Life insurance is popularly referred to as life assurance. In the case of life insurance, the underwriter agrees to pay the assured or his heirs, a certain sum of money on death or on the happening of an event dependent upon human life in consideration of premiums paid by the assured.
Section 2(11) of the Insurance Act, 1938 defines Life Insurance business as follows: “Life Insurance Business” is the business of effecting contracts of insurance upon human life, including any contract whereby the payment of money is assured on death (except death by accident only) or the happening of any contingency dependent on human life and any contract which is subject to the payment of premiums for a term dependent on human life and shall be deemed to include:
- The granting of disability and double or triple indemnity accident benefits if so provided in the contract of insurance.
- The granting of annuities on human life; and
- The granting of superannuation allowances and annuities payable out of any fund applicable solely to the relief and maintenance of persons engaged in any particular profession, trade or employment or of the dependents of such persons”.
Need of Life Insurance
The business of insurance is related to protection of the economic values of the assets. Every asset is of some value and is expected to last for a certain period of time during which it will deliver that value. In case the asset is destroyed it ceases to provide the value to the owner thus leading to an unpleasant situation. Insurance is a mechanism to reduce the effect of such unpleasant situation. Human life is considered to be a value generating asset and is also subject to risks. Assets are insured because there if a possibility that perhaps they might get destroyed, through accidental occurrences. Such possible occurrences are called perils. If such perils can cause damage to the asset we say that the asset is exposed to risk. To be more precised Perils are the events and risks are the consequential losses or damages. The risk only means that there is a possibility of a loss or damage, the loss may or may not happen. Insurance is done against the contingency that it might happen. Insurance is relevant only if there are uncertainties. If there is no uncertainty about the occurrence of an event, it cannot be insured against. In case of human beings death is certain; however the time of death is uncertain.
Insurance doesn’t protect the asset. It doesn’t prevent the loss due to its peril. The perils can sometime be avoided by ensuring better safety and damage control management. Insurance only tries to reduce the impact of the risk on the owner of the asset and those who depend on that asset. Only economic consequences can be insured. If the loss is not financial, insurance may not be possible. Moreover insurance is backed up with many economic benefits which can be enlisted as follows.
- Life insurance provides financial security to the family in case of untimely or premature death.
- Life insurance is also a potent instrument for saving.
- Life insurance provides financial independence in old age.
- Organizations or individuals, who are in credit business, can ensure for themselves recovery of loan in case their debtor dies.
- A partnership firm can insure partners to the extent of capital invested by each in the business.
- Under key man insurance, an organization can insure the lives of their executives, whose expertise greatly contributes to their profits.
- Organizations can purchase group insurance policies as a part of their employee- welfare program.
- Life insurance also provides tax benefits to the holder.
- Life insurance policies create an estate.
- Life insurance policies also create thrift. I.e. a compulsory saving.
- A policy of life insurance can be used as a collateral security for procuring loans from the market.
Working of Life Insurance Business
There are three primary methods to avoid risk viz.
- Avoid
- Reduce
- Transfer
Insurance deals with transfer of risk from the consumer to the provider. Insurance works on a fundamental principle of pooling of risk. People who are exposed to the same risk come together and agree that, if any one of them suffers a loss, the others will share the loss and make good the person who has suffered the loss. The manner in which the loss is to be shared can be determined beforehand. It may be proportional to the risk that each person is exposed to. This would be indicative of the benefit he would receive if the peril befell him. Insurance companies collect the share in the form of premiums and create a fund from which losses are paid; this fund is known as the life fund. The insurance company pays the losses to the members of that group. The insurance company also invests the funds in governmental and private organizations.
Types of Life Insurance Policies
The important types of life insurance policies are:
1. Whole Life Policy
As the name itself says, the policy holder has to pay the premium for whole life till his death. This policy doesn’t address any other needs of the policy holder. Because of these reasons this kind of policy is not very popular or insurance company not suggesting to take this policy.
