Meaning of Insurance: An Introduction Insurance may be described as a social device to reduce or eliminate risks of loss to life and property.

It is a provision which a prudent man makes against inevitable contingencies, loss or misfortune. Once Frank H. Knight said Risk is uncertainty and uncertainty is one of the fundamentals facts of life. Insurance is the modern method by which men makes the uncertain and the unequal, equal. It is the means by which success is almost guaranteed. Through its operations, the strong contribute to the support of the weak and weak secure, not by favor sent by right duly purchased and paid for, the support of the strong( Calvin Coolidge.) Under the plan of insurance, a large number of people associate themselves by sharing risks attached to individuals. As in private life, in business also there are dangers and risks of different kinds. The aim of all types of insurance is to make provisions against such dangers. The risks which can be insured against include fire, the perils of sea (Marine Insurance), death (life Insurance) and, accidents and burglary. Any risk contingent upon these, may be insured against at a premium a commensurate with the risk involved. Thus, collective bearing of risks is insurance.

MEANING AND DEFINITION OF INSURANCE Business of insurance is related to the protection of the economic values of assets. Every asset has a value. The asset would have been created through the efforts of the owner. The asset is valuable to the owner, because he expects to get some benefits from it. The benefit may be an income or something else. It is a benefit because it meets some of his needs. In the case of a factory or a cow, the product generated by is sold and income generated. In the case of a motor car, it provides comfort and convenience in transportation. There is no direct income. Every asset is expected to last to last for a certain period of time during which it will perform. After that, the benefit may not be available. There is a life-time for a machine in a factory or a cow or a motor car. None of them will last forever. The owner is aware of this and he can so manage his affairs that by the end of that period or life-time, a substitute is made available. Thus, he makes sure that the value or income is not lost. However, the asset may get lost earlier. An accident or some other unfortunate event may destroy it or make it non-functional. In that case, the owner and those deriving benefits there from, would be deprived of the benefit and the planned substitute would not have been ready. There is an adverse or unpleasant situation. Insurance is a mechanism that helps to reduce the effect of such adverse situations.

Definitions of Insurance The term Insurance has been defined by different experts on the subject. The views expressed by them through various definitions can be classified into the following three categories for the convenience of the study: 1. General or social Definitions. 2. Functional/ economic/ Business Definition. 3. Contractual/ Legal Definitions. 1. General/ Social Definition : The general definitions are given by the social scientists and they consider insurance as a device to protection against risks, or a provision against inevitable contingencies or a cooperative device of spreading risks. Some of such definitions are given below. 1. In the words of John Magee, Insurance is plan by which large number of people associate themselves and transfer to the shoulders of all, risks that attach to individuals. 2. In the words of Sir William Bevridges, The collective bearing of risks is insurance. 3. In the words of Boom and Kurtz, Insurance is a substitution for a small known loss ( the insurance premium) for a large unknownloss which may or may not occur. 4. In the words of Thomas, Insurance is a provision which a prudent man makes against for the loss or inevitable contingencies, loss or misfortune.

5. In the words of Allen Z. Mayerson, Insurance is a device for the transfer to an insurer of certain risks of economic loss that would otherwise come by the insured. 6. In the words of Ghosh and Agarwal, Insurance is a cooperative form of distributing a certain risk over a group of persons who are exposed to it. 2. Fundamental/ Economic/ Business Definitions: These definitions are based on economic or business oriented since it is a device providing financial compensation against risk or misfortune. 3. Contractual/ legal Definitions: These definitions consider insurance as a contract to indemnity the losses on happening of certain contingency in future. It is a contractual relationship to secure against risks. Some of such definitions are: 1. In the words of justice Tindall, Insurance is a contract in which a sum of money is paid to the assured as consideration of insurers incurring the risk of paying a large sum upon a given contingencies. 2. In the words of E.W. Patterson, Insurance is a contract by which one party, for a compensation called the premium, assumes particularly risks of the other arty and promises to pay him or his nominee a certain or ascertainable sum of money on a specified contingency. 3. In the words of Justice Channel, Insurance is a contract whereby one person, called the insurer, undertakes in return for the agreed consideration called premium, to pay to another person called the insured, a sum of money or its equivalent on specified events.

DIFFERENCE BEETWEN INSURANCE AND ASSURANCE Assurance is older in history and it was used to describe all types of insurances. From 1826, the term assurance came to be used only for the risks covered by life insurance and the term insurance was exclusively used to denote the risks covered by marine, fire, etc. The word assurance indicated certainty. In life insurance, there is an assurance from the insurance company to make payment under the policy either on the maturity or at earlier death. On the other hand the word insurance was used to denote indemnity type of insurances where the insurance company was liable to pay only in case of the loss damage the property. The insured event was bound to happen sooner or later under assurance but the event insured against may or may not happen under insurance. The principle of indemnity applies to insurance contracts (non-life) only. The scope of the word, insurance is wider. PRINCIPLES OF INSURANCE An insurance contract is based on some basic principles of insurance. (1) Principle of Uberrima Fides or Principle of utmost good faith It means maximum truth. Both the parties should disclose all material information regarding the subject matter of insurance. (2) Principle of indemnity This means that if the insured suffers a loss against which the policy has been made, he shall be fully indemnified only to the extent of loss. In other words, the insured is not entitled to make a profit on his loss.

