½ million if you toss the coin atleast a million times. The larger the numbers included in the pool, the better the chances of assumptions regarding the probability of the risk occurring

Advantages of Life Insurance • Life insurance has no competition from any other business • It offers quick settlement of claims in the event of death • It encourages financial discipline, as premiums are required to be paid regularly • Creditors cannot claim life insurance money. The money can be protected against attachment by courts • Marketability and liquidity are better. A life insurance policy is property and can be transferred or mortgaged. Loan can be taken against it.

The Life Insurance Contract The Insurer promises to pay the claim

The Insured pays the premium

Agreement

As per the mode chosen and the premium as per the age and the plan

On happening of insured event or survival to a specified term

A simple contract must have the following components Offer & acceptance Consideration Capacity to contract Consensus „ad idem‟ (genuine meeting of minds)

Legality of object or purpose Capability of performance Intention to create legal relationship

Is Life Insurance a Legal Contract? • Intention is legal • Proposer offers-insurer accepts • Premium is consideration • Insured must be major with sound mind-capacity to contract • Insured and Insurer are in agreement – of same mind and free consent Yes, since all essentials of valid contract are present

Special Characteristics of Insurance Contracts

Principle of Utmost Good Faith……. Principle of Insurable Interest

Uberrimae Fidei

Principles of Life Insurance In Life Insurance…. Hari comes to Ram to sell life insurance Ram agrees to buy insurance from him. Does Hari know about: Whether Ram is already suffering from a disease? What are Ram‟s habits – smoking / drinking etc?

Principles of Life Insurance The insurance company and Hari will not be able to know everything about Ram until and unless Ram discloses it Hence in Life Insurance there is no question of verification of correctness and is based on trust. This is called “Principle of utmost good faith”

Principle of Utmost Good Faith……. Uberrimae Fidei Duty of the proposed insured to make full disclosure to the underwriter It is implied in all insurance contracts that each party discloses every material fact known to him

Every circumstance known to the proposed insured that would have a bearing on the judgement of a prudent underwriter in fixing the premium or decision to accept the proposal, is a material fact

Why……. Uberrimae Fidei Other commercial contracts are subject to the principle of caveat emptor, i.e. let the buyer beware……..an assumption that each party can examine the item or service before getting into the contract

In Life insurance, this doesn‟t happen. Most of the facts relating to health, medical history, habits etc are known only to the proposer, which puts the insurer at a disadvantage to assess the risk accurately Therefore, to avoid “adverse selection”, Uberrimae Fidei

Facts that an Insurer doesn‟t need Facts of common knowledge Facts of law Facts which a survey would have revealed Facts which reduce the risk

Declaration Proposal Form is the Basis Of Contract

If any statement/declaration by the proposer is found untrue

The Contract can be made Null and Void and Premiums paid are Forfeited

The Effect of declaration is to turn Representations in the proposal form into warranties

When does a breach occur to Uberrimae Fides Misrepresentation / Non-Disclosure Substantially false / known to proposer as false Calculated to induce the other party to enter into a contract on its own terms

Section 45 of the Insurance Act,1938 Policy Start Date

2 years

If Material Facts discovered within 2 years of the policy then the insurer can declare the policy null and void

Indisputability of the policy

The policy cannot be called in question after 2 years, on the grounds of inaccurate or false statement unless it is proved to be material and fraudulent.

Principle of Insurable Interest Proposer must have a stake in the continuance of the subject insured; he should benefit from its safety & well being

It is the presence of insurable interest that distinguishes an insurance contract from a wagering contract In life insurance, presence of insurable interest is required at the inception of the policy; not at the time of the claim

Insurance Act, 1938 does not define Insurable Interest

Wagering Contract

Insurance Contract

Presence of Insurable Interest Loss Or Gain

Loss or No Loss

Insurable interest is deemed to exist

Any person in himself

Employer Employee

Husband and wife in each other

Partners in business

Lender- Borrower

Insurable Interest arises as a result of financial involvement

Chapter 5

Life Insurance products

Life insurance products are called plans of insurance There are 2 basic elements; Death Cover & Survival benefit

Term Plan

Term = Duration

BENEFIT PAID OUT

No death, no benefit paid at the end

Pure Endowment Plan

Term = Duration

BENEFIT PAID OUT

Benefit paid out only on survival till the end of the term

Classification of plans Death Benefit By benefits payable

Survival Benefit Maturity Benefit Single Premium

By premium payment

Limited Premium Continuous Premium

By participation in profits

With profits Without profits

All Insurance Plans today

Term Plan + Pure Endowment Term Insurance Endowment Money Back or interest sensitive or anticipated endowment Whole Life

