INSURANCE AT A GLANCE

 What is Insurance and How Insurance Work? According to the U.S. Life
Office Management Association Inc. (LOMA), life insurance is defined as
follows: “Life insurance provides a some of money if the person who is
insured dies whilst the policy is in effect. ‘Insurance’ is basically a sharing
device. The losses to assets resulting from natural calamities like fire, flood,
earthquake; accidents, etc. are mate out of the common pool contributed by
large number of person who is exposed to similar risks. This contribution of
many is used to pay the losses suffered by unfortunate few. However the
basic principle is that loss should occur as a result of natural calamities or
unexpected events, which are beyond the human control. Secondly insured
person should not make any gain out of insurance.
 
 WHAT IS LIFE INSURANCE?

 Life Insurance is a contract between you and a life insurance company, which provides
your beneficiary with a pre-determined amount in case of your death during the contract
term.

 Buying insurance is extremely useful if you are the principal earning member in the family.
In case of your unfortunate premature demise, your family can remain financially secure
because of the life insurance policy that you have purchased.

 The primary purpose of life insurance is therefore protection of the family in the event of
death. Today, insurance is also seen as a tool to plan effectively for your future years,
your retirement, and for your children's future needs. Today, the market offers insurance
plans that not just cover your life and but at the same time grow your wealth too.
 DO YOU NEED LIFE INSURANCE?

 If you have dependants and financial responsibilities towards them, then you
certainly need insurance . Having a family means dependants, which, in turn means
financial commitments. Financial commitments come in the form of loans, children's
education, medical expenses etc . Imagine what would happen if you were to lose
your life suddenly or become disabled and cannot earn. Being insured in a situation
like this is a necessity . When you insure your life, in effect what you are doing is
insuring your earning capacity. This guarantees that your dependants will be able to
continue living without financial hardships even in case of your demise . Most
insurance plans available today come with a savings element built into it. These
policies help you plan not only for protection against death but also for a financially
independent future, which would enable you to have a comfortable retirement.
 HOW MUCH DO I INSURE MYSELF FOR?

 One of the simplest rules is to assume that insurance is a replacement for

your lost earning capacity. Calculate your total income for the years that you
expect to work . Assuming that the prevailing interest rate is 8%, you need to
insure your life for at least 12 times your current annual income. Assuming
that a family needs Rs.100 annually for household expenditure and the rate
of interest would be at 8%, then the breadwinner needs to have a life
insurance policy of approximately Rs.1200. If the insurance amount were to
be put in the bank by the family, the family would get a comfortable Rs.96
p.a., which would at least let the family maintain the current life style.
 WHAT WILL I RECEIVE ON MATURITY OF MY POLICY?

 On maturity, you will receive the sum assured or the Accumulation Account whichever is
higher. Lets understand how does this work . Every year you will pay premium on your
policy.

 This premium will get credited to an Accumulation Account.

 The amount required towards your life cover expenses and any other expense would be
deducted from this Account.

 The balance will be invested in sound financial securities (as per IRDA regulations) on
your behalf.

 The bonuses declared each year by the company would be added to the Accumulation
Account. Thus, every year the value in your Accumulation Account will get compounded.

 At the end of the policy tenure, you would receive the amount in the Accumulation
Account or the sum assured, whichever is higher.
 INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (IRDA):

 Reforms in the Insurance sector were initiated with the passage

of the IRDA Bill in Parliament in December 1999. The IRDA
since its incorporation as a statutory body in April 2000 has
fastidiously stuck to its schedule of framing regulations and
registering the private sector insurance companies. In the
private sector 12 life insurance and 6 general insurance
companies have been registered
 INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY
(IRDA) ACT:

 The Insurance Regulatory and Development Authority Act was introduced to

end the monopoly of State-owned companies and to invest in the Insurance
Regulatory Authority power to control the insurance sector. These powers
inter aria are:
 Imposition of prudential norms such as solvency margins, capital adequacy;
Requirements and investment guidelines for insurance companies; Grant of
licenses to new companies, and cancellation, suspension and withdrawal of
licenses given to insurance companies; Regulation of fund investment by
insurance companies; Maintenance of solvency margins; Adjudication of
disputes between insurers and intermediaries; and Tariff fixing.
 EMERGENCE OF IRDA

 As per the section 4 of IRDA Act' 1999, Insurance Regulatory and

Development Authority (IRDA, which was constituted by an act of
parliament) specify the composition of Authority the Authority is a
ten member team consisting of a. A Chairman; b. Five whole-time
members; c. Four part-time members, (All appointed by the
Government of India)
 ECONOMIC IMPACT
 liberalization of insurance creates an environment for the generation of long term
contractual funds for infrastructural investment. Report on Infrastructure says that
85% of funds for infrastructure development have to come from the domestic
industry. It further says that India would need $ 100 Billion over the next five years to
meet its infrastructure needs. Given the rate of savings in India, there is much more
room to grow and one can expect an additional revenue of about $ 10 Billion a year
entering the market to enhance infrastructure. Insurance is definitely going to be one
area that will assist in mobilization of these funds.
  In China, insurance premium accounted for just over 1 per cent of China's GDP in
1995 but in the four years since the market has been liberalized (albeit partially),
spending on insurance has grown at a compound annual rate of 33 per cent.