Introduction to

Insurance Theory UNIT 2 LIFE AND GENERAL INSURANCE

Structure
2.0 Objectives
2.1 Introduction
2.2 Life Insurance Contracts
2.2.1 Endowment Assurance
2.2.2 Whole Life Assurance
2.2.3 Term Insurance
2.2.4 Annuity
2.2.5 Unit-Linked
2.3 General Insurance
2.3.1 Liability Insurance
2.3.2 Property Insurance
2.3.3 Financial Loss Insurance
2.4 Let Us Sum Up
2.5 Key Words
2.6 Suggested Books for Further Reading
2.7 Answers/Hints to Check Your Progress Exercises

2.0 OBJECTIVES
After reading this unit, you will be able to:

• distinguish between ‘life insurance’ and ‘general insurance’;

• indicate the need for ‘life insurance’;
• specify the design of an ‘endowment assurance’ life insurance contract;
• delineate the features of ‘whole life assurance’ and ‘term insurance’
contracts;
• outline the concept of ‘benefits’ in an ‘annuity contract’;
• list the ‘key features’ of a unit-linked life insurance contract;
• define the terms ‘bid value of unit-fund’ and ‘non-unit fund’;
• state the need for ‘general insurance’ along with its ‘key features’; and
• discuss the types of ‘general insurance products’.

2.1 INTRODUCTION
Life insurance is a contract between an insured (insurance policy holder) and
an insurer (or assurer). In this, the ‘insurer’ promises to pay the ‘beneficiary’
(policy holder) a sum of money (called ‘benefits’) in exchange for a
24 premium. The benefit is payable upon the maturity of the contract or the
death of the insured person, whichever is earlier. Depending on the contract, Life and General
Insurance
other events such as terminal illness or critical illness can also be covered for
payment. The policy holder pays a premium, either periodically or in one
lump sum. Expenses like funeral expenses can also be included in the
benefits. Life insurance policies are legal contracts. The terms of the contract
describe the limitations of the insured events. Specific exclusions are written
into the contract to limit the liability of the insurer. Common examples of
such exclusions relate to suicide, fraud, war, riot and civil commotion. Life-
based contracts fall into two major categories: protection policies and
investment policies. The former is designed to provide a benefit, typically a
lump sum payment, in the event of a specified event. A common form of a
‘protection policy design’ is ‘term insurance’. Investment policies are
designed with the main objective of facilitating the growth of capital by
regular premiums. Common forms of ‘investment policy’ are whole life,
endowment insurance, etc. Insurance contracts that do not come under the
ambit of life insurance are called ‘general insurance’. They go by the names
of property insurance, casualty insurance (in U.S. and Canada) and non-life
insurance (in Europe and India). The products of ‘general insurance’ are
divided in two groups: personal and commercial.

Over time, with changes in lifestyles, standard of living, education and

technology, the need for ‘life insurance’ have undergone changes. With
increasing awareness and better financial position, people are buying life
insurance as a ‘savings product’ rather than a protection policy. Such a trend
has led to innovation in life insurance market to cater to the changing needs
of people. Thus, individuals’ life style over a lifetime has a strong bearing to
influence the kind of life insurance products sold in the market. Further, the
‘need for life insurance’ changes with age. For instance, in the age group of
16-25, one finds the need for financing higher education. Likewise, for those
in the age group of 25-35, there would be need to plan for a house, those in
the age-group of 35-60 would be willing to make provision for the higher
cost of sickness or disability, those in the age group of over 60 years for old
age care, etc. These needs warrant saving for future financial requirements.

2.2 LIFE INSURANCE CONTRACTS

In this section, we shall discuss the following types of life insurance
contracts: (i) endowment assurance, (ii) whole life assurances, (iii) term
insurance, (iv) annuity and (v) unit/index-linked contracts.

2.2.1 Endowment Assurance

An endowment assurance is a life insurance contract designed to pay a ‘lump
sum’ after a specific term on its ‘maturity’ or the death of the insured. This is
thus a savings product. It can be used to: (i) provide a lump sum at the time
of retirement or (ii) provide money on death before maturity. Or, it can also
be used to convert the contract into a ‘paid-up policy’ in case of need of the
25
Introduction to insured to stop paying the premium. The sum-insured is then reduced to the
Insurance Theory
number of premium fully paid. An endowment assurance policy could come
in without-profits, with-profits or in a unit-linked form. Each has
significantly different characteristics to meet the varying needs of consumers.

