Unit – 5 Insurance & Mutual Funds

What is Insurance?

Insurance is a means of protection from financial loss. It is a form of Risk

Management primarily used to Hedge against the risk of a Contingent,
Uncertain loss. (or)An arrangement by which a company or the state undertakes
to provide a guarantee of compensation for specified loss, damages, illness or
death in return for payment of a specified premium. Dictionary of business and
Finance defines “Insurance as a form of contract agreement under which one
party agrees in return for a consideration to pay an agreed amount of money to
another party to make good a loss, damage or injury to something of value in
which the insured has a interest as a result of some uncertain event.

Meaning of Insurance – Insurance means a promise of compensation for any

potential future losses. It facilitates financial protection against by reimbursing
losses during crisis. There are different insurance companies that offer wide
range of insurance options and an insurance purchaser can select as per own
convenience and preference. Several insurances provide comprehensive
coverage with affordable premiums. Premiums are periodical payment and
different insurers offer diverse premium options. The periodical insurance
premiums are calculated according to the total insurance amount. In other
words, a promise of compensation for specific potential future losses in
exchange for a periodic payment. Insurance is designed to protect the financial
well-being of an individual, company or other entity in the case of unexpected
loss. Some forms of insurance are required by law, while others are optional.
Agreeing to the terms of an insurance policy creates a contract between the
insured and the insurer. In exchange for payments from the insured (called
premiums), the insurer agrees to pay the policy holder a sum of money upon the
occurrence of a specific event. In most cases, the policy holder pays part of the
loss (called the deductible), and the insurer pays the rest. Some important
definitions of insurance are as follows: Insurance is cooperative form of
distributing a certain risk over a group of persons who are exposed to it. Ghosh
and Agarwal Insurance is an instrument of distributing the loss of few among
many. Disnadle The collective bearing of risk is insurance. W. Beverideges
 Main Branches of Insurance –

Accident Insurance

Fire Insurance

Holiday and Travel Insurance

Household Insurance

Liability Insurance

Livestock and Bloodstock Insurance

Marine Insurance

Motor Insurance

Pluvial Insurance

Private Health Insurance

Property Insurance

Reinsurance –

Retrocession etc

Basic Functions of Insurance

1. Primary Functions

2. Secondary Functions

3. Other Functions

1. Primary functions of insurance

(a) Providing protection — The elementary purpose of insurance is to allow

security against future risk, accidents and uncertainty. Insurance cannot arrest
the risk from taking place, but can for sure allow for the losses arising with the
risk. Insurance is in reality a protective cover against economic loss, by
apportioning the risk with others.

(b) Collective risk bearing — Insurance is an instrument to share the financial

loss. It is a medium through which few losses are divided among larger number
of people. All the insured add the premiums towards a fund and out of which
the persons facing a specific risk is paid.

(c) Evaluating risk — Insurance fixes the likely volume of risk by assessing
diverse factors that give rise to risk. Risk is the basis for ascertaining the
premium rate as well.

d) Provide Certainty - Insurance is a device, which assists in changing

uncertainty to certainty.

2. Secondary functions of insurance

(a) Preventing losses — Insurance warns individuals and businessmen to

embrace appropriate device to prevent unfortunate aftermaths of risk by
observing safety instructions; installation of automatic sparkler or alarm
systems, etc. '

(b) Covering larger risks with small capital — Insurance assuages the
businessmen from security investments. This is done by paying small amount of
premium against larger risks and dubiety. '

(c )Helps in the development of larger industries — Insurance provides an

opportunity to develop to those larger industries which have more risks in their
setting up.

3. Other functions of insurance

(a) Is a savings and investment tool — Insurance is the best savings and
investment option, restricting unnecessary expenses by the insured. Also, to
take the benefit of income tax exemptions, people take up insurance as a good
investment option.

(b) Medium of earning foreign exchange — Being an international business,

any country can earn foreign exchange by way of issue of marine insurance
policies and a different other way.

(c) Risk Free trade — Insurance boosts exports insurance, making foreign trade
risk free with the help of different types of policies under marine insurance
cover. Insurance provides indemnity, or reimbursement, in the event of an
unanticipated loss or disaster.

Importance of Insurance
I .Individual aspects:

(a) Security for health and property

(b) Encourage savings

(c)Encourage the habit of forced thrift

(d) Provide mental peace

(e) Increase efficiency

(f) Provision for the future

(g) Awareness for the future

(h) Credit Facility

(i) Tax exemption

(j) Contribution to the conservation of health

(k) Cover for legal liability

(l) Security to the mortgaged property

(m)Poster economic independence

II Economic aspects

1. Safety against risk

2. Protection to employees

3. Basis of Credit

4. Protection from the loss of key man

5. Encourage loss prevention methods

6. Reduction of cost

7. Promote foreign trade

8. Development of big industries

9. Increase in efficiency
III Social aspects

1. Stability in family life

2. Development of employment opportunity

3. Encourage alertness

4. Contributes to the development of basic facilities

IV National aspects

1. Increase the national savings

2. Helps in development opportunities

3. Develops the money market

4. Earns foreign exchange

5. Capitalizes the savings

Need for Insurance

1. Removal of uncertainties: Insurance company takes the risks of large but

uncertain losses in exchange for small premium. So it gives a sense of security,
which is real gift to the business man. If all uncertainty could be removed from
business, income would be sure. Insurance removed many uncertainties and to
that extent is profitable.

2. Stimulant of business enterprise: Insurance facilitates to maintain the large

size commercial and industrial organizations. No large scale industrial
undertaking could function in the modern world without the transfer of many of
its risks to insurer. It safeguards capital and at the same time it avoids the
necessity on the part of industrialists. They are therefore free to use their capital
as may seem best.

3. Promotion of saving: Saving is a device of preparing for the bad

consequences of the future. Insurance policy is often very suitable way of
providing for the future. This type of policy is found particularly in life
assurance. It promotes savings by making it compulsory which has a beneficial
effect both for the individual and nation.
4. Correct distribution of cost: Insurance helps to maintain correct distribution
of cost. Every business man tries to pass on to the consumer all types of costs
including accidental and losses also. In the various fields of Insurance such
losses are correctly estimated keeping in view a vast number of factors bearing
on them. In the absence of insurance these losses and costs would be assessed
and distributed only by guess work.

5. Source of credit: Modem business depends largely on credit; insurance has

contributed ‘a lot in this regard. A life insurance policy increases the credit
worthiness of the assured person because it can provide funds for repayment if
he dies. Credit extension is also obtained by means of various kinds of property
insurance. A businessman who stock of goods has been properly insured can get
credit easily. Similarly, marine insurance is an essential requirement for every
transaction of import and export.

6. Reduction of the chances of loss: Insurance companies spend large sums of

money with a view to finding out the reasons of fire accidents, theft and robbery
and suggest some measures to prevent them. They also support several medical
programs in order to make the public safety minded. Without such losses
preventive activities of insurance companies, the chances of loss would have
been greater than they are at present days.

7. Solution of social problems: Insurance serves as a useful device for solving

complex social problems e.g. compensation is available to victims of Industrial
injuries and road accident while the financial difficulties arising from old age,
disability or death are minimized. It thus enables many families and business
units to continue intact even after a loss.

8. Productive utilization of fund: Insurer accumulates large resources from the

various insurance funds. Such resources are generally invested in the country,
either in the public or private sector. This facilitates considerably in overall
development of the economy.

9. Insurance as an investment: A life policy is a combination of protection and

investment which serves a useful purpose. The premium that is paid by insured
goes on accumulating in a fund every year. The sum so accumulated by the
insurance company earns interest. Under life assurance a person may also invest
his capital in an annuity which will pay him an income every year till death.
Therefore, insurance may be regarded as an investment.
10. Promotion of international trade: The growth of the international trade of the
country has been greatly helped by shifting of risk to insurance company. A
ship sailing in the sea faces some misfortune. A fire breaks out and burns to
ashes all the merchandise of a business man. But insurance is one of the devices
by which these risks may be reduced or eliminated. So industrialists and
exporter may devote their full attention toward the promotion of business which
may increase the export activities.

11. Removing fear: Insurance helps to remove various types of fear from the
mind of the people. The insured is secured in the knowledge that the protection
of the insurance fund is behind him if some sad event happens. It thus creates
confidence and eliminates worries which are difficult to evaluate, but the benefit
is very real.

12. Favourable allocation of factors of production: Insurance also helps in

achieving favourable allocation of the factors of production. Capital is usually
shy in the risky business. People hesitate to invest their capital where financial
losses are great. If protection is provided against these risks by means of
insurance, several investors will become ready to invest their funds in those
fields.

13. Growth of Business competition: Insurance enables the small business units
to compete upon more equal terms with the bigger organization. Without
insurance it would have been impossible to undertake the risks themselves. On
the other side bigger organization could absorb, their losses due to great
financial strength. Moreover insurance removes uncertainty of financial losses
arising out of the certain causes. It thus increases knowledge which is one of the
most important preconditions of perfect competition.

14. Employment opportunity: Insurance provides employment opportunity to

jobless persons which is helpful for the improvement and progress of social
condition

15. Miscellaneous benefits: Following are some other miscellaneous benefits

offered by insurance:

(a) It establishes the relation between the employed and employer by providing
various facilities i.e. group life insurance, social security scheme, retirement
income plan, and workman’s compensation insurance.
(b) Insurance creates the confidence and sense of security among the policy
holder.

(c) Insurance company provides valuable services of skilled and expert persons
to industries and business in order to eliminate various risks.

(d)It promotes economic growth and development. This would be impossible in

the absence of insurance.

(e) It contributes to the efficiency of business and also industrial and

commercial executives.

(f) Security of dependents is made possible through life assurance. It gives relief
to helpless families after the death of the earning member of the family.

Importance of Insurance in Business

1. Theft: A new business is a big target for thieves. New computers, furniture
and other office equipment are worth more at a pawn or chop shop than older
equipment. Even older businesses that have just undergone renovations and
upgrades are a target. Replacement insurance protects a business in the event of
stolen equipment, replacing the missing items and paying for repairs from
damage caused by the invasion.

2. Liability: If a customer slips and falls while on your business premises or

your product has a defect that injures a customer and you do not have insurance,
this could spell the end of your business. If a company car is involved in an
accident and someone is injured, that could be disastrous as well. Business
liability insurance covers accidents that occur on the business premises, product
defects and mishaps that occur during normal business operations on and off
premises.

3. Level of Coverage: How much insurance to carry will depend on your

industry, the business structure and the amount of assets your business
has .Example: A law firm partnership that owns the building in which it is
housed might need more insurance than a jewellery designer operating out of
her home.

4. Litigation: We live in a litigious society. Even with the Texas tort reform
legislation passed in 2003, which capped judgments and sought to eliminate
frivolous lawsuits, businesses are sued by individuals and other businesses for a
variety of reasons, legitimate and otherwise. Even the most frivolous lawsuit
can be costly to defend; and in the event business ends up on the losing end of a
lawsuit, the awarded damages could exceed the business’s capabilities to pay.
Depending on the business entity structure, not only the business assets, but also
the owner’s personal assets could be at risk. Business liability insurance,
malpractice insurance or professional liability insurance will cover at least part,
if not all, of any damages.

5. Catastrophic Loss: Business insurance protects a business from closing due to

a catastrophic loss. Fires, floods, hurricanes and tornadoes have been the end of
many businesses in Texas, as elsewhere. When a company carries insurance
against these types of losses, closure and loss are only temporary instead of
permanent. Companies should always consider business interruption insurance,
a rider on their business insurance policy, to ensure continued cash flow for the
duration of a closure due to a natural disaster.

6. Personal Injury or Illness: Business owners should have personal insurance as

well. Medical insurance will ensure medical bills incurred due to an illness or
injury will not wipe out a business’s assets.

Nature of Insurance

1. Risk Sharing and Risk Transfer: Insurance is a device to share the financial
losses, which might occur to an individual or his family on the happening of a
specified event. The event may be death of the earning member of the family in
the case of life insurance, marineperils in marine insurance, fire in fire insurance
and other certain events in miscellaneous insurance, e.g., theft in burglary
insurance, accidents in motor insurance, etc. The loss arising from these events
if insured are shared by all the insured in the form of premium which they have
already paid in advance. Hence, the risk is transferred from one individual to a
group.

2. Co-operative Device: A group of persons who agree to share the financial

loss may be brought together voluntarily or through publicity or through
solicitations of the agents. An insurer, by insuring a large number of persons, is
able to pay the amount of loss. Like all co-operative devices, there is no
compulsion here on anybody to purchase the insurance policy (third party
liability insurance in case of a vehicle owner is an exception).
3. Calculates Risk in Advance: The risk is evaluated on the basis of probability
theory before insuring since the premium payable on a policy is to be
determined. Probability theory is that body of knowledge, which is concerned
with measuring the likelihood that something will happen and making estimates
on the basis of this likelihood.

4. Payment of Claim at the Occurrence of Contingency: The payment is made

on happening of a certain insured contingency. It is true for all non-life
insurances that payment will be made on the happening of the specified
contingency only. The life insurance claim is a certainty, because the
contingency of death or the expiry of term will certainly occur and the payment
is certain. Similarly, in certain types of life policies, payment is not certain due
to uncertainty of a particular contingency within a particular period. Example:
In term-insurance the payment is made only when death of the assured occurs
within the specified term, may be one or two years. Similarly, in pure
endowment, payment is made only at the survival of the insured at the expiry of
the period.

5. Amount of Payment: The amount of payment depends upon the value of loss
suffered due to the happening of that particular insured risk, provided insurance
is there up to that amount. In life insurance, the purpose is not to make good the
financial loss suffered. Moreover, one cannot estimate the value of a human
being. A person is no doubt precious to his/her family. The insurer promises to
pay a fixed sum on the happening of an event i.e. death or permanent disability.
The amount of loss at the time of contingency is immaterial in life insurance.
But in the property and general insurances, the amount of loss, as well as the
happening of loss, is required to be proved.

6. Larger Number of Insured Persons: The price of insurance is basically linked

to the cost of claims, which is only known subsequently. In the beginning, it is
an unknown factor and an estimate is made on the basis of past claims
experience or empirical data about the longevity of human beings, accidents and
their financial consequences. Generally, the past claims experience is repeated
with minor variations if a large number of risks are collected. This once again
operates by the law of large numbers and is one reason why insurance
companies want to do as much business as possible.

7. Insurance must not be confused with Charity or Gambling: The uncertainty is

changed into certainty by insuring property and life because the insurer
promises to pay a definite sum at damage or death. In the absence of insurance,
the property owner could at the best, practice only some form of self-insurance,
which may not give him absolute certainty. A family is protected against losses
on death and damage with the help of insurance. From the point of view of an
insurance company, the insurance contract is essentially non speculative. In
fact, no other business operates with greater certainties. From the insured’s
point of view, too, insurance is also not gambling. Failure of taking insurance,
however, amounts to gambling because the uncertainty of loss is always
looming on the head. One could also say that the insurance is just the opposite
of gambling. In gambling, by bidding, the person exposes himself to risk of
losing, but the insured safeguards himself through insurance, and may suffer
loss only if he is not insured.

Types of Insurance

The following are the various types of insurance businesses recognized under
the Insurance Act, 1938:

(a) Life insurance business

(b) General insurance business (also called “Non-Life” business).This is sub

divided into the following 3 sub-categories:

1. Fire insurance business

2. Marine insurance business

3. Miscellaneous insurance business

(I) Life Insurance Policies - Life Insurance refers to a policy or cover whereby
the policyholder can ensure financial freedom for his/her family members after
death. Suppose you are the sole earning member in your family, supporting your
spouse and children. In such an event, your death would financially devastate
the whole family. Life insurance policies ensure that such a thing does not
happen by providing financial assistance to your family in the event of your
passing.