Unit Linked Annuities & Riders

Term Insurance  Provides only death benefit  No savings element  The most economical form of life insurance  Excellent protection cover for any kind of liabilities /

loans, especially housing loans  A variation to the term insurance plan is the TROP, term with a return of premium  Belongs to the traditional class of insurance plans

Endowment Plans  Provides death benefit + maturity benefit  Savings element present, hence have gained popularity  Usually participating in nature  Excellent tool for long term financial planning

 Belongs to the traditional class of insurance plans

Money Back / Anticipated Endowment Plans  A variation of endowment family of plans  Provides death benefit + survival + maturity benefit  Death benefit does not reduce on payment of survival payouts  Are interest sensitive by nature  Survival benefit payouts can meet certain anticipated needs of a family  Belongs to the traditional class of insurance plans

Whole Life Plans  A continuation an endowment plan  Provides a death benefit + maturity benefit at a specified age, which could differ from company to company  May also provide a survival benefit  Can be continuous / limited premium paying  Belongs to the traditional class of insurance plans

Unit Linked Insurance Plans  A combination of term + investment  Provides death benefit + maturity benefit  Are highly liquid in nature, compared to other traditional counterparts

 Returns are dependent on the performance of the market  Highly flexible in nature, compared to other traditional counterparts

Annuities  Opposite or „Reverse‟ of life insurance policies, as the risk covered through them is of living too long  Provide regular periodical payments on retirement  Practically very little underwriting is done in annuities  Can be an Immediate annuity or Deferred  Has many variants in terms of joint life, payment terms etc

Riders  Are a clause or condition that is added on to a basic insurance plan…add on benefits  Hence are supplementary contracts  Very economical way of enhancing risk cover

 Are non-participating in nature  Can be attached only as long as the PPT of the policy  Can offer a variety of risk cover options

Other important information Plans & Annuities can also be joint life SSS – Salary Saving Scheme, is a method of premium payment where the insurer arranges with the employer to deduct the premium from the salary of the employee on a monthly basis Life Insurance can be for an individual as well as for a group of people

Chapter 4

Premiums & Bonuses

Premium Is the consideration that the policyholder has to pay in order to secure the benefits offered under the policy It may be a 1-time payment, or will need to be paid periodically,

as decided at the policy inception Is calculated as per the age of the proposed insured Non-payment would render a policy as Lapsed

Premium

Mortality / Cost of Insurance / Risk Premium

Investment

Expenses

Premium

Mortality / Cost of Insurance / Risk Premium

Investment

Savings/Participating Plan

Administrative Expenses

Which component of premium is missing from a Term insurance product?

Why?

Premium

Mortality / Cost of Insurance / Risk Premium

Investment

Term/Non- Participating Plan

Administrative Expenses

Risk premium is the cost to meet the risk of death for 1 year at a

particular age It is based on the probabilities of death at various ages

Usually represented as per Rs.1000/- rates in a tabular form, called “tabular premium”

Level Premium is equal premium being charged, irrespective of age, year on year

Premium collected in the earlier years is more than necessary for the risk

Loading Any extra premium charged on account of a sub-standard life Loading is done on the published tabular premium Any extra premium charged on account of a mode of payment

Calculation of Age When do you think we should know the exact age of the proposed insured? Is it:-



Before the policy has been issued?



After the policy has been issued?

Why?

When do you think we should know the exact age of the proposed insured? Is it:-



Before the policy has been issued?



After the policy has been issued?

Determining correct age at the commencement of the policy is known as “Admittance of Age”

Age can be as of Age “next” Birthday Age “nearer” birthday

Age “last” birthday

Age within 5 months & 29 days will be age last birthday or the lower age

Lets see how Ex 1:- DOC of contract – 12 Aug 2007

DOB of proposed insured – 16 July 1975

Age within 5 months & 29 days will be age last birthday or the lower age

Days Mth 12. 08. - 16. 07. 26.

0.

