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What is Insurance ?
"Insurance is a contract between two parties whereby one party called insurer undertakes in exchange for a fixed sum called premiums, to pay the other party
called insured a fixed amount of money on the happening of a certain event."
Insurance is a protection against financial loss arising on the happening of an unexpected event. Insurance companies collect premiums to provide for this
protection. A loss is paid out of the premiums collected from the insuring public and the Insurance Companies act as trustees to the amount collected.
For Example, in a Life Policy, by paying a premium to the Insurer, the family of the insured person receives a fixed compensation on the death of the insured.
Similarly, in a car insurance, in the event of the car meeting with an accident, the insured receives the compensation to the extent of damage.
It is a system by which the losses suffered by a few are spread over many, exposed to similar risks.
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Why should you take Insurance ?
Insurance is desired to safeguard oneself and one's family against possible losses on account of risks and perils. It provides financial compensation for
the losses suffered due to the happening of any unforeseen events.
By taking life insurance a person can have peace of mind and need not worry about the financial consequences in case of any untimely death.
Certain Insurance contracts are also made compulsory by legislation. For example, Motor Vehicles Act 1988, stipulates that a person driving a vehicle in a public place should hold a valid insurance policy covering " Act" risks.
Another example of compulsory insurance pertains to the Environmental Protection Act, wherein a person using or carrying hazardous substances (as defined in the Act) must hold a valid public liability (Act) policy.
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Who provides Insurance ?
In India , prior to liberalisation Insurance protection was made available through Public sector Insurance Companies, namely, Life Insurance Corporation
of India (LIC) and the four subsidiaries of General Insurance Corporation of India (GIC).
By the passing of the IRDA Bill, the Insurance sector has been opened up for private companies to carry on Insurance business.
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What are the benefits of taking Insurance ?
1. Tax Relief: Under Section 80C of Income Tax Act , a portion of premiums paid for life insurance policies are deducted from tax liability. Similarly,
exemption is available for Health Insurance Policy premiums.
a. Money paid as claim including Bonus under a life policy is exempted from payment of Income Tax. However annuities received under certain pension plans
are taxable.
2. Encourages Savings : An insurance scheme encourages thrift among individuals. It inculcates the habit of saving compulsorily, unlike other saving
instruments, wherein the saved money can be easily withdrawn.
3. The beneficiaries to an insurance claim amount are protected from the claims of creditors by affecting a valid assignment.
4. For a policy taken under the MWP Act 1874, (Married Women's Property Act), a trust is created for wife and children as beneficiaries.
5. Life Policies are accepted as a security for a loan. They can also be surrendered for meeting unexpected emergencies.
6. Based on the concept of sharing of losses, the society will benefit as catastrophic losses are spread globally.
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What is the logic of insurance?
It is a system by which the losses suffered by a few are spread over many, exposed to similar risks. Insurance is a protection against financial loss
arising on the happening of an unexpected event. Insurance companies collect premiums to provide for this protection. A loss is paid out of the premiums
collected from the insuring public and the Insurance Companies act as trustees to the amount collected.
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What is the difference between Agent & a Broker?
Agent is the representative of Insurance Company whereas broker is the representative of the consumer or policy holder. An agent is licensed to work
for only one company, whereas a broker can deal with more than one company.
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What is reinsurance?
The very fundamental principle of spreading of the risk is actually practised by the insurance companies by reinsuring the risks that they have insured. Simply
speaking, it is insurance of insurers.
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What is Underwriting?
Underwriting of a risk involves consideration of material facts on the basis of which a decision will be taken whether to accept the risk and if so at what
rate of premium.
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What if I already have Life Insurance?
As an individual, for the extent of financial protection you need is different
from that as a married man which in turn is different from that as a parent. At
each lifestage, it is necessary to re-evaluate the amount of protection and
provision you require and adjust for the same.
Below are some of the events in your life for which you should re-evaluate and
plan your life insurance needs Life stages Marriage Birth of a child Schooling
of child College education of child Marriage of child Retirement
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How much insurance do I need?
