INSURANCE
Meaning
Insurance is a contract between two parties — the insurer (insurance company) and the insured
(policyholder) — where the insurer promises to compensate the insured for loss or damage due to
specific risks, in exchange for a fixed premium.
It provides financial protection against uncertain events such as death, accident, or loss of property.
LIFE INSURANCE
Meaning
Life Insurance is a contract in which the insurer undertakes to pay a specified amount of money to
the insured or his/her nominee on the death of the insured or on the expiry of a fixed period, in
return for regular premium payments.
It is both a protection plan and a form of savings.
Features of Life Insurance
1. Contract of Insurance: Legal agreement between insurer and insured.
2. Payment on Death or Maturity: Amount is paid on death or after a fixed term.
3. Payment of Premium: Regular premium payment is required.
4. Long-term Contract: Usually for a number of years.
5. Protection and Savings: Provides financial protection and encourages saving habits.
6. Surrender Value: Policy can be surrendered before maturity for a certain value.
Types of Life Insurance
1. Whole Life Policy:
o Covers the entire life of the insured.
o Payment made only after death.
2. Endowment Policy:
o Amount is paid either on death or after a fixed term.
o Combines protection with savings.
3. Term Insurance Policy:
o Protection for a specific term; no maturity benefit.
o Cheapest form of insurance.
4. Money Back Policy:
o Periodic payments made during the policy term.
o Remaining amount paid on maturity or death.
5. Child Policy:
o Designed to provide financial security for children’s future needs.
6. Annuity Policy:
o Provides regular income to the insured after a certain age (retirement).
Meaning of the Term “Premium”
The premium is the amount paid by the insured to the insurer periodically (monthly, quarterly, or
annually) in return for the insurance coverage.
It represents the cost of protection and depends on age, policy type, and risk involved.
Reinsurance
Reinsurance is a contract where an insurance company (the “ceding company”) transfers a part of its
risk to another insurance company (the “reinsurer”) in exchange for a portion of the premium.
It helps in spreading risk and maintaining financial stability for the insurer.
Consideration for Annuities Granted
It is the amount received by the insurance company from an individual in exchange for granting an
annuity (a fixed regular payment).
The consideration may be paid as a lump sum or periodic payments.
Commission on Reinsurance Accepted
This refers to the commission earned by an insurance company when it accepts reinsurance from
another insurer.
It is an income for the accepting company.
Commission on Reinsurance Ceded
This is the commission paid by the original insurance company (ceding company) to the reinsurer for
accepting the risk.
It is an expense for the ceding company.
Claims
A claim is a demand by the insured or nominee for payment of the insured amount after the
occurrence of the insured event (like death or maturity).
Types of claims:
1. Maturity Claims – when the policy term ends.
2. Death Claims – when the insured dies before policy maturity.
3. Surrender Claims – when policy is voluntarily surrendered before maturity.
Annuity
An annuity is a series of regular payments made by the insurance company to the insured over a
period of time, often after retirement.
It provides a steady income and acts as a pension plan.
Payments may be for life or for a fixed term.
Surrender Value
If a policyholder decides to terminate (surrender) the policy before its maturity, the insurer pays a
certain amount known as the surrender value.
It is usually less than the total premiums paid.
Applicable only after a minimum period (e.g., 3 years).
Bonus in Reduction of Premium
Instead of paying the bonus in cash, the insurance company may allow the policyholder to use the
bonus to reduce future premium payments.
It benefits the insured by lowering costs.
Reversion
Reversion means restoration of a lapsed policy after it has been discontinued due to non-payment of
premiums.
The policyholder must pay outstanding premiums with interest to revive the policy.
Life Insurance Fund
The Life Insurance Fund is the total amount accumulated by the insurance company from:
Premiums received
Interest earned
Profits from investments
after deducting claims and expenses.
It represents the liability towards policyholders.
Valuation Balance Sheet
A Valuation Balance Sheet is prepared by life insurance companies to:
Show the assets and liabilities of the insurer,
Determine the surplus or deficiency, and
Calculate the bonus payable to policyholders.
It helps assess the financial strength and solvency of the insurer.
Double Insurance – Meaning
Double Insurance means taking two or more insurance policies for the same subject matter, against
the same risk, and for the same period of time from different insurance companies.