Introduction to Insurance - Part 3

BASIC CONCEPTS

What is Premium?

Premium is the consideration that the policyholder has to pay in order to secure the benefits offered by the insurance policy. It can be looked upon as the price of the insurance policy. It can be one time payment or it has to be paid regularly over a period of time. A default in premium can endanger the continuance of the policy. If that happens, the policy will be treated as lapsed and the expected benefits will not be available.

The calculation of premium is a highly complex technical process, involving actuarial and statistical principles.

Loadings

Loadings can be made for covering administrative expenses, unexpected contingencies and fluctuations like an earthquake or accident or riots or epidemic, these can raise the number of deaths to a much higher level than normal so insurers for safety measure provide for such contingencies by loading the premium.

Bonus

The distribution of the valuation surplus to policyholders is done through the declaration of ‘Bonus’. Only policyholders who opt for ‘participating’ or ‘With profit’ policies would be entitled to bonus. Other policyholders who have ‘Non participating’ or ‘Without Profit’ policies would be paying a slightly lesser amount of premium for the same kind of insurance cover, because of the factor of ‘Bonus Loading’.

Sum Assured

In a life assurance policy (for example, whole life assurance or endowment assurance), the sum assured is the minimum amount payable to the assured or his/her dependants on the death of the life assured.

Paid Up Value

Under this option, the sum assured is reduced to a sum which bears the same ratio to the full sum assured as the number of premiums actually paid bears to the total number originally stipulated in the policy.

For example, if the sum assured is rs. 10000 and the total number of premiums payable is 50 (i.e. term is 25 years and mode is half yearly) and the default occurs after 25 half yearly installments are paid, the policy acquires a paid up value of Rs. 5000, with effect from the date of 26th installment was due.

Assignment

A Life Insurance Policy is property. It represents rights. A life insurance policy forms the estate of the assured and can be sold, mortgaged, charged or gifted.

An assignment transfers the rights, title and interest of the assignor to the assignee.

Nomination

Nomination is a simple way to ensure easy payment of policy moneys in the case of a death claim. A nomination gives the nominee only the right to receive the policy moneys in the event of death of the life assured. A nominee does not have any right to the whole (or part) of the claim. He only has the right to give a valid discharge but has to hold the moneys (all of it) on behalf of those entitled to it.



Surrender

Surrender is a voluntary termination of the contract, by the policy holder. A policyholder can surrender the life insurance policy at any time before it becomes a claim. The amount payable on surrender is called the surrender value or cash value. The surrender value is usually a percentage of the premiums paid or a percentage of the paid up value.

LIFE INSURANCE PRODUCTS

Life insurance products are usually referred to as ‘plans’ of insurance. These plans have two basic elements. The elements are as follows:

Death Cover – Death Cover provides for the benefit being paid on the death of the insured person within specified period.

Survival Benefit – Survival benefit provides for the benefit being paid on survival of a specified period.

Now let’s discuss some of the life insurance plans.

Some of the basic life insurance policies are as follows:

Term Assurance – It provides only death cover. If the insured does not die within specified period, no payment is made under a Term Assurance Plan.

Pure Endowment – It provides only survival benefit. If the insured dies within the specified period, no payment is made under a Pure Endowment Plan.

Whole life policy – A term assurance plan with an unspecified period is called a ‘Whole Life Policy’ under which the sum assured is paid on death, whenever it occurs.

Annuities – A form of pension in which an insurance company makes a series of periodic payments to a person or his or her dependents over a number of years, in return for the money paid to the insurance company either lump sum or in installments.

All insurance plans are combinations of Term Assurance and pure endowment plan.

Endowment Assurance Plan – A combination of Term Assurance Plan and Pure Endowment plan is Endowment Assurance Plan. In this Sum assured is paid on survival of specified period or on earlier death.

Double Endowment Assurance Plan – A combination of A Term Assurance plan with a Pure Endowment of double the value is called a Double Endowment Assurance plan. In this plan the amount payable on survival is double the amount payable on death.

Money back Policy – In this policy say 20% of Sum Assured is given every 5 years and 40 % on 20 years. And full sum assured on death at any time within 20 years. This a combination of Term Assurance plan and four Pure Endowment plan.

Limited Payment Policy – In this type of policies premium are payable for a limited period or short period.

Single Premium Policy – In this type of policy premium is payable once.

Participating or With Profit policy – In this Policyholder can participate in profits of the insurance company.

Non Participating or Without Profit Policy - In this Policyholder cannot participate in profits of the insurance company. And the premium is also charged less.

Universal Life Policies - Universal Life Insurance is a flexible-premium, adjustable benefit life insurance policy that accumulates account value. The flexibility of this policy allows you to change the amount of insurance as per your needs for insurance change. Some changes require underwriting approval. As with all life insurance, the main purpose for buying a Universal Life insurance policy is the death protection provided to your loved ones at your death.
Variable Life policies - Variable life is one kind of permanent insurance that lets you target your premium to one or more separate investment funds. These could be fixed income investments, or stocks, bonds, or a money market fund. Depending on company policy, you can switch your investments two to five times per year. Unlike universal life, with variable life you can control the investment of your cash value.
Joint Life Policies – Two or more lives can be covered under one policy. Such policies generally cover married couple or partners. The sum assured is paid on the death of any of the insured persons during the term or at the end of the term.

Group Life Assurance – Group life assurance is a life assurance policy that covers a number of people, usually a group of employees or the members of a particular club or association.

Riders – A rider is a clause or condition that is added on to a basic policy providing an additional benefit, at the choice of the proposer. For example, a provision that in the event of death of the life assured by accident, the Sum assured would be double can be a rider on an Endowment policy.

CLAIMS

A claim is the demand that the insurer should redeem the promise made in the contract. The insurer has then to perform his part of the contract i.e settle the claim after satisfying himself that all the conditions and requirements for settlement of claim have been compiled. Different types of claims are as follows:

Maturity Claim – Under endowment type of policies, the sum assured is to be paid when the term of the policy is over. The date on which the term is complete, is the date of maturity and the settlement of the Sum assured on that date, is maturity claim.

Death Claim – This type of claim is given on the death of the assured.

Note: Please pour in your comments and suggestions to improve my writing and grammatical capabilities.

Disclaimer: This post is from point of view of Elizabeth, if anyone feels hurt or disrespected by any post please revert back, Elizabeth will try to correct her ways of expressing. This is her first attempt to writing.

Regards,

Eliz
(Motto of Life - Mast Raho)