The main purpose of life insurance is to provide a financial cushion to your
loved ones in the event that something unfortunate should happen to you. One
must provide enough, so as to generate a future income stream that will take
care of the financial needs of their dependants. How much insurance you need
depends on your annual income, your expenses and your existing assets. Use our
Insurance Calculator to get a rough estimate of how much you should insure
yourself for. Concept of Human Life Value
Generally speaking, one can estimate the extent of life insurance by
calculating one's “Human Life Value” (HLV). This is the net present value of
one's future earnings. Put simply, it is the amount that a person's family
would permanently lose, should anything unfortunate happen to that person. As a
thumb rule, a 30-year old should insure oneself for about 8 times his or her
annual income. At 35, this is about 6 times. Of course, the exact amount must
be adjusted according to the number of dependents, existing investments and
one's lifestage. For instance, if at 30, a person has two children and parents
to provide for, the amount of insurance should also be higher. You can
calculate your Human Life Value by multiplying your current annual income with
the number of years remaining for your retirement. Let's assume that you are 30
years old and you earn Rs. 4,00,000 per annum. Now, if your retirement age is
55 you have 25 years to go before retirement. So your Human Life Value is (25 x
4,00, 000) = Rs. 100, 00, 000 (One Crore rupees). So, your present Human Life
Value is one crore rupees, provided you stay healthy. If you take factors like
inflation and increase in income over a period of time into account, your Human
Life Value is a lot more.
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Hints to Fill a Proposal Form
A proposal form is the basis of contract between you and the insurer. Utmost care has to be taken while filling this form. All the details should be written
legibly and should be accurate.
Listed below are a few tips, which we think will help you fill the form.
Object/Purpose of insurance:
In this column one is required to specify the purpose of taking an insurance policy. You are advised to fill any one of the following:
Family provision.
Old age provision.
Earmarking of policies for marriage.
Nomination:
Nomination is the process of identifying a person to receive the policy money in the event of the death of the Policy holder.
In this column you can fill in the name of the person whom you wish to choose as your nominee. For example, Father, Mother, Wife, Son, etc.
Appointment of Appointee:
In case the nominee happens to be a minor, then the policyholder has to appoint an Appointee. So, please fill the Appointee's full name and his/her
relationship to the nominee.
Exact nature of duties:
In this column you are supposed to give a detailed description of your job or the duties you are responsible for.
Source of income:
You are required to give the details of all the sources of your income as specified under the Annual Income column. This refers to the total income from
sources other than that you have specified in present occupation column.
Is your life now being proposed for another assurance or an application for revival of the policy on your life under consideration in any office of the
insurer.
In this column you are supposed to give complete information of all the policies due for approval by the insurer. Also mention details of those policies, which
were lapsed and have been applied for revival. You must bear in mind that withholding this information could lead to complications at a future date.
If the Answer to the above question is "YES", then full details regarding
Name of the branch, Proposal number, Policy number, face amount/sum assured (if it has been declined or accepted with extra premium or accepted on terms other
than proposed) must be given.
Family History:
You are required to give complete details of your family members (both living and dead).
Personal History:
Full details of your health history have to be filled.
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Claim Settlements
The settlement of a claim arises due to Death of the Policyholder or due to Maturity of the Policy.
Death Claim
In respect of a death claim an intimation regarding death of a policyholder from a relative / nominee / or assignee is to be received.
The facts required to be submitted are:
1. Date of death,
2. Reason and Place of Death,
3. Full details of policies held by the Life assured should also be submitted.
Death claims are categorized as Non-Early Death claims and Early Claims. The procedure for processing these claims is different.
Non-early Death Claim:
Non-early Death Claims refer to death of the Life assured occurring after 3 years from the date of commencement of policy or Date of last revival /
reinstatement
If the policy is in force till death by regular payment of premiums, full sum assured is payable along with bonus (if it is a with profit policy).
The following are the requirements for the settlement of the death claim:
Policy Document
Death Certificate from the appropriate authority
Legal evidence of Title, if the claimant is not an assignee / nominee
Abridged claim Form (3783/A)
Discharge Form in 3801, duly signed
Assignment / Reassignment deed, if any
Age proof, if age is not already admitted
Once these documents are received and if they are found in order, claim is settled and payment is made to the person entitled to.
Early Claims:
Early Claims refer to the death of Life assured occurring within 3 years from commencement of policy.
The following forms are to be submitted duly completed:
Claim Form B: Statement from the medical attendants who last treated the deceased Life assured.
Claim form B1: certificate of treatment issued by the hospital authorities where the deceased was treated last.
