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Insurance Planning Concept of InsuranceInsurance is the most common method used for transferring risks. It transfers the risk from an individual to a group. It also provides a means for paying for losses. Insurance provides an important means of preventing risk from derailing a clients financial goals.Insurance is defined as a process by which an individual (Policyholder) pays a small definite cost (the premium) for a large uncertain financial loss (the risk) to the insurance company.Concept of InsuranceThe theory of large Numbers implies that the frequency with which an event happens, reflects the actual probability of the event occurring more closely if the number of cases involved is larger.How does Insurance work?To understand the concept of insurance, let us imagine a small town with 100 houses.The town is located in an area where storms of great severity occur frequently . Each family in the town faces the risk that a storm will destroy their house completely. If the house is destroyed, the family will have to spend Rs. 50,000 to reconstruct the house. However, at the same time, it is unlikely that a storm will destroy all the 100 houses simultaneously.Concept of InsuranceLets suppose all the citizens of the town agree to share the losses (if and when they occur) equally, so that no single family will be forced to bear the entire loss of Rs. 50,000. This means that whenever any house is destroyed, every family will pay a sum of Rs. 500 to the affected family to rebuild their house.While the cost of Rs. 50,000 would have been disastrous for a single family, the expense of Rs. 500 is easily affordable.Thus, the risk is transferred from a single family to the entire village and the loss (when it occurs) is shared.The above example, brings out the importance of risk sharing and risk transfer and risk management.

Life Insurance Human Life ValueHuman life value of any person is the present value of the persons future earnings.This is a method of calculating the amount of life insurance a family will need based on the financial loss that family would incur if the insured were to die today. The rule of thumb in the insurance industry is that a person should have life cover equal to at least 10 times his annual income or earnings.It is calculated based on factors like the individuals age, gender, dependents, occupation, income, employment benefits and personal and financial information .The Principles of InsuranceAn insurance contract is different from a normal contract . Let us discuss these in more detail.The Principle of Utmost Good FaithIn an insurance contract, subject matter of the contract is not known to the insurer.For example, if a person suffering from high blood pressure or is a compulsive smoker and chooses not to mention it in the proposal form, there is no way that the insurance company will know about it.Or if a person has a congenital problem and suppresses/withholds the information from the Life Insurance company.The Principles of InsuranceAs a result, the insurance company would be taking on a higher risk than anticipated.For this reason, the law imposes a greater duty on the parties of an insurance contract than in other commercial contracts. This is called the doctrine of uberrima fides or utmost good faith.This doctrine calls for the proposer to disclose all facts that are material to the risk, whether the insurer asks for the facts or not.Utmost Good Faith then, is defined as a duty on the part of proposer to disclose, all facts material to the risk being proposed, whether requested or not.Principles of InsuranceFor example, for insurance of a car, the age of the car is a material fact while the colour of the car is a trivial fact.Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium or determining whether he will take the risk.Breach of the Duty of Utmost Good FaithBreaches of the duty of Utmost Good Faith arise due to: 1. Misrepresentation 2. Non-disclosureMisrepresentation happens when the proposer does not report the facts accurately.Non-disclosure happens when the proposer omits to report material facts. If the proposer deliberately hides facts that he knows to be material it is called Concealment.The Principles of InsuranceThe Principle of Insurable InterestAny asset is insurable by a person only if damage to that asset results in loss of a legal right or creation of a legal liability for that person.For example, you can not insure your neighbours car because damage to the car does not result in any financial or legal implications for you.Insurable interest is the financial interest of the proposer in such a manner that the proposer stands benefited by the safety or continuous existence of an asset and prejudiced by the destruction or damage of assets. Principles of insuranceThe Principle of IndemnityIndemnity is the mechanism by which insurers provide financial compensation in an attempt to make good the loss suffered by the insured due to the happening of the event insured against.The effect of indemnity is to place the insured in exactly the same financial position he was in, immediately before the loss . Neither better-off nor worse-off financially.Indemnity means to provide compensation to the policyholder in such a way that he is not benefited nor does he remain in loss, after a claim under the policy.

