insurance and life insurance

7/24/2019 insurance and life insurance

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CHAPTER I

INTRODUCTION TOINSURANCE-

LIFE INSURANCE


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1.1 What is insurance and its r!e

Insurance is a form of risk management in which the insured transfers the cost of

potential loss to another entity in exchange for monetary compensation known as

thepremium.

Insurance allows individuals, businesses and other entities to protect themselves

against significant potential losses and financial hardship at a reasonably affordable

rate. It is "significant" because if the potential loss is small, then it doesn't make

sense to pay a premium to protect against the loss..

Insurance is appropriate when one wants to protect against a significant monetary

loss. Take life insuranceas an example. If a person is the primary breadwinner in his

home, the loss of income that the family would experience as a result of his

premature death is considered a significant loss and hardship that he should protect

them against. It would be very difficult for his family to replace his income, so the

monthly premiums ensure that if he dies, his income will be replaced by the insured

amount. The same principle applies to many other forms of insurance. If the potential

loss will have a detrimental effect on the person or entity, insurance makes sense.

veryone that wants to protect themselves or someone else against financial hardship

should consider insurance. This may include!

rotecting family after one's death from loss of income

nsuring debt repayment after death
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#overing contingent liabilities

rotecting against the death of a key employee or person in your business

$uying out a partner or co%shareholder after his or her death

rotecting your business from business interruption and loss of income

rotecting yourself against unforeseeable health expenses

rotecting your home against theft, fire, flood and other ha&ards

rotecting yourself against lawsuits

rotecting yourself in the event of disability

rotecting your car against theft or losses incurred because of accidents and

many more

1." Insurance#s R!e in $ur Financia! P!an

Insurance is one of life's necessities and probably the least%understood financial

product. Insurance reimburses people for covered losses in the event of an

unfortunate occurrence such as an illness, accident, or death. t the same time, it can

encourage prevention and safety measures, provide investment capital, lend money,and help to reduce anxiety for society at large.

s a mechanism against loss of income and a means of safeguarding assets, most

mericans have insurance in one form or another. These coverage's may include

public coverage, such as disability insurance under (ocial (ecurity, a health care
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policy from an employer, or personal insurance to protect property such as

computers, homes, and cars.

)ou may save money in your pension and other investments and have capital in your

home. $ut if you don't know exactly what your life insurance policy covers or have

only glanced at your employer%provided health and disability insurance policies,

you're neglecting an important aspect of your financial plan.

*ntil something happens, such as a car accident, an illness, or the death of a loved

one, paying for insurance may seem like buying something you'll never use. $ut even

if you never submit a claim, insurance is an investment in your future, as important

as pensions and personal investments. Indeed, many financial planners argue that you

should have an ade+uate insurance safety net in place before considering investment

strategies.

The function of insurance is to protect you against losses you can't afford. This is

done by transferring the risks of a person, business, or organi&ation %% the "insured" %%

to an insurance company, or "insurer." The insurer then reimburses the insured for

"covered" losses % i.e., those losses it pays for under the policy's terms.

s the insurance consumer, you pay an amount of money, called a premium, to the

insurer to transfer the risk. The insurer pools all its premiums into a large fund, and

when a policyholder has a loss, the insurer draws funds from the pool to pay for the

loss.

ife is full of unexpected events that can create large financial losses. -or example,

whenever you drive, it is possible that you may have a costly accident. isks affect

you by causing worry about potential loss and how to deal with the conse+uences.

Insurance reduces anxiety over a possible loss and absorbs the financial brunt of its

conse+uences.


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/owever, while insurance coverage is essential, how much and what type of

insurance people need differ with each individual. )ou must decide how much risk

you're willing to tolerate without insurance. -or example, benefits for disability

policies typically begin after a waiting period of one to six months. Therefore, you

should ensure that you have some form of coverage or financial resources before the

policy period begins.

1.% What is !i&e insurance

ife insurance in India made its debut well over 011 years ago.

In our country, which is one of the most populated in the world, the prominence of

insurance is not as widely understood, as it ought to be. 2hat follows is an attempt to

ac+uaint readers with some of the concepts of life insurance, with special reference to

I#.

It should, however, be clearly understood that the following content is by no means

an exhaustive description of the terms and conditions of an I# policy or its benefits

or privileges.

ife insurance is a contract that pledges payment of an amount to the person assured

3or his nominee4 on the happening of the event insured against.

The contract is valid for payment of the insured amount during!

The date of maturity, or


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(pecified dates at periodic intervals, or

*nfortunate death, if it occurs earlier.

mong other things, the contract also provides for the payment of premium

periodically to the #orporation by the policyholder. ife insurance is universally

acknowledged to be an institution, which eliminates 'risk', substituting certainty for

uncertainty and comes to the timely aid of the family in the unfortunate event of

death of the breadwinner.

