insurance and life insurance

CHAPTER I

INTRODUCTION TO INSURANCELIFE INSURANCE

1.1

What is insurance and its role

Insurance is a form of risk management in which the insured transfers the cost of potential loss to another entity in exchange for monetary compensation known as the premium. Insurance allows individuals, businesses and other entities to protect themselves against significant potential losses and financial hardship at a reasonably affordable rate. It is "significant" because if the potential loss is small, then it doesn't make sense to pay a premium to protect against the loss.. Insurance is appropriate when one wants to protect against a significant monetary loss. Take life insurance as an example. If a person is the primary breadwinner in his home, the loss of income that the family would experience as a result of his premature death is considered a significant loss and hardship that he should protect them against. It would be very difficult for his family to replace his income, so the monthly premiums ensure that if he die’s, his income will be replaced by the insured amount. The same principle applies to many other forms of insurance. If the potential loss will have a detrimental effect on the person or entity, insurance makes sense. Everyone that wants to protect themselves or someone else against financial hardship should consider insurance. This may include:  Protecting family after one's death from loss of income  Ensuring debt repayment after death

 Covering contingent liabilities  Protecting against the death of a key employee or person in your business  Buying out a partner or co-shareholder after his or her death  Protecting your business from business interruption and loss of income  Protecting yourself against unforeseeable health expenses  Protecting your home against theft, fire, flood and other hazards  Protecting yourself against lawsuits  Protecting yourself in the event of disability  Protecting your car against theft or losses incurred because of accidents and many

more

1.2 Insurance's Role in Your Financial Plan Insurance is one of life's necessities and probably the least-understood financial product. Insurance reimburses people for covered losses in the event of an unfortunate occurrence such as an illness, accident, or death. At the same time, it can encourage prevention and safety measures, provide investment capital, lend money, and help to reduce anxiety for society at large. As a mechanism against loss of income and a means of safeguarding assets, most Americans have insurance in one form or another. These coverage's may include public coverage, such as disability insurance under Social Security, a health care

policy from an employer, or personal insurance to protect property such as computers, homes, and cars. You may save money in your pension and other investments and have capital in your home. But if you don't know exactly what your life insurance policy covers or have only glanced at your employer-provided health and disability insurance policies, you're neglecting an important aspect of your financial plan. Until something happens, such as a car accident, an illness, or the death of a loved one, paying for insurance may seem like buying something you'll never use. But even if you never submit a claim, insurance is an investment in your future, as important as pensions and personal investments. Indeed, many financial planners argue that you should have an adequate insurance safety net in place before considering investment strategies. The function of insurance is to protect you against losses you can't afford. This is done by transferring the risks of a person, business, or organization -- the "insured" -to an insurance company, or "insurer." The insurer then reimburses the insured for "covered" losses - i.e., those losses it pays for under the policy's terms. As the insurance consumer, you pay an amount of money, called a premium, to the insurer to transfer the risk. The insurer pools all its premiums into a large fund, and when a policyholder has a loss, the insurer draws funds from the pool to pay for the loss. Life is full of unexpected events that can create large financial losses. For example, whenever you drive, it is possible that you may have a costly accident. Risks affect you by causing worry about potential loss and how to deal with the consequences. Insurance reduces anxiety over a possible loss and absorbs the financial brunt of its consequences.

However, while insurance coverage is essential, how much and what type of insurance people need differ with each individual. You must decide how much risk you're willing to tolerate without insurance. For example, benefits for disability policies typically begin after a waiting period of one to six months. Therefore, you should ensure that you have some form of coverage or financial resources before the policy period begins.

1.3

What is life insurance

Life insurance in India made its debut well over 100 years ago. In our country, which is one of the most populated in the world, the prominence of insurance is not as widely understood, as it ought to be. What follows is an attempt to acquaint readers with some of the concepts of life insurance, with special reference to LIC. It should, however, be clearly understood that the following content is by no means an exhaustive description of the terms and conditions of an LIC policy or its benefits or privileges. 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. The contract is valid for payment of the insured amount during:  The date of maturity, or

 Specified dates at periodic intervals, or  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 civilisation'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: 1. That of dying prematurely leaving a dependent family to fend for itself. 2. That of living till old age without visible means of support.