Principles of Insurance Corollaries of IndemnityThere are two corollaries to the principle of indemnity Subrogation and Contribution.Subrogation is the right of one person (insurer), having indemnified another (insured) under a legal obligation to do so, to stand in the place of that other (insured) and avail himself (insurer) of all the rights and remedies of that other, whether already enforced or not.This principle is corollary to the principle of indemnity in the sense that it prevents the insured to benefit from the loss.Subrogation applies only when there is a contract of indemnity. It is not applicable in life insurance.

Principle of insurance ContributionIn some cases, more than one policy may be in force on the same subject matter at the time of loss. In that circumstance, each insurer would need to bear a proportion of loss. This is referred to as Contribution.Contribution is the right of the insurer to call upon others similarly (but not necessarily equally) liable to the same insured to share the cost of an indemnity payment. The following features are to be met before the condition of contribution arises: -Two or more policies of indemnity must exist; -The policies must cover the same interest; -The policies must cover a common peril which gives rise to the loss. Types of Life Insurance Term PlansTerm insurance is a pure risk cover product. It pays a death benefit only if the policy holder dies during the period for which one is insured. Term insurance is the cheapest form of life insurance. Term life insurance provides for life insurance coverage for a specified term of years for a specified premium. Term is generally considered pure insurance, where the premium buys protection in the event of death and there is no investment component in it as there are no survival benefits.

Types of Life InsuranceThe three key factors to be considered in term insurance are: sum assured (protection or death benefit), premium to be paid (cost to the insured), and years of coverage (term). Various insurance companies sell term insurance. Term Policy with Return of PremiumIn this variant, normally the premium is higher than a regular term policy and at the end of the term, if the individual survives, he gets back the premium paid.Types of Life Insurance Endowment PlansIt is a insurance cum savings plan. At maturity, a lump sum is paid out equal to the sum assured (plus bonus). If death occurs during the term of the policy then the total amount of insurance and any bonus accrued are paid out.Endowments are considerably more expensive (in terms of annual premiums) as there are maturity benefits.It serves as source of financial needs during active life. It also acts as a good tool for retirement planning.Types of Life InsuranceMoney Back InsuranceThe money back plan not only covers life, it also assures the return of a certain per cent of the sum assured as cash payment at regular intervals.It is a savings plan with the added advantage of life cover and regular cash inflows. Since this is generally a participating plan the sum assured is paid along with the accrued bonuses.Since fixed amounts are paid at regular intervals, this is the most expensive of all policies.

Types of Life InsuranceChildrens PlansChildrens plans not only cover the life of the parent; but also ensure that in case of their death, the child gets the sum assured and the insurance company may fund future premiums and the child gets the sum assured at the end of the term. This is used for the education of the child. As the plan is on the childs life the premium is very low. Childrens plans are suitable for passing on a financial asset to a child. In this wealth is created in the name of the child.