Types of Life Insurance Policies

A. Term Insurance - Term Insurance is the simplest form of life insurance. It

pays only if death occurs during the term of the policy, which is usually from
one to 30 years. Most term policies have no other benefit provisions. Thus, the
features of Term Insurance Plan are as follows: ¾ It is a pure life cover i.e. in
the event of death of the insured the sum assured is paid to the family
(beneficiaries). ¾ in case the insured survives the policy term, there is no return
of premium. ¾ There is no investment component in a term plan Example Mr.
X took a term insurance plan from ABC Life Insurance Co. Ltd. for a period of
20 years and sum assured of Rs.10lacs. In the event of his death, Rs.10lacs
would be paid to Mrs. X. If Mr. X survives the term, there will be no return of
premium.

B. Whole Life Insurance - Under this policy premiums are paid throughout life
and the sum insured becomes payable only at the death of the insured. The
policy remains in force throughout the life of the assured and he continues to
pay the premium till his death. This is the cheapest policy as the premium is to
be paid till the death of the Insured. This is the cheapest policy as the premium
charged is the lowest under this policy. This is also known as ‘ordinary life
policy’. This policy is suitable to persons who want to make bequeathments for
charitable purposes and to provide for their families after their death.

C. Endowment Plans - An endowment policy is a saving linked Insurance

policy with a specific maturity date. Under this policy the sum assured becomes
payable if the assured reaches a particular age or after the expiry of a fixed
period called the endowment period or at the death of the assured whichever is
earlier. The premium under this policy is to be paid up to the maturity of the
policy i.e. the time when the policy becomes payable. Premium would be little
higher in case of this policy than the whole life policy. This is a very popular
policy these days as it serves the dual purpose securing the family and /or
saving for the retirement.

D. Children Policies: These types of policies are taken on the life of the
parent/children for the benefit of the child. By such policy the parent can plan to
get funds when the child attains various stages in life. Some Insurers offer
waiver of premium in case of unfortunate death of the parent/proposer during
the term of the policy.

E. Annuity/ Pension Plans: When an employee retires, he no longer gets his

salary while his need for a regular income continues. Retirement benefits like
Provident Fund and gratuity are paid in lump sum which are often spent too
quickly or not invested prudently with the result that the employee finds himself
without regular income in his post - retirement days. Pension is therefore an
ideal method of retirement provision because the benefit is in the form of
regular income. It is wise to provide for old age, when we have regular income
during our earning period to take care of rainy days. Financial independence
during old age is a must for everybody. This issue of having regular income
during old age is taken care off by Annuity Policies. It is a policy under which
the insured amount is payable to the assured by monthly or annual instalments
after he attains a certain age. The assured may pay the premium regularly over a
certain period or he may pay the premium regularly over a certain period or he
may a lump sum of money at the outset. These policies are useful to persons
who wish to provide a regular income for themselves and their dependents.

F. Money Back Policies - Money Back Plan is a special type of Life Insurance
Policy. Under this policy the money comes back to the Life Insured after
specified intervals of time as Survival Benefits. However, if the Life insured
dies during the term of the policy then the death benefit will be paid to the
nominee and the policy would be terminated and no further money would be
paid to him at regular intervals. Thus a money back policy is an endowment
policy with liquidity benefit. The maturity benefit comes in instalments instead
of Lump Sum at the end of the term of the policy. These benefits received at
regular intervals are called Survival Benefits. Each installment is a percentage
of sum assured. The remaining bit comes from maturity benefit at the end of the
term of the policy. Illustration Bhakt Sethi has opted for a Money Back Life
Insurance Policy. His plan has a Sum Assured of 5 lakhs for a policy term of 25
years. He would need to pay premiums for 25 years. And he would get back a
part of the Sum Assured at regular intervals. For example, for a policy of 25
years, he would get 15% of Sum Assured after the 5th, 10th, 15th and 20th year
of the policy i.e. he gets 15 X 4 = 60% of the Sum Assured as Survival Benefit.
On Maturity of the policy he would get the remaining 40% of the Sumassured.

G. Group Insurance- Group insurance refers to the life insurance protection to

group of persons. Opting for group insurance provides the advantage of a
standardized cover to the group at competitive rates. They are suitable for large
part of population who cannot afford individual life cover. Further members of
an eligible group who otherwise cannot be insured can benefit through group
insurance. Once the conditions of group insurance are satisfied, members can
get life insurance at significantly lower rates compared to individual policies.
The group may consist of employees, doctors, lawyers, credit societies etc. A
group insurance scheme can be either
a. Contributory scheme – In this case the premium on the group life insurance
policy is paid by both the employer and the employee.

b. Non-Contributory scheme – In this case premium is paid by the employer or

the main agency fully.

H. Unit Linked Insurance Plan - Unit linked insurance plans (ULIPs) aim to
serve both the protection and investment objectives of investing. ULIP’s are
subject to capital market risks.

Objectives of Life Insurance

Life Insurance is a financial cover for a contingency or risk linked with human
life such as loss of life by death, disability, accident, retirement etc. Thus the
risk to human life is due to natural factors or causes related to various types of
accidents. When human life is lost or a person is disabled permanently or
temporarily there is a loss of income to the entire household. It is not possible to
value human life rather it would be more appropriate to say that it is beyond any
value. However, a method to determine loss would be to assess the same on the
basis of loss of income in the future years, also known as Human Life Value.
Thus Life Insurance policies provide for a definite amount of money to be paid
by the Insurer in the event the Insured dies during the term of the policy. Thus
the essential features of life insurance can be summed up as under:

- It is a contract relating to human life.

- There need not be an express provision that payment is due on the death of a
person.

- A definite agreed money known as premium needs to be paid for starting a

Life Insurance

Contract/Policy.

- The contract provides for payment of lump sum money

- The amount is paid at the expiration of a certain period or on the death of a

person.

Advantages of Life Insurance

Life Insurance provides dual benefits to the persons taking such insurance.
These dual benefits are savings and security. The following factors explain as to
why this investment tool should be a part of one’s financial plans.

A. Risk Cover Life is today full of uncertainties. In this scenario Life Insurance
ensures that the loved ones of the Insured continue to enjoy good quality of life
against any unforeseen circumstances

B. Planning Life Stage Needs Life Insurance not only provides for financial
support in the event of untimely death but also acts as a long-term investment.
One can meet one’s goals, be it children's education, their marriage, building
one’s dream home or planning a relaxed retired life.

C. Habit of Saving Life Insurance is a long-term contract whereas policy holder

one has to pay a fixed amount at specified periods. This builds the habit of Long
term savings. Regular Savings over a long period ensures that a decent corpus is
built to meet various needs at different stages of life.

D. Safety of Investment The investment made in Life Insurance is quite safe as

Life Insurance is a highly regulated sector. The body that regulates Insurance
Sector in India is called IRDA (Insurance Regulatory and Development
Authority)

E. Liquidity Life Insurance provides good liquidity to the Policy Holder as they
have the option of taking loan against their policy. Thus when there is an urgent
need of funds, the insured can avail the facility of loan against his policy which
will, however, depend upon the surrender value of the Policy.

F. Tax Benefits The premiums paid for life insurance policies and the amounts
received in the event of death or on maturity of the said policy attract tax
benefits.

II.GENERAL INSURANCE POLICY

 A policy or agreement between the policyholder and the insurer which is

considered only after

realization of the premium.

 The premium is paid by the insurer who has a financial interest in the asset
covered.
 The insurer will protect the insured from the financial liability in case of loss.

How does the concept of General Insurance work?

Insurance is a concept that applies to a large group of people which may suffer
the same risk in the same conditions or region. The money collected as the
premium can be called as a pool and when anyone faces a loss, the person is
paid from that pool.

Still perplexed at how does a general insurance policy come into play? Consider
that your mother suffered a heart attack suddenly and she needs a transplant. At
the same time, your daughter’s college fee was due. It definitely is a huge
expense to be made at the same time and none can be preferred over the other.
In this time of stress, the family’s health insurance policy can save your burden
and the fees can be paid from the savings. A General Insurance Policy here
works to save your burden for money.

Why do we need General Insurance?

Imagine you're driving back home in your car and suddenly, a taxi hits you from
behind. Your car has a dent and its bumper has come off too. Now you need
about Rs. 2000/- for the dent and Rs.7500/- for the bumper to be able to fix it
all.

A car insurance policy, in this case, will play well. You can get the amount
reimbursed under the insurance policy. Your car is the asset here in which you
have a financial interest. But remember, an insurance policy will pay only as per
its predefined conditions.

(a) Fire Insurance

Fire insurance pays or compensates for the damages caused to your property or
goods due to fire. It covers the replacement, reconstruction or repair expenses of
the insured property as well as the surrounding structures. It also covers the
damages caused to a third-party property due to fire. In addition to these, it
takes care of the expenses of those whose livelihood has been affected due to
fire.

Types of fire insurance

Some of the common types are:

Valued policy - The insurer firsts value the property and then undertakes to pay
compensation up to that value in the case of loss or damage.

Floating policy It covers the damages to properties lying at different places.

Comprehensive policy - This is known as an all-in-one policy.It has a wide

coverage and includes damages due to fire, theft, burglary, etc.

Specific policy - This covers you for a specific amount which is less than the
real value of the property.

(b) Motor Insurance

Motor Insurance refers to policies that offer financial assistance in the event of
accidents involving your car or bike. Motor insurance can be availed for three
categories of motorized vehicles, including:

 Car Insurance - Personally owned four-wheeler vehicles are covered under

such a policy.

 Two-wheeler Insurance - Personally owned two-wheeler vehicles, including

bikes and scooters, are covered under these plans.

 Commercial Vehicle Insurance - If you own a vehicle that is used

commercially, you need to avail insurance for the same. These policies ensure
that your business automobiles stay in the best of shapes, reducing losses
significantly.

Types of Motor Insurance Policies

Based on the extent of cover or protection offered, motor insurance policies are
of three types, namely:

 Third-Party Liability - This is the most basic type of motor insurance cover in

India. It is the minimum mandatory requirement for all motorised vehicle

owners, as per the Motor Vehicles Act of 1988. Due to the limited financial
assistance, premiums for such policies also tend to be low. These insurance
plans only pay the financial liability to the third-party affected in the said
mishap, ensuring that you do not face legal hassle due to the accident. They,
however, do not offer any financial assistance to repair the policyholder’s
vehicle after accidents.
 Comprehensive Cover - Compared to the third-party liability option,
comprehensive insurance plans offer better protection and security. Apart from
covering third party liabilities, these plans also cover the expenses incurred for
repairing the damages to the policyholder’s own vehicle due to an accident.
Additionally, comprehensive plans also offer a payout in case your vehicle
sustains damage due to fire, man-made and natural calamities, riots and others
such instances. Lastly, you can recover your bike’s cost if it gets stolen, when
you have a comprehensive cover in place. One can also opt for several add-ons
with their comprehensive motor insurance policy that can make it better-
rounded. Some of these add-ons include zero depreciation cover, engine and
gear-box protection cover, consumable cover, breakdown assistance, etc.

 Own Damage Cover - This is a specialized form of motor insurance, which

insurance companies offer to consumers. Further, you are eligible to avail such
a plan only if you purchased the two-wheeler or car after September 2018. The
vehicle must be brand new and not a second-hand one. You should also
remember that you can avail this standalone own damage cover only if you
already have a third party liability motor insurance policy in place. With own
damage cover, you basically receive the same benefits as a comprehensive
policy without the third party liability portion of the policy.

Benefits of Motor Insurance Policies

Cars and bikes are increasingly more expensive with each passing day. At such
a time, staying without proper insurance can lead to severe monetary losses for
the owner. Listed below are some advantages of purchasing such a plan.

 Prevents Legal Hassle - Helps you avoid any traffic fines and other legalities
that you would otherwise need to bear.

 Meets All Third-Party Liability - If you injure a person or damage someone’s

property during a vehicular accident, the insurance policy helps you meet the
monetary losses, effectively.

 Financial Assistance to Repair Your own Vehicle - After accidents, you need
to spend considerable sums on repairing your own vehicle. Insurance plans limit
such out of pocket expenses, allowing you to undertake repairs immediately.

 Theft/loss cover - If your vehicle is stolen, your insurance policy will help
you reclaim a portion of the car/bike’s on-road price. You can expect similar
assistance if your vehicle is damaged beyond repair due to accidents.
Additionally, individuals who own a commercial car/two-wheeler can also avail
tax benefits if they pay premiums for that vehicle.

(c)Health Insurance

Health insurance refers to a type of general insurance, which provides financial

assistance to policyholders when they are admitted to hospitals for treatment.
Additionally, some plans also cover the cost of treatment undertaken at home,
prior to a hospitalization or after discharge from the same.

With the rising medical inflation in India, buying health insurance has become a
necessity. However, before proceeding with your purchase, consider the various
types of health insurance plans available in India.

Types of Health Insurance policies

There are eight main types of health insurance policies available in India. They
are:

 Individual Health Insurance - These are healthcare plans that offer medical
cover to just one policyholder.

 Family Floater Insurance - These policies allow you to avail health insurance
for your entire family without needing to buy separate plans for each member.

Generally, husband, wife and two of their children are allowed health cover
under one such family floater policy.

 Critical Illness Cover - These are specialized health plans that provide
extensive financial assistance when the policyholder is diagnosed with specific,
chronic illnesses. These plans provide a lump-sum payout after such a
diagnosis, unlike typical health insurance policies.

 Senior Citizen Health Insurance - As the name suggests, these policies

specifically cater to individuals aged 60 years and beyond.

 Group Health Insurance - Such policies are generally offered to employees of

an organization or company. They are designed in such a way that older
beneficiaries can be removed, and fresh beneficiaries can be added, as per the
company’s employee retention capability.
 Maternity Health Insurance - These policies cover medical expenses during
prenatal, post-natal and delivery stages. It covers both the mother as well as her
newborn.

 Personal Accident Insurance - These medical insurance policies only cover

financial liability from injuries, disability or death arising due to accidents.

 Preventive Healthcare Plan - Such policies cover the cost of treatment

concerned with preventing a severe disease or condition.

Benefits of Health Insurance

After assessing the various kinds of health insurance available, you must be
wondering why availing such a plan is essential for you and your loved ones.
Look at the reasons listed below to understand why.

 Medical Cover - The primary benefit of such insurance is that it offers

financial coverage against medical expenditure.

 Cashless Claim - If you seek treatment at one of the hospitals that have tie-
ups with your insurance provider, you can avail cashless claim benefit. This
feature ensures that all medical bills are directly settled between your insurer
and hospital.

 Tax Benefits - Those who pay health insurance premiums can enjoy income
tax benefits. Under Section 80D of the Income Tax Act one can avail a tax
benefit of up to Rs.1 Lakh on the premium payment of their health insurance
policies.

(d) Travel Insurance

When talking about the different types of insurance policies, one must not
forget to learn more about travel insurance plans. Such policies ensure the
financial safety of a traveller during a trip. Therefore, when compared to other
insurance policies, travel insurance is a short-term cover.

Depending on the provider you choose, travel insurance may offer financial aid
at various times, such as during loss of baggage, trip cancellation and much
more. Here is a look at some of the different types of travel insurance plans
available in the country:
 Domestic Travel Insurance - This is the kind of travel insurance policy that
safeguards your finances during travels within India. However, if you plan to
step outside the country for a vacation, such a policy would not offer any aid.

 International Travel Insurance - If you are stepping out of the country, ensure
you pick an international travel insurance plan. It allows you to cover the
unforeseen expenses that can arise during your trip like medical emergencies,
baggage loss, loss of passport, etc.

 Home Holiday Insurance - When you are travelling with family, your home
remains unguarded and unprotected. Chances of burglary are always significant,
which may lead to significant losses. Thankfully, with home holiday insurance
plans, which are often included within travel policies, you are financially
protected from such events as well.

Benefits of Travel Insurance

The following aspects are covered under travel insurance plans:

 Cover Flight Delay - Flight delays or cancellations can lead to significant

losses for the passenger. If you buy travel insurance, you can claim such
financial losses from the insurer.

 Baggage Loss/Delay - Travel insurance lets you claim monetary assistance if

there is a delay or you happen to lose your luggage during the trip. With this
amount, you can purchase some of the necessary items.

