Principles of Insurance
Q. 8. Discuss the nature & definition of contract of insurance.
Ans. Nature of Contract of Insurance. Insurance may be defined as a contract between two parties whereby one party called insurer undertakes, in exchange for a fixed sum called premiums, to pay the other party called insured a fixed amount of money on the happening of a certain event. Since insurance is a contract, certain sections of Indian Contract Act are applicable. Section 10 of this Act says, “All agreements are contracts if they are made by free consent of the parties, competent to contract, for a lawful consideration and with a lawful object and which are not hereby declared to be void”.
Definitions of Insurance Contract- Insurance contract means that contract by which a sum of money is paid to the assured in consideration of insurer’s incurring any event of paying a large sum upon a given contingency. Some definitions of Insurance contract are as follows-
(1) “Insurance is a contract by which a sum of money is paid to the assured in consideration of insurer’s incurring the risk of paying a large sum upon a given contingency.”. -JUSTICE TINDALL
(2) “In its legal aspect, it is a contract, the insurer agreeing to make good any financial loss the insured may suffer within the scope of the contract, and insured agreeing to pay a consideration (the premium).”. -RIEGEL AND MILLER
(3) “Insurance is a contract whereby the insurance company agrees to make payments to a party, generally called the insured, should the event insured against in the contract occur.”. -FRANK JOSEPH ANGELL
(4) “A contract of insurance is a contract whereby one person, called the ‘insurer’ undertakes in return for the agreed consideration called the ‘premium’, a sum of money or its equivalent on the happening of a specified event.” -JUSTICE CHANNELL in Prudential Insurance Company vs Inland Revenue Commissioner, (1904) 2 KB 658.
(5) “Insurance is a contract by which one party for a consideration called the premium, assumes particular risks of other party and promises to pay to his nominee a certain or ascertainable sum of money on a specified contingency.”-E. W. PATTERSON
(6) “Any contract by which one of the parties for a valuable consideration, known as premium, assumes a risk of loss or liability that rests upon the other is a contract of Insurance.” -WILLIAM R. VANCE
Thus, we can say that, Insurance is a contract by which a sum of money is paid to the insured in consideration (Premium) of insurer’s incurring the risk or losses of paying a large sum of money upon a given contingency.
The contract of insurance may cover interest of persons other than person (5) having insuring interest in property. The person insuring the interest may not be owner of property. The contract of insurance is valid as long as there is insurable interest in property.
Q. 9. Describe the essential elements of a valid insurance contract.
Ans. The insurance contract involves-
A. the elements of general contract, and
B. the elements of special contract relating to insurance.
A. General Elements The valid contract, according to Section 10 of “Indian contract Act, 1872, must have the following essentials-
1. Agreement (Offer and Acceptance)
2. Legal Consideration
3. Competence to make contract
4. Free consent
5. Legal object
1. Offer and Acceptance- The offer for entering into contract may generally come from the insured. The insurer may also propose to make the contract. Whether the offer is from the side of insurer or from the side of insured, the main fact is acceptance. Any act that precedes it is an offer or a counter-offer. All that precede the offer or counter-offer is an invitation to offer. In insurance, the publication of prospectus, the canvassing of the agents are invitations to offer. In absence of counter-offer, the acceptance of offer will be an acceptance by the insurer. At the moment, the notice of acceptance is given to other party, it would be a valid acceptance.
2. Legal Consideration- The promisor to pay a fixed sum at a given contingency is the insurer who must have some return for his promise. It need not be money only but it must be valuable. It may be sums, right, interest, profit, or benefit. Premium being the valuable consideration, must be given for starting the insurance contract. The amount of premium is not important to begin the contract. The fact is that without payment of premium, the insurance contract cannot start.
3. Competent to make contract- Every person is competent to contract (a) who is of the age of majority according to the law, (b) who is of sound mind, and (c) who is not disqualified from contracting by any law to which he is subject. A minor is not competent to contract.
4. Free Consent-Parties entering into the contract should enter into it by their free consent. The consent will be free when it is not caused by- (1) coercion, (2) undue influence, (3) fraud, (4) misrepresentation, or (5) mistake. When there is no free consent except fraud the contract becomes voidable at the option of the party whose consent was so caused. In case of fraud the contract would be void. The proposer for free consent must sign a declaration to this effect. The person explaining the subject-matter of the proposal to the proposer must also accordingly make a written declaration on the proposal.