A contract without-profit offers a guaranteed amount of money (the sum

assured) at the end of the contract. This can be either in exchange for a single
premium at the start of the contract or a series of regular premiums paid
throughout the contract. If the policy holder dies before the contract term
ends, then the sum assured is paid to the nominee. The contract should be so
structured than an ‘assured sum’ is payable on the death of the insured. A
contract with-profit is also known as ‘participating contract’. It is a contract
in which the insurance company distributes part of its profit to the policy
holder in the form of bonus or dividend. The rate of bonus is decided after
considering a variety of factors such as the return on underlying assets, the
level of bonuses declared in previous years and other actuarial assumptions
like future liabilities, anticipated investment returns and marketing
considerations.

The ‘basic sum assured’ in ‘with profit contracts’ is the ‘minimum amount of
life assurance payable on death’ or the ‘minimum lump sum payable at
maturity’. A ‘reversionary bonus’ is awarded during the term of the insurance
contract and guaranteed to be paid at maturity. It cannot be taken away after
declaration. Besides this, the annual bonus consists of two parts. One is a
‘guaranteed bonus’. This is an amount expressed as ‘per Rs. 1,000 sum
assured’. This is set at the outset of the policy and is not altered. The second
is a ‘terminal bonus’ paid at maturity. This is sometimes paid even to a
surrendered policy. The quantum of ‘terminal bonus’ depends on the
‘investment return achieved’ by the fund. The basic sum assured may earn
‘reversionary bonuses’ which are based on profits earned. These are usually
applied in unit-linked contracts (discussed later in sub-section 2.2.5) in which
the premiums paid by the policy holders is lumped into a ‘pooled investment
fund’. Here, the benefit payable at maturity depends on the performance of
the underlying assets and the level of ‘charges’ levied by the insurance
company.

2.2.2 Whole Life Assurance

Whole life assurance is a life insurance contract guaranteed to remain in force
for the insured’s entire lifetime. The contract is valid as long as the premiums
are paid or till the maturity date. Based on the age of issue, premiums are
fixed i.e. premiums do not increase with age. The insured pays premiums
until death, except for limited payment policies which may be paid for 10
years or 20 years or till retirement date. For the insured, this contract is useful
as a means of providing for funeral expenses or for meeting any liability tax
(e.g. inheritance tax or death duties, arising on the death of the life assured).
It is also a general purpose contract providing for long-term protection to
26 dependents. In this sense, it is useful as a means of protecting the dependents
the expected transfer of wealth from a parent to one’s children will take place Life and General
Insurance
either when the term of the policy expires or upon the insurer’s death.

2.2.3 Term Insurance

The ‘term insurance’ contract pays benefit on the death of the life insured.
The benefit is paid within the terms of the contract to be chosen at the outset.
Generally, no benefit is paid on surrender of the policy. The benefit on death
is usually a lump sum. The term of the contract can range from one year to
twenty-five years or more. The lump sum remains a fixed amount throughout
the policy term. The policy is also referred to as ‘level term assurance’. Like
‘endowment assurance contracts’, ‘term insurance’ can also be on without-
profit, with profits or on unit-linked basis. They can further be level-
decreasing, level-increasing, renewable or convertible.

The ‘level term decreasing policies’ are useful to provide income to children
until such time as they become independent. The ‘level term increasing term
assurance’ policies are also referred to as ‘index-linked life insurance’. This
is because the sum assured increases each year in line with the ‘retail price
index’ (RPI). The main advantage of ‘increasing term assurance’ policies are
that a policy will not be affected by inflation. The renewal term insurance
contracts allow the policyholder to renew or extend their policy for additional
terms without medical examination. This is useful when a policy holder
wishes to continue their insurance as they get older or find themselves in
poorer health. A convertible term assurance allows the policyholder to
convert one type of contract into another type of contract. At what point
conversion is allowed depends on the policy conditions. This ‘hybrid’ nature
of conversion proves useful in situations of ill health when a policyholder has
difficulty in making payments to secure the coverage.