 Reclaim Lost Travel Documents - Visa and passport are essential documents
during an international trip. Opting for international travel insurance ensures
that you have the necessary financial backing to reapply for interim or
replacement documents as and when necessary.

 Trip Cancellation Cover - A sudden death in the family or a medical

emergency may play spoilsport with your travel arrangements. Thankfully,
international travel insurance plans support trip cancellations in such events.
You can claim financial assistance to pay penalties and cancellation charges for
flights, hotels, etc.

(e) Property Insurance- Any building or immovable structure can be insured

through property insurance plans. This can be either your residence or
commercial space. If any damage befalls such a property, you can claim
financial assistance from the insurance provider. Keep in mind that such a plan
also financially safeguards the content inside the property.

Types of Property Insurance in India

Here are some types of property insurance policies available in India:

 Home Insurance - With such a policy, you remain free from all financial
liabilities that may arise from damage to your home or contents inside due to
fires, burglaries, storms, earthquakes, explosions and other events.

 Shop Insurance - If you own a shop, which acts as a source of income for
you, it is integral to protect yourself from financial liability arising from the
same. Whether the liability occurs due to natural calamities or due to accidents,
with these plans, you can immediately undertake repairs to the shop.

 Office Insurance - Another type of property insurance policy, office

insurance ensures that the office building and all the equipment inside are
significantly protected in the event of unforeseen events. Generally, office
spaces include

expensive equipment, such as computers, servers and much more. Thus,

availing these plans is essential.

 Building Insurance - If you own a complete building, opting for home

insurance may not be sufficient. Instead, you can purchase building insurance to
cover the entire premises.

Benefits of Property Insurance

 Protection against Fires - While the insurance policy cannot prevent fires, it
can prevent financial liabilities from such an event.

 Burglaries - If your property exists in an area prone to theft and burglaries,

such a policy is vital to ensure financial security.

 Floods - In certain parts of India, floods are common. These floods can
ravage your property leading to substantial losses. Property insurance also
protects against such events.

 Natural Calamities - The plan also offers financial aid against damage arising
from earthquakes, storms and more. Rebuilding or renovation of a property is
immensely expensive. Thus, property insurance policies are the best option to
ensure long-term financial health.

(f) Mobile Insurance

Owing to the rising price of mobile phones and their several applications today,
it has become imperative to insure the device. Mobile insurance allows you to
reclaim money that you spend on repairing your phone in the event of
accidental damage. Further, you can also claim the same in case of phone theft,
making it easier to replace the handset with a new phone.

Benefits of Mobile Insurance

Mobile insurance policies are extremely beneficial, especially for those who
own a premium smartphone.

 Comprehensive protection for new devices - The value of phones tends to

decline with time. Thus, when the handset is new, phone insurance can help
safeguard its significant value.

 Coverage against Damage to Screen - If you accidentally damage the

smartphone screen, which is one of the most important parts of such devices,
your insurance plan will pay for the repair expenses.

 Theft or Robbery of Smartphone - Nothing is worse than buying your dream

smartphone and losing it due to theft or burglary. Well, phone insurance will
help you afford a replacement handset if such an unfortunate thing
happens.Some insurers may not allow you to buy insurance for the smartphone
after a month or two passes from the purchase of the handset.

(g) Cycle Insurance

Bicycles are valuable properties in India as some people rely on these vehicles
for their daily commute. A cycle insurance policy ensures that you have access
to necessary funds should your bicycle undergo accidental damage or theft. It
saves your out of pocket expenses, while also ensuring immediate repairs to the
vehicle.

Benefits of Cycle Insurance

The advantages of availing such an insurance policy are:

 Worldwide Coverage - Depending on the insurance provider, cycle insurance
policies provide financial assistance regardless of where your bicycle undergoes
damage. Even if you meet with a cycling accident in a different country, such a
plan will offer aid.

 Protection against Fires and Riots - If your bicycle sustains damage due to
accidental fires and/or rioting, insurance policies will provide the necessary
financial assistance to repair or undo the damage.

 Accidental Death Benefit - If you pass away due to bicycle accidents, the
insurance policy for the cycle would offer a lump-sum payout to your surviving
family members.

Regardless of your cycle’s price, opting for insurance can reduce your financial
liabilities significantly.

(h) Bite-Size Insurance

Bite-sized insurance policies refer to sachet insurance plans that minimize your
financial liability for a very limited tenure, generally up to a year. These
insurance plans allow you to protect your finances against specific damage or
threats. For instance, particular bite-sized insurance may offer accidental cover
of Rs. 1 Lakh for a year. You can choose this policy when you think you might
be particularly susceptible to accidental injuries.

Another example is insurance cover for specific diseases. For instance, if your
area is prone to water-borne diseases, such as cholera, you can pick a policy that
covers cholera treatment and all associated costs for a 1-year period.

Benefits of Bite-sized Insurance

The primary benefit of bite-size insurance policies is that it allows you to avail
financial protection at very limited prices. The premiums are so low that it
hardly makes any impact on your overall monthly expenditures. In comparison,
the sum insured is significant.

Principles of Insurance

The business of insurance aims to protect the economic value of assets or life of
a person. Through a contract of insurance, the insurer agrees to make good any
loss on the insured property or loss of life (as the case may be) that may occur
in course of time in consideration for a small premium to be paid by the insured.
Apart from the above essentials of a valid contract, insurance contracts are
subject to additional principles.

These distinctive features are based on the basic principles of law and are
applicable to all types of insurance contracts. These principles provide
guidelines based upon which insurance agreements are undertaken. A proper
understanding of these principles is therefore necessary for a clear interpretation
of insurance contracts and helps in proper termination of contracts, settlement of
claims, enforcement of rules and smooth award of verdicts in case of disputes.

1. Principle of Uberrimae Fidei (Utmost Good Faith)

• Both the parties i.e. the insured and the insurer should have a good faith
towards each other.

• The insurer must provide the insured complete, correct and clear information
of subject matter.

• The insurer must provide the insured complete, correct and clear information
regarding terms

and conditions of the contract.

• This principle is applicable to all contracts of insurance i.e. life, fire and
marine insurance.

Principle of Uberrimae fidei (a Latin phrase), or in simple English words, the

Principle of Utmost Good Faith, is a very basic and first primary principle of
insurance. According to this principle, the insurance contract must be signed by
both parties (i.e. insurer and insured) in an absolute good faith or belief or trust.
The person getting insured must willingly disclose and surrender to the insurer
his complete true information regarding the subject matter of insurance. The
insurer's liability gets void (i.e legally revoked or cancelled) if any facts, about
the subject matter of insurance are either omitted, hidden, falsified or presented
in a wrong manner by the insured.

The principle of Uberrimae fidei applies to all types of insurance contracts.

For example, if any person has taken a life insurance policy by hiding the fact
that he is a cancer patient and later on if he dies because of cancer then
insurance company can refuse to pay the compensation as the fact was hidden
by the insured.
2. Principle of Insurable Interest

• The insured must have insurable interest in the subject matter of insurance.

• In life insurance it refers to the life insured.

• In marine insurance it is enough if the insurable interest exists only at the time
of occurrence of the loss.

• In fire and general insurance, it must be present at the time of taking policy
and also at the time of the occurrence of loss.

• The owner of the party is said to have insurable interest as long as he is the
owner of it.

• It is applicable to all contracts of insurance. The principle of insurable interest

states that the person getting insured must have insurable interest in the object
of insurance. A person has an insurable interest when the physical existence of
the insured object gives him some gain but its non-existence will give him a
loss. In simple words, the insured person must suffer some financial loss by the
damage of the insured object.

For example: - The owner of a taxicab has insurable interest in the taxicab
because he is getting income from it. But, if he sells it, he will not have an
insurable interest left in that taxicab. From above example, we can conclude
that, ownership plays a very crucial role in evaluating insurable interest. Every
person has an insurable interest in his own life. A merchant has insurable
interest in his business of trading. Similarly, a creditor has insurable interest in
his debtor.

For example, if a person has taken the loan against the security of a factory
premises then the lender can take fire insurance policy of that factory without
being the owner of the factory because he has financial interest in the factory
premises.

3. Principle of Indemnity

• Indemnity means guarantee or assurance to put the insured in the same

position in which he was immediately prior to the happening of the uncertain
event. The insurer undertakes to make good the loss.

• It is applicable to fire, marine and other general insurance.

• Under this the insurer agreed to compensate the insured for the actual loss
suffered. Indemnity means security, protection and compensation given against
damage, loss or injury.

According to the principle of indemnity, an insurance contract is signed only for

getting protection against unpredicted financial losses arising due to future
uncertainties. Insurance contract is not made for making profit else its sole
purpose is to give compensation in case of any damage or loss. In an insurance
contract, the amount of compensations paid is in proportion to the incurred
losses. The amount of compensations is limited to the amount assured or the
actual losses, whichever is less. The compensation must not be less or more
than the actual damage.

Compensation is not paid if the specified loss does not happen due to a
particular reason during a specific time period. Thus, insurance is only for
giving protection against losses and not for making profit. However, in case of
life insurance, the principle of indemnity does not apply because the value of
human life cannot be measured in terms of money.

For example, a person insured a car for 2.5 lakh against damage on an accident
case. Due to accident he suffered a loss of 1.5 lakh, then the insurance company
will compensate him 1.5 lakh only not the policy amount i.e., 2.5 lakh as the
purpose behind it is to compensate not to make profit.

4. Principle of Subrogation

• As per this principle after the insured is compensated for the loss due to
damage to property insured, then the right of ownership of such property passes
to the insurer.

• This principle is corollary of the principle of indemnity and is applicable to all

contracts of indemnity. Subrogation means substituting one creditor for another.
Principle of Subrogation is an extension and another corollary of the principle
of indemnity. It also applies to all contracts of indemnity. According to the
principle of subrogation, when the insured is compensated for the losses due to
damage to his insured property, then the ownership right of such property shifts
to the insurer. This principle is applicable only when the damaged property has
any value after the event causing the damage. The insurer can benefit out of
subrogation rights only to the extent of the amount he has paid to the insured as
compensation.
For example:- Mr. Arvind insures his house for Rs. 1 million. The house is
totally destroyed by the negligence of his neighbor Mr. Mohan. The insurance
company shall settle the claim of Mr. Arvind for Rs. 1 million. At the same
time, it can file a law suit against Mr. Mohan for Rs. 1.2 million, the market
value of the house. If insurance company wins the case and collects Rs. 1.2
million from Mr. Mohan, then the insurance company will retain Rs. 1 million
(which it has already paid to Mr. Arvind) plus other expenses such as court fees.
The balance amount, if any will be given to Mr. Arvind, the insured.

5. Principle of contribution

• The principle is corollary of the principle of indemnity.

• It is applicable to all contracts of indemnity. • Under this principle the insured

can claim the compensation only to the extent of actual loss either from any one
insurer or all the insurers.

Principle of Contribution is a corollary of the principle of indemnity. It applies

to all contracts of indemnity, if the insured has taken out more than one policy
on the same subject matter. According to this principle, the insured can claim
the compensation only to the extent of actual loss either from all insurers or
from any one insurer. If one insurer pays full compensation then that insurer can
claim proportionate claim from the other insurers.

For example :- Mr. Arvind insures his property worth Rs. 100,000 with two
insurers "AIG Ltd." for `90,000 and "MetLife Ltd." For `60,000. Arvind's actual
property destroyed is worth Rs. 60,000, then Mr. Arvind can claim the full loss
of `60,000 either from AIG Ltd. or MetLife Ltd., or he can claim `36,000 from
AIG Ltd. and `24,000 from Metlife Ltd. So, if the insured claims full amount of
compensation from one insurer then he cannot claim the same compensation
from other insurer and make a profit. Secondly, if one insurance company pays
the full compensation then it can recover the proportionate contribution from
the other insurance company.

6. Principle of Causa Proxima (NEAREST CAUSE)

• The loss of insured property can be caused by more than one cause in
succession to another.

• The property may be insured against some causes and not against all causes.
• In such an instance, the proximate cause or nearest cause of loss is to be found
out.

• If the proximate cause is the one which is insured against, the insurance
company is bound to pay the compensation and vice versa.

Principle of Causa Proxima (a Latin phrase), or in simple english words, the

Principle of Proximate (i.e Nearest) Cause, means when a loss is caused by
more than one causes, the proximate or the nearest or the closest cause should
be taken into consideration to decide the liability of the insurer. The principle
states that to find out whether the insurer is liable for the loss or not, the
proximate (closest) and not the remote (farest) must be looked into.

For example:- A cargo ship's base was punctured due to rats and so sea water
entered and cargo was damaged. Here there are two causes for the damage of
the cargo ship –

(i) The cargo ship getting punctured because of rats, and

(ii) The sea water entering ship through puncture. The risk of sea water is
insured but the first cause is not. The nearest cause of damage is sea water
which is insured and therefore the insurer must pay the compensation. However,
in case of life insurance, the principle of Causa Proxima does not apply.
Whatever may be the reason of death (whether a natural death or an unnatural
death) the insurer is liable to pay the amount of insurance.

7. Principle of loss minimization

• Under this principle it is the duty of the insured to take all possible steps to
minimize the loss to the insured property on the happening of uncertain event.
According to the Principle of Loss Minimization, insured must always try his
level best to minimize the loss of his insured property, in case of uncertain
events like a fire outbreak or blast, etc. The insured must take all possible
measures and necessary steps to control and reduce the losses in such a
scenario. The insured must not neglect and behave irresponsibly during such
events just because the property is insured. Hence it is a responsibility of the
insured to protect his insured property and avoid further losses.

For example :- Assume, Mr. Arvind's house is set on fire due to an electric
short-circuit. In this tragic scenario, Mr. Arvind must try his level best to stop
fire by all possible means, like first calling nearest fire department office, asking
neighbours for emergency fire extinguishers, etc. He must not remain inactive
and watch his house burning hoping, "Why should I worry? I've insured my
house." Life insurance is an agreement between you (the policy owner) and an
insurer. Under the terms of a life insurance policy, the insurer promises to pay a
certain sum to a person you choose (your beneficiary) upon your death, in
exchange for your premium payments. Proper life insurance coverage should
provide you with peace of mind, since you know that those you care about will
be financially protected after you die.

Uses of life insurance

One of the most common reasons for buying life insurance is to replace the loss
of income that would occur in the event of your death.

When you die and your paychecks stop, your family may be left with limited
resources.

Proceedsfromalifeinsurancepolicymakecashavailabletosupportyourfamily
almost immediately upon your death.

Life insurance can pay any debts that you may leave behind.

Life insurance can pay off mortgages, car loans, and credit card debts, leaving
other remaining assets intact for your family.

Life insurance proceeds can also be used to pay for final expenses and estate
taxes.

Finally, life insurance can create an estate for your heirs.

How Much Life Insurance do you need?

Your life insurance needs will depend on a number of factors, including:

• Whether you’re married

• the size of your family

• the nature of your financial obligations

• your career stage

• your goals.
For example, when you’re young, you may not have a great need for life
insurance. However, as you take on more responsibilities and your family
grows, your need for life insurance increases.

Determining Life Insurance Needs

There are tools to help you determine how much coverage you should have.
Your best resource may be a financial professional. At the most basic level, the
amount of life insurance coverage that you need corresponds directly to your
answers to these questions:

1. What immediate financial expenses (e.g.,debt repayment,funeral expenses)

would your family face upon your death?

2. How much of your salary is devoted to current expenses and future needs?

3. How long would your dependents need support if you were to die tomorrow?

4. How much money would you want to leave for special situations upon your
death, such as funding your children’s education, gifts to charities, or an
inheritance for your children?

Since your needs will change over time, you’ll need to continually re-evaluate
your need for coverage.

Life insurance-concept

Life insurance is a contract under which the insurer (Insurance Company)

inconsideration of a premium paid undertakes to pay a fixed sum of money on
the death of the insured or on the expiry of a specified period of time whichever
is earlier. In case of life insurance, the payment for life insurance policy is
certain. The event insured against is sure to happen only the time of its
happening is not known. So life insurance is known as ‘Life Assurance’. The
subject matter of insurance is life of human being. Life insurance provides risk
coverage to the life of a person. On death of the person insurance offers
protection against loss of income and compensate the titleholders of the policy.