(3) Principle of subrogation This means the insurer has the right to stand in the place of the insured after settlement of claims in so far as the insureds right of recovery from an alternative source is involved. The insurer before the settlement of the claim may exercise the right. In other words, the insurer is entitled to recover from a negligent third party any loss payments made to the insured. The purposes of subrogation are to hold the negligent person responsible for the loss and prevent the insured from collecting twice for the same loss. The concept of Third Party Claims is based on the same principle. (4) Principle of causa proxima The cause of loss must be direct and an insured one in order to claim of compensation. (5) Principle of insurable interest The assured must have insurance interest in the life or property insured. Insurable interest is that interest which considerably alters the position of the assured in the event of loss taking place and if the event does not take placed, he remains in the same old position.

History of insurance
The concept of insurance is believed to have emerged almost 4500 years ago in the ancient land of Babylonia where traders used to bear risk of the carvan by giving loans, which were later repaid with interest when the goods arrived safely. The concept of insurance as we know today took shape in 1688 at a place called Lloyds Coffee House in London where risk bearers used to meet to transact business. This coffee house became so popular that Lloyds became the one of the first modern insurance companies by the end of the eighteenth century. Marine insurance companies came into existence by the end of the eighteenth century. These companies were empowered to write fire and life insurance as well as marine. The Great Fire of London in 1966 caused huge loss of property and life. With a view to providing fire insurance facilities, Dr. Nicholas Barbon set up in 1967 the first fire insurance company known as the Fire office. The early history of insurance in India can be traced back to the Vedas. The Sanskrit term Yogakshema (meaning well being), the name of Life Insurance Corporation of Indias corporate headquarters, is found in the Rig Veda. The Aryans practiced some form of community insurance around 1000 BC. Life insurance in its modern form came to India from England in 1818. The Oriental Life Insurance Company was the first insurance company to be set up in India to help the widows of European community. The insurance companies, which came into existence between 1818 and 1869, treated Indian lives as subnormal and charged an extra premium of 15 to 20 percent. The first Indian insurance company, the Bombay Mutual Life Assurance Society, came into existence in 1870 to cover Indian lives at normal rates.

The Insurance Act, 1938, the first comprehensive legislation governing both life and non-life branches of insurance were enacted to provide strict state control over insurance business. This amended insurance Act looked into investments, expenditure and management of these companies. By the mid- 1950s there were 154 Indian insurers, 16 foreign insurers, and 75 provident societies carrying on life insurance business in India. Insurance business flourished and so did scams, irregularities and dubious investment practices by scores of companies. As a result the government decided to nationalize the life assurance business in India. The Life Insurance Corporation of India (LIC) was set up in 1956. The nationalization of life insurance was followed by general insurance in 1972.

TIME LINE IN INSURANCE HISTORY (MAJOR LANDMARKS) 1818 British introduced the life insurance to India with the establishment of the Oriental Life Insurance Company in Calcutta. 1850 Non life insurance started with Triton Insurance Company. 1870 Bombay Mutual Life Assurance Society is the first India owned life insurer. 1912 The Indian Life Assurance Company Act enacted to regulate the life insurance business. 1938 The Insurance Act was enacted. 1956 Nationalization took place. Government took over 245 Indian and foreign insurers and provident societies. 1972 Non-life business nationalized, General Insurance Corporation (GIC) came into being. 1993 Malhotra committee was constituted under the chairmanship of former RBI chief R. N. Malhotra to draw a blue print for insurance sector reforms. 1994 Malhotra committee recommended reentry of private players. 1997 IRDA (Insurance Regulatory and Development Authority) was set up as a regulator of the insurance market in India. 2000 IRDA started giving license to private insurers. ICICI Prudential, HDFC were first private players to sell insurance Policies. 2001 Royal Sundaram was the first non-life private player to sell an insurance policy. 2002 Bank allowed to sell insurance plans as TPAs enter the scene, insurers start setting non-life claims in the cashless mode

LIFE INSURANCE Life insurance is the business of affecting the contracts of insurance upon human life, including any contract whereby the payment of money is assured on death or the happening of any contingency dependant on human life and any contract which is subject to the payment of premiums for a term dependant on human life. There are three parties in a life insurance transaction: the insurer, the insured, and the owner of the policy (policyholder), although the owner and the insured are often the same person. Another important person involved in a life insurance policy is the beneficiary. The beneficiary is the person or persons who will receive the policy proceeds upon the death of the insured. Life insurance may be divided into two basic classes term and permanent. Term life insurance provides for life insurance coverage for a specified term of years for a specified premium. The policy does not accumulate cash value. Permanent life insurance is life insurance that remains in force until the policy matures, unless the owner fails to pay the premium when due. Whole life insurance provides for a level premium, and a cash value table included in the policy guaranteed by the company. The primary advantages of whole life are guaranteed death benefits, guaranteed cash values, fixed and known annual premiums, and mortality and expense charges will not reduce the cash value shown in the policy. Universal life insurance (UL) is a relatively new insurance product intended to provide permanent insurance coverage with greater flexibility in premium payment and the potential for a higher internal rate of return. A universal life policy includes a cash account. Premiums increase the cash account.

