Insurance in India
Life Insurance
Definition and Purpose
Life insurance is a contract between an insurer and an insured where the insurer agrees to pay a
sum of money to the insured or their beneficiaries upon the death of the individual or at the end
of the policy term. It serves as protection against life's uncertainties and can be used for family
needs, education, or retirement planning.
Features of Life Insurance Plans
Premium Payment: The cost of the life insurance plan, which can be paid monthly, quarterly,
or annually.
Maturity Benefits: A lump sum paid to the policyholder at the completion of the policy term if
they survive.
Sum Assured: The guaranteed amount paid to the nominee in case of the policyholder's
death during the policy term.
Policy Term: The duration for which the life insurance policy remains active and provides
coverage.
Claim Settlement: The process by which the insurer pays the policy benefits to the beneficiary
after the policyholder's death.
Riders: Optional add-on benefits that enhance the coverage of a life insurance plan, such as
critical illness cover or accidental death benefit.
Nominee: The person designated to receive the sum assured of the life insurance policy.
Law Relating to Life Insurance
Insurance Act, 1938:
This act established a regulatory framework for the insurance industry in India. Key features
include:
Government power to regulate insurance companies.
Policyholders can name beneficiaries.
Registration requirements for insurance companies.
Mandatory financial reporting.
Deposit requirements to prevent underfunding.
Licensing of insurance agents, surveyors, and loss assessors.
Prohibition of misleading names and rebates.
Establishment of a Department of Insurance for supervision.
Life Insurance Corporation Act, 1956:
This act nationalized the life insurance business in India and established the Life Insurance
Corporation of India (LIC). Key features include:
Nationalization of life insurance business.
Establishment of LIC as a statutory body.
Objectives of LIC: maximizing savings mobilization, providing security, conducting
business economically, meeting diverse life insurance needs, and spreading insurance
wider, especially in rural areas.
Investment requirements: at least 75% of funds must be invested in government securities
and socially oriented sectors.
Formation by merging 154 life insurance companies, 16 foreign companies, and 75
provident companies.
Headquarters in Mumbai.
General Principles of Life Insurance Contract
Principle of Utmost Good Faith: Both parties must act with honesty and transparency,
disclosing all relevant information.
Principle of Proximate Cause: The insurer is liable only if the loss is proximately caused by a
peril insured against.
Principle of Insurable Interest: The insured must have a financial interest in the subject
matter of insurance.
Principle of Indemnity: The insurer compensates the insured for the actual loss suffered, up
to the sum assured, aiming to put the insured back in the financial position they were in
before the loss. (Note: This principle is strictly applied to general insurance, but life insurance
provides a fixed sum assured regardless of the actual financial loss).
Principle of Subrogation: After paying a claim, the insurer gains the right to pursue any third
party responsible for the loss. (Primarily applicable to general insurance).
Principle of Contribution: If the insured has multiple policies for the same risk, they can claim
from each insurer proportionally. (Primarily applicable to general insurance).
Principle of Mitigation: The insured must take reasonable steps to minimize the loss or
damage.
Proposal and Policy
Proposal Form: The initial document filled by the applicant, providing details about the
proposer and the life assured. It forms the basis of the insurance contract and includes
information such as name, address, occupation, sum insured, age, and a declaration of
truthfulness.
Policy: A legally binding contract that details the terms and conditions of the insurance
coverage, including the sum assured, premium payments, policy term, and benefits.
Assignment and Nomination
Assignment: The transfer of rights of a life insurance policy to another person (assignee) as
collateral or for other reasons. The assignee becomes the new owner, but the risk remains
with the original policyholder.
Nomination:
The designation of a person (nominee or beneficiary) to receive the policy benefits in case of
the policyholder's death.
Rights of Nominee: Nominees have rights only upon the death of the policyholder during
the policy term. If the policyholder survives the term, the nomination typically cancels.
Minor Nominee: If the nominee is a minor (under 18), an appointee must be appointed to
receive benefits on their behalf.
Change of Nominee: The policyholder can change the nominee during the policy's active
period. A nominee has no right to change the policy.
Multiple Nominees: A policyholder can designate multiple nominees, specifying the
percentage of the sum assured each will receive.
Nominee's Demise: If a nominee dies before the policyholder, a new nominee must be
appointed.
Distinction between Assignment and Nomination
Purpose: Assignment transfers rights and control; Nomination designates beneficiaries.
Ownership and Rights: Assignment transfers ownership; Nomination does not transfer policy
ownership.
Legal Endorsement: Assignment requires legal endorsement on the policy; Nomination does
not.
Claim Benefits: Assignee receives claim benefits (if applicable); Nominee receives benefits
upon policyholder's death.
Witness: Assignment requires a witness; Nomination generally does not (unless an appointee
is involved for a minor).
Right to Sue: Assignee can sue the assignor; Nominees cannot sue the policyholder.
Claims
Insurance Claim: A formal request by a policyholder to an insurance company for coverage or
compensation for a covered loss or policy event.
Life Insurance Claim:
A request for a payout after the death of the policyholder or upon the maturity of the policy.
Death Claim: Filed by beneficiaries after the policyholder's death.
Maturity Claim: Filed by the policyholder upon the end of the policy term.
Claim Process:
Policyholder or beneficiary files a claim.
Insurance company verifies documents and processes the payout.