Claim form E - certificate by the employer if the deceased was an employee.
Claim form C - certificate of burial/cremation signed by a person who attended the funeral of the deceased.
Where death takes place due to accident, the death has to be reported to the police and a FIR (First Information Report), police inquest report, and
postmortem report (if conducted only) are to be submitted.
Wherever death takes place within 2 years from Date of commencement an enquiry is conducted to determine the genuineness of claim.
On the basis of these, the decisions to settle accidental benefits are taken.
Maturity:
If the life insured survives to the full term, then basic sum assured is payable. This payment by the insurer to the insured on the date of maturity is
called maturity payment.
In majority of the plans, full sum assured becomes payable along with Bonus as a maturity payment, unless survivals benefits are paid earlier as in a money back
policy.
At least 2 months before maturity date, information is sent to the life assured with a blank discharge form for signature & completion by him. It is to be
returned to the office along with:
Original Policy document
Age proof if age not already submitted
Assignment /reassignment, if any.
Postdated cheques are submitted to the Life Insured on receipt of the above mentioned requirements.
Certain Relaxations in Settlements of the claims:
Legally no claim is acceptable in respect of a lapsed policy or death of the Life assured occurring within 3 years from the date of commencement of the
policy. However, some concessions are available and payment of claims are made -
If the Life assured had paid at least 3 years' premiums and thereafter if premiums have not been paid, the nominees get proportionate paid up value.
In the event of the death of the Life assured within 3 years and the policy is under the lapsed position, nothing is payable.
Other concessions are:
If minimum 2 years premiums are paid and if death of Life assured occurs :
1. Within 3 months from the Date of first unpaid premium
Full sum assured along with bonus is payable subject to recovery of the premium already fallen due and the premium that falls during the policy anniversary.
2. Between 3 to 6 months from fully unpaid premium
Only 50% of basic sum assured is payable. No bonus is paid and no arrears of premium are received.
3. 6 months to 1 year from fully unpaid premium
Only notional paid up value is given.
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Nomination
Nomination is the process of identifying a person to receive the policy money in the event of the death of the Policyholder.
Nomination can be done at the inception of the Policy by providing details of nominee in the proposal form. However, if the nomination is not given at the
beginning, the policyholder can give it at a later date.
This nomination has to be effected by giving notice in a prescribed form to the insurer and getting it endorsed on Policy Bond.
Change of Nomination can be done by the Policyholder any time during the term of the Policy and any number of times. For this, the policyholder has to give a notice in a prescribed form to the insurer and get it endorsed at the back of
the Policy. Further, Nomination can be removed any time by the Policyholder without giving prior notice to the Nominee.
Nomination can be done only by a policyholder, who is a major, and on a policy on his own life.
Under Nomination, the Nominee gets only the right to receive the policy money in the event of the death of the Policyholder.
Nomination does not pass on the property in the Policy.
If Nominee dies when the Policyholder is still surviving then the nomination would be ineffective.
Nomination has no effect if the Policyholder is surviving.
If Nominee dies after the death of the policyholder but before receiving policy money, then also Nomination becomes ineffective and only the Legal Heirs of the Policyholder can claim money.
In the case of Children's Policies, Nomination is not done until the Child becomes a major. Nomination is governed by Section 39 of Insurance Act 1938.
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Loans On Policies
Policyholders are eligible to take loans on their policies subject to certain rules.
The policyholder has to apply for a loan in a prescribed form and submit the Policy Bond along with the form duly completed.
The loan amount is calculated depending on the Surrender Value (SV) that the policy would have acquired, and approximately 85% of the Surrender Value is
given as loan.
Rate of interested charged on loans taken on insurance policies varies from company to company and from time to time.
A policyholder can repay the loan amount either in part or in full, any time during the term of the Policy. For LIC, the minimum repayment should be Rs. 50
and thereafter in multiples of Rs. 10.
If the loan amount is not repaid during the term of the Policy or early claim, the amount of loan plus interest, if any, will be deducted from the claim money
payable and the balance amount will be paid to the claimant. In case of LIC , if the interest is not paid regularly every half year, then the interest is
calculated on compound interest basis.
If the premiums are not paid regularly, that is, if the policy is not kept in force, there is a possibility that the loan amount along with accrued interest
exceeds the surrender value. At that stage, foreclosure action is taken on the policy.