Yr 2007 1975 32

Age “next” Birthday - 33 Age “nearer” birthday - 32 Age “last” birthday - 32

Calculate all ages 3 for the following example Ex 1:- DOC of contract – 1 Jan 2000

DOB of proposed insured – 2 Feb 1975

Age “next” Birthday - 25

Age “nearer” birthday - 25 Age “last” birthday - 24

Calculation of Premium Step 1 : Determine tabular premium depending on the Table-Term (Consider Age) Step 2 : Allow for modal rebate Step 3 : Allow for adjustment for Large Sum Assured Step 4 : Multiply be number of Units Step 5 : Add if any •Accident extra •Health extra

•Occupational extra •Other extras

Step 6 : Get Annual Premium Step 7 : Divide by 2-Semiannual, 4-Quarterly, 12 - Annual

Modal Rebate  - 3 % for yearly mode  - 1.5 % for half yearly mode  0 % for quarterly mode

 + 5 % for monthly mode  SSS- No mode extra charged

All Modal Rebates are on the Tabular Premium (TP)

Sum Assured Rebate Per thousand Sum Assured  Rs 25,000 - Rs 49,999

- Rs 1

 Rs 50,000 – Rs 99, 999

- Rs 1.5

 Rs 1,00,000 & above

- Rs 2

All Sum Assured Rebates are on the Tabular Premium (TP)

Calculate Premium for the following - Ex 1:Plan – Term

=

14-30

SA

=

Rs. 25000

Age

=

35

Mode

=

Hly

Riders

=

DAB + EPDB

• TP = Rs. 36.55 • Add Re.1/1000 for both the riders

Rs. 450/-

Calculate Premium for the following - Ex 2:Plan – Term

=

5-35

SA

=

Rs. 50,000

Age

=

30

Mode

=

Qtrly

Extra

=

Health extra Rs. 3/1000

• TP = Rs. 28.40

Rs. 373.75/-

Actuarial Valuations The process of checking the validity of assumptions in terms of mortality, interest received on investments & expenses Insurance Act requires that acturial valuations are conducted every year Solvency is one of the results of an acturial valuation exercise

Actuarial Valuations • The insurer is required to maintain 2 separate funds in respect of nonparticipating policies and participating policies • Separate valuations are done for both of these • If the fund has more money than the estimated liabilities, the insurer is said to have a surplus, which may be distributed • Some part may be kept back as reserves

• The law stipulates that 90% of the surplus can be distributed to the policyholders as bonus

Bonus The surplus amount, determined after the valuation, is distributed amongst the policyholders by declaration of bonus

Bonuses are payable only to those policyholders, who have with profit policies

Types of Bonuses Simple Reversionary Bonuses- The bonus as a percentage of sum assured is added to the policy. Subsequent bonuses are calculated on the sum assured only

Compounded Reversionary Bonuses- The bonuses are added to the existing SA including bonuses attached earlier Terminal Bonus- This is a one time bonus that is declared on policies that have been in force for a period of 15 years / or as per policy design Interim Bonus- It is bonus that is payable on policies which become claims between two valuations

Chapter 8

Policy Conditions The present state of the policy in the insurer's records / various rights that can be exercised by a policy holder Days of grace

Lapsation Surrender value Paid up value Loans Revival Assignments & Nominations

Days of Grace Insurers allow a grace period for the payment of premium Payment within grace period is considered payment on time It is one month but not less than 30 days for yearly ,half yearly and quarterly modes of premium 15 days 30 days It is 15 days for monthly mode

No grace period for Salary Savings Scheme

Premium due date

The policy lapses if the premium is not paid within the grace period In case of death during the grace period, the full claim will be admitted after deducting the premium for the current year from the claim amount

Insured

The cheque or DD need to be cleared and proceeds credited into insured‟s account

Insurer’s office

Premium is considered as received when it reaches the insurer‟s office

In practice RPR maybe issued before the clearance of cheque subject to clearance Sometimes especially in case of death claims the insurer may consider the premium is paid if there is proof that policyholder has sent the money

Lapsation The obligation of insurer to pay S.A is subject to premium being paid on due dates The payment within days of grace is deemed to be payment on due date If the payment is not received by the insurer within days of grace the policy terminates this is called a “lapse” No claim arises on a policy after it lapses and all premiums are forfeited

Non-Forfeiture In practice insurers don't forfeit all the premiums The insurance act does not allow such a forfeiture as it is not fair Every policy acquires a reserve Premiums are more in the earlier years There is savings element in the policy The policy conditions provide various safe guards incase of a premium default These provisions are called Non Forfeiture options Various Non-forfeiture options available Surrender Value