5. Legal Object-In order to make a valid contract, the object of the agreement should be lawful. An object that is (i) not forbidden by law, or (ii) is not immoral, or (iii) not opposed to public policy, or (v) which does not defeat the provisions of any law, is lawful. In proposal form the object of insurance is asked which should be legal and the object should not be concealed. If the object of an insurance, like the consideration, is found to be unlawful, the policy is void.
B. Special elements-There are some special elements of a valid insurance contract according to the Insurance Act, 1938. These are as follows-
1. Insurable interest
2. Utmost good faith
3. Indemnity
4. Subrogation
5. Warranties
6. Proximate cause
1. Insurable interest- For an insurance contract to be valid, the insured must possess an insurable interest in the subject matter of insurance. The insurable interest is the pecuniary interest whereby the policy holder is benefited by the existence of the subject-matter and is prejudiced by the death or damage of the subject-matter. The essentials of a valid insurable interest are the following:
(i) There must be a subject-matter to be insured.
(ii) The policy-holder should have monetary relationship with the subject matter.
(iii) The relationship between the policy-holders and subject-matter should be recognised by law.
(iv) The financial relationship between the policy-holder and subject- matter should be such that the policy-holder is economically benefited by the survival or existence of the subject-matter and/or will suffer economic loss at the death or existence of the subject-matter.
2. Utmost good faith-The doctrine of disclosing all material facts is embodied in the important principle ‘utmost good faith’ which applies to all forms of insurance. Both parties of the insurance contract must be of the same mind (ad idem) at the time of contract. There should not be any misrepresentation, non-disclosure or fraud concerning the material facts. In case of insurance contract the legal maxim ‘Caveat Emptor’ (let the buyer beware) does not prevail, where it is regarded the duty of the buyer to satisfy himself of the genuineness of the subject-matter and the seller is under no obligation to supply information about it. But in insurance contract, the seller, i. e., the insurer will also have to disclose all the material facts. An insurance contract is a contract of uberrimae fidei, i.e., of absolute good faith where both parties of the contract must disclose all the material facts truly and fully.
3. Indemnity As a rule all insurance contracts except personal insurance are contracts of indemnity. According to this principle, the insurer undertakes to put the insured, in the event of loss, in the same position that he occupied immediately before the happening of the event insured against. In certain form of insurance, the principle of indemnity is modified to apply. For example, in marine or fire insurance, sometimes, certain profit margin which would have earned in absence of the event, is also included in the loss. In true sense of the indemnity, the insured is not entitled to make a profit of his loss.
4. Subrogation-The doctrine of subrogation refers to the right of the insurer to stand in the place of the insured, after settlement of a claim, in so far as the insured’s right of recovery from an alternative source is involved. If the insured is in a position to recover the loss in full or in part from a third party due to whose negligence gligence the loss may have been precipitated, his right of recovery is subrogated to the insurer on settlement of the claim. The insurers, thereafter, recover the claim from the third party. The right of subrogation may be exercised by the insurer before payment of loss.
5. Warranties There are certain conditions and promises in the insurance contract which are called warranties. According to Marine Insurance Act, “A warranty is that by which the assured undertakes that some particular thing shall or shall not be done, or that some conditions shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts.” Warranties which are mentioned in the policy are called express warranties. There are certain warranties which are not mentioned in the policy. These warranties are called implied warranties. Warranties which are answers to the questions are called affirmative warranties. The warranties fulfilling certain conditions or promises are called promissory warranties.
6. Proximate Cause-The rule is that immediate and not the remote cause is to be regarded. The maxim in sed causa proxima non-remota spectature, i. e., see the proximate cause and not the distant cause. The real cause must be seen while payment of the loss. If the real cause of loss is insured, the insurer is liable to compensate the loss; otherwise the insurer may not be responsible for loss. But, proximate cause is not a device to avoid the trouble of discovering the real cause or common sense cause. Proximate cause means the active efficient cause that sets in motion a train of events which brings about a result, without the intervention of any force started and working actively from a new and independent source.
Q. 10. What is doctrine of utmost-good faith? What are its #characteristics?
Or
“An insurance contract is a contract of Uberrimae fidei.” Explain this statement with the help of decided cases.
Ans. The doctrine of disclosing all material facts is embodied in the important principle of utmost-good faith which applies to all forms of insurance.
Both parties of the insurance contract must be of the same mind (ad idem) at the time of contract. There should not be any misrepresentation, non-disclosure or fraud concerning the material facts. In case of insurance contract the legal maxim ‘Caveat Emptor’ does not prevail, where it is regarded the duty of the buyer to satisfy himself of the genuineness of the subject-matter and the seller is under no obligation to supply information about it. But in insurance contract, the seller, i.e. the insurer will also have to disclose all the material facts. An insurance contract is a contract of uberrimae fidei, i. e, of absolute good faith where both parties of the contract must disclose all the material facts truly and fully.