If you want insurance protection only, and not a savings and investment product, buy a term life insurance policy. If you want to buy a whole life, universal life, or other cash value policy, plan to hold it for at least 15 years. Canceling these policies after only a few years can double your life insurance costs. Check the National Association of Insurance Commissioners website (www.naic.org/cis) or your local library for information on the financial soundness of insurance companies. History of life insurance in India In India, insurance has a deep-rooted history. It finds mention in the writings of Manu ( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). The writings talk in terms of pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine. This was probably a pre-cursor to modern day insurance. Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade loans and carriers contracts. Insurance in India has evolved over time heavily drawing from other countries, England in particular. 1818 saw the advent of life insurance business in India with the establishment of the Oriental Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the Madras Equitable had begun transacting life insurance business in the Madras Presidency. 1870 saw the enactment of the British Insurance Act and in the last three decades of the nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay Residency. This era, however, was dominated by foreign insurance offices which did good business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard competition from the foreign companies.

In 1914, the Government of India started publishing returns of Insurance Companies in India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and non-life business transacted in India by Indian and foreign insurers including provident insurance societies. In 1938, with a view to protecting the interest of the Insurance public, the earlier legislation was consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for effective control over the activities of insurers. The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a large number of insurance companies and the level of competition was high. There were also allegations of unfair trade practices. The Government of India, therefore, decided to nationalize insurance business. An Ordinance was issued on 19th January, 1956 nationalizing the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies 245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector. The history of general insurance dates back to the Industrial Revolution in the west and the consequent growth of seafaring trade and commerce in the 17th century. It came to India as a legacy of British occupation. General Insurance in India has its roots in the establishment of Triton Insurance Company Ltd., in the year 1850 in Calcutta by the British. In 1907, the Indian Mercantile Insurance Ltd, was set up. This was the first company to transact all classes of general insurance business.

1957 saw the formation of the General Insurance Council, a wing of the Insurance Association of India. The General Insurance Council framed a code of conduct for ensuring fair conduct and sound business practices. In 1968, the Insurance Act was amended to regulate investments and set minimum solvency margins. The Tariff Advisory Committee was also set up then. In 1972 with the passing of the General Insurance Business (Nationalization) Act, general insurance business was nationalized with effect from 1st January, 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on January 1sst 1973. This millennium has seen insurance come a full circle in a journey extending to nearly 200 years. The process of re-opening of the sector had begun in the early 1990s and the last decade and more has seen it been opened up substantially. In 1993, the Government set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector. The objective was to complement the reforms initiated in the financial sector. The committee submitted its report in 1994 where in, among other things, it recommended that the private sector be permitted to enter the insurance industry. They stated that foreign companies were allowed to enter by floating Indian companies, preferably a joint venture with Indian partners. Following the recommendations of the Malhotra Committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in April, 2000. The key objectives

of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market. The IRDA opened up the market in August 2000 with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the power to frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000 onwards framed various regulations ranging from registration of companies for carrying on insurance business to protection of policyholders interests. In December, 2000, the subsidiaries of the General Insurance Corporation of India were restructured as independent companies and at the same time GIC was converted into a national re-insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in July, 2002. The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together with banking services, insurance services add about 7% to the countrys GDP. A well-developed and evolved insurance sector is a boon for economic development as it provides long- term funds for infrastructure development at the same time strengthening the risk taking ability of the country.

IMPORTANCE OF LIFE INSURANCE Security and safety: In case of life insurance payment is made when death occurs or the term of insurance is expired. In other words, insurance as security is provided against the loss of a given contingency. Peace of mind: A sense of security removes all tensions and fears. It stimulates more and better work. By means of insurance much of the uncertainty that centres round the modern life may be eliminated. Protects mortgaged property: The insurance provides adequate amount to the dependents at the early death of the property owner to pay off the unpaid loan. Eliminates savings: In the event of death of the bread winner of the family or destruction of property, the family suffers a lot. The insurance assists the family and provides adequate amount at the time of need. Encourages savings: Systematic saving is possible because regular premiums are required to be compulsorily paid. Unlike bank deposits the deposited insurance premiums cannot be withdrawn. Life Insurance is the best media of saving. Provides profitable Investment: The elements of investment, i.e., regular saving, capital formation and return of the capital are observed in life insurance. In India, the Insurance policies carry a special exception from income tax and estate duty. Fulfils the need of a Person: The needs of a person may be divided into (i) Family needs, (ii) Old age needs, (iii) Re-adjustment needs, (iv) Special needs including needs for education, marriage settlement of children etc. (v) Clean up funds for ritual ceremonies, payment of taxes etc.

KEY FEATURES OF LIFE INSURANCE 1) Nomination: When one makes a nomination, as the policyholder you continue to be the owner of the policy and the nominee does not have any right under the policy so long as you are alive. The nominee has only the right to receive the policy monies in case of your death within the term of the policy. 2) Assignment: If your intention is that your policy monies should go only to a particular person, you need to assign the policy in favor of that person. 3) Death Benefit: The primary feature of a life insurance policy is the death benefit it provides. Permanent policies provide a death benefit that is guaranteed for the life of the insured, provided the premiums have been paid and the policy has not been surrendered. 4) Cash Value: The cash value of a permanent life insurance policy is accumulated throughout the life of the policy. It equals the amount a policy owner would receive, after any applicable surrender charges, if the policy were surrendered before the insured's death. 5) Dividends: Many life insurance companies issue life insurance policies that entitle the policy owner to share in the company's divisible surplus. 6) Paid-Up Additions: Dividends paid to a policy owner of a participating policy can be used in numerous ways, one of which is toward the purchase of additional coverage, called paid-up additions.