Types of Life Insurance Pension PlansRetirement Plans or Pension Plans are normally plans where an individual investor pays premium for till he retires. He can then take a monthly payment (annuity) from the accumulated funds.He can also withdraw one third of total accumulated corpus once he has retire for clearing home loans, for childrens marriage etc. The following are the various annuity options:1. Annuity for Life2. Joint Life last survivor annuity3. Annuity guarantee for certain periods4. Life annuity with return of purchase priceTypes of Life InsuranceULIP ( Unit Linked Insurance Plans)Market-linked plan or unit-linked insurance policy (ULIP) is a plan that offers life insurance as well as investment in stock markets.Market-linked insurance plans invest in a basket of securities, allowing policyholder to choose between investment options predominantly in equity, debt or a mix of both.There are charges like Premium Allocation charges, fund management charges, policy administration charge, mortality charge etc.All Life insurance plans offer the same tax advantages i.e premium paid can be included under sec 80C up to a maximum of Rs1lac and maturity proceeds exempt under Sec10 10D of IT Act. General or Non Life insuranceGeneral insurance business in the country was nationalized with effect from 1st January, 1973 by the General Insurance Business Nationalization)Act, 1972. More than 100 non-life insurance companies including branches of foreign companies were amalgamated and grouped into four companies, viz., the National Insurance Company Ltd , the New India Assurance Company Ltd., the Oriental Insurance Company Ltd., and the United India Insurance Company Ltd. with head offices at Kolkata ,Mumbai , New Delhi and Chennai, respectively.General Insurance Property or Home InsuranceProperty or Home insurance provides protection against most risks to property such as fire, theft etc. Property insurance generally means insuring the structure and the contents like furniture and valuables of the building against natural and man-made disasters.Property insurance covers fire , Riots, burglary, theft , acts of God like floods ,storm ,lightening , earthquake etc.Things not covered in property insurance:Wilful destruction of propertyLoss/ damage due to wear and tear , poor or unauthorised constructionArt and antiquesGeneral Insurance Health Mediclaim policy and Critical illness policyHealth insurance protects the policy holder and his family against any financial emergency arising due to disease or accident. It is popularly known as Medi claim in India. This policy provides for reimbursement of hospitalisation/ domiciliary treatment expenses for illness/disease or accidents. The claim is not only allowed for Inpatient(patients who are admitted for overnight stay in hospital) treatments but also for treatments which dont need hospitalisation(Day Care)General InsuranceEarlier the policies were on reimbursement basis only but now we have cashless facility available after appointment of 3rd party administrators (TPA). 80D benefits under IT act are available.Medical expenses incurred during period of 30 days prior to and period of 60 days after hospitalisation are covered.Normal exclusions include all diseases/injuries which are pre existing at the time of taking the cover. Some policies cover pre-existing diseases as well after a specified period of time.The sum assured increases by 5% every year if there are no claims to a maximum of 50% of SA.General Insurance Critical illness insuranceThis policy provides for a lump sum benefit to be paid if the named insured contracts certain specified diseases such as cancer, heart attack, stroke , kidney failure or multiple sclerosis . It differs from life insurance in that there is no payment on death. Payment is usually subject to a minimum survival period of 30 days.Advances in medical science mean that many more people can now survive major illness. The lump sum payment under the critical illness policy can be used in whatever way they want.General Insurance Motor InsuranceUnder this Insurance the company indemnifies the insured in the event of accident caused by or arising out of the use of the motor vehicle against all sums including claimants cost and expenses which the insured shall become legally liable to pay in respect of (i) death or injury to any person, (ii) damage to the vehicle .The motor insurance against damage is not compulsory but the insurance of third party liability arising out of the use of motor vehicles in public places is made compulsory under MV Act.General InsuranceNo motor vehicle can ply in public place without such insurance.If there are no claims in any year, then no claim bonus is given to the policy holder by which the premium gets reduced.Premium is calculated on Insureds declared value(IDV) of the vehicle which goes on reducing every year due to depreciation/wear and tear. These days even the color of car decides the premium.General InsurancePersonal Accident InsuranceThis type of policy provides that if the insured shall sustain any bodily injury resulting solely and directly from accident caused by external violent and visible means, then the company shall pay to the insured , the sums set forth, in the policy. Following types of disablement are covered under this policy: (I ) Permanent total disablement (ii) Permanent Partial disablement (iii) Temporary total disablementGeneral Insurance Liability InsuranceThe purpose of liability insurance is to provide indemnity in respect of damages payable under law for personal injury to third parties or damage to their property. This legal liability may arise under common law on the basis of negligence or under statutory law on no fault basis i.e. when there is no negligence.General Insurance Overseas travel InsuranceThis is for people who travel abroad for business, education or leisure frequently.As the country makes progress and disposable incomes increase, more and more people are travelling abroad making these plans very popular.While in a foreign country any medical emergency due to illness or accident may warrant hospitalization which is very expensive.General InsuranceTravel insurance then, is taken for the period one stays overseas . The coverage starts from the day of departure till the day of arrival in India. What is covered under Travel Plans? Medical Expenses Emergency evacuation/repatriation Trip cancellation/curtailment Delayed departure/baggage Loss , theft of or damage to Passport( possessions) Hijack of plane Burglary , theft of contents at home in India Golfers hole-in-one General Insurance Common exclusions are:Pre existing medical conditionsWar or terrorismInjury or illness due to alcohol or drug AbuseDangerous sportsSuicide/attempted suicide