2.2.4 Annuity
An ‘annuity’ is a contract which pays out amounts at regular time intervals
(e.g. monthly). The policyholder can buy annuity either by paying a single
premium or buy an endowment policy which provides a lump sum at
maturity. The main purpose of this type of contract is to convert capital into
lifetime income. It removes the uncertainty of how carefully the capital
should be spent to provide income over the annuitant’s remaining life time.
Annuity can be of two types: immediate and deferred. An ‘immediate
annuity’ pays out regular amounts of benefit during the life time of the
insured. The word ‘immediate’ indicates that the contract starts payments
immediately without a deferred period. Such contracts are purchased in
advance by a single premium. Such a premium may itself be the proceeds of
another regular periodic premium contract. Immediate annuities may be
purchased on single or joint life basis. In case of joint life policies, it can be
on ‘first death or last survivor’ basis. A last survivor annuity is used to
provide income for dependents following the death of the main life. On the
other hand, a deferred annuity is a contract to pay out regular amounts of 27
Introduction to benefit at the end of the deferred period (called the ‘vesting date’). Such
Insurance Theory
payments are made when the insured is alive ‘from the beginning to the end
point of the policy period’. Due to the ‘deferred period’, regular or single
premiums can be paid up to the ‘vesting date’. Under individual contracts, a
single premium is payable at the beginning of the contract. An insurer may
also prefer the flexibility of buying a ‘new single premium policy’ each year
(until a chosen age like the retirement age) rather than be committed to
paying a fixed level of premium each year (as would be required under a
regular premium contract). Deferred annuities may be without-profits or
with-profits. A with-profit deferred annuity provides a guaranteed level of
regular income with bonus as additions. The additional benefit of bonus
income may also be made while the policy is in deferment.

2.2.5 Unit-Linked
A unit-linked contract enables consumers either to obtain a ‘higher expected
level of benefit’ for a given premium or pay a ‘lower expected level of
premium’ for a given level of benefit. The key features of a unit-linked
contract are the following.

a) The premium is paid into an investment fund. At the time of buying, a

certain ‘number of units’ representing a share of that fund is allotted to
the policy holder. The value of the fund depends directly on the ‘value of
the assets’ underlying the investment fund. The value of one unit (i.e. the
‘unit price’) will be calculated on a daily basis. This is because, being an
investment fund in the market, the value of the assets change at short
intervals. However, the policyholder’s share (i.e. the number of units)
remains unchanged until some ‘cash flow’ occurs. This could occur for
reasons like: (i) payment of a premium, (ii) deduction of a charge, (iii) a
switch over of units from one fund to another, (iv) payment of a claim
(like partial withdrawals), etc. The total value of an individual
policyholder’s fund at any time is the ‘number of units’ multiplied by the
‘unit price’.

b) The insurance company will deduct its charges from the policyholder’s
fund. These are generally deducted from the premiums before they are
invested. This could take various forms like: (i) allocation of units worth
less than 100 percent of premium paid, (ii) application of a bid-offer
spread i.e. a difference between the price at which the insurance
company sells the units (i.e. the ‘offer price’) and that at which it will
buy them back (i.e. the ‘bid price’), (iii) a fixed amount may be deducted
from each premium paid [which may be in the form of a percentage of
the fund value taken on a regular basis, called as the ‘regular fund
charge’ (or a fund management charge)].

c) Another form of recovering the charges is to issue ‘special units’ called

‘capital units’. These are subject to higher fund charge than normal units.
28 A ‘supplementary penalty’ can be levied for policies closed prematurely.
 Such charges by the insurer are meant to balance expenses and risk Life and General
Insurance
benefits in order that the insurance company can remain afloat i.e.
remain solvent.