7) Policy Loans: Some life insurance policies allow a policy owner to apply for a loan against the value of their policy. Either a fixed or variable rate of interest is charged. This feature allows the policy owner an easily accessible loan in times of need or opportunity. 8) Conversion from Term to Permanent: When in need of temporary protection, individuals often purchase term life insurance. If one owns a term policy, sometimes a provision is available that will allow her to convert her policy to a permanent one without providing additional proof of insurability. 9) Disability Waiver of Premium Waiver of Premium is an option or benefit that can be attached to a life insurance policy at an additional cost. It guarantees that coverage will stay in force and continue to grow.

BENEFITS OF LIFE INSURANCE 1) Risk cover: Life Insurance contracts allow an individual to have a risk cover against any unfortunate event of the future. 2) Tax Deduction: Under section 80C of the Income Tax Act of 1961 one can get tax deduction on premiums up to one lakh rupees. Life Insurance policies thus decrease the total taxable income of an individual. 3) Loans: An individual can easily access loans from different financial institutions by pledging his insurance policies. 4) Retirement Planning: What had provided protection against the financial consequences of premature death may now be used to help them enjoy their retirement years. Moreover the cash value can be used as an additional income in the old age. 5) Educational Needs: Similar to retirement planning the cash values that flow from ones life insurance schemes can be utilized for educational needs of the insurer or his children.

FACTORS AFFECTING LIFE INSURANCE A life insurance policy is an agreement between you and your insurance company. An agreement cannot take place without the consent of both the parties involved in the contract. You will be charged premiums based on how you are rated on several predetermined factors - "Health" being one of the major factors. Out of the many factors analyzed during the underwriting process, the health of the applicant attracts special attention. Medical examinations are carried out to learn more about your medical profile. We have thrown some light on certain health related aspects taken into account by the insurance company before granting life insurance coverage. Learn how health and life insurance are related and why the words "Better Health, Lower Rates" are so meaningful! Your age is also a factor in the cost of life insurance. If you want to attract lower insurance premiums then you might consider insuring yourself at a younger age. The premiums go up as we age. But if you buy that policy today, you will lock in that premium rate for length of the term - 10, 15, 20 years. A woman's life expectancy is longer than a man's. Thus women may pay a lower premium. Insurance companies will check your existing medical records and conduct new medical tests in order to focus on certain specific areas to ascertain your insurance cost. These tests would include checking your cholesterol level, blood pressure, among other things. Your basic build, in the form of Height: Weight ratio shall also be calculated at the time of these tests. If the results are not according to the pre-defined standards set by the Insurance Company then you could be charged an extra amount of premium.

Health disorders such as asthma, sleep apnea, heart disease, a family history of certain illnesses, coupled with other factors could increase your cost of insurance. Our society is suffering from a high rate of health disorders such as alcoholism and excessive smoking. Insurance companies will verify your alcoholic consumption and smoking patterns to calculate the life insurance premium. Although, insurance companies do not clearly define heavy alcohol consumption, excessive consumption of alcohol and smoking could result in higher premiums. Your occupation also has an impact on your health and consequently your life expectancy. Insurance companies do adjust their premium rates for those who have extraordinary occupations considered "risky" such as scuba diving, mountain climbing, parachuting, piloting a plane, and others. In brief, insurance companies would take into consideration all the possible information that directly or indirectly affects your life or well being before finalizing your insurance premium.

DEVELOPMENT OF LIFE INSURANCE The early development of life assurance was closely linked with that of marine insurance. The first life assurers were marine insurance underwriters, who started issuing policies on the life of a merchant, master and the crew of the ship, sailing along with the goods. If a ship was captured, the insurer paid the ransom needed to secure release of the captain and the sailors. Life assurance policies were granted during the reign of Queen Elizabeth these early contracts took the form of temporary assurance covering the life assured for a short period only. These were issued by private individuals known as underwriters who formed Mutual assurance associations which were in a way, self-insurance clubs. They issued annuities and pensions for a fixed period or for life to provide relief to widows on the death of their husbands. The first recorded life policy was issued on 18th June, 1583. 8D. For which some sixteen underwriters were responsible. However this first policy was subject to a dispute over payment because the policy-holders died within 11 months of issuing the policy. The underwriters contended that the policy periods of twelve months related to lunar months, which has expired. Happily, the court ruled that payment must be made. It was in the eighteenth century that societies began to be formed with the object of granting life assurances. The amicable society (1705), the Equitable Life Assurance society (1762) the Westminster society (1792) were some important societies. The application of the mortality tables in 1755 by Dodson and societies. The application of the mortality tables in 1755 by Dodson and the introduction of actuarial science revolutionized the whole concept of life insurance. As the life assurances became better known, a practice grew up of speculating in lives, particularly of well-known people, like kings, national leaders or prisoners particularly, if charged with an offence that would call for capital punishment upon conviction. The premiums varied with their reputation and state of

health. If persons of this category fell seriously ill, a huge amount of insurance was written. In order to put an end to this speculation, with its attendant evils, an Act called the Life Assurance Act (commonly known as the Gambling Act) was Passed in 1774. It prohibited all insurance on lives except those satisfying insurable interest requirements. During the early years of the nineteenth century a large number of life assurance companies were formed a large number of companies failed and many of them preferred to amalgamate their business. In order to stabilize the business further, Life Assurance Companies Act, 1870 was passed. Further Acts were passed in 1871 and 1871. The above legislation was repealed by the Assurance Companies Act, 1909, which was applied to all classes of insurance business. Later on, various acts were passed to meet the growing needs of the industry and to protect the insured. Some of these acts are: Industrial Assurance Act, 1923, Assurance Companies Act, 1946, Insurance Companies Act, 1958 and the Companies Act, 1967.