According to JUSTICE JESSEL, all insurance contracts are based on complete trust and faith. The meaning of this principle is to express all material facts fully at the time of contract by both the parties of the contract of insurance.
In other words, parties of insurance contract should disclose all important things, facts and circumstances which can affect the decisions relating to insurance.
In the opinion of JUSTICE ROLFE, in case of insurance one should not only disclose the facts which he considers relevant at the time of the contract but also those facts which may be important in future. If he knowingly conceals the important facts, he commits the act of fraud.
Characteristics of utmost good faith:
Material Facts- A material fact is one which affects the judgment or decision of both parties in entering into the contract. Facts which count materially are those which influence a party in deciding whether or not to offer or to accept such risk and if the risk is acceptable, on what terms and conditions the risk should be accepted. These facts have a direct bearing on the degree of risk in relation to the subject of insurance.
Full and True Disclosure – The utmost good faith says that all the material facts should be disclosed in true and full form. It means that the facts should be disclosed in that form in which they really exist. There should be no concealment, misrepresentation, mistake or fraud about the material facts. There should be no false statement and no half truth nor any silence on the material facts.
Duty of both the Parties-The duty to disclose the material facts lies on both the parties-the insured as well as the insurer, but in practice the assured has to be more particular, about the observance of this principle because he is usually in full knowledge of facts relating to the subject-matter which, despite all effective inspections of the insurer, would not be disclosed.
Exceptions- In the following circumstances, the insured is not required to disclose information:
(1) All those circumstances which diminish the risk.
(2) All those facts which are known or reasonably presumed to be known to the insurer.
(3) Facts which could be inferred from the information disclosed.
(4) Facts of public knowledge.
(5) Those facts which are superfluous to disclose by reason of a condition or warranty.
Q. 11. Discuss the scope and relevance of proximate cause under insurance contracts.
Ans. Proximate Cause-The efficient cause of a loss is called the proximate cause of the loss. The policy, to cover the loss, must have an insured peril as the proximate cause of the loss or also the insured peril must occur in the chain of causation that links the proximate cause with the loss. The proximate cause is not necessarily, the cause that was nearest to the damage either in time or in place, but is rather cause the that was actually responsible for loss.
The rule is that immediate and not the remote cause is to be regarded. The maxim is sed causa proxima non-remota spectature, i.e. see the proximate cause and not the distant cause. The real cause must be seen while payment of the loss. If the real cause of loss is insured, the insurer is liable to compensate the loss; otherwise the insurer may not be responsible for loss. But, proximate cause is not a device to avoid the trouble of discovering the real cause or the common sense cause. Proximate cause means the active efficient cause that sets in motion a train of events which brings about a result, without intervention of any force started and working actively from a new and independent source.
Determination of Proximate Cause– (i) If there is a single cause of the loss, the cause will be the proximate cause and further if the peril (cause of loss) was insured, insurer will have to indemnify the loss.
(ii) If there are concurrent causes, the insured perils and excepted perils have to be segregated. The concurrent causes may be first, separable and second, inseparable. Separable causes are those which can be separated from each other. The loss occurred due to a particular cause may be distinguishedly known. In such a case, if any cause is excepted peril, insurer will have to pay up to the extent of loss which occurred due to insured perils. If the circumstances are such that the perils are inseparable, then the insurers are not liable at all when there exists any excepted peril.
Q. 12. Describe the principle of Insurable interest.
Ans. Insurable interest- For an insurance contract to be valid, the in- sured must possess an insurable interest in the subject-matter of insurance. The insurable interest is the pecuniary interest whereby the policy holder is benefited by the existence of the subject-matter and is prejudiced by the death or damage of the subject-matter.
Definitions- According to RIEGEL AND MILLERR, “An insurable interest is an interest of such a nature that the possessor would be financially injured by the occurrence of the event insured against.
According to MEHR AND CAMMACK, “In property insurance, insurable interest is any financial interest based upon some legal right in the preserva- tion of the property.”
According to him, “In life insurance, an insurable interest is any reason- able expectation of financial loss arising from the death of the person whose life is assured.”
Essentials of insurable interest-The essentials of a valid insurable interest are the following:
(1) There must be subject-matter to be insured.
(2) The policy holder should have monetary relationship with the subject matter.
(3) The relationship between the policy holders and the subject-matter should be recognised by law.
(4) Insured has a right to take insurance of that thing.