Bid-Value of Unit Fund and Non-Unit Fund: The ‘bid value’ of a

policyholder’s ‘unit fund’, at any point of time, is the amount of money that
the company would have to pay to the policyholder on a claim under
contract. This might be upon the death of the insurer or the maturity of an
endowment or on the surrender of a contract. The ‘non-unit fund’ refers to
the ‘balance of money’ with the company. It is the accumulated value of all
the charges the company has levied on its unit-linked policies minus
expenses. The expenses would be on account of (i) the actual costs incurred
on behalf of the contracts, (ii) distribution of profits to creditors i.e. providers
of capital, (iii) any capital injections paid-in (e.g. payment towards the cost of
setting up of reserves), etc. The ‘actual costs’ will include all expenses plus
any ‘additional claim costs’ over and above the amounts of unit fund paid-
out. Such ‘additional claim costs’ could be the additional amounts required to
make up the ‘total guaranteed sum assured’ of all the policyholders.

Check Your Progress 1 [answer within the space given in about 50-100
words]

1) Distinguish between life insurance and general insurance.

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2) Indicate the need for ‘life insurance’.

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3) Give examples of ‘protection policies’ and ‘investment policies’.

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29
Introduction to 4) What are the types of bonuses paid in an ‘endowment assurance’ life
Insurance Theory
insurance contract? Under which category of life insurance policy is this
paid?

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5) What is meant by ‘bid value of a unit fund’?

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2.3 GENERAL INSURANCE

The Need of General Insurance was felt Centuries ago. The merchants had a
common interest in their ventures. They were required to make a contribution
to take care of one’s loss or the cumulative loss of all the ventures. Hence, as
early as in the fourteenth and fifteenth centuries, the practice of insurance
contract gained currency throughout the maritime states of Europe. The
contract protected the merchants from any maritime risk or disaster leading to
bankruptcy. The same social concern or advantage is behind the concept of
‘general insurance’ in the modern society now. Today, the ability to insure
against perils enables the individuals and companies to take on risks that they
would otherwise not take. It is this ability and willingness to make a small,
known outlay as ‘insurance’ against the risk of a potentially large loss is what
is behind the theory of general insurance. People pay more for ‘insurance’
than the ‘expected recovery from insurance’ (i.e. the ‘risk premium’) because
they are risk-averse and prefer a more ‘certain outcome’. The key features of
general insurance contract are: (i) it is not a life insurance, (ii) in most cases it
is a contract of indemnity, (iii) they are for short term (i.e. most general
insurance policies are for one year except some engineering projects, and
property insurance, which are of more than one year duration), (iv) an insured
can make multiple claims over the policy year, (v) claim amounts are
generally unknown and (vi) there can be delays in reporting and settling
claims. The basis of indemnity is to restore the insured to the same financial
position ‘after a loss’ as ‘before the loss’.
30
General insurance contracts can be split into: personal or individual contracts Life and General
Insurance
and commercial contracts (e.g. residential buildings and contents insurance).
Commercial contracts are sold to businesses for their commercial property,
employers’ liability and business interruption. Different businesses are
classified into ‘short-tailed’ or ‘long-tailed’ claims. A short-tailed claim is
reported and settled quickly by the insurer. A long-tailed claim implies that
there is a sizeable proportion of total claim that takes a long time to report or
it would take a long time for the insurer to settle. The types of general
insurance products can be classified under the following main headings. (i)
liability insurance, (ii) property insurance and (iii) financial loss insurance.
The ‘financial loss insurance’ itself is sub-classified into: (a) fidelity
guarantee insurance, (b) credit insurance, (c) creditor insurance, (d) business
interruption insurance and (e) personal accident insurance. General Insurance
policies may comprise elements of one or more of these types of cover.

2.3.1 Liability Insurance

Liability insurance provides indemnity to the insured. It applies where, owing
to some form of negligence, the insured is legally liable to pay compensation
to a third party. Any legal expense relating to such liability are also usually
covered. An illegal act of negligence will invalidate the cover (e.g. injury or
death in a state of drunken driving). Most liability insurance is compulsory
by law. The benefit provided by ‘liability insurance’ is an amount to
compensate a financial loss. The benefit could be restricted by a maximum
specified amount per claim or per event. It can also be restricted by an
aggregate maximum per year in case of more than one claim. The main types
of liability insurance are: (i) employers’ liability/workers compensation, (ii)
motor third party liability, (iii) marine and aviation liability, (iv) public
liability (often linked to other types of insurance such as property and
marine), (v) product liability, (vi) professional indemnity, (vii) Director’s and
Officers (D&O) liability and (viii) environmental liability.