Providing term cover from Surrender Value

Paid up Keeping policy in force through premiums advanced from surrender value

Surrender Value The amount which represents the reserve in a policy can be returned to the policy holder. This is called the Surrender Value or the Cash Value RESERVES

The Insurance Act (Section 113)requires that every policy shall have a guaranteed surrender value if at least three years premiums have been paid.The first year most of the premium goes in expenses and very little is left for accumulation This minimum has to be stated in the policy conditions

Paid up Value In this option the sum Assured is reduced to a sum which bears the same ratio to sum assured as the number of premiums actually paid bears to the total no. of premiums actually payable No. of Premiums Paid

x

Sum Assured

No.of premiums payable Only the S.A is reduced proportionately; the vested bonus remains unaffected This policy now becomes a non participating policy

Keeping Policy in Force The policy is terminated when surrender value is not sufficient to pay the premium and left over surrender value is paid to the customer It helps by safeguarding the cover. The policyholder can resume paying the premium at any time. With profit policy will also be entitled to bonus

In case the policyholder fails to pay the arrears premiums, the surrender value is exhausted and very little is benefit is available

Revival A lapsed policy does not benefit anybody-the insured, the insurer or the agent The insured loses the risk cover and hence beats the very purpose of buying insurance It reflects badly on the agent as it means that the insured was not sufficiently convinced

The insurer follows a level premium system where the except for death claims the policies are expected to run full term Also the initial expenses for the insurer on any policy are high and insurer can recover them only if policy remains in force

Revival People with bad health are the ones to continue while the people with good health do not value continuance. This leads to selection against the insurer. Lapsation may not always be intended by the insured. It could happen due to neglect or temporary financial difficulties.

Revival Requirements Arrears with outstanding premium with Interest Proof of Continued Good Health Revival allowed if policy remains lapsed for not more than 5 years

Revival-Types of Revival

Special Revival Scheme

Loan cum Revival

Installment Revival scheme

Assignment A life insurance policy is a property, it represents rights and as per transfer of property act 1982, it is an actionable claim. An assignment transfers the rights title and interest of the assignor to assignee. Legal provisions for assignment are available in section 38 of Insurance Act 1938 The assignment can be done by an endorsement on policy or by a separate deed No stamp duty is required for endorsement Separate Deed has to be stamped It must be signed by the transfer or his duly authorized agent

Assignment – Section 38 The signature must be attested by a witness The assignment is effective as soon as it is executed It must be sent to the insurer along with a notice An assignor  Must have Title  Must be major  Must be competent to contract An assignment once made cannot be cancelled or altered by the assignor unless assignee reassigns the policy

Types of Assignment Absolute Assignment

The Title cannot be reverted back to the assignor unless the assignee reassigns the policy through a deed

Conditional Assignment

The Title automatically reverts to the assignor on fulfilling of the specified condition

Nomination As per section 39 of insurance act 1938, the holder of a policy on his own life may nominate the person or persons to whom the money secured by policy shall be paid in the event of his death It can be made at the time of proposal or at any time during the currency of the policy A person having policy on the life of another cannot effect a nomination A nomination can be changed by the policy holder by making endorsement on the policy If space is not available on the policy document, nomination can be done on a separate piece of paper and pasted onto the policy with the signature of life assured on the edges, where the slip is attached to the policy

Nomination When nominees are more than one, the policy moneys are payable to them jointly or to the survivor No specific share of each nominee can be made However, nomination in succession, like “payable to A” failing him „B‟ , failing him „C‟ is valid An assignment automatically cancels a nomination, except an assignment made in favour of the insurer in consideration for a loan granted against the security of the policy Nominations made after the commencement of the policy have to be intimated to the insurer, otherwise they are not effective

Surrenders and Loans A surrender is a voluntary termination of the contract by the policyholder.The amount payable on surrender is called surrender or cash value. A policyholder can surrender the policy anytime before it becomes a claim. The surrender value is usually a percentage of the paid up value, the percentage increases with the term. The percentage decreases as the original term of the policy increases. In Life Insurance loan up to 80 to 90% of the Surrender Value is given Interest is also charged on the Loan

Loans may be repaid in full or in part during the currency of the policy or may remain as debts on the policy monies until the claim arises

If the premiums are paid on the time the surrender value will go on increasing and will be more than the outstanding loan and interest