Human Life Approach

The human life value is defined as, The present value of the family's share of the deceased breadwinner's earnings. This approach crudely measures the economic value of a human life. The human life value method simply calculates the present value of all earnings of the breadwinner that would have gone to the dependents. The amount of these earnings would be the estimated amount earned from work or other sources, minus the amount that would be paid in taxes, and minus the amount that the breadwinner would keep for himself. While the human life value method is one way to calculate the amount of life insurance needed, it is not very valuable. It makes more sense to calculate the amount that the financial dependents will need rather than what they would have gotten if the breadwinner had lived. The human life value can be measured by the following steps: a. Estimate the individual's average annual earnings over his or her productive lifetime. b. Deduct federal and state income taxes, Social Security taxes, life and health insurance premiums, and the costs of selfmaintenance. c. Determine the number of years from the person's present age to the contemplated age of retirement. d. Using a reasonable discount rate, determine the present value of the family's share of earnings for the period determined in step c. The use of a lower discount rate in calculating the human life value will produce a higher human life value for the individual.

Needs Approach The needs approach can be used to determine the amount of life insurance to own. After considering other sources of income and financial assets, the various family needs are converted into specific amounts of life insurance. The needs calculation would involve estimating and providing a fund for all known expenses, and paying off all debt; then determine the amount of financial need after all debts have been paid off. It can be paid as a lump sum or as income using a capital retention approach. The advantages of the needs approach are as follows: It is a reasonably accurate method for determining the amount of life insurance to own after family needs are recognized. Other sources of income and financial assets are considered. Possible inadequacy of present life insurance is quickly recognized. The needs approach can also be used to recognize needs during a period of disability or retirement. The disadvantages of the needs approach are as follows: The family head is assumed to die immediately, which is unrealistic. Life insurance planning is required, which may be complex and difficult to understand. The family needs must be periodically evaluated to determine if they are still appropriate as family circumstances change. The needs approach ignores inflation in its simplest version.

Capital Needs Approach The Capital Needs Analysis method is used by most insurance agents/planners and at most financial-planning Web sites. Chartered life underwriters (CLUs) know the method as the Human Life Value Concept or the Human Capitalization Method. A variation of this method is used in litigation to compute the present value of the insured's future income, minus personal expenses, to indemnify survivors for lost net earnings. Like the earnings-multiple method, the Capital Needs Analysis method projects the income the insured will earn between now and retirement and discounts these flows. But this procedure goes further; it calculates the net contribution of the insured to the family's living standard by subtracting the insured's present values of future tax payments and living expenses from his or her present earnings. The net contribution of the insured is then compared with today's spending needs of potential survivors. Such a needs analysis incorporates factors such as mortgage payments, other household expenses and special expenditures. But the Capital Needs Analysis method raises several concerns: If the household sets a spending target too high for survivors, the method will generate a larger amount of life insurance than is appropriate. This will cost the household too much in life insurance premiums. If the spending target is set too low, the recommendation would leave the household underinsured. Decisions about buying insurance, spending and saving money are interrelated and need to be jointly determined. The amount of life insurance purchased affects the amount of premiums

paid, which affects the household's affordable living standard, which influences how much life insurance the household needs. To properly calculate this, a complex mathematical procedure is needed, which this method does not employ. Third, unless future tax payments are calculated accurately on a year-by-year basis, they can easily be overstated or understated, which would throw off the calculation of the amount of life insurance needed. For married couples, tax payments are generally made via a joint return. This makes distinguishing each spouse's individual taxes difficult to determine. And again, without an accurate calculation of future tax responsibility, the life insurance needs analysis will not be reliable.

Life Insurance Planning The insurance contract is providing for payment of a sum of money to the insured person or to the person entitled to receive the same, on the happening of some event or damages. The family need for bread, clothing and housing are met out by the regular income of the family head. His sudden death will disturb the family for necessaries of life. Uncertainty of death is inherent in Human life. It gives rise to the planning or preliminary protection against the financial losses arising from death. Thus insurance is an institution which eliminates such risks and substitutes certainty. While planning for an insurance product, the insured must get clear cut knowledge of various advantages and needs of insurance. Some needs are temporary; others are permanent. Most people have the following needs: Final expenses, which include funeral expenses and unpaid medical bills. A debt retirement fund to retire all debt, including mortgages, credit card bills, and auto loans. Being debt-free will allow a family to live with less income. An income fund provides an income to the surviving members of the family, which would be especially helpful if the surviving spouse would have to stay at home to care for children, or to pay for their care while the surviving spouse works. An education fund to pay for the future education of children. The cost for a 4 year college education can easily be more than 1 Lakh, and this will no doubt continue to increase, probably faster than inflation as it has in the past. An estate preservation fund may be desirable for those with substantial estates that may incur high attorney fees, court costs, and taxes.