Employers are liable if they are negligent in providing their employees with
safe working conditions. The liability covers accidents and perils like
exposure to harmful substances and working conditions. ‘Employers liability’
indemnifies the insured from compensating an employee (for bodily injury,
disease or death suffered), owing to the negligence of the employer in the
course of employment. Loss of or damage to employees’ property is also
usually covered. The benefit can be in the form of regular payments to
compensate for disabilities that reduce the employee’s ability to work. It can
be a lump sum payment to compensate for permanent injuries to the
employee. ‘Motor third party liability’ indemnifies the owner of a motor
vehicle against compensation payable to third parties for personal injury or
damage to their property. Such benefits include compensation for loss of
earnings, hospital costs and damage to property costs. In most countries, such
a cover is compulsory. In the ‘marine and aviation liability’, the insured is
indemnified against paying compensation to a third party for damages arising
31
Introduction to out of operation of the vessel or aircraft. The third parties include passengers
Insurance Theory
and crew. In ‘public liability’, the insured is indemnified against paying
compensation to a third party for damage to property or person. Likewise, in
a ‘product liability’, indemnity is provided to the insured against paying
compensation to a third party resulting from a product’s fault. Here, the perils
depend on the nature of the product like faulty design, faulty manufacture,
faulty packaging, incorrect or misleading instructions, etc. ‘Professional
indemnity’ covers the insured for the losses resulting from negligence in the
provision of a service (i.e. unsatisfactory medical treatment or incorrect
advice from an actuary or solicitor). Likewise, ‘directors and officers
liability’ indemnifies the insured against payment of compensation to third
parties owing to any wrongful act of the insured (in their capacity as a
director or officer of a company). The insurance is personal to the director or
officer but is usually bought by the company. Deliberate fraud by directors
and officers will not be covered by such insurance. Environmental liability
indemnifies payment of compensation to third parties to property by
unintentional pollution for which the insured is deemed responsible. The
costs of cleaning up the pollution and regulatory fines are also covered in
such policies. Gradual and sudden environmental pollution are both covered.

2.3.2 Property Insurance

The main purpose of ‘property damage insurance’ is to indemnify the
policyholder. Here, the indemnity is against loss of or damage to
policyholder’s own material property. The main types of property that are
subject to such insurance against damage are: (i) residential buildings (e.g.
house), (ii) commercial and industrial buildings (e.g. offices, shops and
factories), (iii) moveable property (e.g. contents of a home or of commercial
premises), (iv) land vehicles (e.g. cars, buses, taxis), (v) marine craft, (vi)
aircraft, (vii) goods in transit, (viii) engineering plant and machinery and (ix)
crops. Land vehicles can be further divided into: (i) private motor, (ii)
commercial vehicle, (iii) two wheelers and (iv) motor fleet. A motor fleet
policy provides insurance cover for different vehicles belonging to an
individual owner like a company. A small fleet might have five vehicles in it.
A large fleet could have 500 or more.

Insurance contracts may combine more than one of the above. For instance, a
combined household policy may cover both building and its contents. The
benefit is an amount up to which the insured is compensated for the value of
the loss or damage. In respect of household and commercial buildings, fire is
the principal peril against which it is insured. But policies can cover many
other perils such as explosion, lightning, theft, storm and flood. A policy on
‘moveable property’ will be defined precisely to identify which moveable
property is covered by the insurance. For instance, under a household
contents policy, the definition may include the insured’s household goods
and personal possessions plus visitors’ personal effects. Theft is the major
peril for moveable property. The amount paid on a claim can be: (i) the
32
replacement value, which is the cost of a new item reduced to allow for the Life and General
Insurance
depreciation on the lost item, or (ii) on a ‘new for old’ basis. Under the latter
the cost of an equivalent brand new item is provided. For ‘motor vehicles’,
the perils include accidental or malicious damage to the insured vehicle, fire
and theft. In many countries, including India, this cover is typically provided
together with ‘third party cover’ within a single policy. For ‘marine
property’, the perils covered relate to marine hull cover, marine cargo and
marine freight. Damages through perils of the seas (or other navigable
waters), fire, explosion, jettison, piracy etc. are also covered. ‘Goods in
Transit’ is a commercial insurance cover against loss or damage to goods
while being transported in vehicles specified in the policy (e.g. the
company’s vehicles or by a carrier). The periods of loading and unloading are
also covered in addition to the journey. The sum insured is closer to the value
of the goods. Construction and engineering projects can take several years
and hence the associated policies will last until the end of the project. There
can be an ‘extended warranty’ to cover losses arising from the need to replace
or repair faulty parts in a product (e.g. electrical goods, furniture or motor
vehicles). Such coverage is usually beyond the manufacturer’s normal
warranty period. Policies may have a term of several years.