Surrenders and Loans Temporary life Insurance

Policies without surrender value

Annuity Policies

Money Back Policy Are not eligible for the loan facility No loan is granted on the Children‟s Deferred Assurance policies

Foreclosure Foreclosure means writing off or closure of the policy before its actual maturity When a loan is granted in a policy the customer can either pay the interest or allow it to accumulate to be adjusted against the claim This is possible in case the premiums are paid regularly and policy remains in force

In case of paid up policy the the surrender value will not grow as fast as the accumulated interest

The principal loan and accumulated interest will become more than the surrender value at some timeForeclosure becomes necessary

Foreclosure Action A notice issued to policyholder calling for the payment of arrears of the loan interest The balance surrender value is paid to the policyholder after obtaining a discharge voucher A foreclosed policy can be reinstated; the arrears of loan interest with evidence of good health is taken On foreclosure ,the nomination ceases. If the life assured dies before payment of the balance surrender value, the amount is payable not to nominee but only to the legal heirs

Alterations • Some changes are allowed in the policy after it is issued • Simple changes like – – – –

change in address, change of mode in payment, change in nomination participating policy to non-participating break one policy to two or more-affects premiums but not the risk principle followed is alteration allowed if risk does not increase

Chapter 6

Underwriting

Underwriting of a proposal • When the insurer receives a proposal for insurance, it does not immediately agree to grant the cover • It has to ensure that every new entrant into the pool of policyholder is subject to the same exposures as the others • The process of verifying the risk is called “Selection” or “Underwriting” • A lower premium would affect solvency and the additional risk would have to be borne by the rest of the policyholders in the same group.

• Therefore if the insurer feels that there are adverse features that increase the risk, the premium charged would be different. • In some cases, the insurer may decline the cover.

Hazards • Factors that affect the risk on the life of an individual are called hazards • Hazards may be – Physical – Occupational and – Moral • Physical Hazards are as follows: Age

• As age increases, so does the probability of death. These probabilities are built into the premium rates. • Age also has a relationship with other factors. Being overweight for children is a positive factor, but it is not so in case of adults.

Sex

• Mortality on female lives are seen to be more than that of male lives at younger ages. • This may be due to the lack of adequate care in maternity cases. • The underwriting considerations are also different in these cases

Physical Hazards Build

Physical Condition

Physical Impairments

Personal History

Family History

• Height, Weight, Chest and Abdomen measurements may suggest tendencies towards ailments. • Variations from standard weights are dealt with care. • Medical examination of reflexes, blood pressure, pulse rates, urine etc, provides data with regard to the condition of important systems in the body. • Blindness, deafness, and other conditions which are not illnesses, are hazards affecting the probability of death.

• This is important as a pointer to the health and lifestyle of the person.

• Hereditary factors which may make a person more prone to a particular disease are important factors. • A history of early deaths, cardiac illnesses or diabetes

Occupational Hazards • Hazards that arise from ones job/occupation • The nature and place of job effects the worker • Contact with or inhalation of fumes, excessive temperatures are some examples • People working in chemical factories are likely to be afflicted with various respiratory disorders

• Studies have identified occupations with various hazards and have also tried to quantify the excess hazard, so the underwriters can determine the appropriate extra premiums

Moral Hazard • Moral Hazard refers to the intentions of the proposer • If proposal is made for a genuine insurance need, there is no moral hazard • It is said to be a moral hazard if one seeks some undue advantage due such as getting a lower premium, or to make monetary gains, through insurance, there is a moral hazard • This has to be judged on the basis of circumstantial evidence like lifestyles, income as compared to premium payable, reputation for integrity, and so on • Moral Hazard is not measurable. It is a matter of opinion

• If moral hazard is suspected, no amount of extra premium will be appropriate

Moral hazards Moral hazards can be suspected in the following circumstances: The proposal is for a larger amount than the income of the proposer would justify.

A large amount of insurance is proposed on the life of a family member while the breadwinner is not insured or insured for a relatively lower amount

The proposer is old, has not been insured so far and now wants insurance for a large amount

Financial Underwriting • A process to check whether the premium is commensurable to the cover asked for • The premium for the insurance policy is paid from the current income, so the source of this premiums needs to be checked • If someone else is paying the premium the source of the premium needs to be checked, as there could be issues of Insurable Interest • The underwriter needs to be satisfied that the need for insurance is related to the current situation and not a desirable situation in the future Making a judgement on these financial aspects is called “Financial Underwriting”

Data for underwriting

• The underwriting decision is based on the following parameters: – The statements made in the proposal form (principal of utmost good faith) – Report of the medical examination – Report of the agent or other officials.