Documents Required: Claim intimation form, death certificate (for death claim), proof of
identity of the beneficiary, age proof of the policyholder, medical certificate, and original
policy documents.
Surrender Value
Surrender Value:
The amount a policyholder receives if they decide to terminate a life insurance policy before
its maturity.
Guaranteed Surrender Value (GSV): The minimum amount guaranteed by the policy,
usually a percentage of premiums paid, minus charges.
Special Surrender Value (SSV): A potentially higher value offered at the discretion of the
insurer, often based on policy performance and bonuses.
Calculation Factors: Premiums paid, policy term, bonuses/interest earned, and applicable
deductions (surrender charges).
General Insurance
Definition and Purpose
General insurance (non-life insurance) policies provide compensation for losses arising from
specific financial events, covering assets and health rather than life.
Types of General Insurance
Motor Insurance: Covers vehicles (two-wheelers, four-wheelers).
Health Insurance: Covers medical expenses (individual, family floater, critical illness).
Travel Insurance: Covers risks during travel (individual, family, student, senior citizen).
Home Insurance: Protects the house and its contents.
Marine Insurance: Covers goods and interests during transit by sea, air, or land.
Commercial Insurance: Covers risks arising from business operations.
Accident Insurance: Covers injuries or damages due to accidents.
Fire Insurance: Protects assets, stock, or machinery against fire.
Theft Insurance: Covers loss due to theft.
Property Insurance: Covers various types of property against damage.
Aviation Insurance: Covers aircraft and related risks.
Livestock Insurance: Covers livestock against death or disease.
Crop Insurance: Covers crops against losses due to natural calamities.
Difference between Life Insurance and General Insurance
Feature Life Insurance General Insurance
Coverage Life of the policyholder Non-life assets and health
Purpose Financial protection for beneficiaries Protection against financial losses
Policy Term Long-term (10+ years to lifetime) Short-term (usually 1 year)
Payout Sum assured on death or maturity Compensation for insured events
Types Term, Whole Life, Endowment, ULIP Health, Motor, Property, Travel, Liability
Tax Benefits Under Section 80C Under Section 80D for health insurance
Premium Regular or single premium Annual or as per policy terms
Law Relating to General Insurance
Insurance Act, 1938: Also governs general insurance, including provisions for registration,
financial reporting, and restrictions on certain transactions.
General Insurance Business (Nationalisation) Act, 1972: Transferred shares of existing
general insurance companies to the General Insurance Corporation (GIC) and aimed to
regulate and control the general insurance business.
General Insurance Council (GI Council): A self-regulatory organization that advises insurers
and IRDAI on standards of conduct, sound practices, and control of expenses.
Re-insurance
Definition: Insurance for insurance companies, where an insurer (ceding party) transfers
some of its insured risk to a reinsurance company.
Features:
Risk Mitigation & Diversification: Spreads large or catastrophic losses across multiple
reinsurers.
Financial Stability: Provides a financial buffer and helps maintain solvency.
Capacity Expansion: Enables insurers to underwrite more and larger risks.
Capital Efficiency: Frees up capital for reinvestment.
Expertise & Knowledge Sharing: Access to reinsurer's specialized skills.
Regulatory Compliance: Helps meet solvency requirements.
Benefits: Risk transfer, financial stability, catastrophe protection, increased underwriting
capacity, capital relief, access to expertise, global diversification, and market access.
Insurance Regulatory and Development Authority of
India (IRDAI)
Role, Powers, and Functions
Establishment: An autonomous statutory body established by the Insurance Regulatory and
Development Authority Act, 1999. Headquarters in Hyderabad.
Composition: A 10-member body, including a chairman, five full-time members, and four part-
time members appointed by the government.
Functions:
Policyholder Protection: Safeguarding interests, ensuring fair pricing, transparency, and
timely claim settlements.
Regulation & Supervision: Licensing insurers and intermediaries, setting conduct rules,
regulating investments, and ensuring financial solvency.
Industry Growth: Promoting orderly growth, increasing insurance penetration (especially in
rural areas), and encouraging innovation.
Fair Competition: Fostering a competitive environment for customer benefit.
Grievance Redressal: Providing mechanisms for dispute resolution.
Powers:
Registering and regulating insurance companies.
Setting eligibility criteria for licenses.
Ensuring high service standards and prompt claim settlement.
Approving insurance products.
Regulating investment of policyholder funds.
Regulating premium rates and terms for non-life insurance.
Setting qualifications for agents and intermediaries.
Establishing grievance redressal mechanisms.
Promoting and regulating professional organizations.
Conducting inspections, investigations, and audits.
Insurance Business in India
Regulatory Framework: Insurance is a Union List subject, legislated by the Central
government. The primary regulator is IRDAI.
Historical Context:
The Insurance Act, 1938, was the first comprehensive legislation.
Life insurance was nationalized on January 19, 1956, with the establishment of the Life
Insurance Corporation of India (LIC).
Market Evolution:
Private companies were allowed in the insurance sector in 2000.
Foreign Direct Investment (FDI) limits have increased over time: 26% (2000), 49% (2014),
74% (2021), and recently 100%.
Industry Size: By 2020, the Indian insurance industry was a US$280 billion industry.
Penetration: Despite industry growth, insurance penetration remains relatively low, with a
significant portion of the population not covered by health insurance.
Specialized Services: Entities like ECGC, ESIC, and AIC provide insurance for niche markets.