$y and large, life insurance is civilisation's partial solution to the problems caused by

death. ife insurance, in short, is concerned with two ha&ards that stand across the

life%path of every person!

0. That of dying prematurely leaving a dependent family to fend for itself.

5. That of living till old age without visible means of support.

ife is too precious, so much that it is difficult to put a price on it. 6oney surely can't

bring our late loved ones back or buy us happiness and affection. $ut it can very well

help us reali&e its significance for survival. family's survival is risked if its sole

earner dies unexpectedly. The demise of a loved one creates a void that is hard to fill

but his7her absence must not disrupt the financial future of the family. s it is, the

grief of losing a member is a lot to deal with8 at least money woes should not bereason behind worries and miseries. It is therefore, essential to reali&e the value of

your life and sign up for life insurance, which is a protection against financial loss

resulting from insured's death. In legal terms, life insurance is a contract between a

policy owner and insurer, wherein the latter agrees to reimburse the occurrence of the


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insured individual's death or other event such as terminal illness or critical illness.

The insured agrees to pay the cost in terms of insurance premium for the service.

ife insurance offers you risk coverage and takes care of monetary needs of your

family after your death. $esides providing coverage against all sorts of risks, it gives

you an opportunity to grow your investments. It could also be viewed as a long%term

investment tool that helps you to save for your child's future expenses or your post

retirement expenses.

1.' T()es & !i&e insurance

9epending on the diversified needs of every individual, various insurance plans are

available in the market. (uch customi&ed plans are made in such a way that they suit

the likes of ma:ority of customers.

-ollowing are the different forms oflife insurance plans!

T()es & Li&e Insurance*

There are various types of life insurance policies available to aid you in meeting

needs of various life stages.

0. Ter+ !i&e insurance! )ou get coverage for a tenure that you specifically choose.These policies could be availed by people who find it difficult to pay a lump sum

amount for endowment assurance policy or whole life policy.
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5. Wh!e !i&e insurance! This policy covers you for as long as you live. )ou stay

protected for your entire life, thus this plan is named as whole life policy.

;. End,+ent )!ic(! isk is covered for a specific period and at the end of the

period sum assured along with the accumulated bonus, is paid back to the

policyholder. ndowment policy pays back the face value of the amount on the

insured person's death or after a stipulated number of years. (ome policies also make

payment in case of critical illness.

. Retire+ent )!ans! This plan is a retirement solution plan and does not cover life

insurance. )ou can build your retirement corpus as per your risk appetite and on

completion of the specified period, a certain amount of money is paid to the

insured7beneficiary in the form of pension, monthly, half%yearly, or annually.

?. Unit Lin/ed Insurance P!ans 3ULIPs4! part of investment goes towards

providing life cover, while the residual portion is invested in stocks or bonds. It is a

goal%based financial product, which is designed to impart safety and wealth creation

opportunities.

@. Chi!d insurance )!ic(! These plans are designed to meet rising education and

other needs of children. child plan offers a lump sum amount on the death of the

policyholder, but the policy doesnt end. ll future premiums are waived and


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insurance company continues investing money on the behalf of policyholder. The

child gets the money at specified tenure as planned.

ife insurance is undoubtedly mandatory but availing it without understanding its

functioning would make your purchase worthless and useless. Aarious terms and

phrases need to be familiari&ed with prior to buying life insurance. Term life

insurance and whole life insurance would differ in appeal if the consumers have a

strong idea about their features and uses. The real motive behind life insurance would

get defeated if you buy a plan without prior knowledge and your decision turn out be

regretful, especially at the time of maturity of the plan or death of the policyholder.

et us see how!

Term Life Insurance Protection Plan

Term life insurance protection plans give you coverage only for a

specied term. The main advantages of term life

insurance protection plans are that they are easy on your pocket,

give you the highest amount of coverage, safeguard your family

against nancial liabilities and oer you tax benets.

Term life insurance protection plans have no face value and hence the premium for

such policies is comparatively lower when compared with other policies. In case of

survival of policy term, the insured does not get any return. The premiums in such

policies increase with rising age as the chances of death are high in old age. Bnce

you cross >1 years, these policies become difficult to afford.

Life Insurance Investment Plan


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(ettlement options! )ou have the provision to collect the settlement proceeds as per

the options offered by your company.

xcluded isks! 9epending on the policy, death under circumstances like war or an

aviation accident may or may not be covered.

Crace eriod! There are times when you are unable to pay premiums due to financial

crunch. )our insurance company provides a grace period within which you can make

the necessary monetary arrangements and pay your premiums.

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