(5) It is possible to measure that financial interest.
(6) The financial relationship between the policy holder and subject mat- ter should be such that the policy-holder is economically benefitted by the survival or existence of the subject-matter and/or will suffer economic loss at the death or existence of the subject-matter.
Q. 13. Insurance is based upon the principles of co-operation and prob- ability. Discuss.
Ans. Principle of Co-operation– Insurance is a co-operative device. If one person is providing for his own losses, it cannot be strictly an insurance because in insurance, the loss is shared by a group of persons who are willing to co-operate. In ancient period, the persons of a group were willingly sharing the loss to a member of the group. They used to share the loss at the time of damage. They collected enough funds from the society and paid to the depen- dents of the deceased or the persons suffering property losses. The mutual co- operation was prevailing from the very beginning upto the era of Christ in most of the countries. Lately, the co-operation took another form where it was agreed between the individual or the society to pay a certain sum in advance to be a member of the society. The society by accumulating the funds, guarantees payment of certain amount at the time of loss to any member of the society. The accumulation of funds and charging of the share from the member in advance became the job of one institution called insurer. Now it became the duty and responsibility of the insurer to obtain adequate funds from the members of the society to pay them at the happening of the insured risk. Thus, the shares of loss took the form of premium. Today, all the insured give a premium to join the scheme of insurance. Thus, the insured are co-operating to share the loss of an individual by payment of a premium in advance.
Principle of Probability- The loss in the shape of premium can be dis- tributed only on the basis of theory of probability. With the help of this prin- ciple, the uncertainty of loss is converted into certainty.
The insurer will have not to suffer loss as well have to gain windfall. Therefore, the insurer has to charge only so much amount which is adequate to meet the losses. The probability tells what are the chances of losses and what will be the amount of losses.
The inertia of large number is applied while calculating the probability. The larger the number of exposed persons, the better and the more practical would I be the findings of the probability. Therefore, the law of large number is applied in the principle of probability. In each and every field of insurance the law of large number is essential. These principles keep in account that the past events will incur in the same inertia. The insurance, on the basis of past expe rience, present conditions and future prospects fixes the amount of premium. Without premium, no co-operation is possible and the premium cannot be calculated without the help of theory of probability, and consequently no insurance is possible.
So, these two principles are the two main legs of insurance.
Q. 14. Describe the meaning, form, characteristics and kinds of warranties. What is the effect of breach of warranty ?
Ans. Warranty is the very important condition in the insurance contract which is to be fulfilled by the insured. On breach of warranty the insurer becomes free from his liability. Therefore insured must have to fulfil the condition and promises during the insurance contract whether it is important or not in connection with the risk. The contract can continue only when warranties are fulfilled. If warranties are not followed, the contract may be cancelled by the other party whether risk has occurred or not or the loss has occurred due to other reason than the waiving of warranties. However, when the warranty is declared illegal and there is no reverse effect on the contract, the warranty can be waived.
The definition of warranty-According to Sec. 35 of the Marine Insurance Act, 1963-
(1) Warranty means a promissory warranty, that is to say, a warranty by which the assured undertakes that some particular thing shall or shall not be done or that some condition shall be fulfilled or whereby he affirms or negatives the existence of a particular state of facts.
(2) A Warranty may be express or implied.
(3) A warranty, as above defined, is a condition which must be exactly complied with, whether it be material to the risk or not. If be not so complied with, then, subject to any express provision in the policy, the insurer is discharged from liability as from the date of the breach of warranty, but without prejudice to any liability incurred by him before that date.
Kinds of Warranties:
Warranties which are mentioned in the policy are called express warranties. There are certain warranties which are not mentioned in the policy. These warranties are called implied warranties. Warranties which are answers to the question are called affirmative warranties. The warranties fulfilling certain conditions or promises are called promissory warranties.
Breach of warranty – If there is breach of warranty, the insurer is not bound to perform his part of the contract unless he chooses to ignore the breach. The effect of a breach of a warranty is to render the contract voidable at the option of other party provided there is no element of fraud. In case of fraudulent representation or promise, the contract will be void ab initio.
Q. 15. “Indemnity is the controlling principle in Insurance law.” Discuss this statement.
Ans. As a rule, all insurance contracts except personal insurance are contracts of indemnity. According to this principle, the insurer undertakes to put the insured, in the event of loss, in the same position that he occupied immediately before the happening of the event insured against. In certain form of insurance, the principle of indemnity is modified to apply. For example, in marine or fire insurance, sometimes, certain profit margin which would have earned in absence of the event, is also included in the loss. In true sense of the indemnity, the insured is not entitled to make a profit of his loss.