Chapter 2 Introduction to the company TATA AIG Life Insurance Types of life insurance policies All insurance plans are combinations of these two basic plans. A term assurance plan with an unspecified period is called a whole life policy under which the sum assured (SA) is paid on death whenever it may occur. A term assurance plan along with a pure endowment plan, when offered as a single product is called an Endowment Assurance plan, under which the S.A. is paid on survival of the specified period or on earlier death. A term assurance plan with a pure endowment plan of double the value is called a Double Endowment Assurance plan, under which the amount payable on survival is double Endowment Assurance plan, under which the amount payable on survival is double the amount payable on death, what is called money back or Anticipated Endowment policy, under which. Say 20% of SA is paid on survival every five years and 40% on survival of 20 years and full SA on death at any time within the 20 years, is effectively a combination of a term assurance plan for 20 years for full SA and 4 different pure endowment plans (20% SA for 5 years. 20% SA for 10 years. 20% SA for 15 years and 40% SA for 20 years). A plan of assurance will have the following features. By making changes in these features or adding and combining some of them, any number of plans can be developed. Who can be insured? The various possibilities are (i) individual adults (ii) children (minors) (iii) two or more persons jointly under one policy.

 What can be the SA? Some plans stipulate a minimum SA. There are maximum limits also for certain benefits, like accident benefits. In what contingency would the SA be payable? Could be on death or on survival. When would the SA be payable? On the contingency happening or some other dates. How would the SA be payable? Could be in one lump sum of in installments. What would be the term (duration) of the policy? This determines the period during which the specified event should occur for the SA to be payable. Some plans provide for benefits even beyond the term. When would the premium be payable? Variations are in the frequency of payment (monthly), quarterly, half-yearly or yearly), as well as the period during which it is payable. Some plans provide for premiums to be paid for a period less than the term. Does the SA increase? This can happen because of participation in surpluses and bonus additions or because of guaranteed increases in S.A. Does the SA reduce? This can also happen, if the plan is to meet reducing liabilities under a mortgage. Are there additional benefits? These, also called supplementary benefits, may be provided by way of riders, in addition to the basic covers. The same plan may be called by different names by insurers. The variations, between insurers are plenty. It is not possible to give details of all the plans offered by all the insurers, mainly because insurers make changes in their offers or practices from time to time. Even if a reference is made to a plan of any particular insurer, the accuracy of the information is not to be taken for granted.

Whole Life Assurance A whole life policy is one which is taken to cover the entire or whole period of life of the assured. The policy money becomes payable to the beneficiary on the death of the life assured. L.I.C. issues the following usual forms of whole life policy: Ordinary whole life policy: Under this policy, premium is payable throughout the life time of the assured and the policy money shall be payable after his death. If payment of premium ceases after at least three years premium have been paid, a fix paid-up policy for such reduced actually paid bearer to the number stipulate for in the policy will be automatically secured, provided the reduced sum assured including bonus is not less than Rs.250 such reduced paid up as has already been declared on the policy, will remain attached thereto. The minimum amount for which a policy will be issued under this plan is Rs.1, 000 and the mode of payment of the premium shall be yearly or half-yearly except under salary saving schemes. Limited Payment Whole Life Policy: In this type of policy, the life assure is required to pay premium for a fixed period from 5 to 55 years or up to the attainment of a certain age particularly up to retirement. The assured is required to pay premium for a selected period of years or until his death if it occurs within the period. The life assured shall have the satisfaction of knowing the maximum amount he will be required to pay, no matter how he lives. If he survives the period of selected to pay, selected number of years no

further premium is required to be paid. But the assured sum becomes payable only after his death. With profits limited payment polices do not cease to participate in the profits after completion of the premium paying period but continue to share in the periodical bonus distributions until the death of the life assured. This is a better form of life assurance for family provisions, since it enables the assured to pay all the premiums during the productive years of life. Single Premium Whole Life Policy: This is an extreme form of limited payment life insurance. The total amount of premium payable is paid in one lump sum by the assured. The policy is not so popular but is purchased for investment purposes. It suits those persons who get windfall income like lotteries etc. and who can afford such singe payment. Convertible whole Life Assurance Policy: This policy is suitable to young man who is on the thresh-hold of his career and has prospects of increase in income after some time. The object is to provide maximum insurance protection at minimum cost at the same time to offer a flexible contract which can be altered into and Endowment Assurance at the end of 5 years from the commencement of the policy by which time it is expected that there would be a rise in income and he would be in a position to pay more premium. The minimum sum assured is Rs.5, 000 and the maximum age at the entry is 45 years. Endowment Assurance The Endowment Policy is that where policy money shall be payable to the assured person upon attaining a certain age on the event of early death to his nominee. These policies are more popular than whole-life policies due to the following advantages:

 Compulsory savings: It is a method of compulsory savings. A vast majority of people never save a rupee even though they get good incomes because of extravagant habits. For such people this type of policy turns out to be a means of forcing thrift. Old Age Provision: These policies are meant to benefit the policy holder under self-benefit scheme as he is able to beget some fund from the insurance company if he services. If the policy matures, say at 70 years of age of an assured, it serves as an excellent method of savings a large amount in old age. Accumulation of Fund: The specific assured sums collected after the exposing of the endowment period may well be utilized for higher education or marriage of children. Types of Endowment Policies: Ordinary Endowment Policy: single or ordinary Endowment Policy provides an ideal combination of both family prodigious and investment. The amount becomes payable on the expiry of the endowment period or at any time before maturity in case of death of the assured. The assured is required to pay premium throughout the term or for a specified period or till death. Double Endowment. Under this policy, double the amount of sum assured is payable if the assured survives the policy. It the assured dies during the endowment period, only the sum assured is payable a higher rate of premium is charged under the policy. The payment of premium is continued until the endowment period or death which ever is earlier.