• In case of large sum assureds the underwriter may also ask for additional medical reports or from senior officials (for moral hazard) as a matter of routine. • The underwriting decision is based on The statements made in the proposal form (principal of utmost good faith)

Report of the medical examination

Report of the agent or other officials.

Data for underwriting • In case of large sum assureds the underwriter may also ask for additional medical reports or from senior officials (for moral hazard) as a matter of routine

• Officials are also expected to make enquiries about the proposed insured, family, occupation/business, income, lifestyles, etc. • Proofs may be sought to substantiate the reports on these aspects of the proposed Insured • A report from the insurance agent is a must in all the cases • In some cases, the report of the agent may be sufficient, if the agent is experienced enough

Assessing the risk • The underwriter decides on the level of risk in a particular case after examination and interpretation of the data available • For this purpose, the underwriter would avail of the assistance of doctors associated with Life Insurance companies and having specialized knowledge about the effect of medical conditions on mortality • These doctors are called medical referees who are on the panels of insurers • In case of very high Sum Assured, the insurer may even refer the case to the specialists in the panel of re-insurers

Assessing the risk Some insurers have developed parameters to identify and interpret data which is significant to risk: Numerical Rating System • Standards are laid down for each factor such as weight, height for different ages • Variations are given values, based on the level of significance • The values are then grouped and tabulated showing extra mortality (em) and therefore extra premium • A variation of 20% may be considered normal, between 20% and 35% may be considered Class I and so on • The few cases which would not clearly fall into these classes would be referred to experts

Assessment of Risks The decision of the underwriter may be one of the following: Accept as OR (Ordinary

Accept with Extra

Life- standard for which the tabular rates can be offered)

(amount to be specified) per 1000 of SA

Accept with lien of (The

Accept with Modified Terms (Other than the original

lien condition)*

plan applied for)

Accept with (Specified) Clause [excluding specific risks]

Postpone for specific period

Decline

The regulations of IRDA require that the decision should be conveyed to the proposer within 15 days. *The risk is not standard but the risk is expected to wear off and does not justify increase in premium. Instead, the SA would be reduced to the extent of the Lien

Non- Medical Underwriting • Usually medical underwriting starts from a particular level of risk that the insurer is willing to take (the SA)…any SA case below this threshold is within non-medical underwriting • Non-medical underwriting is limited to younger ages, less than 45 years old • The SA limits are higher for those in employment in reputed organisations, with leave records, medical check at entry and so on. • These limits are not sacrosanct. The conditions for non-medical insurance are decided by insurers from time to time, depending on experience

Female lives • Insurers were cautious when insuring female lives because of: – High pregnancy related deaths, particularly in remote areas – History of frauds

• These practices are have changed over the last 50 years. Working women and men are now treated at par • Some women who do not have any earned income are considered, provided their husbands are adequately insured • Women in “purdah” are not considered These are not rigid rules or principles and every insurer will have their own experiences and practices. Some insurers allow lower premium rates for working women.

Agent as underwriter • The agent is the first level underwriter • He/ she has to inform the insurer about the factors that affect the risk of the subject matter of the insurance

• This is done by submitting an unambiguous report and also by ensuring that the proposal papers do not conceal any information • The agents report is a source of data for the underwriter in the

office

Recent Trends • The underwriting standards are dynamic and are studied by institutes and re-insurers all over the world • Advances in medical sciences have lead to better insights into diseases, so people who would not have been insurable 40 years ago can avail of the benefits of insurance now • Insurers have also begun to take note of habits that affect healthsmoking and drinking • Some insurers charge additional premium from those who smoke or drink • Proposers may be tempted to understate such habits, but run the risk of being guilty of “Suppression of material facts” and facing the consequences

Chapter 9

Claims

A claim is a demand for performance of the promise made by the insurer at the time of making the contract The insurer should find out: Policy holder has performed his part Insured event has taken place Who are the persons entitled to demand performance.Nomination/ Assignment/Income Tax Notice/ Prohibitory Orders /Official Assignees Notice

Payment of Claims depends upon the type of contract!!