Meaning of Life Insurance

Life insurance is a contract to a certain sum of money on the death of a person

in consideration of the certain annuity for his life calculated according to the
probable duration of life.
A life insurance is a contract in which one party agrees to pay a given sum of
money upon the happening of a particular event contingent upon the duration of
human life in consideration of immediate payment of smaller sum.

Features of life insurance plans

(a) Waiver of premium. This feature pays the premium of a policy if you
become seriously ill or disabled.

(b) Accelerated death benefit. This feature allows you to receive cash advances
against the death benefit of your policy if you're diagnosed with a terminal
illness. Many people with this benefit use the money to help pay for treatment
and other expenses when they have only a short time to live.

(c) Guaranteed purchase option. With this feature, you can purchase coverage at
designated future dates or life events without proving you're in good health.

(d) Long-term care riders. Some life products include this option, which allows
you to use the benefits of your policy to pay for long-term care in exchange for
a reduced life benefit.

(e) Spouse or child term riders. Life policies with this feature allow you to
purchase term life insurance for your spouse or dependent child, up to age 26.
This option can be a more affordable way to purchase coverage if you can't
afford separate policies.

(f) Cash value plans. This type of policy pays out upon your death and also
accumulates value during your lifetime. You can use the cash value as a tax-
sheltered investment, as a fund from which you can borrow and use to pay the
policy premiums later.

(g) Mortgage protection. This feature, typically found on term life policies, will
pay your mortgage if you die.

(h) Cash withdrawals and loans. Many universal and whole life policies allow
you to withdraw or borrow money, using the cash value of the policy as
collateral. Interest rates tend to be relatively low. You can also use the cash
value of your life policy to pay your premiums if you need or want to stop
paying premiums for a period of time. You must pay back the loan or your
beneficiaries will receive a reduced death benefit.
(i) Survivor support services. Some life policies offer services that provide
objective financial and legal assistance to beneficiaries.

(j) Employee assistance programs. This feature makes resources available to

you for problems that can affect your personal and professional life. Resources
are usually free and help address issues such as substance abuse, stress, marital
problems, legal concerns and major life events.

Procedure for Taking a Life Policy

1. Procedure for Taking a Life Policy: Life policy is based on the principle
utmost good faith. The procedure-filling in the form is quite simple. It is almost
like a home industry where the person who wishes to make an investment in the
form of insurance. The first thing to do is to fill in a proposal form.

The proposal form contains the following details:

(a) Name, nationality, permanent residential address, occupation, nature of

duties, present employer’s name, length of service, previous employment
record, father’s name in full.

(b) Place of birth, date of birth, proof of age and district of birth.

(c) Term of insurance, nature of insurance, type of policy, amount to be insured,

mode of premium payable — yearly, half-yearly, quarterly and monthly.

d) Personal information regarding height, weight where the life is proposed.

(e) Details of any previous policies whether one or double insurance.

(f) Family history, history of father, mother, brothers, sisters, children.

(g) Information regarding diseases likes epileptics, asthma, tuberculosis, cancer,

leprosy, etc.

(h) Information regarding previous records of accident, injury, operation

diseases.

2. Medical Examination: If the applicant has a family history of disease then

the investment procedure is more detailed and description about permanent
immunity and other family diseases have to be given including habits, name,
income, occupation and salary. A person of normal health almost goes through a
medical examination as a matter of formality.
3. Medical Report: The next step after filling-in proposal form is to undergo a
medical examination from one of the doctors approved by the Life Insurance
Corporation. The examination is usually of a routine kind where the
identification of the applicant, his appearance, measurement, weight, condition
of teeth, eyes, throat, tongue, ears, and condition of heart, chest, digestion, nerve
system and past operation is taken into consideration to find out the life span of
the individual.

4. Agent’s Report: The third step consists of a report which is confidential in

nature. It is made by the agent who is underwriting the life of the person. His
report consist of the age of the person insuring himself, his health, occupation,
soundness of payment of premium, proper health and longevity of life.

5. Acceptance of Proposal: The Life Insurance Corporation accepts the

proposal of the insurer on the commitment made by the agent and after taking
into consideration the doctor’s medical report. The factors which play a
dominating role is the mode of premium, type of policy, the age of the
applicant, his health, occupation and habits. Once these factors have been
considered and the Life Insurance Corporation’s officers are satisfied, the form
is accepted. An investor’s form will be rejected only if he suffers from serious
diseases or the longevity of life cannot be guaranteed.

6. Proof of Age: The next step after accepting the proposal of a person is to ask
him to submit the proof the age. The person who is interested in insuring
himself may give this proof by submitting any of the following documents:

(a) A copy of a certificate giving details of the school leaving examination with
age or date of birth stated therein;

(b) Municipal records;

(c) Original horoscope prepared at the time of birth, if no proof of age is

available;

(d) In the case of uneducated families, entry in the family record through birth
registers;

(e) Employer’s Certificate’

(f) Any other satisfactory proof.

7. Mode of Premium: When an investor takes a life policy on his portfolio he
must pay some installment to the life insurance company for this investment.
This installment is called premium and may be paid periodically. It may be paid
annually, half-yearly, quarterly or monthly. Usually, a period of 30 days is
given as grace beyond the due date of payment of premium. The rates of
premium are different for different kinds of policies offered as investment.

8. Issue of Policy: When all these formalities are completed the Life Insurance
Corporation sends a life policy to the insured. This legal document between the
life company and the insured states the details of the policy.

It gives details regarding the age, address, sum assured, type of policy with or
without profits, date of maturity, premium, mode of payment of premium, name
of person who is entitled to receive the ultimate sum, amount at the termination
of the policy, the surrender value of the policy, the settlement of claims of
policy and all other conditions of the contract.

Principles of Life Insurance

(a) Insurable interest -The insured must have insurable interest in the life
assured. In absence of insurable interest, Contract of insurance is void. Insurable
interest must be present at the time of entering into contract with insurance
company for life insurance. It is not necessary that the assured should have
insurable interest at the time of maturity also.

(b) Utmost good faith- The contract of life insurance is a contract of utmost
good faith. The insured should be open and truthful and should not conceal any
material fact in giving information to the insurance company, while entering
into a contract with insurance company.
Misrepresentationorconcealmentofanyfactwillentitletheinsurertorepudiatethecon
tractifhe wishes to do so.

(c) Not a contract of indemnity-The life insurance contract is not a contract of

indemnity. Contract of life insurance is not a contract of indemnity. The loss of
life cannot be compensated and only a fixed sum of money is paid in the event
of death of the insured. So, the life insurance contract is not a contract of
indemnity. The loss resulting from the death of life assured cannot be calculated
in terms of money.

Importance of Life Insurance

Life Insurance is of great importance to individuals, groups, business
community and general public. Some of the main benefits of life insurance are
given below.

(a) Protection against untimely death Life - Insurance provides protection to the
dependents of the life insured and the families of the assured in case of his
untimely death. The dependents or family members get a fixed sum of money in
case of death of the assured.

(b) Saving for old age - After retirement the earning capacity of a person
reduces. Life insurance enables a person to enjoy peace of mind and a sense of
security in his/her old age.

(c) Promotion of savings - Life insurance encourages people to save money

compulsorily. When a life policy is taken, the assured is to pay premiums
regularly to keep the policy in force and he cannot get back the premiums, only
surrender value can be returned to him. In case of surrender of policy, the
policyholder gets the surrendered value only after the expiry of duration of the
policy.

(d) Initiates investments - Life Insurance Corporation encourages and mobilizes

the public savings and channelizes the same in various investments for the
economic development of the country. Life insurance is an important tool for
the mobilization and investment of small savings.

(e) Credit worthiness - Life insurance policy can be used as a security to raise
loans. It improves the credit worthiness of business

(f) Social Security - Life insurance is important for the society as a whole also.
Life insurance enables a person to provide for education and marriage of
children and for construction of house. It helps a person to make financial base
for future.

(g) Tax Benefit - Under the Income Tax Act, premium paid is allowed as a
deduction from the total income under section80C.

Life insurance Policies

Life insurance policies can be grouped into the following categories:

(a) Term Policy-In case of Term assurance plans, insurance company promises
the insured for a nominal premium to pay the face value mentioned in the policy
in case he is no longer alive during the term of the policy. Term assurance
policy has the following features:

• It provides a risk cover only for a prescribed period. Usually these policies are
short-term plans and the term ranges from one year onwards. If the policyholder
survives till the end of this period, the risk cover lapses and no insurance benefit
payment is made to him.

• The amount of premium to be paid for these policies is lower than allot her life
insurance policies. As savings and reserves are not accumulated under this
policy, it has no surrender value and loan or paid-up values are not allowed on
these policies.

• This plan is most suitable for those who are initially unable to pay high
premium

• When income is low as required for Whole Life or Endowment policies, but
requires life cover for a high amount.

(b) Whole Life Policy- This policy runs for the whole life of the assured. The
sum assured becomes payable to the legal heir only after the death of the
assured. The whole life policy can be of three types.

(i) Ordinary whole life policy – In this case premium is payable periodically
throughout the life of the assured.

(ii) Limited payment whole life policy – In this case premium is payable for a
specified period (Say 20 Years or 25 Years) Only.

(iii) Single Premium whole life policy In this type of policy the entire premiums
payable in one single payment.

(c) Endowment Life Policy-In this policy the insurer agrees to pay the assured
or his nominees a specified sum of money on his death or on the maturity of the
policy whichever is earlier. The premium for endowment policy is
comparatively higher than that of the whole life policy. The premium is payable
till the maturity of the policy or until the death of the assured whichever is
earlier. It provides protection to the family against the untimely death of the
assured.

(d) Health insurance schemes - An individual is subject to uncertainty

regarding his health. He may suffer from ailments, diseases, disability caused by
stroke or accident, etc. For serious cases the person may have to be hospitalized
and intensive medical care has to be provided which can be very expensive. It is
here that medical insurance is helpful in reducing the financial burden. These
days the vulnerability to lifestyle diseases such as heart, cancer, neurotic, and
pollution based, etc are on the increase. So it makes sense for an individual to
go for medical insurance cover.

(e) Joint Life Policy- This policy is taken on the lives of two or more persons
simultaneously. Under this policy the sum assured becomes payable on the
death of any one of those who have taken the joint life policy. The sum assured
will be paid to the survivor(s).For example, a joint life policy may be taken on
the live so husband and wife, sum assured will be payable to the survivor on the
death of the spouse.

(f) With Profit and without Profit Policy-Under with profit policy the assured
is paid, in addition to the sum assured, a share in the profits of the insurer in the
form of bonus. Without profit policy is a policy under which the assured does
not get any share in the profits earned by the insurer and gets only the sum
assured on the maturity of the policy. With profit and without profit policies are
also known as participating and non–participating policies respectively.

(g) Double Accident Benefit Policy - This policy provides that if the insured
person dies of any accident, his beneficiaries will get double the amount of the
sum assured.

(h) Annuity Policy - Under this policy, the sum assured is payable not in one
lump sum payment but in monthly, quarterly and half-yearly or yearly
installments after the assured attains a certain age. This policy is useful to those
who want to have a regular income after the expiry of a certain period e.g. after
retirement. Annuity is paid so long as the assured survives. In annuity policy
medical check-up is not required. Annuity is paid so long as the assured
survives.

(i) Policies for Women - Women, now days are free to take life assurance
policies. However, some specially designed policies suit their needs in a unique
manner; important policies for women are

A. Jeevan Sathi is also known a Life Partner plan where the husband and wife
are covered under this endowment policy

B. Jeevan Sukanya
(j) Group Insurance - Group life insurance is a plan of insurance under which
the lives of many persons are covered under one life insurance policy. However,
the insurance on each life is independent of that on the other lives. Usually, in
group insurance, the employer secures a group policy for the benefit of his
employees. Insurer provides coverage for many people under single contract.

(k) Policies for Children - Policies for children are meant for the various needs
of the children such as education, marriage, security of life etc. Some of the
major children policies are:

(1) Children’s deferred assurances

(2) Marriage endowment and educational annuity plans

(3) Children endowment policy

(l) Money Back Policy- In this case policy money is paid to the insured in a
number of separate cash payments. Insurer gives periodic payments of survival
benefit at fixed intervals during the term of policy as long as the policyholder is
alive. The contract for the life insurance starts with the proposal made by the
proposer in standard application form available with insurance company and
then various other documents are prepared.

(m) Unit Linked Insurance Plan - This is one of the most sort after type of life
insurance policy today. This is because ULIPs provide the basic life insurance
element as well as a flexible investment element too. With ULIP plans, the
premium paid is split toward two causes, one is of course the life insurance
component, wherein the insured person’s family receives a sum assured in case
of his or her demise within the tenure of the ULIP plan. The other component of
the premium is directed towards investment opportunities in the equity or debt
markets. ULIPs offer the insured person are turn on investment similar to that of
a mutual fund and the financial security against his death that other life
insurance policies provide.

RE-INSURANCE

Reinsurance is a contract between two or more insurance companies by which

a portion of risk of loss is transferred to another insurance company. This
happen when an insurance company has undertaken more risk burden on its
shoulders than its bearing capacity.
Double insurance is thus a device to reduce the risk. Usually, an insurance
company insure a profitable venture comes in its way, even if the risk involved
is beyond the capacity. By transferring the risk to any other insurance company,
the insurer reduces his liability.

Definition

1. According to the Federation of Insurance Institutes, Mumbai, "Reinsurance is

an arrangement whereby an insurer who has accepted an insurance, transfers a
part of the risk to another insurer so that his liability on any one risk is limited
to a figure proportionate to his financial capacity."

2. In the words of Riegel and Miller, "Reinsurance is the transfer by an

insurance company a portion of its risk to another company."

3. In the words of R.S. Sharma, "When an insurer transfers a part of his risk on
a particular policy by insuring it with someother insurer, it is called re-
insurance."

A reinsurance does not affect the contract between the original insurer and the
assured. Reinsurance can be restored in all types of insurance contracts, which
involves large risks. As the contract of reinsurance is a contract of good faith,
the reinsurer is not liable to the assured and the contract is co-extensive with the
original policy.

Under the reinsurance method, if an insurance company receives an insurance

proposal worth Rs. 10 crore, where its risk bearing capacity is of Rs. 5 crore
only, it has two options either to reject the proposal or to accept it. After
accepting the proposal the insurer can limit his liability by getting reinsured for
Rs. 5 crore with another insurer. In case of complete loss the original insurer
makes the payment of claim to the insured for Rs. 10 crore and then claims Rs.
5 crore from the reinsurer(s).

Features

1. Reinsurance is a contract of indemnity.

2. It is an insurance contract between two insurance companies.

3. The relationship of the assured remains with the original insurer only. The re-
insurer is not liable directly towards the assured.
4. In re-insurance the insurer transfers the risk beyond the risk beyond the limit
of his capacity to another insurance company.

5. Re-insurance does not affects the right of insured.

6. The original insurer cannot do re-insurance more than the insured sum.

7. Re-insurance can be possible in all types of insurance.

8. The fundamental principles of insurance are applicable in reinsurance also.

9. Re-insurer is bound only those liability for which the original insurer is
legally liable.

Merits of Re-insurance

Re-insurance is beneficial to the insurers and the insured both.

1. Re-insurance is a security for the insurers. He can share his risk with other
insurers.

2. It increases the capacity of the insurer of undertake insurance of larger sums

without any hesitation. Many smaller companies can also undertake heavy risks.

3. It reduces the situation of uncertainty by distribution of risks among other

insurers.

4. It encourages the new and smell insures to undertake more risk and remain in
business.

5. It makes possible for the insurer to insure catastrophic risks like flood,
earthquake, cyclone etc. Normally such risks are not insured.