Generally, plans for Children or special plans like Jeevan Griha and Deferred Annuity/ Pension Plans as well as Money Back Plans etc. are not eligible for
loans.
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Revival Of Policies
A policy lapses if the premiums are not paid within the grace period allowed.
In case of LIC a lapsed policy can be revived within 5 years from the date of first unpaid premium. There are five different schemes under which a policy can
be revived.
Ordinary Revival Scheme
Under this scheme, all the arrears of unpaid premiums along with interest have to be paid.
Interest is calculated on the unpaid amount of premiums. Rate of Interest depends on when the policy was commenced. The current interest rate charged is
9% per annum compounded yearly. For certain plans 12% interest per annum is charged.
Also, a 'Declaration of Good Health' in Form No. 680 and medical certificate, if necessary, is required for effecting revival.
Special Revival Scheme
If a person is not in a position to pay all the arrears, then, he can choose this scheme.
Under this scheme, the date of commencement of the policy is shifted so that the policy is lapsed just prior to the date of revival. This means that the date of
commencement is advanced approximately by the period of lapse.
Where the lapsed period is over 2 years, only 2 year period is ignored while arriving at the new Date of commencement and on revival one quarterly
installment at the new rate of premium for the new age has to be paid.
Other requirements like 'Declaration of Good Health' and Medical wherever necessary are required as in Ordinary Revival.
Special Revival is allowed under the following conditions
The policy should not have acquired any surrender value.
Revival should be within 3 years of lapse.
Special Revival is allowed only once during policy term.
Revival by Instalment method
If a policyholder cannot pay arrears in one lump sum and if the policy cannot be revived under Special Revival Scheme, he can make use of Instalment Revival
Scheme. Under this scheme, on the date of revival the policyholder has to pay immediately.
6 months premiums, if mode is Monthly,
2 quarterly premiums, if mode is Quarterly,
1 Half year premium, if mode is Halfyearly,
Half of the yearly premium, if mode is Yearly.
The balance of the revival amount is paid in installments spread over two years along with normal premium installments.
Other requirements regarding health are as required in Ordinary Revival Scheme.
Loan-cum-Revival Scheme
If a policy acquires surrender value on the date of revival, the policy can be revived by taking a policy loan.
Loan amount will be calculated treating the premiums as paid up to the date of revival.
Shortfall, if any, in revival amount is called for. If loan amount is more than required for revival, the excess will be paid to the policyholder.
Survival Benefit-cum-Revival Scheme
In a Money-back type of policy, the Survival Benefit which falls due, can be used for revival of the policy if the date of revival is later than the
Survival Benefit due date.
If the survival benefit is less than the revival amount, the short fall will be called for.
If the survival benefit is more than the revival amount, the excess is paid back to the policyholder.
The other requirements for normal survival benefit settlement and revival requirement are to be fulfilled.
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Lost Policies in case of LIC
Though the life policy is only an evidence to contract, the policy being a valuable document, should be stored in a safe place till its maturity. In case
the policy gets lost, destroyed or mutilated, then the policyholder must immediately procure a duplicate policy.
The need to have a duplicate policy also arises on the following occasions :
At the time of receiving Maturity Amount or Death claim,
To obtain Surrender Value/Loan,
To obtain a Duplicate Policy in other cases.
The procedure involved to obtain the duplicate Policy is as follows :
At the time of receiving Maturity Amount or Death claim, the policyholder must duly fill in,
Loss of Policy questionnaire,
Indemnity Letter in Form No. 3815 A (unstamped) if the claim amount does not exceed Rs. 5,000 and a no Surety, must be submitted,
Discharge Form,
Form of Declaration of 'No Assignment',
A declaration by Surety having sound financial status, acceptable to LIC in appropriate Form, if the claim amount exceeds Rs. 5,000.
To Obtain Surrender Value
Indemnity Bond in Form No. 3815 duly stamped and executed by the Policyholder along with Surety,
Stamp Duty charges - which depends on the Surrender Value of the Policy,
A declaration by the Surety having sound financial status acceptable to LIC,
Discharge form,
Form of Declaration of 'No Assignment'.
