INSURANCE
In life policy, such interest exist in relationship based on emotion.
• No insurance contract can exist, without insurable interest. Principle of
Indemnity:
• General Insurance contract is a contract of indemnity (ie. to make good the loss)
• Life insurance is not a contract of indemnity as loss cannot be made good
• Loss to be compensated is calculated on the basis value of asset and amount of
insurance.
• Stock worth Rs. 15 lac. Insurance Rs. 12 lac. Loss to stock Rs. 8 lac
• Claim liability of insurance company = 8*12/15 = 6.40 lac Principle of
Subrogation:
• Rights of insured (say to sue 3rd parties for loss) are transferred to insurer on
payment of claim.
• X is insured for personal accident. He is hit by a car. The driver of the car was drunk.
X can claim from insurance company. Insurance company can claim from car
owner/driver.
Principle of Contribution:
• If a person is insured by more than one insurer, max amount if claim is restricted to
amount of loss.
• It is shared by all insurers. If one of them makes payment, it can recover from other
insurers
Principle of Proximate Cause:
• It means immediate cause of mishap, that resulted into loss.
• If cause is different from the one, for which insurance is obtained, the insurer is not
liable Example: Fire insurance taken for short circuiting. Fire caused by leakage of
LPG cylinder. Insurance company not liable.
Types of Insurance Business
• Life
• Health
• Travel
• Motor
• Property
Term insurance plans:
• Furnishes protection for a limited number of years ( 10 or 20 years upto age of 65 or
70 years)
• Nothing is paid in case of survival
• Face value is paid on death of the insured, before maturity
• Suitable for low income person or who started business or who are threshold of
their career.
Whole Life Policy:
Provides cover for over one’s entire life.
• Face value is payable on death of the insured
• Gross premium remains same throughout the premium payment period.
Endowment Policy:
• Face value payable on death of insured before maturity.
• On maturity face value is payable to the insured.
• Policies are issued with a specific term of (say) 10-15-20-25-30 years
• For shorter duration, premium is higher.
With profit policy:
• Policy holder entitled to profit or surplus to the insurer
• Surplus is paid as bonus. It is based on valuation of assets and liabilities.
Without profit:
• No entitlement for profit. But premium is low compared to ‘with profit’
Money back policy:
• Insured received a certain percentage of sum assured periodically as survival
benefit.
• On maturity balance amount is paid. Life risk is covered for the full amount.
Unit Linked Insurance Policy:
• It offers a combination of insurance and investment.
• In case of death, the sum insured is paid to the family.
Annuity or Pension Plans:
There are 2 types of plans
Immediate annuity : Annuity payment from insurance company begins immediately after
payment of premium in lump sum.
Deferred annuity:
• A person contributes regularly till vesting age / vesting date.
• Single payment can also made
• Fund accumulates and is available on vesting date
• 1/3rd can be encashed on vesting date and 2/3rd utilised to purchase the annuity.
Calculation of paid up value of a policy
• When premium is paid for a certain minimum period and not for the entire period,
the sum insured is reduced proportionately.
It is calculated as :
• Paid up value = No. of premium paid/ no. of premium payable * sum insured.
Example: Sum assured is 10 lac. No of premium payable is 10. Policyholder paid only
5. Bonus accrued till 5th premium is Rs. 1.5 lac. What is paid up value.
Solution: Paid up value = 5/10 * 10 lac = Rs. 5 lac + Bonus (1.5 lac)
= 6.5 lac
Health Insurance
• It covers medical expenses.
• It is similar to other general insurance policies
• The expenses include : room, boarding, nursing expenses etc
• Sum insured offered may be on an individual basis or on floater basis for the family.
• It provides tax benefit under section u/s 80 Income Tax Act.
Travel Insurance
• It provides insurance protection while on travel (domestic or overseas)
• It covers travel related accident, unexpected medical expenses during travel time,
loss of baggage/ passport, delay in flights etc.
Motor Insurance
Motor insurance provides cover for
• damage to vehicle and
• liability payable to 3rd parties by the owner
• Under Motor Vehicles Act 1988, driving without insurance in a public place, is
punishable
Types of policies :
1. Liability only policy which is a statutory requirement
2. Package policy (liability only + damage to vehicle)
• Damage covered by OD cover include fire, explosion, riot, burglary, flood, cyclone,
earthquake, malicious act etc.