6. It brings stability of earning the profits by distributing risks among many.

7. It brings stability in income by reducing liability.

8. It is device against becoming an insolvent. When a number of insurers

become insolvent the business cannot be carried forward. In such a situation the
remaining business can be reinsured and can find alternative for survival.

9. It reduces unhealthy competition since most of the insurers cooperate each

other in this case.
10. Re-insurance is more useful to new insurers who bear loss capacity to
undertake risks.

11. It increases the goodwill of insurance business as it undertakes different

types of risks and issues policies against those risks.

Advantages to the insured include the following

1. The insured gets the goodwill of two insurers and in the case where one
insurer becomes insolvent he can claim indemnity from the other.

2. The insured is protected against bad effect of insuring with an insurer who
undertakes more than his risk bearing capacity.

3. The insured also gets the advantages to insure with one insurer for a large
sum. There is no need for him to insure with more than one insurer.

4. Advantage of insuring against catastrophic risks like cyclone, floods,

earthquake etc. which are not insured normally by the insurance companies.

There are three methods of Re-insurance

1. Facultative method

2. Treaty method

3. Pooling method

1. Facultative Method : This is the very oldest method of reinsurance. Under

this method both the parties are formed into a contract for any specific time.
The reinsurer has the liberty to accept or reject a proposal received for re-
insurance. The method is a flexible one, reinsurance can be affected according
to the needs of circumstance. This method is more suitable for emergent
situations.

In the words of Reigel and Miller, "Facultative reinsurance is an arrangement

made with respect to a particular risk at a particular time."

Merits : Certain important merits are as follows :

(1) This method is flexible. The facility to make reinsurance is based on the
circumstances of the case.

(2) There is no restriction on re-insurance.

(3) This method can be adopted even in emergency situations.

(4) This method is more useful where the risk is not standardized.

(5) This method makes the original insurer vigilant and makes arrangement for
reinsurance before the insurance is made. In case no re-insurance is available,
he may refuse to accept heavy losses due to involvement of heavy risk.

Demerits : The important demerits of this method are as follows :

(1) Many paper-work is involved in the process of reinsurance.

(2) This is an uncertain method.

(3) Unnecessary delays take place since the consent of the reinsurer is to be
taken again and again.

(4) This sort of delay in getting the consent of the reinsurer leaves the chance of
getting the insurance proposal.

(5) This method is more expensive.

(6) This method is impractical and non-beneficial to small and medium re-
insures.

(7) In absence of getting prior consent of the re-insurer, if the proposals

involving heavy risk are accepted, the insurer has to suffer heavy losses due to
involvement of heavy risk.

Because of these and many other drawbacks of facultative reinsurance method,

the Auto-Facultative reinsurance method has been developed. Under this new
method a special category of risks ar reinsured. Re-insurance of this method has
much importance in

Engineering Insurance, Air Transport Insurance, Satellite Insurance,Crop

Insurance, Disturbance Insurance etc.

(2) Treaty Method : It is an informal agreement between two insurers under

which the re-insurer agrees to reinsure risks written by the other insurance
company (propose) subject to the terms and conditions of the treaty and within
the prescribed time limit. Treaty is a formal and legally binding agreement
between the parties. The following types of treaty of agreements are made under
this method ;
(1) Quota or fixed share treaty.

(2) Surplus treaty

(3) Excess of loss treaty

(4) Excess of loss ratio or stop-loss treaty.

Group Insurance

Group Insurance covers a defined group of people, for example members of a

professional association, or a society or employees of an organization. Group
Insurance may offer life cover, health cover, and/or other types of personal
insurance.

Most insurance companies in India have introduced group insurance policies to

meet insurance needs of specific groups including professionals, employers-
employees, co-operative societies, among others.

Group insurance has several advantages chief among which is a life cover made
available to members irrespective of age, gender, socio economic background or
profession, so long as they belong to the group that is applying for insurance.

Group insurance is a type of insurance plan that covers a number of people in

the same contract. Such a plan provides the same level of insurance coverage to
all members of a group irrespective of their age, gender, occupation or socio-
economic status. Group insurance eliminates the need to buy a separate
insurance plan for each member. Often, employers cover their employees with
a group insurance plan as part of the pay-out benefits. Such a plan provides
cover to group members and their spouses, children and dependent parents.

While there are various objectives of group insurance, they cover the following
basic functions:

a. Term insurance - The sum assured is paid out to family members of the
deceased in case of death over the employment tenure with the company.

b. Annuity - Superannuation schemes of group insurance policies provide for

retirement plans that can be availed of by employees post-retirement, at existing
NAV (group insurance), as pension.
c. Gratuity - On completing five years of service an employee becomes eligible
for gratuity subject to relevant laws. Group insurance provides investment
options to the organization to create a corpus for gratuity.

d. Savings - It mobilizes savings of participating members which can meet long-

term financial goals like child's education or marriage.

e. Covering liability - It can provide for outstanding dues or loans (like home
loans) of participating members on death or disability.

Features of Group Insurance

Here are some of the key features of group insurance.

As risk spreads over a large number of people, a group insurance plan provides
standardized coverage at competitive premium rates. This means that the
coverage is the same for all members of a group.

Irrespective of the size of the group, group insurance covers all members under
the same plan. The plan may be in the form of group life insurance, group
health insurance, group travel insurance or group personal accident insurance.

A group can comprise employer and employees or non-employer and

employees such as holders of a credit card or members of a social or cultural
association.

The manager of the group gets a master policy in the name of the group.

Premium is charged to the members or can be paid by the group.

A member is covered as long as he is a part of the group. The cover ceases if a

member leaves the group.

Benefits of Group Insurance

Buying a group insurance plan can be rewarding for individual group members
such as employees as well as employers. Today, many companies and
businesses prefer to cover their employees with group insurance as part of the
overall compensation. Here are the key advantages of a group insurance plan for
employers and employees.
 The premium paid in group insurance is lower than the premium in an
individual policy for a member. These plans reduce the liability of the insurance
provider as the risk is spread across all members of the group.
 As premiums are often paid by the employer, group insurance offers a
convenient way to cover all employees with different income brackets. These
plans provide a cost-effective means for employers to provide an insurance
cover for their employees.
 Group insurance helps enhance loyalty of employees for the employer. A group
member feels valued to be a part of the group and is likely to continue his
association with the group for a long period. In addition, these plans help
employers create an employee-friendly workplace and positive work
environment.
 Often, a group insurance plan covers family members of group members. For
example, many group health insurance plans cover spouses, dependent children
and parents of the group member.
 Group members can claim tax benefits on the premium paid on group insurance
while filing their income tax returns. Employers can also claim tax benefits for
paying premiums on insurance plans for their employees.
 Group insurance provides standardised coverage for all members. It helps
people of lower income groups to get the same coverage as those with higher
income groups.
 Some group insurance plans can be converted into individual plans when a
member leaves a group. In such a case, the member has to pay a conversion fee.
 Group members are not required to fulfil pre-requisite conditions. On the other
hand, individual insurance plans often require the policy applicant to undergo a
health check-up.

Eligibility criteria
Here are the eligibility requirements for a group insurance plan.
 The minimum number of group members can vary in different types of group
insurance plans. Some plans may require a group strength of at least 10
members. Others may require 50 members in a group to be eligible for group
insurance.
 The minimum age for entry is 18 years.
 The maximum age may vary. Some plans have a maximum age limit of 60
years while some allow entry till 80 years.
 All members must be active and full-time members of the group.

Types of Groups
A group insurance plan provides cover to the below types of groups.

 Formal group: In a formal group, also known as employer-employee group, all

members work for the same employer or group owner. A company, business
organization and professional organization are examples of a formal group. The
insurance plan is purchased by the employer.
 Informal group: The members of an informal group may belong to a society or
cultural association. They may hold the same credit card or account. In such a
group, the group owner or administrator purchases the policy on behalf of the
group members.
Conclusion: Group insurance offers a smart and convenient option to cover all
members of a group under the same plan. Such a plan offers several benefits to
individual members as well as the group as a whole.

Micro Insurance

Insurance accessed by low ‐income people

• provided by a variety of institutions

• run in accordance with generally accepted Insurance Core Principles

• funded by premiums

• a financial service, besides savings, credit and cashless payments which the
poor use to manage their risks

• Insurance targeting those that are “ignored by mainstream commercial

insurance and social insurance schemes”. That is, “persons who do not have
access to benefits” often because they are not part of the formal sector or have
no access to benefits normally provided through formal employment.

• closely linked with other financial services via clients, products, insurers,
intermediaries, policy decision makers, regulation and national strategies

• a strategic tool for different development agendas (pro ‐ poor financing,

agricultural and rural development, social security development, mitigation of
climate change)

Definitions of microinsurance

1. Microinsurance is insurance with low premiums and low caps / coverage.

In this definition, "micro" refers to the small financial transaction that
each insurance policy generates. "General micro insurance product
means health insurance contract, any contract covering the belongings,
such as, hut, livestock or tools or instruments or any personal accident
contract, either on individual or group basis, as per terms stated in
Schedule-I appended to these regulations"; and "life microinsurance
product" means any term insurance contract with or without return of
premium, any endowment insurance contract or health insurance
contract, with or without an accident benefit rider, either on individual or
group basis, as per terms stated in Schedule-II appended to these
 regulations as those within defined (low) minimum and maximum caps.
The Indian Insurance Regulatory and Development Authority (IRDAI)
characterizes micro insurance by the product features. This is further
complemented by their definition for micro insurance agents, those
appointed by and acting for an insurer, for distribution of micro
insurance products (and only those products).
2. Micro insurance is a financial arrangement to protect low-income people
against specific perils in exchange for regular premium payments
proportionate to the likelihood and cost of the risk involved.[2] The author
of this definition adds that micro-insurance does not refer to: (i) the size
of the risk-carrier (some are small and even informal, others very large
companies); (ii) the scope of the risk (the risks themselves are by no
means "micro" to the households that experience them); (iii) the delivery
channel: it can be delivered through a variety of different channels,
including small community-based schemes, credit unions or other types
of microfinance institutions, but also by enormous multinational
insurance companies, etc.
3. Micro insurance is synonymous to community-based financing
arrangements,[3] including community health funds, mutual health
organizations, rural health insurance, revolving drugs funds, and
community involvement in user-fee management. Most community
financing schemes have evolved in the context of severe economic
constraints, political instability, and lack of good governance. The
common feature within all, is the active involvement of the community
in revenue collection, pooling, resource allocation and, frequently,
service provision.
4. Micro insurance is the use of insurance as an economic instrument at the
"micro" (i.e. smaller than national) level of society.[4] This definition
integrates the above approaches into one comprehensive conceptual
framework. It was first published in 1999, pre-dating the other three
approaches, and has been noted to be the first recorded use of the term
"micro insurance".[3] Under this definition, decisions in micro insurance
are made within each unit, (rather than far away, at the level
of governments, companies, NGOs that offer support in operations, etc.).
Insurance functions on the concept of risk pooling, and likewise, regardless of
its small unit size and its activities at the level of single communities, so does
micro insurance. Micro insurance links multiple small units into larger
structures, creating networks that enhance both insurance functions (through
broader risk pools) and support structures for improved governance (i.e.
training, data banks, research facilities, access to reinsurance etc.). This
mechanism is conceived as an autonomous enterprise, independent of
permanent external financial lifelines, and its main objective is to pool both
risks and resources of whole groups for the purpose of providing financial
protection to all members against the financial consequences of mutually
determined risks.
The last definition therefore, includes the critical features of the previous three:

1. transactions are low-cost (and reflect members’ willingness to pay);

2. clients are essentially low-net-worth (but not necessarily uniformly poor);
3. the essential role of the network of micro insurance units is to enhance
risk management of the members of the entire pool of micro insurance
units over and above what each can do when operating as a stand-alone
entity.

Micro insurance products

Micro insurance, like regular insurance, may be offered for a wide variety of
risks. These include both health risks (illness, injury, or death) and property
risks (damage or loss). A wide variety of micro insurance products exist to
address these risks, including crop insurance and livestock/cattle insurance,
which are increasingly sold as index-based insurance, theft or fire
insurance, health insurance, term life insurance, death insurance, disability
insurance, and insurance for natural disasters.
Micro insurance has made a significant difference in countries like Mali, as
Maxime Prud'Homme and Bakary Traoré describe in Innovations in Sikasso.
Still, many countries face continuing challenges. Specifically in Bangladesh,
micro health insurance schemes are having trouble with financial and
institutional sustainability, Syed Abdul Hamid and Jinnat Ara describe, but
things are improving. Progress in Bangladesh

Microinsurance delivery models

One of the greatest challenge for micro insurance is the actual delivery to
clients. Methods and models for doing so vary depending on the organization,
institution, and provider involved. As Dubby Mahalanobis states, one must be
thorough and careful when making policies, otherwise micro insurance could do
more harm than good. Tricky challenges In general, there are four main
methods for offering micro insurance the partner-agent model, the provider-
driven model, the full-service model, and the community-based model. Each of
these models has their own advantages and disadvantages.

 Partner agent model: A partnership is formed between the micro

insurance(partner as MFI) scheme and an agent (insurance companies), and
in some cases a third-party healthcare provider. The microinsurance scheme
is responsible for the delivery and marketing of products to the clients, while
the agent retains all responsibility for design and development. In this
 model, microinsurance schemes benefit from limited risk, but are also
disadvantaged in their limited control. Micro Insurance Centre is an example
of an organization using this model.
 Full service model: The microinsurance scheme is in charge of everything;
both the design and delivery of products to the clients, working with external
healthcare providers to provide the services. This model has the advantage
of offering microinsurance schemes full control, yet the disadvantage of
higher risks.
 Provider-driven model: The healthcare provider is the microinsurance
scheme, and similar to the full-service model, is responsible for all
operations, delivery, design, and service. There is an advantage once more in
the amount of control retained, yet disadvantage in the limitations on
products and services.
 Community-based/mutual model: The policyholders or clients are in
charge, managing and owning the operations, and working with external
healthcare providers to offer services. This model is advantageous for its
ability to design and market products more easily and effectively, yet is
disadvantaged by its small size and scope of operations.

Microinsurance scheme
A microinsurance scheme is a scheme that uses, among others, an insurance
mechanism whose beneficiaries are (at least in part) people excluded from
formal social protection schemes, particularly, informal economy workers and
their families. The scheme differs from others created to provide legal social
protection to formal economy workers. Membership is not compulsory (but can
be automatic), and members pay, at least in part, the necessary contributions in
order to cover benefits.
The expression "microinsurance scheme" designates either the institution that
provides insurance (e.g., a health mutual benefit association) or the set of
institutions (in the case of linkages) that provide insurance or the insurance
service itself provided by an institution that also handles other activities (e.g., a
micro-finance institution).
The use of the mechanism of insurance implies:

 Prepayment and resource-pooling: the regular prepayment of contributions

(before the insured risks occur) that are pooled together.
 Risk-sharing: the pooled contributions are used to pay a financial
compensation to those who are affected by predetermined risks, and those
who are not exposed to these risks do not get their contributions back.
 Guarantee of coverage: a financial compensation for a number of risks, in
line with a pre-defined benefits package.
 Microinsurance schemes may cover various risks (health, life, etc.); the most
frequent microinsurance products are:

 Life microinsurance (and retirement savings plans)

 Health microinsurance (hospitalisation, primary health care, maternity, etc.)
 Disability microinsurance
 Property microinsurance – assets, livestock, housing
 Crop microinsurance

Types of Micro insurance Plans:

Micro insurance plans can be divided into the following two broad categories.
1) General Microinsurance
A General or regular Microinsurance product covers health insurance, personal
accidents, and assets such as livestock, hut, etc. This product can be availed at
an individual or a group basis. 
2) Life Microinsurance

A Life Microinsurance Plan can be Term or an Endowment Plan. It can be

purchased at an individual or a group level and with or without an accident
benefit. Such plans can also be related to health insurance.

How Does a Microinsurance Policy Work?