To Obtain a Duplicate Policy in other cases
The Policy Document should have been really lost,
If Assigned or Mortgaged, the duplicate policy shall bear the latest Assignment that is in force as on the date of issue,
Where the Policy is due for maturity or survival benefit within 3 years and if the sum assured is more than Rs.25,000, an advertisement in a Local Daily
newspaper having wide circulation is required,
Indemnity Bond in Form No. 3756 duly stamped and executed by the policy holder on a stamp paper of appropriate value is to be submitted,
If sum assured exceeds Rs. 50,000, declaration by a Surety having sound financial status acceptable to LIC in Form No. 3807 is required ,
Duplicate Policy charges of Rs. 5,
Stamp Duty charges at prevailing rates.
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Surrender Value
The cash value payable by LIC on termination of the policy contract at the desire of Policyholder, but before the expiry term, is known as Surrender
Value.
A policy can be surrendered, provided, it is kept in force for at least three years.
The bonus will be added, provided, the policy was in force for at least 5 years, i.e., premiums should have been paid for 5 years and five years should have
been completed from the date of commencement of the Policy. (this condition is not applicable in respect to claims by death)
Surrender Value will depend upon the duration elapsed and the total duration under the policy as on the date of surrender. Separate Surrender Value tables
are available for all plans.
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Assignment
Assignment is a means whereby the beneficial interest, right and title under a Policy gets transferred from Assignor to Assignee.
'Assignor' is the Policyholder who transfers the title, and 'Assignee' is the person who derives the title from the Assignor.
Assignment can be made only after acquiring the Policy.
Assignment can be done only for consideration - for money or money's worth or good, moral and meritorious consideration, like Love and Affection.
Assignment can be made by mere endorsement on the Policy or by a separate duly stamped Deed.
Assignment can be done by the Proposer, Policyholder or the Absolute Assignee.
Assignor must be a major, and must have an absolute right over the Policy. Assignment must be in writing and the Assignor's signature along with a Witness is a must.
Notice of Assignment should be submitted to the insurer.
There are two types of Assignments:
Conditional Assignment,
Absolute Assignment.
Conditional Assignment is usually effected for consideration of natural Love and Affection.
Absolute Assignment is usually effected for valuable consideration.
On Assigning the Policy, the Assignor loses his right over the Policy and the Assignee gets the right and becomes the owner of the Policy.
The Assignee can further re-assign the Policy and he also has a right to sue under the Policy.
A valid assignment once made cannot be cancelled. It can be done only by another valid assignment.
In all the cases, Assignment automatically cancels an earlier Nomination. However, when the Policy is assigned to the insurer say for loan, Nomination gets affected and it does not get cancelled.
Under Conditional Assignment, if the Conditional Assignee dies, the benefit under the Policy goes back to the Life Assured if surviving. Otherwise, the benefit goes to Policyholder's Nominee.
Under Absolute Assignment, if the Absolute Assignee dies, the benefits under the Policy go to the Legal Heirs of the Assignee. Assignment is governed by Section 38 of Insurance Act, 1938.
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Delayed Payment of Premiums
If the due premiums are not paid within the days of grace, the policy lapses. However, such a policy can be revived by furnishing revival requirements, i.e.,
paying interest on premiums for the lapsed period and evidence regarding its continued good health. The policy can be revived by mere payment of arrears
with interest, if six months have not lapsed from the first unpaid premium.
In case of LIC rate of interest charged are,
6% per annum compounded yearly for policy with Date of commencement up to 14.7.72,
7.5% per annum compounded yearly for policy with Date of commencement from 15.9.72 to 31.12.86,
9% per annum compounded yearly for policy with Date of commencement from 1.1.87 onwards.
For, certain new plans, the revival interest rate is 12% per annum.
The interest charged for Delayed Payment of Premiums for Re.1.00 premium is as follows:
Delayed Months |
Late Fee Rate |
| |
6% |
7.5% |
9% |
12% |
1 |
0.005 |
0.0062 |
0.0075 |
0.010 |
2 |
0.010 |
0.0125 |
0.0150 |
0.020 |
3 |
0.015 |
0.0187 |
0.0225 |
0.030 |
4 |
0.020 |
0.0249 |
0.0300 |
0.040 |
5 |
0.025 |
0.0311 |
0.0375 |
0.050 |
6 |
0.030 |
0.0373 |
0.0450 |
0.060 |
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