Conditions for Indemnity Principle- The following conditions should be fulfilled in full application of principle of indemnity.
(i) The insured has to prove that he will suffer loss on the inured matter at the time of happening of the event and the loss is actual monetary loss.
(ii) The amount of compensation will be the amount of insurance. Indemnification cannot be more than the amount insured.
(iii) If the insured gets more amount than the actual loss, the insurer has right to get the extra-amount back.
(iv) If the insured gets some amount from third party after being fully indemnified by insurer, the insurer will have right to receive all the amount paid by the third party.
Characteristics of Principle of Indemnity- Principle of Indemnity has the following characteristics-
(1) Scope This principle is applicable on all types of insurance contract except life, accidental, and health insurance.
(2) Object The object of this principle is to indemnify the insured by providing financial security.
(3) Amount of Indemnity The amount of indemnity can never be more than the amount of actual loss. It can not exceed the stüm assured. In other words, the amount of indemnity can not exceed the actual loss or the sum assured, whichever is less.
(4) Certification of the actual loss-The insured has to certify that the amount he is claiming, is his actual loss.
(5) No profits-An insured can be indemnified to the extent of his actual loss only under this principle. Insured has to return the excess amount if he receives more than the actual loss.
(6) Insurable interest-The amount of losses can be recovered by the insured only when he proves his insurable interest in the subject matter of the insurance.
(7) In case of more than one insurance policy-If insured has more than one insurance policy, he can get one complete indemnity.
Importance of the Principle of Indemnity:
(1) Protection of public interest-National property can be saved from destruction through this principle.
(2) Reduction in Premium-This principle encourages the reduction in premium. Because they are given the indemnity for actual loss, they are more cautious regarding their losses.
(3) Validity Insurance contract is valid through the enforcement of this principle. Without it, insurance contract will be considered illegal, unenforceable and against public policy like gambling.
(4) Care of Property People will take proper care of their insurance property and will not be careless. So this principle provides social security.
Implementation of the Principle of Indemnity-This principle is implemented in various insurances, such as-Fire Insurance-According to the principle of Indemnity the financial loss suffered due to perils insured against will be compensated in full, not more than this and not less than this. The insurance provides protection by indemnifying the financial loss suffered by insured person which occurred beyond the control of insured and insurer.
Marine Insurance-Under no circumstances an insured is allowed to make a profit out of a claim. The insurer agrees to indemnify the assured only in the manner and to the extent agreed upon.
Q. 16. What are the grounds on which court can order winding up of an insurance company. ? Is the voluntary winding up of an insurance company possible? How is the valuation of property and liabilities of insurance company ascertained on winding-up?
Ans. Winding up by the court– According to Sec. 53 of the Insurance Act, 1938-
(1) The court may order the winding up in accordance with the Indian Companies Act, 1913, of any insurance company and the provisions of that Act shall, subject to the provisions of this Act apply accordingly.
(2) In addition to the ground on which such an order may be based, the court may order the winding up of an insurance company-
(a) If with the sanction of the court previously obtained a petition in this behalf is presented by shareholders not less in number than one-tenth of the whole body of shareholders and holding not less than one-tenth of the whole share capital or by not less than fifty policy-holders holding policies of life insurance that have been in force for not less than three years and are of the total value of not loss than fifty thousand rupees; or
(b) If the controller, who is hereby authorized to do so, applies in this behalf to the court on any of the following grounds, namely:-
(i) that the company has failed to deposit or to keep deposited with the Reserve Bank of India the amounts required by Section 7 or Section 98.
(ii) that the company having failed to comply with any requirement of this Act, has continued such failure or having contravened any provision of this Act has continued such contravention for a period of three months after notice of such failure or contravention has been conveyed to the company by controller.
(iii) that it appears from any returns, statements furnished under the provisions of this Act or from the results of any investigation made thereunder that the company is or is deemed to be, insolvent.
(iv) that the continuance of the company is prejudicial to the interests of the policy-holders or to public interest generally.
Voluntary winding up-According to Sec. 54-
Notwithstanding anything contained in the Indian Companies Act, 1913, an insurance company shall not be wound up voluntarily except for the purpose of effecting an amalgamation or a reconstruction of the company, or on the ground that by reason of its liabilities it cannot continue its business.
Valuation of liabilities– According to Sec. 55 of the Act-
(1) In the winding up of an insurance company or in the insolvency of any other insurer the value of the assets and the liabilities of the insurer shall be ascertained in such manner and upon such basis as the liquidator or receiver in insolvency thinks fit, subject, so far as applicable to the rule contained in the Seventh Schedule and to any directions which may be given by the court.