Here are some points highlighting the working of a Microinsurance Policy in
India.
 Microinsurance policies are distributed via Non-governmental Organizations
(NGOs), Self-help Groups, and Micro-finance Institutions.
 The premium for such plans is nominal to widen the reach and ensure
engagement at a large scale.
 Insurers have the freedom to offer composite covers or a packaged product
belonging to either the General Insurance or the Life Insurance category.
 Insurers also offer some Microinsurance Policies in case the sum assured of a
policy is within the range specified by the authorities.

Advantages of Choosing Microinsurance Policies:

The biggest advantage concerning Microinsurance is that it offers the
opportunity for the economically vulnerable section of the population to buy
insurance at a low cost. Because of buying Microinsurance Policies, they can
 receive financial assistance during challenging times. This will result in the
safeguarding of their savings, which are usually on the lower side. Here are
some top advantages of specific Microinsurance Covers.
1) Endowment/Pension Microinsurance

It offers survival as well as death benefits as per the terms and conditions
Pension allowance can also be built-in
2) Term Microinsurance

Covers life risk with accidental benefits

Some insurers offer permanent disability benefits
3) Health Microinsurance

It covers pre-and post-hospitalisation expenses

Covers medical bills for diagnosis, medical bills, etc.
4) Property Microinsurance

It offers coverage due to damage/losses of properties due to natural calamities.

This policy offers compensation due to the theft of assets.

Importance of Microinsurance Policies:

Here’s why such policies are important.
 They are an accessible risk-management tool to reduce financial vulnerability in
times of adversity.
 The affordable premium of such plans is an incentive for better reach in an
organized manner.
 Microinsurance covers the policyholder’s financial liability as per the chosen
plan.
 Microinsurance helps the poor to save money.
 Can bring about a positive change in poor people’s perception of insurance.
Agriculture Insurance

Agriculture Insurance covers risks of anticipated loss in yield of various crops.

Almost the entire of Crop Insurance business comes from ‘Schemes’ or
‘Programme’. These Schemes operate on principles of ‘Area Approach’.
Coverage is compulsory for farmers taking crop loans from rural financial
institutions (RFIs) for cultivation of crops, i.e., loanee farmers. Non-loanee
farmers can also insure their crops under the same schemes. The main Schemes
available to farmers in respect of crop insurance are as under: a) National
Agricultural Insurance Scheme (NAIS) of Government of India b) National
Crop Insurance Programme (NCIP) of Government of India i. Modified
National Agricultural Insurance Scheme (MNAIS), ii. Weather Based Crop
Insurance Scheme (WBCIS) and iii. Coconut Palm Insurance Scheme (CPIS)

a) National Agricultural Insurance Scheme (NAIS)

Crop or Agriculture Insurance covers risks of anticipated loss in yield of various

crops. Almost the entire of Crop Insurance business comes from ‘Schemes’ or
‘Programme’. These Schemes operate on principles of ‘Area Approach’.
Coverage is compulsory for farmers taking crop loans from rural financial
institutions (RFIs) for cultivation of crops, i.e., loan farmers. Non-loan farmers
can also insure their crops under the same schemes.

The main Schemes available to farmers in respect of crop insurance are as

under:

a) National Agricultural Insurance Scheme (NAIS) of Government of India

b) National Crop Insurance Programme (NCIP) of Government of India

i. Modified National Agricultural Insurance Scheme (MNAIS),

ii. Weather Based Crop Insurance Scheme (WBCIS) and

iii. Coconut Palm Insurance Scheme (CPIS) NAIS was introduced in the year
1999 and is presently in operation in a few states. The Scheme 3 is practically
an all-risk insurance cover based on ‘Area Yield Index’.

The Scheme covers all food, oilseeds and annual commercial / horticultural
crops for which historical yield data is available and crop cutting experiments
are planned for the current year. State governments issue notifications
containing names of crops, areas eligible for insurance, rates of premium etc. at
the beginning of each cropping season.

The Scheme is available to all Farmers - compulsory for borrowing farmers and
optional for non-borrowing farmers. Farmers have to fill-up a simple Proposal
Form and submit the same with premium amount at the nearest branch of bank
or Primary Agricultural Credit Society.

Sum Insured is at least equal to loan amount which can be increased to 150% of
the value of average yield at the option of the farmer. There are limits for no
loan farmers which are published in state government’s notification. Premium
rates for Food crops and Oilseeds ranges from 1.5% to 3.5% and actuarial rates
are charged for Annual

Commercial / Horticultural Crops. Subsidy in premium is available to small and

marginal farmers Which are the crops covered: Who can insure: What is Sum
Insured and Premium: 4 at 10% of premium. Some State governments offer
higher subsidy. Network of financial institutions viz. commercial banks,
regional rural banks and cooperative banks, spread across length and breadth of
country, play the role of intermediaries. The scheme operates broadly on
bancassurance model.

Levels of indemnity are 60%, 80% and 90% which means farmers are
themselves to bear the loss of first 40%, 20% or 10% respectively. This
condition is also broadly called ‘deductible’.

The Scheme operates on principles of Area-Yield Index or Guarantee. There is

a guaranteed yield termed as Threshold Yield for every crop in every
Homogenous Area e.g. taluka, block or gram panchayat etc. Threshold Yield is
moving average of past five years actual yield (three years in case of Paddy and
Wheat) multiplied by applicable level of indemnity. If current season’s actual
yield recorded is lower than the Threshold yield, then claims become payable.
Yield data used for claims is generated under General Crop Estimation Surveys
(GCES) by way of crop cutting experiments. Procedure of assessment and

Where to pay premium (Intermediary):

Levels of Indemnity:

What is the procedure for claims:

settlement of claims are automated processes and

the claim amount is credited to insured farmers’

bank account. No paper work is required to be

done by insured farmers or intermediaries.

NCIP has three components- viz. MNAIS,

WBCIS and CPIS. There are some common

features for MNAIS andWBCIS components i.e.

1. Private sector insurance companies are allowed as ‘implementing agencies’.

2. Rates of premium are charged on actuarial basis. Actuarial rates of premium

help insurance companies to transfer the risk in global reinsurance market and
the governments to budget their liabilities.

3. Premium payable by farmers is subsidized substantially to make it affordable.

4. Sum insured is broadly equal to cost of cultivation.

5. All claims will be paid by insurance company as there will be no sharing of

claims by state and central governments.

MNAIS is an improved version of NAIS.

The Scheme covers all food, oilseeds and annual commercial /

b) National Crop Insurance Programme (NCIP) Component – I: Modified

National Agricultural Insurance Scheme (MNAIS)

Which are the crops covered: horticultural crops for which historical yield data

is available and crop cutting experiments are planned for current year. State
governments issue notifications containing names of crops and areas eligible for
insurance, rates of premium etc. at the beginning of each cropping season.

Available to all Farmers - compulsory for borrowing and optional for no

borrowing farmers- who have to fill-up a simple Proposal Form and submit the
same with premium amount in a nearest branch of bank or

Primary Agricultural Credit Society.

Sum Insured is based on cost of cultivation and at least equal to loans disbursed.
Often the State government decides the sum insured for various crops for a
district within the State. Sum insured can extend up to value of Threshold Yield.
Premium rates vary from crop to crop and area to area based on risk profile
reflected in historical yield data, past insurance and claims experience. Network
of financial institutions viz., commercial banks, regional rural banks and
cooperative banks, spread across length and breadth of country plays the role of
intermediaries. Additionally, insurance intermediaries licensed by IRDAI are
also allowed to insure non-loanee farmers.

Who can insure:

What is Sum Insured and Premium:

Where to pay premium (Intermediary):

Levels of Indemnity:

What is the procedure for claims:

New provisions on claims:

Component – II: Weather Based Crop Insurance Scheme (WBCIS):

Which are the crops covered:

Who can insure:

Levels of indemnity are 80% and 90% which means farmers have to bear first

20% or 10% of losses respectively. Operates on principles of Area-Yield Index

or Guarantee. The guaranteed yield termed as Threshold Yield for every crop in
every Homogenous Area e.g. taluka, block or gram panchayat, is based on past
seven years’ moving average yield with a provision for excluding yields of
maximum two calamity years.

The other process is same as the NAIS. MNAIS provides for additional features
in terms of coverage of ‘Prevented sowing’, post harvest losses, individual farm
level assessment in case of localized calamities, and On-Account settlement of
claims in case of serious crop losses/major disasters.

The Scheme covers all food, oilseeds and annual commercial / horticultural
crops. All crops for which historical yield data is not available can also be
covered.

Available to all Farmers - compulsory for borrowing farmers and optional for
non-borrowing farmers -who have to fill-up a simple Proposal Form and submit
the same with premium amount in a nearest branch of bank or Primary
Agricultural Credit Society.
Major perils covered are deficit, excess and deviation of rainfall, relative
humidity, temperature (high and low), wind speed and combination of above.
Risks of hail-storm and cloud burst can also be covered as add-on covers.

Sum Insured is pre-defined and is based on cost of cultivation, and is decided by

the state for each crop and district. Premium rates can be a maximum of 10%
for Kharif and 8% for Rabi season with 12% for commercial / horticultural
crops. The premium subsidy available ranges from 25% to 50%.

Network of financial institutions viz., commercial banks, regional rural banks

and cooperative banks, spread across length and breadth of country plays the
role of intermediaries. Insurance intermediaries licensed by IRDAI are also
allowed to insure non-loan farmers.

If observed weather index value falls below or above (as the case may be) the
notified trigger value, then claims Risks covered:

What is Sum Insured and Premium:

Where to pay premium (Intermediary):

What is the procedure for claims: shall be calculated per unit area. Claims are

assessed and settled solely based on weather data of automated stations installed
in Reference Unit

Area for the purpose. Calculation is done based on term sheets published in
notifications.Procedure of assessment and settlement of claims are automated
processes. No paper work is required to be done by insured farmers or
intermediaries.

Losses for Add-on covers are assessed on individual basis for which farmers
have to intimate the insurance company within 48 hours of the occurrence of the
insured peril.

This scheme operates largely like a non-life insurance policy. It is an annual

contract, administered only by Agriculture Insurance Company of India.

Any palm grower having at least five healthy nut bearing palms in a contiguous
area is eligible to insure. Palms are insured in two categories viz., palms in age
group of 4 to 60 years in case of dwarf and hybrid palms and 7 to 60 years in
case of tall variety. Storm, Hailstorm, cyclone, typhoon, tornado, heavy rains,
flood, inundation, pests, diseases, accidental fire, forest fire, bush fire,

Component - III: Coconut Palm Insurance

Scheme (CPIS)

Who can insure:

What is covered: lightening, tsunami, severe drought and consequential total

loss causing death of palm or making it totally un-productive.

Loss due to theft, war, nuclear risks, rebellion, revolution, insurrection, mutiny,
natural mortality, uprooting etc.

Sum Insured for palms within the age group of 4th to 15th year is Rs. 900/- and
premium is Rs. 9.00 per tree while for palms within the age group of 16th to
60th year is Rs. 1750/- and premium is Rs. 14.00 per tree.

Subsidy of 75% is available. Farmer pays only 25% of premium amount.

Claims have to intimated to the insurance company within 15 days from

occurrence of peril. Claims will be assessed on individual basis and claims
amount will be released to insured farmer.

What is not covered:

Sum Insured and premium:

Assessment of claims:

The objectives are:-

• To provide financial support to the farmers in the event of failure of any of the
notified crop as a result of natural calamities, pests and diseases.

• To restore the credit worthiness of farmers arising out of crop losses leading to
no repayment of crop loans.

• To encourage the farmers to adopt progressive farming practices, high value

in-puts and higher technology in Agriculture.

• To help stabilize farm incomes, particularly in disaster years

Crop insurance is an arrangement aimed at mitigating the financial losses
suffered by the farmers due to damage and destruction of their crops resulting
from various production risks.

The objectives are:-

• To provide financial support to the farmers in the event of failure of any of the
notified crop as a result of natural calamities, pests and diseases.

• To restore the credit worthiness of farmers arising out of crop losses leading to
no repayment of crop loans.

• To encourage the farmers to adopt progressive farming practices, high value

in-puts and higher technology in Agriculture.

• To help stabilize farm incomes, particularly in disaster years.

The Scheme provides comprehensive risk insurance for yield losses due to: (i)
Natural Fire and Lightening, Storm, Hailstorm, Cyclone, Typhoon, Tempest,
Hurricane, Tornado, Flood, Inundation and Landslide (ii) Drought, Dry spells
(iii) Pests / Diseases etc. in Area-Yield Index insurance Schemes and Weather
indices under WBCIS or Weather Index based crop insurance Scheme.

S.No Name of the Company

Ans: Selecting of Insurance Company to do crop insurance in the State is

decided by the concerned State Government only and it may vary from season
to season.The following general insurance companies are empanelled by Govt
of India to transact Crop Insurance:

1. Agriculture Insurance Company of India

Limited,

2. ICICI Lombard General Insurance Co. Ltd.

3. IFFCO TOKIO General Insurance Co. Ltd.

4. HDFC ERGO General Insurance Co. Ltd.

5. Cholamandalam MS General Insurance Co. Ltd.

6. Tata-AIG General Insurance Co. Ltd.

7. Future Generali India Insurance Company Ltd.

8. Reliance General Insurance Company Ltd.

9. Bajaj Allianz General Insurance Co. Ltd.

10. Universal Sompo General Insurance Co. Ltd.

11. SBI General Insurance Co. Ltd.

This list is indicative only and subject to change by Govt of India from time to
time.

Bancassurance

Bancassurance refers to selling of insurance policies through banks. Banks earn

revenue through this sale of insurance policies. The concept of bancassurance
originated in France. In India, this process began in the year 2000. Traditionally,
insurance products were sold only through individual agents and they solely
accounted for a major chunk of business in retail segment.

The Insurance Regulatory and Development Authority (IRDA) came up with

regulation on registration of Indian insurance companies. Government of
India issued a notification specifying ‘Insurance’ as a permissible form of
business which could be undertaken by banks under the Section 6(1)(o) of the
Banking Regulation Act, 1949. However, it was also clarified that any bank
intending to take up the business would have to seek specific approval from the
RBI. All scheduled commercial banks have been permitted to undertake the
insurance business as the agent of insurance companies on fee-basis, without
any risk participation. Also, specific rules were framed for set up of joint
venture companies for undertaking the insurance business with risk
participation.

Since then, there has been no looking back ever since. With the opening up of
this sector to private players, competition in this sector has become more
intense. Insurance industry in India has been progressing at a rapid pace since
the opening up of the sector to the private companies in 2000.

Bancassurance in India

In India the banking and the insurance sectors are regulated by two different
entities. While the banking sector is governed by Reserve Bank of India, the
insurance sector is regulated by the Insurance Regulatory and Development
Authority (IRDA). Since Bancassurance, is the combination of these two
sectors, it comes under the purview of both the RBI and IRDA regulations.

Corporate Agency Regulations:

Banks can act as corporate agents for only one life insurance company and one
non life insurance company in lieu of  a commission, according to current
regulatory framework set up by the IRDA. Under this, the banks are not eligible
for any payout other than the said commission. It is also mandatory for banks to
observe code of conduct prescribed towards both customer and the principal
who is the insurer.

Broker Route: Banks cannot become brokers, since the IRDA regulations

require brokers to be exclusively engaged in insurance broking business. Also,
RBI does not allow banks to promote separate insurance brokerage outfits.

Advantages of Bancassurance to Banks and Insurance Companies

1. The insurance company will attract further business, both from existing
and the new policyholders, because it can offer a wider range of services
than what they could before.
2. It gives the customers access to banking as well as insurance services. It
also encourages customers of banks to purchase insurance policies and
further promotes a better relationship with the bank.
3. The economics of the Bancassurance operation allows the insurer to offer
products which were not feasible through the insurer’s existing channels
previously. For example, if the sales cost incurred under the existing
channels force premium rates for a said product to render it
uncompetitive, the product will not be sold. On contrary, the costs via the
 Bancassurance channel may be low enough to make such products
feasible.
4. The insurance company may offer to carry out the administrative
activities of the bancassurer’s business, if for instance, the bancassurer is
a separate company. Upon, combining the bancassurer’s business with
that of the  insurer, they can produce economies of scale in the
administration costs including the capital expenditure.
5. Combining of the business administration allows the insurer to
improve profitability and also enables them to price their future products
with narrower margins. It helps to make the insurer’s products more
competitive in the market.
6. Both for the bank and the insurer there lies a great opportunity to learn
and to make improvements in their own operations. Since, each one gets
exposure to the other’s distinctive management styles, objectives,
measures and the pressures. The benefit comes to either company which
can implement the innovations as a result of the learning process.