 Pure Endowment Policy: The sum assured is payable on the life assured surviving the endowment term. This policy suits those who have no dependents and want to enjoy the money by themselves. This type of policy is not very popular. Under pure Endowment with Return policy the sum is payable if the policy holder services the endowment period. If he dies earlier, then his nominee shall receive the premium so far paid minus the first year premium. Anticipated Endowment of Money back Policy: Anticipated policies are issued with profits by the L.I.C. for the terms of 12, 15, 20, 25 years only. The main feature of the money back policy is that a number of installments of 20% of the sum assured are payable in cash or at certain intervals to the assured and the balance at maturity. In the event of death of the assured before the endowment term, full sum assured shall be payable without any deduction of payment made earlier. The plan is of special interest to those who feel the need for lump sum besides desiring to provide for their old age and family. No loan is granted under this policy and the minimum amount for which a policy is issued is Rs.5, 000. Triple Benefit Endowment Policy: This Policy is also known as perfect protection or family protection policy. Under this policy, the rate of premium is higher. In this policy are combined special features of whole life limited payment and a pure endowment. It is issued for a fixed period of 15, 20 or 25 years. Benefits given ahead are guaranteed in the policy. (i) 15% to 25% of sum assured is payable upon death of the assured and until the end of endowment period each year regularly to the family as a provision. (ii) Sum assured shall also be payable in addition to the above provision at the end of the term of insurance.

(iii) In case of the assureds survival upon the expiry of the endowment period the sum assured shall be payable. Besides, an equal amount also becomes payable after death. Marriage Endowment Policy: As a special class of endowment policy, it enables the parents to provide funds for the marriage of their children. The premium is paid till the death of the policy holder or for an agreed period, but the policy matures after the expiry of the endowment period. If the expires during the currency of the term the assured is given an option to substitute the name of another child as beneficiary or to accept total premier contributed so far minus the first years premium. Educational Endowment Policy: The policy aims to finance the education of the children whether or not the parents are alive after the endowment period. Premium is paid up to the death of the life assured or for an agreed period whichever is earlier. Instead of payment the assured sum in a lump sum, it is spread over ten half-yearly installments starting from the date on which the policy matures substitute another child in the place of late child. Provision for school fees can be made by made by effecting an endowment policy, on the life on the parent with the sum assured, payable in installments over the period of schooling. Term Assurance Term assurance is temporary contracts, which provide basic death risk cover. This is the cheapest form of life assurance, since as the description suggests, it is only for a certain period of time and the policy money is payable on death during the term of time and policy

money is payable on death during the term of the policy. On expiry, the policy has no value. Normally, the policyholder does not receive any benefit on survival to the end of the stipulated term but he will have enjoyed the protection for death occurring during the policy period. The whole life policy in effect is a term insurance policy without the limitation of a period. In India, return of premiums is allowed in the event of survival of the policy holder to the end of the term. No doubt, a higher premium would be payable to cover the additional survival benefit. The term insurance policy can be secured by paying a single premium at the start or by an annual premium covering the risk for one year at a time (which is called renewable term insurance) or by a level premium payable over the period chosen when it is called level premium payable over the period chosen when it is called level premium term insurance. These polices do not generally have surrender or loan values. Increasing Term Assurance: Because of inflation, a term, assurance with a level sum assured gives a reducing amount of real cover as the value of money declines year by year and consequently. Attempts are made to combat this by providing term assurance policies with some form of escalating sum assured. The premium would be of level amount payable throughout the term. The renewable term and convertible term policies as also index-linked polices which like the sum assured to an index like the cost of living index meet the need for increasing insurance cover. Decreasing Term Assurance : Term assurance of this type has a sum assured which reduces each year or even each months, by a stated amount decreasing to nil at the end of the term. It is normally used to cover a reducing debt, such as the capital outstanding on a house

purchaser mortgage, with the sum assured being linked to the reduction in the capital outstanding under the loan. Although the sum assured decrease, the premium remains constant. Other Life Insurance Plans Money Back Policy Money Back policy plan is an excellent plan with good return on reinvestment, best suited for businessmen and professionals. Money is available at regular intervals in future to meet the specific expenses such as children's education or marriage. At the same time, the policy provides insurance protection for the family as well as old age provision. Features

A policy where lump sum amounts are paid to the life assured at periodic intervals on survival. In case of death of the life assured within the term, the total sum insured is paid to the nominee, irrespective of earlier survival benefits. Bonus is payable under this scheme. Premiums are to be paid regularly to get survival benefits. Premiums cease at death or on expiry of term whichever is earlier. This plan can be availed of for terms 20 or 25 years .

