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INSURANCE - ONLINE

Lesson 12 - Life Insurance - Basic Concepts
Introduction of the Host
Mr. Harikumar is a freelance journalist with rich experience gained from working with leading periodicals and dotcoms. His association with leading financial portals has contributed greatly to his ability to deal with classroom sessions in the financial sector, especially investments. Currently, he is a columnist with some of the well known publishing companies. Some of his published works on mutual funds and insurance have got wide acclaim.

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LIFE INSURANCE - BASICS AND CONCEPTS

Life Insurance in India

In India, the history of Life Insurance can be traced back about 100 years. The LIC Act was passed in 1912. The year 1956 was significant as 243 life insurance companies were merged into a new entity called Life Insurance Corporation of India (LIC). Life Insurance which was under state control for a long period, was nationalized in 1956 .

Once LIC expected the insurable population to grow 30 crore but has so far insured only eight crore leaving a gap of 22 crore. So one can guess the potential. With the expansion of life insurance business in India, many other ancillary industries like IT will fall into the groove of major expansion.

There are expectations that market has tremendous potential for expansion With more entry of private players into the field. More customized policies are off the shelf now.

The Concept and Features

Life Insurance, or in other words Life Assurance is one of the most important forms of insurance, and most popular among all categories of insurance. It is a contract by which the insurer agrees to pay a certain sum of money, for a consideration, either at the end of a definite period or at the expiry of the insured. If the money is payable at the end of a particular period, the policy is called Endowment Policy and if the sum assured is due at the death, it is named Whole-Life Assurance.

Though the life insurance policy is taken to cover the contingency of one's life, there are other benefits built in this. The policy entitles one to a rebate under Income Tax at the rate of 20 per cent of the premium payable. Also, it can be utilized as additional/collateral security for the purpose of taking loans. Moreover, the policy holder is entitled to get bonuses as and when declared by the insurance company, and comes in lump sum at specified intervals.

The distinctive features of Life Insurance in comparison with other insurance policies will help us understand the term better.

One of the major differences between Life and other forms of insurance is on the basis of the fact that Life insurance is taken on a certain event sooner or later and other policies such as fire insurance, personal accident insurance, etc. are taken against uncertainty.

Life Insurance is not a contract of indemnity. In other types of insurance, the insured is indemnified or made good to the extent of loss, and not the sum insured. In other words, the insured is not allowed to make any profit over and above the actual pecuniary loss. But in Life Insurance, the sum assured is given back at the end of the period, irrespective of the amount of loss. In that respect, we can say, Life Insurance is near to investment, though not investment in strict sense.

The principle of insurable interest is not applicable in the case of Life Insurance except at the time of taking the policy. Main reason being that one cannot measure the value of life in terms of money. Here, the insurable interest is implied when the policy is taken for own life, for husband, and wife.

Another prominent feature is that the policy is not a renewable contract. The policy does not lapse year over year, unlike other types of policies. Life Insurance is a continuing contract as long as the premium is paid without fail.

Understand Your Need

The importance of taking a Life Insurance policy is that it affords financial security to one's family on a contingency. This will see to it that a regular flow of incomes comes into the family after the death of the breadwinner. As a rule, the person who earns for the family is advised to take insurance. The spouse also can get insured. In this case, one can think of joint life policies. The insurance company will pay the sum assured to the surviving partner in the case of joint life policy. Children above the age of 5 also can be insured.

The ideal time to initiate an insurance coverage is when you start earning. The amount of insurance is better to be based on the minimum amount required to maintain on a monthly basis, your age and of course, your earnings. It is also preferred to heed your future requirements and expenses too while deciding on the amount of policy.

The amount of premium that you want to pay could depend on the following factors

a. Your earning period
b. Your monthly savings
c. The amount you are able to set aside for paying the premium
d. Whether to participate in Bonus

Normally the age limit for taking life insurance policies is 5 and 75.

There are insurance policies which offer no return and those with post tax returns. Those who come under tax bracket may opt for a policy with investment returns

At this stage, one had better have a basic understanding of the types of policies though the details are to follow in the ensuing sessions.

Following are the main types of policies:

1.Whole Life Policies
2.Endowment policies
3.Joint Life policies
4.Children's
5.Money back policies

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