(2) For the purposes of any reduction by the court of the amount of the contracts of any insurance company the value of the assets and liabilities of the company and all claims in respect of policies issued by it shall be ascertained in such manner and upon such basis as the court thinks proper having regard to the rule aforesaid.
(3) The rule in the Seventh Schedule shall be of the same force and may be repealed, altered or amended as if it were a rule made in pursuance of Sec. 246 of the Indian Companies Act, 1913 and rules may be made under that section for the purpose of carrying into effect the provisions of this Act with respect to the winding up of insurance companies.
Insurance Policies, Risk And Premium Calculation
Q. 17. State the various kinds of policies. Explain some important policies in detail.
Ans. The Life Insurance contract provides elements of protection and investment. After getting insurance the policy holder feels a sense of protection because he shall be paid a definite sum at the death or maturity. Since a definite sum must be paid, the element of investment is also present.
Having different elements in different policies the policy-holders are free to choose the best policy according to their requirements. The life insurance can be divided into many policies. Some of them are as follows:-
(1) Whole life policy
(2) Endowment Assurance policy
(3) Term policy
(4) Policy with profit
(5) Policy without profit
(6) Debenture policy
(7) Instalment policy
(8) Regular premium policy
(9) Limited payment policy
(10) Single premium policy
(11) Money back policy
(12) Bima Sandesh premium back term policy
(13) Bhavishya Jeevan policy
(14) Jeevan Dhara policy
(15) Jeevan Akshay policy
(16) Jeevan Balya (New children deferred endowment policy)
(17) Jeevan Kishore (A New deferred Endowment assurance policy)
(18) Jeevan Sarita (Joint life assurance cum last survivor annuity plan)
(19) Jeevan Chhaya (An assurance plan for higher education of children)
(20) Jeevan Grah alias Jeevan Mitra double cover endowment plan.
(21) Jeevan Surabhi policy
(22) Jeevan Sukanya policy
(23) Bima Kiran policy
(24) Children’s money back assurance policy
(25) Jeevan Shree policy
(26) Jeevan Suraksha policy
(1) Whole life policy- Whole life polices are issued for life. It means that the policy amount will be paid at the death of the life assured. The assured, thus cannot get the policy amount during his life time, only his dependents will get the advantages of this policy. It is also beneficial to pay estate duty. The minimum amount for which a policy will be issued under this plan is Rs. 1,000.
(2) Term insurance policy- Term insurance is for a short period of ranging from 3 months to 7 years. Sum assured is payable only in the event of death of the life assured occurring during the period but the assurance comes to an end, should the life assured survive. Term insurance policies are the cheapest policies. These policies are always without profits.
(3) Endowment policy- The sum assured is payable on the life-assured’s surviving the endowment term. In the event of his death within the term, premiums may be returnable or not. In corporation, all premiums paid, without any deduction, will be refunded to. Actually these two policies, i.e. endowment and term policies, are the bases of all other policies.
Q. 18. What do you understand by a Term insurance policy? Describe the main Term policies available in India.
Ans. Term insurance policy- Term insurance is for a short period of years ranging from 3 months to seven years. Sum assured is payable only in the event of death of the life assured occurring during the period but the assurance comes to an end, should the life assured survive. The selected term premiums are usually payable throughout the term of the policy or till the prior death of the life assured. Term insurance policies are the cheapest policies.
Uses of Term Insurance Policies:
The term insurance policies are useful to those (i) who need extra- protection for a short duration, or (ii) who need protection for long duration but are unable to purchase for the time-being due to ill-health ealth or lesser income, (iii) a young businessman can take the policy to save the business-disaster during initial stage of the business, (iv) key-men’s insurances are generally on term insurance basis, (v) a mortgagor of the property may be benefited by this scheme, (vi) a father can take this policy during the period of education of his child, and (vii) any such persons who are willing to provide insurance for a shorter period.
Main Term insurance policies available in India- There are three important types of Term insurance. They are as follows-
(i) Straight-Term (Temporary) Insurance-This type of term policy is for two years, it is also called as two-year temporary assurance policy. The sum assured will be payable only in the event of the life-assured’s death occurring within two years from the commencement of the policy. A single premium is required to be paid at the outset. The policies are issued only under the without profits plan. The policy is not entitled to any surrender value and no loan can be granted on the security thereof because, it is not of accumulative nature and payment is not always certain.
This policy is beneficial to the dependents who are required to pay Estate Duty and to those persons who are given charity or donation of fixed property.
