Thursday, February 3, 2011

Life Insurance - A look through

What is Insurance?
Insurance Co Promises to pay the owner of Insured asset a certain sum,if there is any adverse/unfortunate situation.

Insurance does not protect the asset nor does prevent the loss due to event happening.Insurance only tries to reduce the Impact of Loss on the Owner of the asset and those depend on that asset,they are ones who benefit from the asset and would lose income when the asset is damaged.

Insurance Only tries to compensate the loss impact and that too not-full extent.

Only Economic Risks can be insured,so sorry folks,your daily head spinning stock market fluctuations are not insured!!!

Life Insurance.
Life insurance is a contract between the policy holder and the Insurance Co, where the Insurance Co agrees to pay a certain sum of money on event of the insured persons death.In return, the policy owner agrees to pay a pre-decided amount called a premium at regular intervals or in lump sums.

An human being income generating asset,he can be lost through early death or sickness or by accidental events.

Accidents may or may not happen.death will happen but timing is uncertain,but if it happens earlier when alternate Income source is not present,then there will loss and financial difficulty to the person and his dependents.

for eg.
when a bread winner dies the source of income for his family dies,financial and economic condition of the family is school-going kids will have to drop out of school due lack of money for school fees,..etc..

those dependent on that income are helped to overcome their financial difficulties by Insurance.

General Insurance.
Without insurance,trade and industry will find it difficult to face the impact of major disasters like fire earthquake and floods.Financiers like banks would go belly up,if the factory financed by it is reduced to ashes in a terrible fire,Insurance cover helps the financiers,if their loan party defaults on loan.

Insurance Cos are called Insurers.the business of insurance is
(a) is to bring together persons with common interests(i.e mutual sharing the same risks).
(b)Collect the Risk-contribution called premium from all of the person with common
(c)pay out compensations(called claims) to those who suffer from the risks.

Insurance spreads the losses of an individual over the group of individuals who are expose to similar risks.

Premium for Insurance is based on expectaions of the losses.these expectaions are based on study of losses from the past with statistics.

Insurance Co as a trustee.
The Insurer is a trustee,as it manages the common fund on behalf of large community of policy holders,he should Ensure Nobody takes Undue advantage of this no rajus or kajus are allowed to take your money.

the decision to allow entry is called "Underwriting of risk".Underwriting means assessing the risks.premium charged depends on this assessment of risk.

Principle of life insurance.
Life Insurance policy Promises that Insurer will pay to the policyholder a certan sun of money,if the person insured dies or any contract-specified event happens.

Insurance is a contract,where there is an agreement between 2 or more parties,for legally binding relationship.

A simple contract must have these principles:
Offer and acceptance,
Capacity to contract,
Legality of object.
capacity of performance.
intention to create legal relationship.

Insurance is a specialised contract,where there are 3 more
Principle of Utmost Good Faith
Principle of Insurable Interest.
Principle of Indemnity

Principle of Utmost Good Faith.
Non-Disclosure of material facts and Information such as Age,height,build,Health of person insured,habits,personal history,family history,nature of occupation,would put the Insurance Co at a disadvantage.In such cases,Insurance Co can ask for Medical Report or Medical Examination.

Its the duty of proposer(policyholder) to make a full disclosure to the Insurer(Insurance Co),in the event of failure to disclose material facts(such as Age,height,build,Health of person insured,personal habits(like smoking/drinking or tobacco consumption..etc),personal history,family history,nature of occupation),the Insurance contract will be held Null and void.and proposer cannot defend such non-disclosure,by saying/thinking that fact was not material to Insurer.

Insurance Application Form is called as Proposal for it proposer has to make a declaration that all the statement in the proposal form are true in every respect ,and if any untrue statements are made,the insurer would treat the insurance contract null and void and forfeit all the money paid as premia.

Principle of Insurable Interest.
It means the proposer must have a stake in well being of person insured and proposer could suffer a loss,if the Risk event happens.

for eg.
A husband has Insurable interest in the life of his wife and vice versa.
parents have insurable interests in the lifes of thier children.

Principle of Indemnity.
Insurance is meant to compensate loss,it does not mean,one take insurance just to make profit.

Need for Insurance:
Risks arise bcoz there are needs to be fulfilled.if there are no needs there would be no risks.needs of people are not same,they depend on age,occupation,family,habits and place of residence...etc. so while buying insurance one should be aware of his needs.

one has to take future expenses also like new car,or buying a house or childrens education,daughters marriage,which are ambitions and helps in planning for future expenses in advance than planned for.

Life insurance products are called as Plans of Insurance.
these plans have 2 basic elements,they are
(a)Death cover,where Sum is paid on the death of Insured person within a Specified Period.
(b)Survival Benefit,Where sum is paid on survival of insured person for a specified period.

Plan of Insurance which provides only death cover is called Term Assurance Plan.
Plan of Insurance which provides benefits on survival is called Pure Endowment there is no death cover for the insured person.

In term Assurance,if the insured person does not die within the specified Policy term,then No payment is made.Term Assurance is the cheapest of Assurance.

In Pure Endowment plan,if the insured person dies within the specified Policy term,then No payment is made.

Other types.
A term Assurance with Unspecified Period is called as Whole Life Policy,where Sum Assured is paid on death,whenever it occurs.