Benefits of Bancassurance to Customers

1. Bancassurance encourages customers of banks to purchase the insurance

policies associated and further helps in building a better relationship with
the bank.
2. The people/customers who are unaware of or are not in the reach of
insurance policies would benefit through the widely distributed banking
networks and better marketing channels available to the banks.
3. An increase in number of insurance providers means an increase in the
competition and hence, people can expect better premium rates and also
better services from bancassurance when compared to the
traditional insurance companies.

Demerits/ Disadvantages of Bancassurance

 The data management of an individual customer’s identity and the contact

details might result in the insurance company utilizing the details to
market their products, but this may compromise on data security.
 In case of conflict of interest between the other products of bank and the
insurance policies (such as money back policies), the customers may get
confused regarding where to invest.
 It should be noted that, better approach and services will be provided by
the banks to customer, is a hope rather than a fact. This is unlikely
because many banks in India give bad customer service and this will turn
worse when they are also responsible to sell insurance products.

Important bancassurance tie-ups in India

 LIC: The insurance company LIC of India have tie up with the following
bank for Bancassurance. They are:
o Corporation Bank
o Indian Overseas Bank
o Centurion Bank
o Sahara District Central Co-operative bank
o Janta Urban Co-operative bank
o Yeotmal Mahila Sahakari Bank
o Vijaya Bank
o Oriental Bank of Commerce
 SBI Life Insurance Co: The SBI life Insurance Co Ltd is running its
Insurance business with the help of S.B.I.
 Bajaj Allianz General Insurance Co. Ltd: It has tie-up with
Karur Vysya Bank & Lord Krishna Bank.
 Birla Sun life Insurance Co. Ltd: The Birla Sun life Insurance
Company has a tie-up for bancassurance  with the
following banks: (a) Bank of Rajasthan (b) Andhra Bank (c) Bank of
Muscat (d) Development Credit Bank (e) Dutch Bank & (f) Catholic
Syrian Bank.

“ Bancassurance is a French term. ▪ Bancassurance is a relationship

between a bank and an insurance company that is aimed at offering
insurance products or insurance benefits to the bank's customers. ▪
According to IRDA, ‘bancassurance’ refers to banks acting as corporate
agents for insurers to distribute insurance products. ▪ It is an arrangement
between a bank and an insurance company allowing the insurance
company to sell its products to the bank's client base and by doing this
both companies earn a profit.

BANCASSURANCE FEATURES

1. Bank cannot pay a premium on behalf of the customer.

2. It can use only two insurance companies in one bank.

3. All commissions are disclosed in the annual accounts report.

4. A bank always focuses on its banking business.

5. For an insurance company, the network of a bank is useful for the sale.
6. It improves profitability.

7. It increases customer lifetime value.

8. It can offer all the financial facilities under one roof.

TYPES OF BANCASSURANCE

Life Insurance Products ▪ Term insurance plans ▪ Endowment plans ▪

Unit linked insurance plans Non-Life Insurance Products ▪ Health
insurance ▪ Marine insurance ▪ Property insurance ▪ Key men insurance

Full Integration Model: This model entails a full integration of banking

and insurance services. The bank sells the insurance products under its
brand acting as a provider of financial solutions matching customer
needs. Bank controls sales and insurer service levels including approach
to claims. Under such an arrangement the Bank has an additional core
activity almost similar to that of an insurance company. Joint Venture
Model: In this model, the bank participates in product and distribution
design. There are joint decisionmaking and high system integration for
infrastructure utilization. Strategic Alliance Model: Under this Model,
there is a tie-up between a bank and an insurance company. The bank
only markets the products of the insurance company. Except for
marketing the products, no other insurance functions are carried out by
the bank. Financial Service Group: In this, all the facilities of financial
activities are under one roof.

• Strategic Alliance

a) Insurer able to leverage the bank’s infrastructure; source of fee income

for banks. b) Integration in product development and channel
management. c) Sharing of customer database. d) Reluctance of bank
staff to sell insurance; insurer has little control over distribution.

• Joint Venture

a) Joint decision making; bank participation in product and distribution

design. b) High system integration, infrastructure utilization; low-cost
model. c) Insurer loses control on distribution. d) Bank may be able to
realize higher profitability as an insurance distributor rather than a
producer.

• Financial Services Group

a) Full integration of system; lowcost model. b) Potential for fully

integrated products and developing a onestop shop for financial services.
c) Insurer is ill-equipped to exercise control over distribution. d) Bank
 may be able to realize higher profitability as an insurance distributor
rather than a producer.

A D VA N TA G E S T O C U S T O M E R S

1. ONE-STOP-SHOP FOR ALL FINANCIAL NEEDS

The advantage of bancassurance is just that:

a) Right Product: It provides the end users a customized insurance solution.

b) Right Time: At a location, they already are for their financial needs – their
banks. This improves the overall experience of the customers. They are more
likely to opt for a complete financial solution from their banks, thus making
bancassurance a success.

2. IMPROVED APPLICATION AND POLICY PROCESSING TIME

Bank already has the data and documentation of customers. This realtime
information accessibility makes sure that the turnaround time is reduced – in
application processing and claims management.

3. EASE OF RENEWALS

Bank being the front dealing with customers, handle renewals as well, making
the transaction even more hassle-free.
In the EY survey, 52% of insurance customers from banks stated their
willingness to renew their policies. This was against a dismal 19% of insurance
customers from non-bank channels, willing to renew. Also with new tech and
data access for the bancassurance channel, tracking the renewals is very easy.

4. TRUST

Customers trust their banks to sell them the right product. The trust they would

place on insurance carriers and independent agents is comparatively lesser.

Therefore, the propensity to buy insurance products from their banks is higher.

5. EXPERT ADVISE

Banks sit on mounds of customer data. This, along with insurance carriers’
expertise in packaging insurance products helps the alliance suggest the right
products. Customers also recognize this expertise, majorly because of their trust
in their banks.

A D VA N TA G E S T O B A N KS

1. DIVERSIFICATION OF CUSTOMER PORTFOLIO Banks already have a

relationship with their customers selling them an amalgamation of financial
products. With Bancassurance, insurance is added to the banks’ product mix,
diversifying their customer portfolio and increasing their penetration in the
market.

2. IMPROVED PROFITABILITY & NONINTEREST FEE INCOME

In Bancassurance models, banks can easily generate risk-free income in the

form of the commissions from insurance carriers. Multiple studies have been
done in Indian bancassurance context to prove its positive impact on the bank’s
profitability. SBI, after entering Bancassurance, improved almost all
components of CAMEL model (except four indicators).

3. CUSTOMER LOYALTY AND RETENTION

Banks enjoy the benefit of being able to provide yet another product to

their customers. Providing integrated financial services strengthens customer

relationships and builds better customer loyalty and retention levels.

4. COST-EFFECTIVE USE OF EXISTING RESOURCES

Banks use their existing premises and employees (tellers and branch staff) for
the sale of the new insurance products. This means that there’s no additional
cost of operation in selling insurance. They also utilize the insurance company’s
expertise in training bank employees and packaging insurance products. This
reduces the cost of distribution for both insurers and the banks, increasing the
channel’s profitability.

5. INCREASED CUSTOMER LIFETIME VALUE

With increased loyalty and stickiness, comes higher CLV per customer which is
a very important metric for banks.

DISADVANTAGES OF BANCASSURANCE

▪ Data management of an individual customer’s identity and contact details may

result in the insurance company utilizing the details to market their products,
thus compromising on data security.

▪ There is a possibility of the conflict of interest between the other products of

bank and insurance policies (like money back policy). This could confuse the
customer regarding where he has to invest.

▪ Better approach and services provided by banks to the customer is a hope

rather than a fact. This is because many banks in India are known for their bad
customer service and this fact turns worse when they are responsible to sell
insurance products. Work nature to market insurance products requires
submissive attitude, which is a point that has to be worked on by many banks in
India.

BANCASSURANCE IN INDIA

• In India, the process of Bancassurance began in 2000. IRDA came up with

regulation on registration of Indian companies. Government of India also issued
a Notification specifying ‘Insurance’ as a permissible form of business that
could be undertaken by banks under Section 6(1)(o) of the Banking Regulation
Act, 1949. However it was clarified that any bank intending to take up the
business would have to take specific approval from RBI.

• The need and subsequent development of bancassurance in India began for the
following reasons:
➢ To improve the channels through which insurance policies are sold/marketed
so as to make them reach the hands of common man

➢ To widen the area of working of banking sector having a network that is

spread widely in every part of the nation

➢ To improve the services of insurance by creating a competitive atmosphere

among private insurance companies in the market

Bancassurance companies in India

1. SBI life insurance Company

2. LIC is tied up with Vijaya bank, Oriental bank of commerce,

Corporation bank

3. ICICI Lombard

4. Barclays – MetLife India

5. Axis bank – MetLife India

6. Aviva Life

7. Kotak Mahindra

8. ICICI Pru - ICICI Pru Life Insurance has tied up with 18 banks

9. HDFC Standard Life - HDFC Bank, Indian Bank and Bank of Baroda and

many co-operative banks

10. Birla Sun Life - The first bancassurance policy in India was sold by

Birla Sun.

Mutual Fund

What is a Mutual Fund?

Mutual fund is a financial instrument that pools money from different investors.

The pooled money is then invested in securities like stocks of listed companies,
government bonds, corporate bonds, and money market instruments.
As an investor, you don’t directly own the company’s stocks that mutual funds
purchases. However, you share the profit or loss equally with the other investors
of the pool. This is how the word “mutual” is associated with a mutual fund.
You get the advantage of the expertise of the fund manager and regulatory
safety of the Securities Exchange and Board of India (SEBI). The professional
fund manager ensures a maximum return to investors.
A mutual fund is a company that pools money from many investors and
invests the money in securities such as stocks, bonds, and short-term debt.
The combined holdings of the mutual fund are known as its portfolio.
Investors buy shares in mutual funds. Each share represents an investor’s
part ownership in the fund and the income it generates.

How Do Mutual Funds Work?

Mutual fund investment is simple. You invest in a fund consisting of several

assets. Thus, you need not risk putting all eggs in one basket.
Additionally, the headache of tracking market movements is not there. The
mutual fund house takes care of the research, fund management, and market
tracking. This makes the mutual fund a highly popular investment option for all
types of investors.
A mutual fund is managed by the Asset Management Company (AMC). Mutual
fund investment starts with the pooling of money from several investors.
The pooled money is invested in a meticulously built portfolio of different asset
classes like equity, debt, money market instruments, and other funds. Hence,
you have the advantage of diversification, the time tested market mantra.
Additionally, your money is invested in instruments like Government bonds,
that you wouldn’t be able to afford individually.
The best part about mutual funds is that a team of experts along with the fund
manager picks all the investments to build a portfolio. The investments are
made according to the defined objective of the mutual fund.
Expert and professional fund management help you outperform the returns of
traditional investment vehicles like a bank savings account and fixed deposits.
As an investor, you are allotted units for your contribution to the pooled fund.
The portfolio value depends on the price movements of the underlying assets.
The portfolio value is net assets divided by the number of outstanding units
which is called the Net Asset Value (NAV)
The gains are reflected in higher NAV and lower NAV indicates a loss
in portfolio value.

Types of Mutual Funds Based on Asset Class

 Investors should pick mutual funds based on their financial objectives and risk
appetite. Proper mutual fund selection helps you meet your life goals in the
defined time period.
Mutual fund type depends on the defined objective and the underlying asset.
The are categories of mutual funds are:
1. Equity Mutual Funds
Equity mutual funds invest the pooled money majorly in stocks of different
companies. Hence, equity mutual funds have an inherent higher market risk.
Factors like earnings, revenue forecasts, management changes, and company &
economic policy impact price movements and the returns. Returns
from equity funds have high fluctuations. Hence, you should invest, if you have
a fair understanding of the asset class risks associated with equity.
Types of Equity Funds
Equity fund can be further categorised depending on market capitalisation and
sectors.

 Based on Market Capitalisation

 Large-cap Equity Funds – Invest in shares of large-cap companies that are well-

established with a track record of performing consistently over a longer time
period. These companies have sound fundamentals and are least affected by
business cycles.
 Mid-cap Equity funds – Invest in shares of mid-cap companies. Mid-sized
companies have relatively lower stability in terms of performance. But have the
potential to grow more than the large-cap companies.
 Small-cap Funds – Invest in shares of small-cap companies. Small-
cap companies have the highest potential to grow or fail. Thus, small-cap funds
have a high-risk exposure but also offer an opportunity to generate the highest
returns.
 Multi-cap funds – Invest in a defined proportion across all market caps. Based
on cues and trend analysis, the fund manager allocates aggressively to capitalize
on the volatility.
 Sector Based Equity Funds: Sector-based equity funds invest in stocks of a
specific sector. For example, sectors like FMCG, technology, and pharma.
Sector funds are prone to business cycle risk and sector getting out of focus.

2. Debt Mutual Funds

A debt mutual fund invests a major portion of the pooled corpus in
debt instruments like government securities, corporate bonds, debentures, and
money-market instruments. The bond issuers “borrow” from investors by giving
an assurance of steady and regular interest income. Thus, debt funds are less
risky compared to equity funds. The debt fund manager ensures that the fund is
 invested in the highest-rated securities. The best credit rating signifies the
creditworthiness of the issuer in terms of regular interest payments and principal
repayment.
Who Should Invest in Debt Funds?
Debt funds have less volatility and range bound returns as compared to equity
funds. Thus, debt funds are safer for conservative investors who are looking to
grow wealth with minimal risk.
In fact, the interest income and maturity amount are known beforehand. Thus,
debt funds are best for short-term (3 to 12 months) and medium-term (3 to 5
years) investment horizon.
Type of Debt Funds
Following are the debt funds available in India:

 Dynamic Bond Funds: Dynamic bond fund investment basket comprises of both
shorter and longer maturities. The debt fund manager aggressively tweaks
the portfolio composition based on changing interest rate regime. This
aggressiveness makes the debt fund dynamic, hence the name.
 Liquid Funds: The short maturity of the underlying securities (not more than 91
days) makes the liquid funds almost risk-free. It is better than parking funds in
saving bank accounts as it gives better returns with much-needed liquidity. You
can redeem liquid funds almost instantly. If you are short-term investors then
debt funds like liquid funds could be better as you get returns in the range of 6.5
to 8%. Liquid funds are an effective tool to meet emergency fund needs.
 Income Funds: Fund managers invest majorly in securities with longer
maturities to have more stability and regular interest income flow. Most of the
income funds have an average maturity of 5 to 6 years.
 Short-Term and Ultra Short-Term Debt Funds : There is another category in the
maturity range of 1 to 3 years. The fund manager takes a call on interest rate
regime and invests in securities with maturity of the said range. This is suitable
for those investors who are risk-averse and looking for interest rate movement
safety.
 Gilt Funds: Gilt funds invest only in high-rated government securities. Since the
government rarely defaults, it has zero risks. You can park your money in this
instrument to have assured returns in longer maturity range.
 Credit Opportunities Funds: Credit Opportunities Funds are a relatively riskier
instrument that focuses more on higher returns by holding low-rated bonds or
taking a call on credit risks. The fund manager of credit opportunity funds relies
more on interest rate volatility to earn higher returns.
 Fixed Maturity Plans: These closed-ended debt funds invest in fixed income
securities like government bonds and corporate bonds. You invest only during
the initial offer period and your money remains locked-in for a fixed tenure,
which could be months or years.
Types of Mutual Funds based on Investment Objectives

Since mutual funds are all about the mutuality of common goals, mutual fund
schemes are also categorized based on the objectives of investors.
Here are some popular types of mutual funds based on investor objectives:
1. Growth Oriented Scheme
As the name suggests the primary goal of this type of mutual fund is to ensure
wealth creation in the medium and long-term.
Aligned with the objective, the fund manager allocates the corpus
predominantly (over 65%) in equities. With a focus on higher returns, the
manager aggressively shuffles the portfolio to reap the benefits of market
movements.
2. Income Oriented Scheme
The objective of the regular income could be achieved only when the
underlying assets assure a steady return.
To meet the objective, fund manager of income funds allocate a major portion
of the corpus in fixed income securities such as government securities, bonds,
corporate debentures, and money market instruments.
Lesser risks and assured return makes it safe for regular income as dividends.
However, these products have very limited potential for wealth creation in the
defined period.
3. Balanced Fund
The name comes from the asset allocation as the fund is allocated in both
equities and debt instruments in defined proportions. The objective of the
balanced fund is to have reasonable growth and regular income with the lowest
possible risk.
Fund managers of these funds normally allocated approx 60% in equities and
rest on debt instruments. NAV of balanced funds is less volatile as compared to
equity funds.
The balanced objective is suitable for those who want to have advantages of
market movements and the safety of the debt market.
4. Liquid Fund
The objective of these schemes is to ensure liquidity, capital protection, and
reasonable income in the short-term.
Most of the pooled fund is invested in short-term safe instruments like
government securities, treasury bills, certificates of deposit, commercial paper,
and inter-bank call money.
Since there isn’t much volatility, these funds are suitable for investors who want
to park money for short-term and earn better returns compared to savings bank
accounts.

