LIFE INSURANCE IN INDIA - I

Contents :
1. About Life
2. About Insurance
3. About Life Insurance
4. Insurance Not For Risk Cover Only
5. Understanding Premium
6. Life Insurance Open to Private Players
7. Important Points
8. Relevant Points
9. Section 64-VB
10. Points to Remember

ABOUT LIFE
Life is an Excellent Gift of God to Mankind. But nothing in life is ever certain. Unexpected
accidents, hospitalisations, business setbacks, ever decreasing work-force (resulting in
retrenchments), terrorism can all mar our well-laid plans. In extreme cases we end up
with loss of earning power. Thus the future may be uncertain. But one thing is certain.
One needs to plan for it. It is a human tendency to postpone planning till retirement. But
the later one starts saving the harder it is to do so. With longer life expectancy, rising
inflation and declining interest rates, it is imperative that we start planning now.
Conversely life is also full of opportunities for all of us to seize, like:
1. Financing our children's education (children are our biggest assets),
2. Buying our dream home (a place of protective roof on our head),
3. Taking a well-earned vacation (after all why we are earning - we need to enjoy life
and need to recharge our energy for earning our livelihood),
4. To save for the time when we cannot earn sufficiently to sustain ourselves (saving for
the rainy day, old age, retirement),
5. We may wish we could safeguard our opportunities and protect against the
uncertainties,
6. And finally, for our sheer investment needs.
This is where "INSURANCE" comes in. This is explained in short in the following :

ABOUT INSURANCE
Insurance ensures protection of economic value of assets. Assets are insured against the
risk of being destroyed or made non-functional due to any accidental occurrence. Risk is
defined as the possibility of adverse results flowing from any occurrence. Insurance is
used with reference to financial protection against a possibility, such as fire, accidental
damage, theft, or medical expenses: motor insurance, household insurance, travel
insurance, health insurance. Insurance reduces the impact of risk on the owner, and
those who depend on the asset. Integral to the concept of insurance is the concept of
risk. In insurance parlance, "RISK" is called "PERIL". Only where risk prevails, is insurance

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applicable. Basically there are two types of Insurance : "LIFE" and "NON-LIFE". We are
now concentrating on LIFE Insurance only.

ABOUT LIFE INSURANCE

The economic value of a human life arises out of its relation to other lives. Whenever
continuance of a life is financially valuable to others, either to family dependents,
business associates, or educational and philanthropic situations, the necessity for life
insurance is present. Human life is also considered as an income generating asset. This
asset can be lost thru unexpected death or made non-functional thru sickness or
disability caused by an accident. There is no certainty that an accident shall happen.
Events that must occur at some time, such as death, are provided for by assurance.
We all know that "DEATH" is the ultimate truth of life, but NOT its timing. Life Insurance
exists because of this element of "UNCERTAINTY". Life Insurance protects against loss of
income of an individual. But it DOESN'T (1) protect the asset, (2) prevent its loss. Life
insurance is designed to make an attempt to compensate a policyholder for a loss
suffered, by the payment of money, repair, replacement, or reinstatement. In every case
the policyholder is entitled to be put back in the same financial position as he or she was
immediately before the event insured against occurred. There must be no element of
profit or loss to the policyholder.
Most, but not all insurance policies are indemnity contracts. For example, personal
accident and life assurance policies are not contracts of indemnity as it is impossible to
calculate the value of a lost life or limb (whereas the value of a car or other property can
be calculated). Insurance works on the principle of transferring risk from an individual to
a group.

INSURANCE NOT FOR RISK COVER ONLY

Initially, Insurance started as guard or security against risk. Slowly, the elements of
savings & investment opportunities have been added to make it an integrated approach
for personal or family needs. Accordingly, Schemes were designed for various needs for
various types of clientele. Some Companies have even tailor-make the schemes to suit
particular individuals. Broadly speaking the Insurance Schemes can be divided into a few
basic categories, which are given in the following :
1. Pure Risk Cover - Term Insurance - No other benefit except Risk Cover.
2. Endowment Schemes - Risk Cover with returns ( Like Guaranteed Addition, Money-
Back, Bonuses etc. ).
3. Whole Life Schemes - Limited Period Premium Payment and whole life cover with or
without benefits.
4. Pension / Annuity type Retirement Schemes.
5. Health & Hospitalisation Cover.
6. And lately ULIPs- a combination of Mutual Funds & Life Insurance.
Thus the whole lot of Life Insurance Schemes can be a permutation & combination of
these types of basic schemes at varying proportions. In addition to this certain extra
benefits are added for a marginally extra premium to the basic scheme. These are called
Riders.

