Important words in Insurance

S.No	Important Words	SUMMARY
1	proposer	A person who requests to buy a policy for self, spouse or child.
2	Proposal form	This is a form to be filled by person who wishes to take a policy. (all a person in whose name policy is taken.
3	Policy holder	A person in whose name policy is taken.
4	Premium	Amount to buy a policy or installment. (Annually, semi annually, quarterly, monthly (ECS-electronic clearing system)
5	agent	Intermediate between company & policy holder. (one who sells policies on commission basis)
6	insurer	Insurance company who sells policy & also gives money (SA/maturity) at the end of the period.
7	contract	Agreement between company& policy holder. (one giving & one taking)
8	nominee	A person who receives the money on death of the life insured
9	rider	It can be taken along with normal policy for extra benefits (WOP, CI AD &D, SC, HC)
10	Sum assured	The limit of the policy amount. (risk amount- sum at risk)
11	claim	Payment of sum assured on death or maturity.
12	Risk/peril/hazard	Risk- chance of damage of loss, peril- event which might cause a loss, hazard- conditions that a peril would happen.
13	Coroner (investigator)	A person who investigates in case of death cases.
14	Medical referee	Panel of doctors who are appointed for medical checkups. (not company employee)
15	underwriter	He is a company employee who decides to give the policy or not

Types of savings products

Ø  Life insurance

o  Many life insurance products apart from an insurance cover have a savings

o  Component,

o  Ex: participating endowment,

o  Participating whole life, where investment risk is borne by insurance  company on behalf of the policyholders and the returns earned are shared  with the policyholders in the form of bonuses.

Ø  Bank deposit

o   Bank deposits are products where an individual has to invest a lump sum amount for a fixed tenure at a fixed rate of interest decided at the time of making the deposit.

o   There are three types of bank deposits-

§   traditional deposits

§  Cumulative de posits

§  Recurring deposits;

Ø  Mutual fund

o  Mutual funds provide risk diversification

o  Managed by asset management companies (AMCs),

o  Brings people with a common objective together. Money collected from these   people is

o  Invested on their behalf and the returns are shared back amongst them.

o  Provides regular income & capital appreciation.

o  The  buying and selling of shares is done through brokerage houses on the two stock exchanges in India-

§  Bombay stock exchange (BSE) and the

§  National stock exchange (NSE).

o   Equity shares provide three types of income to the investor dividend income.

o   Bonus share& capital appreciation.

o   An investor can also incur a capital loss on equity investments.

o   Investors can incur capital loses in equity, if shares are  bought at a higher price and sold at a lower price due to poor financial performance of the company.

Taxation and inflation

Taxation and inflation

Ø  Taxation: the premium paid for life insurance plans qualifies for deduction from taxable income under section 80c of the income tax act. The act specifies certain conditions for tax benefits to be granted. The following condition should be fulfilled:

·         As per current tax laws the premium paid should be 20% ,or less than 20%, of the sum insured; or

·         The sum insured should be five times, or more than five times, the premium paid

Ø  Inflation: over a period of time, inflation can have a big impact on the insurance cover that has been taken out.

Ø  In simple words inflation is the rise in the price of goods and services in the economy and means and  increase in the cost of  living.

Life insurance products

Life insurance products

v  Return of premium plan      

v  Pure endowment plan

v  Endowment insurance plan

v  Whole life insurance plans

v  Convertible insurance plans

v  Joint life insurance plans

v  Annuities

v  Group insurance plans

v  Micro-insurance plans

v   unit-linked insurance plans

v  Child plans

v  Money-back policies

v  Salary saving schemes,

INSURANCE PRINCIPLES

Ø The following are the essential features of a valid contract:

·        Offer and acceptance-one party makes an offer accepted unconditionally by the other

·        Consideration-a contract must be supported by a consideration in order to be valid. Premium is the insured’s consideration.

·        Capacity to contract – individuals are said to be competent to enter into a contract if the are:

§  Of the age of majority (age 18 );

§  Of sound mind; and

§  Not disqualified, buy law, from entering into contracts

·        Any contracts entered into by people not competent to contract will be null and void.

·        Consensus ad idem- in simple terms: both parties to the contract must understand and agree upon the same thing, in the same sense.

·        Legality of object or purpose- the objective of both the parties to the contract should be to create a legal relationship.

·        Capability of performance- the contract must be capable of being performed by both the parties.

Law of large numbers

Ø Insurance companies apply the law of large numbers to determine the cost of total annual claim.

Ø Determine the probability that a certain amount of claim will have to be paid by insurer if a large number of people re insured for a similar risk.

Ø Set the rates of premiums according to the number of claims expected over the term of the policy.

Pooling of risk

Ø Pooling of risk is one of the fundamental principles of insurance there the company pools the premium collected from several individuals to insure them against similar risk.

Ø Separate pools are maintained by insurance company for different risks.

Ø The pool account for one risk can be used to settle the claim of  another type of risk

Ø The premium collected from the individuals is deposited in the pool accounts and claims are paid out of this pool.

Ø Premium charged should be sufficient be sufficient to meet the claim payments & administrative and other expenses for maintaining the pool.

Risk transfer

In case of transfer of risk from an individual to insurance company, the company is called insurer and individual is called insured.

          1.The insured pays a certain amount (consideration) to insurer,  called as premium.

          2.Insurance company provides cover for only a specified number of risks as listed in policy document.

          3.Insurer will not provide for claims arising out of risks other than the specified risks.

Insurable risk

             1.   Risks that can be insured are financial risk, pure risk &particular risk.

             2.   Financial risk: the outcome of risk that can be measured in monetary terms are known as financial risk. Some of the financial risks include loss of life, disease or disability, savings accumulation, retirement.

             3.   Pure risk: risks where there is no possibility of making a profit are called pure risk.  
4.   In pure risk, there is no possibility of benefit as a result of the insured event happening, the only possibility is loss or break even. Pure risk is associated with event which are totally out of control of individuals.

           5.   Particular risk: particular risk are personal or local in their effect and the consequences effect  and the consequences effect specific individual or local community.

Peril and Hazzard

   RISK AND INSURANCE

Ø Perils: peril refers to specific events which might cause a loss.

·        Perils are risk being insured against.

·        Loss arising out of peril can be loss of life or loss of property

Ø Hazard: hazard is a condition that either increases the chance that a peril will happen or may cause its effects to be worse, if it does.

Ø Hazards can be categorized as physical hazard and moral hazard

·        Physical hazard refers to dimensions  and physical characteristics of the risk.

·        Moral hazard refers to habits and activities of the individual that increases the risk 

Ø Some hazards that would cause an individual to be categorized as high risk are

·        Risky job profile

·        Existing medical condition

·        Life style of individual

·        Imposing restrictions on the sum assured

·        Term or a lien etc