Advantages of Investing in Mutual Funds

There are over 8000 mutual funds in different categories to meet the objectives
of all types of investors. The right mix of growth, income, and safety makes
mutual funds suitable for everyone.
Below are the advantages of investing in mutual funds:
1. Expert Money Management
Your pooled money is managed by a team of experts. So, you have the
advantage of expert guidance in creating wealth. The fund manager does
meticulous research in deciding equities, sectors, allocation, and of course the
buy and sell.
2. Low Cost
If you calculate the benefits of expertise, diversity, and other options of return,
then mutual funds are definitely a very cost-effective instrument of investment.
There is a regulatory cap of 2.5% on the expense ratio.
3. SIP Option
Systematic Investment Plan gives you the flexibility to invest at an agreed
interval which could be weekly, monthly, quarterly. You can start investing in
mutual funds with an amount as low as Rs. 500.
4. Switch Funds
If you are not happy with the performance of a particular mutual fund scheme,
then some mutual funds do offer you an option to switch funds. However, you
need to be very cautious while opting to switch.
5. Diversification
Mutual funds offer you the benefit of diversification in such asset class which
otherwise isn’t possible for an individual investor. You reap the dividend of
maximum exposure with minimum risk.
6. Ease of Investing and Redemption
Now, it is pretty easy to buy, sell, and redeem fund units at NAV. Just place the
redemption request and you will get your money in the desired bank account
within a few days.
7. Tax Benefit
Under the ELSS, tax-saving mutual fund you have the double benefit of tax
saving and wealth creation. Under Section 80C of the Income Tax Act, you can
have a deduction of a maximum of Rs. 1,50,000 a year.
8. Lock-in Period
Close-ended mutual funds have a lock-in period, meaning as an investor you are
not allowed to redeem the fund before a certain period.
You get benefits in terms of long-term capital gain tax.

Ways to Invest in Mutual Funds

Thanks to the fast adoption of internet technology, now your MF units are just a
few clicks away. Depending on your resources, you have several options to start
investing in mutual funds.
1. Direct Investment
You can visit the branch of the concerned mutual fund company and deposit the
duly filled form. Alternately, you can download the form and fill it carefully.
You should read the document carefully before handing over the cheque.
2. Online Mutual Fund Investment Platform
For investing online, all you need is your mobile phone and internet connection.
There are several platforms that help you in choosing the right mutual fund
based on defined objectives, risk appetite, and other factors.
Scripbox is an online investment platform that helps you save your time and
energy. The step-by-step process from selection to payment and redemption
makes it simple for even a beginner to start investing without any assistance.
All you need is your PAN Card details, Identity details, and an active bank
account to link with the mutual fund house.
3. Using a Demat Account
Your existing Demat account and bank account can be used for investing and
transacting in the mutual fund. Your stockbroker needs to be a registered mutual
fund distributor providing the facility.
For investing, you need to log-in to your Demat account and look for the option
to invest in the mutual fund.
In the next step, you need to choose the fund in which you want to invest. Then
you need to complete the investment by transferring the amount online.
4. Through Karvy and CAMS
You can invest online and offline in funds through registrars like Karvy
and CAMS.
In Online Method – You need to visit the website of CAMS or Karvy, create
an account, provide folio number, select the scheme and make payment.
In Offline Method – You can invest by visiting the local office and complete
the application form, hand over the cancelled cheque and the copy of KYC
documents.
5. Mutual Fund Agents
Investing through agents is a time consuming and costly method that should be
avoided. You can call an agent to help you choose and fill the requisite form.
Nowadays, agents come with digital devices to help you fill form digitally and
activate your account instantly.
However, you should make sure that the agent is genuine. Some agents may
charge a commission for services.

How to Invest in Mutual Funds Through Scripbox

Mutual fund investment through Scripbox is a quick, paperless and hassle-free
experience. Following are the steps to invest;
Step 1 – Visit Scripbox and Get Started
Click the box “Let’s Get Started” on the Scripbox home page. The page will
scroll down to show you different objectives.
Mutual fund schemes fulfill most of the financial objectives. You can pick the
objective that aligns with your financial needs.
For example, we have taken “Start a SIP” to invest in the best equity and debt
mutual funds.
Step 2 – Create a Plan
Here you will be prompted to create a plan for investing in the mutual funds.
Provide investment amount and number of years to create a plan. The
hypothetical example shows a SIP of Rs. 8000 and 10 years as the stay invested
period.
Click on “Create a plan” to proceed.
Step 3 – Choose Between “Long Term Wealth” and “Short Term Money”
Scripbox gives you two options to build wealth. You have the option to pick
one of them.
Long Term Wealth – The plan invests in risky equity and is for aggressive
investors.
Short Term Money – The plan invests in safe debt & money market instruments
and is for risk-averse investors.
The example has selected the “Long Term Wealth” option. Where you will get
plan details indicating the best mutual funds and the expected returns.
Click on “Continue” to proceed with fund investment.
Step 4 – Account Creation and Login
Create an account for investing through Scripbox. You will need an email ID
and password for creating an account.
The account can also be created using your Facebook or Google account.
Step 5 – Plan Confirmation
When you log-in you will get the plan as shown below.
Click on “See Recommended Funds” to proceed with mutual fund investment.
Next, you will the list of algorithmically selected best mutual funds and
investment amount.
You can either go with the selection or can change the funds and the amount.
For that, you need to click “I Want to change funds/amount”.
Click the tab “Next” to proceed with payment.
Step 6 – Bank Details and Money Transfer
You need to provide Bank account and PAN details necessary for investment.
The account will be used for investment and crediting the redemption amount
by the mutual fund houses directly into your specified bank account.
 Why do people buy mutual funds?

Mutual funds are a popular choice among investors because they generally offer
the following features:

 Professional Management. The fund managers do the research for you.

They select the securities and monitor the performance.
 Diversification or “Don’t put all your eggs in one basket.” Mutual funds
typically invest in a range of companies and industries. This helps to
lower your risk if one company fails.
 Affordability. Most mutual funds set a relatively low dollar amount for
initial investment and subsequent purchases.
 Liquidity. Mutual fund investors can easily redeem their shares at any
time, for the current net asset value (NAV) plus any redemption fees.

What types of mutual funds are there?

Most mutual funds fall into one of four main categories – money market funds,
bond funds, stock funds, and target date funds. Each type has different features,
risks, and rewards.

 Money market funds have relatively low risks. By law, they can invest
only in certain high-quality, short-term investments issued by U.S.
corporations, and federal, state and local governments.
 Bond funds have higher risks than money market funds because they
typically aim to produce higher returns. Because there are many different
types of bonds, the risks and rewards of bond funds can vary
dramatically.
 Stock funds invest in corporate stocks. Not all stock funds are the same.
Some examples are:
o Growth funds focus on stocks that may not pay a regular dividend
but have potential for above-average financial gains.
o Income funds invest in stocks that pay regular dividends.
o Index funds track a particular market index such as the Standard &
Poor’s 500 Index.
o Sector funds specialize in a particular industry segment.
 Target date funds hold a mix of stocks, bonds, and other investments.
Over time, the mix gradually shifts according to the fund’s strategy.
Target date funds, sometimes known as lifecycle funds, are designed for
individuals with particular retirement dates in mind.

What are the benefits and risks of mutual funds?

Mutual funds offer professional investment management and potential
diversification. They also offer three ways to earn money:

 Dividend Payments. A fund may earn income from dividends on stock or

interest on bonds. The fund then pays the shareholders nearly all the
income, less expenses.
 Capital Gains Distributions. The price of the securities in a fund may
increase. When a fund sells a security that has increased in price, the fund
has a capital gain. At the end of the year, the fund distributes these capital
gains, minus any capital losses, to investors.
 Increased NAV. If the market value of a fund’s portfolio increases, after
deducting expenses, then the value of the fund and its shares increases.
The higher NAV reflects the higher value of your investment.

All funds carry some level of risk. With mutual funds, you may lose some or all
of the money you invest because the securities held by a fund can go down in
value. Dividends or interest payments may also change as market conditions
change.

A fund’s past performance is not as important as you might think because past
performance does not predict future returns. But past performance can tell you
how volatile or stable a fund has been over a period of time. The more volatile
the fund, the higher the investment risk.

How to buy and sell mutual funds

Investors buy mutual fund shares from the fund itself or through a broker for the
fund, rather than from other investors. The price that investors pay for the
mutual fund is the fund’s per share net asset value plus any fees charged at the
time of purchase, such as sales loads.

Mutual fund shares are “redeemable,” meaning investors can sell the shares
back to the fund at any time. The fund usually must send you the payment
within seven days.

Before buying shares in a mutual fund, read the prospectus carefully. The
prospectus contains information about the mutual fund’s investment objectives,
risks, performance, and expenses.

Understanding fees

As with any business, running a mutual fund involves costs. Funds pass along
these costs to investors by charging fees and expenses. Fees and expenses vary
from fund to fund. A fund with high costs must perform better than a low-cost
fund to generate the same returns for you.

Even small differences in fees can mean large differences in returns over time.
For example, if you invested $10,000 in a fund with a 10% annual return, and
annual operating expenses of 1.5%, after 20 years you would have roughly
$49,725. If you invested in a fund with the same performance and expenses of
0.5%, after 20 years you would end up with $60,858.

It takes only minutes to use a mutual fund cost calculator to compute how the
costs of different mutual funds add up over time and eat into your returns. See
the Mutual Fund Glossary for types of fees.

Avoiding fraud

By law, each mutual fund is required to file a prospectus and regular

shareholder reports with the SEC. Before you invest, be sure to read the
prospectus and the required shareholder reports. Additionally, the investment
portfolios of mutual funds are managed by separate entities know as
“investment advisers” that are registered with the SEC. Always check that the
investment adviser is registered before investing.

TOP 5 MEASURES TO EVALUATE A MUTUAL FUND’S

PERFORMANCE

1. Alpha:

A market benchmark is a set standard used to measure mutual fund

performance. Alpha is a financial ratio that reflects the returns generated
by the fund over and above the returns generated by the benchmark
index. The Alpha value of 0 would indicate that the fund has performed
in line with the benchmark. While a negative value would mean it has
underperformed as compared to its benchmark index, a figure above 0
would mean that the fund has outperformed. For instance, if a mutual
fund generates a return of 15% in a year, whereas the benchmark grows at
12%, the Alpha value, in this case, would be 3. It is generally considered
as a measure that represents the value that a fund manager adds or
subtracts to a portfolio’s returns.

2. Beta:
 Beta is another statistical measure calculated using regression analysis,
reflecting the volatility of a portfolio compared to the market. It shows
the tendency of a portfolio's return to fluctuate as per the market
movements. Beta value of 1 indicates that the mutual fund is as volatile
as its benchmark. While a value above 1 indicates that the fund is more
volatile, a value below represents that the fund reacts lesser than its
benchmark.

3. Expense Ratio:

The expense ratio is the ratio of the total fund’s expenses to its assets and
reflects the per-unit cost of managing a fund. Subtracted from the funds'
total earnings before it is distributed to the investors, the expense ratio is
inversely proportional to the AUM (Asset Under Management) of the
fund. It is an essential factor to be considered while selecting a fund since
the higher the expense ratio, the lower is the return and vice versa.

4. Allocations in the Fund’s Portfolio:

One of the benefits of investing in mutual funds is the diversification of

assets in the portfolio. A well-diversified portfolio is expected to generate
better returns since volatile assets are balanced out with stable ones. The
fund fact sheet can provide you with the details of the allocated assets in
your fund’s portfolio.

5. Rolling Returns:

Rolling returns are average annual returns for a specified timeframe with
returns taken into account till the last day of the duration. It reflects the
relative and absolute performance of the fund at regular intervals. It is
sometimes a better measure than CAGR (compounded annual growth
rate) because a CAGR reflects the fund's performance at the time of
calculation but not how it performed during the entire period. Rolling
returns can be more effective, accurate, and unbiased as they show how
the fund performed during the entire duration.

CHOOSING THE RIGHT FUND FOR YOU INVESTMENT GOALS

The above parameters can help you judge the mutual fund performance helping
you select the right one. Also, you must analyse if the fund's performance aligns
with your financial goals in the future. Once you have chosen the right fund,
you must keep tracking its performance periodically to ensure it's suitability
according to your goals and risk profile.

Different types of Mutual Funds

1. EQUITY FUNDS

Also known as stock funds, equity funds invest in stocks of different companies.
There’s a fixed proportion or a certain percentage which equity funds must
invest into stocks of different firms. The returns from equity funds depend on
how well the stocks of the company perform.Generally, equity funds have the
potential to deliver returns that can beat the effects of inflation in the long run.
In other words, the returns from equity funds help you counter inflation, which
reduces the value of money with time.

2. DEBT FUNDS

Unlike equity funds that invest in stocks of companies, debt funds invest in

fixed-return instruments such as corporate bonds, government securities,
treasury bills and commercial papers among others. While stocks can be
volatile, fixed-income instruments are relatively stable.If you are a conservative
investor who don’t want to take a high risk with your money, you can invest in
debt funds. These funds can be an alternative to bank fixed deposits.

3.HYBRID FUNDS

Hybrid funds invest in a mix of equities and debt. In other words, these funds
invest a certain portion into equities, while the rest in debt. Thus, hybrid
funds are designed to give you the best of both worlds – equities and debt.If you
want to gain from the high return potential of equities and also protect your
gains from taking a hit due to market fluctuations, hybrid funds can be an ideal
choice.
4.LIQUID FUNDS

Liquid funds as the name suggest are highly liquid in nature. It means you can
redeem them anytime you want to. These are a category of debt funds which
invest in debt and money market instruments such as government bonds and
treasury bills with a maturity period of up to 91 days.These funds have no lock-
in period and are a better alternative to a bank savings account. If you want to
accumulate money for an emergency or a short-term goal such as going on a
vacation.

5.TAX-SAVING FUNDS OR ELSS

Equity-linked savings scheme or ELSS is a type of Mutual Fund which offers

tax-benefits. Investments up to Rs. 1.5 lakh in a financial year made in an ELSS
fund can be claimed as tax deduction under section 80C of the Income Tax Act,
1961. ELSS funds come with a lock-in period of 3 years. It means you can’t
withdraw your money before 3 years. Being equity-focussed, investing in an
ELSS fund can give you potentially high returns in the long run.