UNDERSTANDING PREMIUM
Insurance is operated as a contract between two parties :

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1. The INSURER who promises to cover the risk and give back other benefits if any to,
and
2. The INSURED or ASSURED who promises to make a specific periodical payment for
the service intended to the Insured.
This contract is based on the guiding principles of :
1. The Indian Contract Act - 1872,
2. The Insurance Act - 1938,
3. The Consumer Protection Act - 1986,
4. The Insurance Regulatory and Development Authority Act - 1999.
This periodic payment is known as Premium. This Premium varies in relation with
1. The Amount of Assurance (Sum Assured),
2. Paying period (Term) of the Policy,
3. The age of the Assured at the starting of Policy,
4. The Occupation of the Assured,
5. Any additional benefits (Riders),
6. Type of Policy / Scheme,
7. The status of the Policy,
8. The amount of risk involved, and several other factors.
The Insurer is in the position of a Trustee, managing a common fund. The Insurer checks
that nobody gets undue advantage. Therefore, care is taken to ensure that those in the
group have similar risk; and if not, they pay more contribution because their risk is
greater.
Thus the premium which the Assured pays has three basic parts, as explained below :
1. Administrative, Marketing and Management expenses - These are the common
expenses of running the Insurance Company = (to the extent of approx. 20 % of the
annual premium),
2. Expense for the cover of the RISK Element only = (to the extent of approx. 0.5 % of
the Sum Assured, annually),
3. The Saving or Investment Element which is invested in the prescribed areas
according to strict guiding principles of IRDA (Insurance Regulatory and Development
Authority). This is the element which earns profits for the Insurance Company. And
again according to the strict guiding principles of IRDA this is distributed amongst the
policy holders as Bonus, and the Insurance Company as Surplus.
These elements are present in various proportions in the premiums according to the type
of schemes like whether it is a pure risk, endowment, whole life or annuity schemes or
participatory (with benefits) or non-participatory (without benefits).

LIFE INSURANCE OPEN TO PRIVATE PLAYERS

The Indian Life Insurance Companies Act, 1912 was the first statutory measure to
regulate life insurance business. Later, in 1928 the Indian Insurance Companies Act was
enacted, inter alia, to enable the government to collect statistical information about life
and non-life insurance business transacted in India and foreign insurers, including the
provident insurance societies. In 1938, with a view to protecting the interest of the

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insuring public, earlier legislation was consolidated and amended by Insurance Act -
1938 with comprehensive provisions for detailed and effective control over the activities
of insurers.
By 1956, 154 Indian Insurers, 16 non-Indian Insurers and 75 Provident Societies were
carrying on life insurance business in India. Life insurance business was confined mainly
to cities and the better-off segments of the society. On 19th., January 1956, the
management of life insurance business of 245 Insurers then operating in India, were
taken over by the Central Govt. and then nationalised on 1st., September 1956. LICI (Life
Insurance Corporation of India) was formed in September 1956 by an act of Parliament,
with a capital contribution of Rs. 5 Crores from the Govt. of India. The objectives of LICI
were thus outlined: to conduct the business with utmost economy, in a sprit of
trusteeship; to charge premium no higher than warranted by strict actuarial
considerations; to invest the funds for obtaining maximum yield for the policy holders
consistent with safety of the capital.
But by 2000 AD, the performance and the social obligations fell short of the Objectives
and expectations of the GoI. Because of all round globalisation, which started in 1991-92
and involved introduction of healthy competition and privatisation, the business of
Insurance was thrown open to private players like the Banking Sector, with a Foreign
Investment participation of 26 % max. The IRDA is the controlling authority and oversees
each and every aspect of it. As of now twenty-three (23) private Life Insurance
Companies and twenty-two non-life Insurance Companies have registered with the IRDA
and started their operations in India.

IMPORTANT POINTS ABOUT INSURANCE

1. Insurance ensures protection of economic value of assets. Assets are insured against
the risk of being destroyed or made non-functional due to any accidental occurrence.
2. Risk is defined as the possibility of adverse results flowing from any occurrence.
3. Insurance is used with reference to financial protection against a possibility, such as
fire, accidental damage, theft, or medical expenses: motor insurance, household
insurance, travel insurance, health insurance.
4. Events that must occur at some time, such as death, are provided for by assurance.
5. Any insurance is designed to compensate a policyholder for a loss suffered, by the
payment of money, repair, replacement, or reinstatement. In every case the
policyholder is entitled to be put back in the same financial position as he or she was
immediately before the event insured against occurred. There must be no element of
profit or loss to the policyholder. Most, but not all insurance policies are indemnity
contracts.
6. For example, personal accident and life assurance policies are not contracts of
indemnity as it is impossible to calculate the value of a lost life or limb(whereas the
value of a car or other property can be calculated).
7. Definition(s) of insurable Interest
a. The legal right of the Insurer arising out of a financial relationship recognised
under the law, between the insured and the subject matter of insurance.
b. An interest (financial or otherwise) in the subject matter of a contract of
insurance, which provides the person insured with the right to enforce the
contract. An insurable interest (e.g. ownership of goods insured) distinguishes a
contract of insurance from a wager or bet. An interest is required by statute for
various types of insurance contract (e.g. life insurance).