Maturity Claims Sum Assured

Bonuses if any

Loan and Interest or Outstanding Premiums

Maturity Claim The Date on which the term of the policy is complete is the date of maturity Settlement of sum assured on that date is called Maturity Claim Insurer usually sends advance intimations regarding the maturity of the policy

Maturity Claims- The insurer has to satisfy that There are no Assignments on the policy The identity of the Policyholder is proved The Age stands admitted by the insurer

The original policy has to be submitted The discharge voucher is duly completed

Maturity Claims The insurer is expected to make payments on the maturity date Post dated cheques are sent in advance after the duly signed discharge voucher is received

Difficulties encountered in settling the claim The original policy is reported lost The claim can be settled by taking an indemnity bond and a copy of advertisement in the newspaper

The policy is covered under MWP ACT The policy proceeds will be paid to the trustee or to the

beneficiaries if they are competent to contract

The policy is under

Absolute Assignment The payment will be made to the assignee. In case of conditional assignment if the title has reverted to the life assured he can also receive the payment directly

Survival Benefit Payments Survival Benefits are paid during the currency of the policy before the date of maturity

Action is initiated by the insurer and the post dated cheques are sent to the customer If the policy is lost an indemnity bond will not suffice as the policy still exists. Instead a duly endorsed duplicate policy is issued If the life assured dies after the survival benefit due date but before it is settled instead of the survival benefit the death benefit will be paid to the nominee

Death Claim Settling death claim is more complicated than Maturity claims The death claim action begins with the intimation being received in the insurer‟s office The intimation may be sent by nominee, assignee, a relative of life assured ,the employer ,agent ,or development officer The office need not wait for the intimation of the claim. Obituary columns and newspaper reports in case of accidents or air crashes may give the required information

Documents required to settle a death claim

Policy Document

Assignment or Reassignment Deed

Certificate of Death

Legal Evidence of Title ,if no assignment or nomination

Proof of Age ,if already not admitted

Form of Discharge executed and

witnessed

Documentation for Early Claim If the death claim occurs within 3 years from the Date of commencement or revival the following additional Documents are required Statement from the last medical attendant giving details of last illness and treatment

Statement from the hospital, if the deceased had been admitted to hospital

Statement from the person who had attended last rites and had seen the dead body Statement from the employer, if the deceased was employed showing details of leave

Unnatural Death Accident, suicide,or unknown causes the following documents would be required

Police Inquest Report

Chemical Analyzer‟s Report

Panchnama/ FIR

Coroner‟s Report/ Investigators reports

Postmortem Report

Early Claims Claims arising within 3 years are looked at with suspicion There could be suppression of material facts which if found true would result in repudiation of claim When the policy is revived on the basis of evidence of good health during underwriter‟s scrutiny, an early claim in this scenario would raise the same issues as above

Disputes In case of repudiation of claim the customer may go to the court The court is more sympathetic to the policyholder and the insurer may be asked to prove the suppression of facts Insurer may fail to submit enough evidence and may still end up paying the claim The Insurer despite these inconveniences still prefers to do the enquiry because it prevents anybody from taking undue advantage of the insurer Also it helps improve the underwriting standards and also helps point out agent and regions more prone to claims

Proof of Title In case of no valid nomination or assignment the claimant would have to prove his title

Title is proved through legal procedures like probate of will, succession certificates, court orders, etc. If the amount of claim is not large insurers may waive the proof of title and settle the claims on the basis of declaration, affidavits and Indemnity Bonds

Presumption of Death Proof of Death is an important document A death certificate issued by the municipal office or similar local body is the acceptable proof of death A certificate from burial cremation is also acceptable Statements from witnesses of the last rites can be used as the supporting evidence In case the body is not found the statement from competent authorities with relevant information is acceptable. FIR/ Panchnama is required In case of defense personnel ,the statement from the commanding officer may be obtained As per Indian Evidence Act a presumption of death can be made if a person is not heard of for a period of seven years If the nominee or claimant of such a person claim him to be missing and ask him to be presumed as dead then the insurer asks for a decree from court of presumption of death

Time Barred If the intimation of death is received 3 years after the death Investigation needs to be carried out in case of early claims as the Insurer would have grounds of suspicion and there might be a possibility of Fraud, non-disclosure of complete facts.