Life is too precious, so much that it is difficult to put a price on it. Money surely can't bring our late loved ones back or buy us happiness and affection. But it can very well help us realize its significance for survival. A family's survival is risked if its sole earner dies unexpectedly. The demise of a loved one creates a void that is hard to fill but his/her absence must not disrupt the financial future of the family. As it is, the grief of losing a member is a lot to deal with; at least money woes should not be reason behind worries and miseries. It is therefore, essential to realize the value of your life and sign up for life insurance, which is a protection against financial loss resulting from insured's death. In legal terms, life insurance is a contract between a policy owner and insurer, wherein the latter agrees to reimburse the occurrence of the

insured individual's death or other event such as terminal illness or critical illness. The insured agrees to pay the cost in terms of insurance premium for the service. Life insurance offers you risk coverage and takes care of monetary needs of your family after your death. Besides providing coverage against all sorts of risks, it gives you an opportunity to grow your investments. It could also be viewed as a long-term investment tool that helps you to save for your child's future expenses or your post retirement expenses.

1.4

Types of life insurance

Depending on the diversified needs of every individual, various insurance plans are available in the market. Such customized plans are made in such a way that they suit the likes of majority of customers. Following are the different forms of life insurance plans:

Types of Life Insurance: There are various types of life insurance policies available to aid you in meeting needs of various life stages. 1. Term life insurance: You get coverage for a tenure that you specifically choose. These policies could be availed by people who find it difficult to pay a lump sum amount

for

endowment

assurance

policy

or

whole

life

policy.

2. Whole life insurance: This policy covers you for as long as you live. You stay protected for your entire life, thus this plan is named as whole life policy. 3. Endowment policy: Risk is covered for a specific period and at the end of the period sum assured along with the accumulated bonus, is paid back to the policyholder. Endowment policy pays back the face value of the amount on the insured person's death or after a stipulated number of years. Some policies also make payment in case of critical illness. 4. Money back policy: This policy repays survival benefits periodically during the term of the plan. 5. Savings & investment plans: Help you save and invest to make your money grow. 6. Retirement plans: This plan is a retirement solution plan and does not cover life insurance. You can build your retirement corpus as per your risk appetite and on completion of the specified period, a certain amount of money is paid to the insured/beneficiary in the form of pension, monthly, half-yearly, or annually. 7. Unit Linked Insurance Plans (ULIPs): A part of investment goes towards providing life cover, while the residual portion is invested in stocks or bonds. It is a goal-based financial product, which is designed to impart safety and wealth creation opportunities.

8. Child insurance policy: These plans are designed to meet rising education and other needs of children. A child plan offers a lump sum amount on the death of the policyholder, but the policy doesn’t end. All future premiums are waived and

insurance company continues investing money on the behalf of policyholder. The child gets the money at specified tenure as planned. Life insurance is undoubtedly mandatory but availing it without understanding its functioning would make your purchase worthless and useless. Various terms and phrases need to be familiarized with prior to buying life insurance. Term life insurance and whole life insurance would differ in appeal if the consumers have a strong idea about their features and uses. The real motive behind life insurance would get defeated if you buy a plan without prior knowledge and your decision turn out be regretful, especially at the time of maturity of the plan or death of the policyholder. Let us see how: Term Life Insurance Protection Plan Term life insurance protection plans give you coverage only for a specified

term.

The

main

advantages

of term

life

insurance protection plans are that they are easy on your pocket, give you the highest amount of coverage, safeguard your family against financial liabilities and offer you tax benefits. Term life insurance protection plans have no face value and hence the premium for such policies is comparatively lower when compared with other policies. In case of survival of policy term, the insured does not get any return. The premiums in such policies increase with rising age as the chances of death are high in old age. Once you cross 60 years, these policies become difficult to afford. Life Insurance Investment Plan

These life insurance investment plans offer you dual advantages of Investment and protection. The life insurance investment plans range from low risk to high risk investment propositions, depending on the risk profile of a customer. Life Insurance Coverage The life insurance coverage is defined as the sum assured that you buy under the policy. You have the discretion to decide your sum assured but certain factors that affect the coverage are your annual income, your life stage and your risk group. Life Insurance Contract Terms The

most

common

terms

used

in

a

life

insurance

contract

are:

Indisputable Clause: Your insurance company is entitled, usually during the first two years of the policy, to challenge the validity of your policy in case you hide any information from the insurer. If you are found guilty of concealment, your insurer could void the policy and return the premiums. Suicide Provision: The suicide clause in your policy specifies that the insurance company will not pay you sum assured if the insured attempts or commits suicide within a specified period from the beginning of the coverage. Reinstatement Clause: If your policy has lapsed due to non-payment of premium, you can revive it by paying all the past outstanding premiums along with interest. However, you need to prove to your insurer that you still continue to enjoy good health to qualify for this provision.

Settlement options: You have the provision to collect the settlement proceeds as per the options offered by your company. Excluded Risks: Depending on the policy, death under circumstances like war or an aviation accident may or may not be covered. Grace Period: There are times when you are unable to pay premiums due to financial crunch. Your insurance company provides a grace period within which you can make the necessary monetary arrangements and pay your premiums.