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8. Insurable interest exists if the policy owner or the nominee is likely to benefit
financially if the insured continues to live and is likely to suffer from an economical
loss if the insured dies.
9. Definition of Utmost faith or Uberrima Fides
a. The duty to disclose all material facts relating to the risk to be covered.
b. A positive duty to disclose, accurately and fully, all facts material to the risk being
proposed, whether requested or not.
10. A material fact is a fact, which would influence the mind of a prudent underwriter in
deciding whether to accept a risk for insurance and on what terms.
11. An insurance agent is an agent licensed under section 42 of the Insurance Act, 1938.
12. The primary function of the agent is to procure business for the insurance company.
Prior to offering the policy, the agent has to check out on the insurability of the
proposer based on the principles of insurable interest and utmost good faith. The
relevant information can be :
a. Paying capacity
b. Health and Habits
c. Age
13. Once the insurance contract has been put into force, the agent is supposed to ensure
continuance of policy through regular payment of renewal premiums.
14. In case of a claim the agent should help the insured or his family in proper settlement
of claims.

RELEVANT POINTS
1. An agent is appointed by the insurer, but he acts as the agent of the proposer while
following up a proposal
2. It is the duty of the proposer to insure that the agent provides all the information to
the insurer. In case the agent omits certain information, the proposer can not shift
the blame to the agent, when a question of suppression of information is raised by
the insurer
3. Giving money to the agent is not tantamount to giving money
4. Mortality table is an actuarial table prepared on the basis of mortality rates for
people in different regions of a country. It provides life-assurance companies with the
information they require to quote for life-assurance policies, annuities, etc. Based on
the mortality tables the premium rates are calculated.
5. Morbidity is the state of being diseased. The morbidity rate is the number of cases of
a disease found to occur in a stated number of the population, usually given as cases
per 100,000 or per million (the number may be smaller for common diseases).
Annual figures for morbidity rate give the incidence of the disease, which is the
number of new cases reported in the year.

SECTION 64VB
1. No risk to be assumed unless the premium is received in advance
2. Advance payment of premium before acceptance of the risk: Section 64VB of
Insurance Act, 1938

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3. The first premium paid is the consideration for the life insurance contract to come in
to force.
4. Subsequent premiums is the condition necessary for the contract to remain in force.
5. Therefore, if a policy holder has not paid the premium and has died, -then the insurer
is not liable to pay as per the contract.
6. A policy should remain in force till the claims happen. In case of a lapse of a policy, a
revival brings it back to life. For a policy to remain in force, the premiums needs to
be paid routinely as per the contract and within the stipulated grace period. Non
payment of premium leads to a lapse of the policy (lapsation may occur due to sheer
neglect to pay or due to financial difficulties). Insurance facilitates revival of the
lapsed policies.

POINTS TO REMEMBER
1. The role of an Insurance Advisor (Agent) :
a. The role of the agent starts right from the time the Insurance contract is sold to
the time the claim takes place.
b. The three forms which need to be filled up are proposal form, personal statement
and moral hazard report.
c. Underwriting department needs to be provided with medical and financial
information of the proposer by the agent.
d. A material fact is information which might make a difference in the insurance
premium or of acceptance of risk.
e. Section 64VB states that no risk is to be assumed unless premium is received in
advance.
f. An agent has to advise the insured on revivals, loans, foreclosure.
g. Nomination can be done before the policy comes in to force
h. Assignment can be done after the policy comes in to force
i. There are three types of claims- maturity claims, survival benefits and death
claims
j. Claim concessions are provided by insurers.
2. Term insurance pays a death benefit to the legal heirs if the person insured, dies
during the term of the policy.
3. Whole life insurance guarantees death benefit cover throughout the course of life,
provided the required premiums are paid.
4. Endowment assurance pays out either on the death of the assured, whenever it
occurs, or after a fixed number of years (e.g. when the assured reaches the age of
75).
5. A form of pension in which an insurance company makes a series of periodic
payments to a person(annuitant) or his or her departments over a number of years
(term), in return for the money paid to the insurance company either in a lump sum
or in instalments.
6. A unit linked policy is a life assurance policy in which the benefits depend on the
performance of portfolio of shares or mutual funds.

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7. A life assurance policy, that has additional amounts added to the sum assured, or
paid separately as cash bonuses, as a result of a surplus or profit made on the
investment of the fund of the life assurance office, is called a with profits policy.
8. The surplus generated by the insurance company is retained and also distributed as
bonus to policyholders. Policies may be :
9. With profits, entitling the assured to a share in the assurer's profits (which is added
to the sum assured when it is paid out).In a with profits policy, it is possible to offset
subsequent premiums against accumulated profits.
10. Without profits, in which case only the sum assured is paid out (which in times of
inflation may have considerably less purchasing power than the assured intended).
Without profit policies are not entitled to bonus.
11. The combination plans combine whole life insurance with term insurance.
12. Group life assurance is a life assurance policy that covers a number of people,
usually a group of employees or the members of a particular club or association.

REFERENCE
1. IRDA Website.
2. LICI Website.
3. Websites of other Private Insurance Companies.

[ End of Part 1 of 4 Parts. To be continued in Part 2 ]

Himansu S M / 18-Feb-2009