Lesson 3 - Types of Insurance and their present day relevance

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.

Class Schedule
2 Lessons a Month

TYPES OF INSURANCE
Till recently, insurance, to most of us, was life insurance. There was scanty awareness of any other insurance in existence. But as the concept of insurance gained more importance in terms of utility and acceptability, the relevance of other forms of insurance began to be noticed.

Broadly speaking, there are two sections of insurance- Life Insurance and Non-life or General Insurance. Life insurance, as the term goes, insures one's life. It is otherwise known to be Life Assurance. Life insurance is a contract in which the insurer assures the payment of a sum to the insured in consideration of the premium paid. The sum assured shall be given, either at death or the attainment of a certain age.

The main difference between life and non-life insurance is that, in the case of life insurance, the risk is certain. For General Insurance policies, the risk is uncertain.

Add: For non-life insurance, the duration is shorter than life insurance. While life insurance policies are taken for the whole life, non-life policies are taken for a year or two with renewal facility .

Other forms of insurance other than life, are collectively called general insurance. General insurance or non-life insurance encompasses fire insurance, marine insurance, medical insurance, motor accident insurance, etc. While life insurance does not imply insurable interest, general insurance has it in-built. A brief description including factors and categories which constitute general as well as life insurance will throw light on both concepts.

LIFE INSURANCE

The policy which insures one's life and assures payment either on death or attainment of a specified age would come under this. There are mainly two types of Life insurance policies.

a) Whole life policy: Under this, the premiums are paid throughout one's life, normally till one attains the age of retirement. Thereafter, the policy shall continue to be valid until the death of the insured. The benefits are bound to be passed on to the dependents of the policyholder.

b) Endowment policy: In this case, the sum assured shall be payable either at the death of the assured or at the end of a term, say 20 years, 30 years, etc. for which period the policy is taken. This policy is usually considered as collateral security for a loan taken by the policy holder. Money Back policies come under this category. As a rule, premium will be comparatively higher for endowment policies as the insurer guarantees the sum any way.

Life insurance is not a contract of indemnity unlike general insurance.

Joint Life policy: These are issued to cover two lives jointly. The amount is payable at the death of one or more persons insured as detailed in the policy

Term Assurance policy: As the term suggests, this policy covers only for a certain period of time, the expiry of which will invalidate the policy. The premium is very low as the risk is less. These policies are usually for a short period.

The term assurance policies eventually can be converted to either endowment policy or whole life policy.

Life insurance companies may also issue annuity policies and pension policies.

GENERAL INSURANCE/NON-LIFE INSURANCE

Any insurance other than life insurance is called general insurance; e.g.: motor cycle insurance. General insurance is a contract of indemnity. The premium paid is not an investment, but an expense. The insured can recover the sum assured only if an unforeseen eventuality occurs. Otherwise the premium paid is considered profit for the insurance company. Since the amount is guaranteed only on a contingency, this cannot be placed as collateral or additional security for any loan taken by the policyholder. The premium is low compared to life policies. Here the insurable interest can be quantified in terms of money and hence the amount of loss can be calculated easily. The insured cannot recover an amount more than the assessed value, i.e. the value calculated as compensation to replace the asset insured, at a rate prevailing in the market. The aim is not to allow the policyholder to make any profit out of the contract.

The non-life policies are mainly

1. Fire Insurance        2. Marine Insurance and        3. Other Insurance.

1. Fire Insurance: Fire insurance is a contract of indemnity guaranteeing the payment of loss caused by fire, to the property or asset. But the amount undertaken by the insurance company will not be in excess of the actual loss or the maximum amount stated in the policy whichever is less. Fire insurance policies can be either Replacement policy or policy of Loss of Profit or Consequential loss. In the case of Replacement policies, there is no relevance for the value of the asset, but it is the replacement cost to buy a new property, that is covered. Under loss of profit policies, the cost covered is the profit that would have been earned during the time taken to replace the asset.

2. Marine Insurance: Marine insurance is taken to cover the risk of peril at the sea or maritime peril. This will cover the cost of freight, third party liability in connection with any peril or damage to the cargo. The types of marine insurance policy are based on time, value, voyage, no value or no name.

3. Other Insurance/Miscellaneous Insurance: This comprises all other policies which do not come under Fire or Marine policy. Mediclaim Insurance, Motor Insurance, Householders Insurance, Theft Insurance, Liability Insurance etc.

Unlike Life insurance, many of the general insurance policies are statutory.
You may note that one cannot ride a motorcycle without taking an insurance policy. Similarly for an export or import transaction, it is not complete without taking a marine insurance policy. The objective - to give peace of mind to the property holder, and to play safe.

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