Accident and Disability Benefits These benefits are conditional on conclusive evidence All the eligibility conditions must be present and the exclusions must not apply

Conditions are:The accident must be caused by outward, violent means not self inflicted

The death must be result of injuries caused by that accident

The death must occur within 120 days or such other period as may be specified

Exclusions to claims Intentional self –injury, attempted suicide, insanity, immorality, intoxification Accident while engaged in civil aviation or aeronautics ,other than as a passenger Injuries resulting from riots, civil commotion etc

Claim Concession Payment of full claim in case of a lapsed policy After three years ,if the death claim arises within six months from the date of lapsation Within 6 Months

Date of Lapse

Date of Death

Full Sum Assured-Outstanding Premiums with Interest

After Five years ,if the death claim arises within 1 year from the date of lapse

Within 1 year

Date of Lapse

Date of Death

Full Sum Assured-Outstanding Premiums with Interest

Chapter 14

Role of an Insurance Agent

Introduction According to the Insurance Act An agent requires

License

A license to be able to function as an agent

He is remunerated by way of commissions

on the premium paid under policies procured through his efforts

The Agent is the main component of the distribution channel for the life insurance business

Life Insurance Agent A life Insurance agent is required to solicit and procure new business keeping in mind the interest of the policyholders and of the insurance Company Interest of Policyholder

Interest of Insurer

Procuring new Business

Agent procures new Business by

Contacting prospects, studying their needs and persuading them to buy Completing all the formalities, including proposal form and other documentation Arranging Medical Examination Other information required by Underwriter

Continuation of the policy After the sale, the agent has to ensure that the policy continues without a lapse till it becomes a claim This is in Interest of all the three parties- The insurer, policyholder and the agent For the continuation of the policy the agent has to: Keep in touch with the policyholder to make sure that renewal premiums are paid in time Ensure that nominations are made or changed according to changing circumstances

Assist in settlement of the claim by helping the claimants to complete the formalities and requirements

Customer Service Another way in which an agent can be of assistance to the policyholder in case he needs the loan under the policy or wants to make an assignment

These services strengthen the relationship between the agent and the policyholder

The Agent needs to be familiar with Benefits under Various plans Of insurance Offered by his insurer

The office procedures including various forms and documents

Insurance agent is an agent of the prospect as well He should be knowledgeable enough so that the customer can trust him Besides having knowledge of his own products he also must know about the benefits and advantages of other financial instruments suitable for savings and investment.

Prerequisites for success Since it is difficult for a person to know everything ,an agent can promise the customer that he will get back after checking the details

Rather than using guesswork or saying on basis of hearsay

Selling Insurance An Agent must have continually expanding list of prospects, persons, who can be approached for insurance These names of people within reach obtained obtained from acquaintances,newspapers reports, directories, contacts at parties, meetings, seminars etc. These names have to be qualified after some preliminary work which will indicate whether it is worth approaching them Those in the qualified list have to be met A sale results when the sales man takes the prospect through well defined steps

Selling Insurance Pre approach Approach Interview Objections Close

Service • A life Insurance Contract is long term in nature • Service by the agent includes monitoring premium payments, nominations and revivals and help in settling claims if they arise so that the policy does not get neglected • Every service call gives the agent the opportunity for reviewing the insurance programme • The existing insurance may become inadequate as there may have been changes in policyholder‟s financial position or family • The policyholder will give references of his friends and relatives • Service benefits the policyholder but it benefits the agent more by conveying his reliability and trustworthiness

Ethical Behavior The insurance agent is in a position of trust, the policyholders entrust their small savings in an insurer,trusting the company to look after these funds and look after these funds and look after their dependents. The code of Ethics spelt out by the IRDA in the Agent‟s Regulations is directed towards Ethical Behavior If the agent keeps the interest of the customer in mind the compliance to these is not difficult

Characteristics of good Ethical Behavior

Placing the best interest of the client above one‟s own direct or indirect benefits

Holding in the strictest confidence and considering as privileged all business and personal information pertaining to the client‟s affairs

Making full and adequate disclosure of all facts to enable clients make Informed decision

Examples of compromise in Ethics Becoming aware of such circumstances whose knowledge to insurer would adversely affect the interests of the client. Temptation to recommend discontinuance of an existing policy and taking out a new one Having to choose between two plans one giving more commission than other

Ethical Behaviour Some agents might feel that they are helping the client by not revealing some of his information to the underwriter,but in case of early claim the client and his family will be the loser Although such an action might not directly reflect on the commission of the agent but he loses his credibility and his action affects not only the insurer but also the entire Life Insurance Industry

Summary Overview of the Life Insurance business Principles of life insurance Different types of products Importance of Underwriting Aspects of claims Role of an agent