Family Income Assurance This policy offers payment to the life assureds dependents of an agreed income until the expiry date of the cover. The payment of benefit commences on the death of the life assured

and would be payable till the expiry of policy. Thus, it is a type of decreasing term assurance where the benefit is payable over a period rather than as a lump sum. Family income benefit may be added to a whole life or endowment policy or may stand on its own. Guaranteed Triple Benefit Policy Guaranteed Triple Benefit Policy Limited payment plans All plans other than term assurance plans are variations of the whole life and Endowment plans. The premiums would normally be payable till the SA becomes payable, that is, till a claim arises. It is possible to limit the premium-paying period for a shorter period. Such polices would be called limited payment polices if the limited period is only one year. A single premium polices for whole Life and Endowment plans are rare, but are offered a person who pays a single premium, probably has a larger need for tax benefits, rather than insurance. Persons, who expect that their professional earnings may not continue for a long time, unlike regular office workers, may prefer limited payment policies. Performing artistes and even professionals working abroad, run this risk. Sometimes, officers servicing in the defense forces may retire before they reach the normal retirement age of 55 or more. Participating Plans Both whole life and endowment policies can be made participating in profits at the option of the policy holder. These are also called with profit polices. These policies would be entitled to bonuses declared after every valuation. The methods of bonus additions are dealt with in another chapter.

Term assurance plans are normally not issued as participating polices, mainly because they were issued for short periods of one year. But insurers have begun to insure term assurance plans for long duration of 30 or 40 years, with uniform premium during the entire period. Under these circumstances, they do not vary from whole Life policies. The option of participating in profits is available in such cases. Convertible Plans Convertible plans of assurance are plans, which provide, in its terms and conditions, that it can be changed to another plan after, or within, a certain period after commencement. For example, a convertible term Assurance plan can be converted into a whole life policy or an endowment policy, within a period specified in the original plan. This period specified in the original plan. This period may be not later than two years before the expiry of the original term., in other words, if the original term insurance cover is for 6 years, the option to convert should be exercised before the end of the fourth year. In some plans, the option can be exercised at any time, but before age 60. A convertible whole life plan can be converted into an Endowment plan. If the clause says that the option has to be exercised at the end of say, 5 years, it will have to be done during the fifth year. But before the sixth year begins. If the option to convert is not exercised, the policy will continue on the original terms. The advantage of such convertible plans is that, when the right of conversion is exercised, there would be no further underwriting decision to be made. There would be no medical examination at that time. So, even if the insured has an adverse medical condition at that time, the policy of his choice will not

be denied to him. Such polices are usually taken by persons in the early stages of their careers, who expect their financial conditions to improve soon, but would not like to delay the benefits of insurance till then. Joint Life Policies Two or more lives can be covered under one policy. Such policies usually cover married couples or partners. The SA is paid on death of any of the insured persons during the term or at the end of the term. Some plans also provide payment of S.A. on the death of one life and the policy is continued to cover the second life till maturity without payment of further premium. In the case of joint life insurance: A Joint life declaration is necessary to create a joint interest in the policy. In case of partnership insurance, the partnership deed will be examined to ascertain the nature of financial interest of each partner. Each life will be underwritten separately. Bonuses accrue on the single basic SA only. Childrens Plan Insurance can be taken on the lives of children, who are not majors. The professional will have to be made by a parent or a guardian. In these plans, risk on the life of the insured child will begin only within when the child attains a specified age. Practices vary widely. The time gap between the date of commencement of the policy and the commencement of policy and the commencement of risk is called the Deferment period. If the

child s 6 years old when the policy is taken and insurance is to begin when the child is 15 years old, the deferment period is 9 years. The date on which the risk will commence, at the end of the Deferment period, is called the Deferred Date the deferred date will be a policy anniversary. Ages are reckoned as next birthday, nearest birthday or last birthday, as per the practice of the insurer. There is no insurance cover during the deferment period. If the child dies during the deferment period, the premiums will be returned. Risk will commence automatically on the deferred date, without any medical examination. The main advantage of these plans is that the premium would be relatively low (age of the child at commencement) and cover will be obtained irrespective of the sate of health of the child. These policies have conditions whereby the title will automatically pass on to the insured child, on his attaining the age of majority. This process is called vesting. The policy anniversary corresponding to age of majority, or any later date as may be chosen; of the insured child is the vesting date. After vesting, the policy becomes a contract between the insurer and the insured person. The vesting age cannot be earlier than 18. This is because there cannot be a valid contract with a minor. The deferred date and the vesting date need not be the same. With regard to the deferred date, various options are available. In some plans, children between the ages of 5 and 12 are insured, with risk commencing at age 12. In some other plans. Policy can commence when the child is some other plans, policy can commence when the child is between I and 12 years

old an risk will commence 2 years after policy commences, but not earlier than age 7. In a plan offered by the LIC the insurance is taken on female children. The risk cover is extended to the husband three months after the insured child gets married or one month after intimation of marriage or on attainment of age 20 by the life assured, whichever is the latest. The sum assures is paid a survival benefit on the latest. Te sum assured is paid as survival benefit on the deferred date, and again on the death of the life assured before maturity, but there is no survival benefit on maturity.