A term Assurance with Pure Endowment plan,is called Endowment Assurance Sum Assured(called as SA,in Insurance dictionary!!) is paid on survival( the end of policy term) or death whichever is earlier.

In whole Life and Endowment plans,the premiums would be normally payable till SA(Whats SA??...arree..its Sum Assured) becomes Payable(it can be on end of Policy term or on death claim).

Premium can be paid also be for short periods,such plans are called Limited Payment Policies(LPP's).best example,Short service Commission Officers,Cricket players and Glamourous Actress.

Survival Benefits may be paid at regular intervals during the policy term,such plans are called Money Back or Money Saver Plans.

Before Insurance Co accepts your proposal,it does best,a process wat its called as Underwriting,its done by (u guessed it right!!) by Underwriter ..of course.

Underwriting makes Insurance good and fair to all parties (i.e. Insurer and fellow policyholders).

If Underwriter feels that particular Insurance proposal is less risky,he will accpet the proposal at normal/standard/first class life.

Premium here would depend on tabular rate (these rates are decided by Actuary of Insurance Co...please DONT beg for discounts or kick back of premium from Insurance Agents..its considered offence by IRDA,he can lose his license and his future commissions).

In some Cases of HIGH RISK,Underwriter can refuse Insurance cover,so he uses DECLINE in the proposal,and Insurance Co rejects the proposal.

Insurance Documents,
First document is Proposal for Insurance.its basis of Insurance Contract and its to be completed and signed by proposer in the presence of a witness.

Second Document is Personal Statement,Here Particulars such as,
state of Health of to be insured person,family history personal habits,Medical consultations and illnessess etc.

Incorrect or untrue statements in these 2 documents can nullify the insurance contract.

After Proposal Acceptance:
First Premium Receipt(FPR).
If Underwriter accepts your Proposal,first thing one has to do is go straight to his/her house and celebrate the occassion..kuch meetha ho jaye :) bcoz Insurance will always come in handy during tough times...

In real life,when a person is ill,he can go to a doctor and doctor will give treatment to best of his skill,knowledge and experience.

but in insurance,its NOT given to person who is suffering,.here one has to take his medication in advance before arrival of the illness/disease...tats insurance for u.

ok...lets come back to FPR...if your proposal is accepted by underwriter,insurance Co will issue u a First Premium Receipt(FPR).

after receiving FPR from Insurance Co,Insured person has 15 days(known as Free Look-in Period or cooling-off period),to understand the policy terms and conditions,in case he is not satisfied with the terms,he can request to withdraw from Insurance contract,he will be entitled to get refund of his paid premium less office charges(like stamp duty and medical examination charges,...etc),

After FPR,subsequent renewal premiums are called Renewal Premium Receipt.this RPR are important to prove the premiums are paid regularly,as defaults in premium leads to termination of Insurance contract.

Policy Document or Policy Bond:
Its most important evidence document of Insurance contract.Policy bond is signed by competent authority and stamped according to Indian Stamp Act.

The Policy Schedule contains all essential particulars of the policy,like...
Dates of Risk commencement and maturity,
Sum Assured(When and how much to pay),
Premiums(When and how much to pay)
Nominee(if any stated in the proposal)
Special clauses,if any riders,liens and exclusions.

terms and condition also include,days of grace for premium payment,consequences if any default in premium payment...etc..

In Policy bond,standard policy conditions are printed,if one needs modification/alterations like change of nominee or assignment(for loans)..endorsements on a separate sheet of paper is attached on the back of the policy document.

Standard Documents Required For Life Insurance.

For Indian Nationals:

1)Date of Birth Proof,
Birth Certificate/passport,School or College Certificate.

2)Customer Identity and Address Proof.
Pan card,Passport or Driving Licence.

Address Proof:
Templated Written confirmation from bank where the Policyholder is a customer,for
regarding identification and proof of Residence.

3)Income Proof:
for Salaried class:
Income tax returns/Form 16,bank statement/passbook along with copy of latest salary slip.

for Self Employed or business customers:
Income Tax Returns,Audited Company/Firms Accounts.

4)Proof of source of funds:
Copy of sale deed if the income is from sale of property.
DP statement of brokers note.
Proof of Employee Stock option Exercised.

For NRI customers(in addition to above Documents):
copy of Trade license and bank statement with transactions.

NRI's should pay Premium ONLY through NRE Rupee account or FCNR account in the name of policy holder

Stopping Ulip premium Facts
ULIP Premium can be stopped even before the first 3 years,yes u heard it right.there is just lock in period of 3 years,you can stop the premiums of ULIP's anytime after 1 year and you wont loose 100% money.

The other thing is thatpaying premiums just for 3 yrs is wrong thing as ULIPs are long-term products(for 10-15 years) and should not be used for short term.

ULIPs typically collect high surrender charges in the first five years. The Surrender charges could be as high as 25-40 per cent if you have paid premium only for two years.

Apart from that, due to high initial upfront charges you may not even get what you have invested.So don't be in hurry to make a hasty decision.

If you stop regular premium payments before 3 years(lock in period) have passed, your funds will be held in suspense,after deduction of surrender charges. The amount in the policy will be paid out to you only at the end of the third year.

The major problem with an ULIP is that if the product underperforms the market for the initial years and if you try to exit, investor will suffer a double blow – low market-fund returns and high surrender charges.

So keep your cool,and enjoy creating wealth and safety for your family.

The credit to this useful article is fully given to

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