(ii) Renewable Term Policies-These policies are renewable at the expiry of term for an additional period without medical examination; but the premium rate will be altered according to the age attained at the time of renewal. This policy is beneficial to those whose health is deteriorating and will be uninsurable at an advanced age. With the help of this policy, they continue to enjoy the insurance benefit without going under fresh medical examination. However, the premium rate will be increasing according to the attained age. The policy-holder can renew it many times provided the attained age has not crossed 55 years.
(iii) Convertible Term Policy Under this policy, option to convert it into whole life or endowment policy is available. In Corporation, the life assured under this plan has an option to convert the policy, provided it is in full force, into either a limited payment life policy or an endowment assurance policy. without having to undergo fresh medical examination, at any time during the specified term except the last two years. If the option of conversion is exercised, a new policy under the limited payment life plan or endowment assurance plan will be issued, as the case may be, subject to the rates of premium and terms and conditions prevailing on the date of conversion. In other words, the premium rates will be increased according to the age attained.
Q. 19. What is an Endowment policy?
Ans. Endowment policy- This policy is the most popular policy of Life Insurance. This policy is issued for the fixed period and in which the premium is also paid for the fixed period. The sum assured is payable on the life assured’s surviving endowment term. In the event of his death within the term, premiums may be returnable or not. The liability to pay premium is ended after the death of insured.
Various Endowment policies in India:
There are several endowment policies, only some of the important Endowment policies are discussed below-
(1) Pure Endowment policy-This can be issued in the life of adult as well as in the life of child. In the case of a policy effected on the life of a child payment of premiums does not cease on the death of the proposer but must be continued during the whole currency of the policy. Paid-up and surrender values are allowed on this policy. The mode of payment of premium under this plan is only yearly or half-yearly.
This policy is useful to the person who does not care to present himself for medical examination. This is also beneficial to those who, for reasons of health, would be unacceptable for life insurance on standard premium. It is a sort of compulsory saving for old age.
(2) Ordinary Endowment Policy- This is the policy which actually represents the Life insurance in true sense. It provides an ideal combination of both the family protection and the investment. It is taken out for a specified term of years, the sum assured being payable either on the life assured’s death during the period or on his survival to the end of the period. Premiums are payable throughout the term of the policy or to a limited period or till the prior death of the life assured. Ordinary Endowment policy is the combination of Term Insurance and of Pure Endowment. So, the net premium rate for an ordinary Endowment policy is equal to the net premiums of ‘term’ and ‘pure endowment’ policies issued at the same age, for the same period of time.
(3) Joint Life Endowment Policy-This policy covers more than one life under a single policy. Under this plan, the sum assured is payable on the expiry of the term or on the death of one of the assured lives during the endowment period. Premiums are payable throughout the endowment period or till the prior death of any one of the lives assured. The premium is calculated with certain modification according to the age of all insured partners. Paid-up and surrender values are payable on the policy.
(4) Double Endowment Policy Under this policy, if the life assured dies during the endowment period, the basic sum assured is payable and if he survives to the end of the term, double of the sum assured is paid. Premiums are payabie ühroughout the endowmeni term or till the prior death of the life insured. The premiums are generally quoted according to the endowment period, irrespective of the age at entry subject to the provision that maturity age is not beyond 65. The term of policy is ranging from 10 years to 40 years but no policy is insured to mature at an age exceeding 65 years. This policy is combination of an endowment insurance and a pure endowment (without return of premiums for the same period and for the same amount.
(5) Fixed Term (Marriage) Endowment Policy-Under this plan, the sum assured is payable only at the end of a stipulated period, but the premium ceases if death of the policy-holder occurs earlier. In such an event the policy will remain fully paid until the maturity date but the beneficiary may discount the policy before maturity. This plan is issued on without profit basis. Paid-up values are paid under this policy. This policy is designed to meet the needs of a family man who wants to make available a certain sum for marriage of a female dependent.
(6) Educational Annuity Policy-Like marriage-endowment policy, this policy is also taken out on the life of the father or guardian who undergoes medical examination. The child for whose benefit (education) policy is taken is called beneficiary.
(7) Triple Benefit Policy-This policy is a combination of a whole life limited payment and a pure endowment (without return of premium) with a guaranteed annual bonus payable on death during the endowment term. This policy is granted for a fixed terms of 15, 20 or 25 years. Premiums are payable throughout the term or till prior death of the life assured.
The special feature of the plan is that there is a guaranteed and steadily increasing family provision during the selected period along with the old age benefit. The provision for the family does not terminate when the old age benefit is paid at the end of the period and no further premiums are payable thereafter; but a sum equal to the original sum assured still remains to be paid on the death of the life assured thereafter.