2.3.3 Financial Loss Insurance

Financial loss insurance can be categorised as follows: (i) fidelity guarantee
insurance, (ii) credit insurance, (iii) creditor insurance, (iv) business
interruption cover (also known as consequential loss) and (v) personal
accident insurance. Fidelity guarantee insurance covers the insured against
financial losses caused by dishonest actions of its employees (fraud or
embezzlement). These will include loss of money or goods owned by the
insured or for which the insured is responsible. It will also include reasonable
fees incurred in establishing the size of the loss i.e. what is paid to auditors or
accountants. Fraud is wrongful or criminal deception intended to result in
financial or personal gain. Embezzlement is stealing or misappropriating
funds placed in one’s trust or under one’s control. ‘Credit insurance’ covers a
creditor against the risk that the debtors will not pay their due obligations. Its
principal types are: (i) trade credit and (ii) mortgage indemnity. Trade credit
covers uncollectible debts which can be sold on an annual basis. Such a cover
may also be for the length of a project. For instance, an aircraft built for a
customer who does not pay for it at the end of construction. Mortgage
indemnity covers the lender (mortgagee) in a mortgage loan against the risk
of the borrower’s (mortgagor’s) default. It provides coverage for the value of
the property on which the loan is secured. Creditor insurance provides cover
to all the insured who are subject to obligations to repay credit advances or
debt. Most of such policies are made to individuals to cover ‘personal loans,
mortgage loans or credit card debts’. The cover is usually against disability
and unemployment on the ground that these perils may prevent the insured
from earning an income. The policy will pay for the loan payments until the
borrower has recovered or obtains new employment or until the loan is fully 33
Introduction to repaid. ‘Business interruption cover’ indemnifies the insured against losses
Insurance Theory
made as a result of not being able to conduct business for various reasons
specified in the policy. For instance, fire at the insured’s or in a neighbouring
property where the financial consequences can be substantial. Another
example is where the company’s production lines are hit and income from
customers will be much reduced. If such income stream was being used to
pay off loans from a bank, the accumulating interest charges can put further
financial strain on the company. ‘Personal accident insurance’ gives benefits
by way of ‘specified fixed amounts’ to cover for the loss that an insured party
may suffer on account of losing one or more limbs or other specified injury.
This may also include the policyholder’s family. This is not an indemnity
insurance because it is not possible to quantify the value of the loss of a limb.

Check Your Progress 2 [answer within space given in about 50-100 words]

1) List the features of ‘general insurance’.

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2) Specify the types/classification of ‘general insurance’.

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3) State the types of ‘liability insurance’.

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4) What are the categories of ‘financial loss insurance’?

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34 .....................................................................................................................
5) What is meant by ‘credit insurance’? What are its two principal types? Life and General
Insurance
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2.4 LET US SUM UP

The unit has discussed the need and types of the life and general insurance. It
looks at the way in which insurance is provided as security to the policy
holders. Different kinds of product provided by the life and general insurance
are covered. In particular, it covers five types of life insurance viz.
endowment assurance, whole life assurance, term insurance, annuity and
unit-linked insurance. Under general insurance, the unit covers four specific
types of insurance viz. liability insurance, property insurance, financial loss
insurance and personal accident insurance.