- Whole Life Assurance: This is the purest form of permanent contract. Premiums are payable throughout the Life time of the life assured and the sum assured is payable only at his death. The element of protection of dependants is the dominating element and that of provision for old age is totally absent. This type of assurance provides a larger amount of “life cover” than any other permanent type of life assurance and it is therefore the most inexpensive form of permanent protection for dependants. It has the disadvantage that premiums continue in old age when the ability to pay them may be lessened by contraction of income. To obviate this difficulty the Corporation had decided that under these tables premiums are now limited to a maximum number and are payable either till age 80 or till 35 annual premiums are paid whichever is later. For example a person aged 30 has to pay premiums for a maximum period of 50 years if he survives this period while a person aged 50 will have to pay for a maximum period of 35 years (i.e. not till age 80 but also beyond if he survives beyond age 80). With this benefit extended to all policies including those issued by the previous Insurers, the Corporation has no whole life assurance contract where under premiums are payable indefinitely throughout life.
- Whole Life Assurance by Limited Premiums: Under this type of policy, it can be arranged that premiums cease at retirement age so that the difficulties of maintaining the premiums in old age are removed. When the premium cease, the policy becomes fully paid-up. “With profits” policies continue to participate in profits till the claim arises even though the premiums have ceased.
2. Endowment Policy
This is undoubtedly the most popular form of assurance at the present time. Under this class of contract, the sum assured is payable at the expiration of a fixed term of years or at death should that occur previously. This type of policy is really a combination of Life assurance and investment. In the case of policies running for long terms the assurance element predominates while in the case of assurances maturing at the end of comparatively shorter terms the actual cost of the life assurance is very small the bulk of the premium being required for the investment portion.
3. Joint Life Endowment Policy
Under this plan, two lives are simultaneously insured and the sum assured is payable on the expiry of the term or/on the death of one of the assured lives during the endowment period. The premiums are payable throughout the endowment period or till the prior death of either of the lives assured. It should be noted that one payment of the sum assured is envisaged even though two lives are insured; two payments on two deaths are not contemplated as the first death will determine the contract.
4. Family Protection Policy
Many different names are given to describe policies such as “Family Protection”, “Family Safeguard”, “Planned Protection” etc., but most of them incorporate the idea of protecting or safeguarding the family while the family members are young. The policy provides that when the assured die during a fixed period, from the outset annual instalments or yearly income usually 10% to 12% of the basic sum assured shall be paid for the balance of the period. In addition the basic sum assured is paid either at the time of death or at the expiration of the fixed period or in varying proportion at both points of time. In the event of the life assured’s surviving the specified term, only the basic sum assured is payable either at death or at maturity depending on the main plan of assurance. Premiums under this plan are generally payable for a fixed term of years or till death.
5. Multipurpose Policy
Under the multi-purpose policy the basic assurance is a type of family income policy under the endowment assurance scheme. The following benefits can be taken under the policy by paying appropriate extra premium:
- School Education Provision
- College Education Provision
- Marriage Provision for Daughter
6. Convertible Whole Life Policy
This plan is essentially a whole life assurance with the option to convert after 5 years from commencement, into an endowment assurance effective from inception. This plan is suitable for a young man earning a modest income for the time being but with good prospects of higher income after a short period. The object is to provide maximum assurance protection at minimum immediate cost and at the same time to offer a flexible contract which can be altered to an endowment assurance at the end of 5 years from the commencement of the policy by which time it is expected that there would be a rise in his income which would enable him to pay the larger premium payable after conversion. If the conversion option is not exercised the policy would continue as whole life assurance.
7. Money Back Policy
This plan is suitable for those who besides providing for their old age and family, need lump sum benefit at periodic intervals. The sum assured is paid in suitable installments. Yet throughout the period of assurance, the dependents are guaranteed the benefit of the full sum assured protection in the event of the death of the assured, irrespective of the installments that might have been paid. The policy is available for 4 terms — 12 years, 15 years, 20 years and 25 years to suit one’s best convenience. No loan is granted under this plan.