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PRINCIPLES OF INSURANCE. UNIT II. Practical aspects of Life Insurance.
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PRINCIPLES OF INSURANCE UNIT II
Practical aspects of Life Insurance • Life insurance is a contract between an insurer and a policyholder in which the insurer guarantees payment of a death benefit to named beneficiaries upon the death of the insured. The insurance company promises a death benefit in consideration of the payment of premium by the insured.
Economic uses • The purpose of life insurance is to provide financial protection to surviving dependents after the death of an insured. It is essential for applicants to analyze their financial situation and determine the standard of living needed for their surviving dependents before purchasing a life insurance policy. Life insurance agents or brokers are instrumental in assessing needs and establishing the type of life insurance most suitable to address those needs. Several life insurance channels are available including whole life, term life, universal life, and variable universal life (VUL) policies. It is prudent to re-evaluate life insurance needs annually, or after significant life events like marriage, divorce, the birth or adoption of a child, and major purchases, like a house.
Life Insurance Vs Non-Life Insurance • The term insurance can be understood as an arrangement, in which the insurer commits to provide compensation for loss, damage, death, caused to the insured in return for the payment of the premium. There are two types of contract, life insurance, and general insurance. The insurance plan which covers the life-risk of the insured is called life insurance. On the other hand, the insurance plan which covers any risk other than the life-risk of an individual is called general insurance. • Life insurance is also known as assurance, whereby the sum assured is paid to the insured, while the general insurance policies are called as insurance. Check out this article excerpt, in which we have covered all the important differences between life insurance and general insurance.
Life Insurance Basics • The term life insurance implies the type of insurance, that covers the risk of life and provides a guarantee to compensate by paying the specified sum, either on the death of the insured or after the specified period. • In life insurance, the amount is payable on the happening of the uncertain event. Moreover, there are certain plans, wherein the payment of the policy amount is made at the maturity. These are long term contracts which require the payment of premium throughout its life till it matures and the sum assured is paid on maturity. It can be surrendered, after some years, wherein the policyholder will get a proportion of premiums paid, called as surrender value.
There are three types of life insurance, discussed as under: • Whole life assurance: In whole life assurance, the amount of the policy is paid only on the death of the insured, to the nominee or the legal heir of the insured. • Term life assurance: In term life assurance, the policy amount is paid to the nominee, if the insured passes away before the expiry of the specified term, or to the insured himself, on the maturity of the term. • Annuity: When the term of the policy expires, the payment of the policy amount is paid to the holder periodically, as long as the insured is alive.
Life Insurance in India • There are currently, a total of 24 life insurance companies in India. Of these, Life Insurance Corporation of India (LIC) is the only public sector insurance company. All others are private insurance companies. Many of these are joint ventures between public/private sector banks and national/international insurance-financial companies. • Private life insurance companies in India got access to the life insurance sector in the year 2000. Most private players have tied up with international insurance giants for their life insurance foray.
There are top 10 private life insurance companies in India. • Life Insurance Corporation Of India • ICICI Prudential life Insurance • Bajaj Allianz life Insurance • HDFC Standard life Insurance • Max life insurance • SBI life insurance • Kotaklife insurance • Birla Sun life insurance • Star Union Dai • lchilife insurance Co.Ltd. • PNB Metlife Insurance
Insurance Documents • a) Insurance Policy: The insurance policy sets out all the terms and conditions of the contract between the insurer and insured. • (b) Certificate of Insurance: It is an evidence of insurance but does not set out the terms and conditions of insurance. It is also known as ‘Cover Note’. • (c) Insurance Broker’s Note: It indicates insurance has been made pending issuance of policy or certificate. However, it is not considered to be evidence of contract of insurance.
Surrender Value • The cash surrender value is the sum of money an insurance company pays to a policyholder or an annuity contract owner in the event that his or her policy is voluntarily terminated before its maturity or an insured event occurs. This cash value is the savings component of most permanent life insurance policies, particularly whole life insurance policies. It is also known as "cash value," "surrender value," and "policyholder's equity."
Accessing Cash Surrender Values • In most whole life insurance plans, the cash value is guaranteed, but it can only be surrendered when the policy is canceled. Policyholders may borrow or withdraw a portion of their cash value for current use. A policy's cash value may be used as collateral for low-interest policy loans. If not repaid, the policy's death benefit is reduced by the outstanding loan amount. Loans are tax-free unless the policy is surrendered, which makes outstanding loans taxable to the extent they represent cash value earnings. • In universal life insurance plans, the cash value is not guaranteed. However, after the first year, it can be partially surrendered. Universal life policies typically include a surrender period during which cash values can be surrendered, but a surrender charge of up to 10% may be applied. When the surrender period ends, usually after seven to 10 years, there is no surrender charge. Policyholders are responsible for the taxes on portions of the surrendered cash values that represent cash value earnings. • In either case, sufficient cash value must remain inside the policy to support the death benefit. With whole life plans, loans are not considered cash surrenders; so the level of cash value is not affected. With universal life policies, cash values are not guaranteed. If cash value growth falls below the minimum level of growth needed to sustain the death benefit, the policyholder is required to put enough money back into the policy to prevent it from lapsing.
Claim and Settlements • Claim time is when your insurance policy really proves itself. After all, it’s when the financial back-up plan you put in place ‘just in case’ has to kick in to provide financial security to you and your family. • Many insurers also offer additional support services, like access to an independent counsellor, or rehabilitation services, where appropriate. Some insurers also offer a financial planning benefit, so that you can get professional advice on how to make the most of your claimed benefit for your family’s financial future. • At claim time you’ll be asked to complete a claim form. You will need to provide details about the condition including diagnosis and doctor’s appointments and you will be asked to supply copies of medical certificates, reports or tests as well as your original policy documents. If you are claiming on a Life Insurance policy you will need to supply a copy of the death certificate.