2.5 KEY WORDS

Endowment : An ‘endowment assurance’ is a life insurance

Assurance contract designed to pay a lump sum after a
specific term (on its 'maturity') or on death.
Term Assurance : A ‘term assurance’ is a contract to pay a benefit
on the death of the life insured within the term of
the contract (chosen at outset). No benefit is
given on surrender of the policy.
Convertible (or : These contracts combine a term assurance with
Renewable Term the certainty of being able to either convert to a
Assurance) permanent form of contract ([Link] endowment or
whole life assurance) or to renew the original
contract for a further period without requiring
evidence of health (unless the benefit level is
increased).
Annuity : An annuity is a contract that pays out regular
amounts of benefit. The policyholder can buy
annuity either paying single premium or buy an
endowment policy which provides a lump sum at
maturity.
Unit-linked : Unit-linked contracts operate by paying the
Contracts premiums of the policyholders into pooled
investment funds. The benefit payable at
35
Introduction to maturity depends on the performance of the
Insurance Theory
underlying assets and the level of charges levied
by the insurance company.
Liability Insurance : Liability insurance provides indemnity where the
insured, owing to some form of negligence, is
legally liable to pay compensation to a third
party. Any legal expenses relating to such
liability are also usually covered.
Property Insurance : The main characteristic of property damage
insurance is that it indemnifies the policyholder.
The indemnity is against loss of or damage to
policyholder’s own material property.
Financial Loss : This is an insurance against financial losses
Insurance arising from a peril covered by the policy.

2.6 SUGGESTED BOOKS FOR FURTHER

READING
1) Dorlan H. Francis (1999). Life Insurance, Aprilee Publishers.

2) Willey Nathan (1972). Principles and Practice of Life Insurance, Arkose

Press.

3) R Haridas (2011). Life Insurance in India, Neha Publishers &

Distributors.

2.7 ANSWERS/HINTS TO CHECK YOUR

PROGRESS EXERCISES
Check Your Progress 1

1) Life insurance is a contract between an individual and an insurance

company. The insured is covered for life as well as critical health needs.
Expenses like funeral expenditures are also covered under life insurance.
General insurance, on the other hand, relates to property insurance,
liability insurance, etc. In general, whatever is not covered under the
ambit of life insurance, is covered under ‘general insurance’.

2) With changes in lifestyles, standard of living, education and technology,

the need for ‘life insurance’ too have undergone changes. Parents often
plan for the higher educational needs of their children in advance. Young
people in the age-group of 35-45 plan for investing in their own house.
In short, life insurance products have graduated from being mere
‘protection policies’ to serve as ‘investment policies’. The latter
facilitates the growth of capital by regular payment of premiums.

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3) Term insurance and annuity are examples of protection policies. Life and General
Insurance
Endowment assurance, whole life assurance and unit-linked policies are
examples of investment policies.

4) Bonuses are paid in the with-profit endowment assurance contract.

Bonuses are of two types: guaranteed bonus and terminal bonus. The
former is a sum expressed as ‘per 1000 sum assured’. The latter depends
on the ‘investment return achieved’.

5) The ‘bid value’ of a policyholder’s ‘unit fund’, at any point of time, is

the amount of money that the company would have to pay to the
policyholder on a claim under contract.

Check Your Progress 2

1) It is not a life insurance, it is a contract of indemnity, it is for short term,

there can be multiple claim over the policy year, claim amounts are
unknown and there is usually delay in reporting and settling claims.

2) A broad classification is: individual or personal insurance and

commercial insurance. A second type of classification based on claims
is: short tailed claim and long tailed claim. Former is reported and settled
quickly, latter is its opposite. A third type of classification is based on the
main head viz. liability insurance, property insurance and financial loss
insurance.

3) Employer’s liability/workers compensation, motor third party liability,

marine and aviation liability, public liability, product liability,
professional indemnity, etc.

4) Fidelity guarantee insurance, credit insurance, creditor insurance,

business interruption cover and personal accident insurance.

5) It covers a creditor against the risk that the debtors will not pay their due
obligations. Its two principal types are: (i) trade credit and (ii) mortgage
indemnity. Trade credit covers uncollectible debts e.g. an aircraft ordered
but not collected later. Mortgage indemnity covers the lender in a
mortgage loan against the risk of the borrower’s default.

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