(8) Anticipated Endowment Policy-This policy is similar to endowment assurance except that a part of the sum assured is paid at certain intervals before death within maturity of the policy and the balance of the sum assured is payable at maturity. In the event of death at any time during the term of the policy, ie. before the maturity date, full sum assured is payable without any deduction of instalments paid earlier. The policy may be issued both under with and without profit plan. The term may be 15, 20 or 25 years.
(9) Mortgage Redemption Assurance Policy-This policy meets the requirements of institutions and individual borrowers to ensure that the outstanding loan is automatically extinguished in the event of the borrower’s death. The benefits under the plan at any time during the currency of the policy would be the amount of outstanding loan at the beginning of the year as envisaged at the beginning of the transaction, and would become payable in the event of death of the borrower.
(10) Children’s Deferred Endowment Assurance-Sometimes a parent or guardian or near relative of a child wishes to take an insurance policy on the life of the child under which the premium is paid by the proposer during the first few years and by the life assured thereafter. This can be done by taking the children’s deferred endowment assurance. The low premium rate under this plan is a great attraction. A parent can help to his children to take a policy at a rate which is considerably lower than that what they would be called upon to pay at the attainment of majority.
(11) Children Anticipated Policy with Profits-This policy can be taken by parent or legal guardian or any near relative on the life of a child on whose life risk will commence at the age of 18 completed, or 21 years as required by the proponent. The policy will automatically vest in the child at the end of the deferment period and half of the premiums paid during this period will be paid to him in lump sum. The policy will attach bonus from the deferred date at the endowment assurance rate. This policy is issued on the lives of children both males and females upto the age of 14 years.
Q. 20. What do you mean by risk? What are the factors to affect the risk ?
Ans. Risk- It is difficult to define the term ‘risk’. Human life is full of uncertainties. The term risk is used in various meaning according to the conditions but the possibility of loss or injury is called risk form the point of view to study insurance. Its important definitions are as follows-
According to DENENBERG, “Risk is the uncertainty of loss.”
FRANK H. Knight, “Risk is a measurable uncertainty.”
BOON AND KURTZ, “Risk is the chance of loss or injury.”
Thus, any unwanted loss, injury, accident, possibility or uncertainty of destruction is called risk.
Factors affecting the risk– In life insurance, the factors which may affect the risk are usually those factors which are affecting the mortality; they are also called factors affecting longevity of a person. The mortality is not the only risk but the capacity and willingness of a person also influence the insurance decision. These factors are discussed in the following paragraphs.
(1) Age The age of the life to be assured is the most important factor to affect mortality. Except for a few years of the childhood, the premium is determined at every year of the completion of age. The Corporation asks for the age nearer to birth days. The person below six months and the person above six months older of the age will be treated of the same age. For instance, a person of 22 years 7 months and another person of 23 years 5 months will be treated of the age of 23 years.
(2) Build-Build refers to physique of the proposed life and includes height, weight, the distribution of weight and chest expansion. There are standards of weight, maximum weight reveals the indication of certain hidden diseases. Therefore this sign is not favourable. The relationship between height, weight, girth and expansion of chest are the basic determinants of mortality expectations.
Overweight is dangerous in advanced age and underweight is similarly not desirable at younger age, say, below 35 years. The Corporation, for example, has fixed the minimum weight, and maximum weight tat a specified height. I If the assured life is not within the standard the proposal may not be accepted at the time of proposal and it may be postponed or may be accepted at extra-premium or may be rejected at all.
(3) Physical Condition-The physical condition of the life proposed has a direct bearing on the mortality of the life. Insurers are, therefore, very particular about the conditions of an applicants’ sight, hearing, heart, arteries, lungs, tonsils, teeth, kidneys, nervous system, etc. The experts in the field can assess the longevity or mortality of a person due to impairment of certain organs. The questions are also designed to elicit information on the physical status of the applicant in the proposal form. The information is confirmed and supplemented by a medical examination. The primary purpose of the medical cxamination is to detect any malfunctioning of the vital organs of the body.
(4) Personal History The personal history of the life proposed would reveal the possibility of death to him. The history may be connected with the (i) health record, (ii) past habit, (iii) previous occupation, (iv) insurance history.
(i) Health Record-The past health record is the most important factor under personal history because it affects the longevity or mortality of a person to a greater extent. It includes any operations of the life proposed.
(ii) Past Habits The insurers want to know the past habit of the life proposed, for drugs or alcohol because the cure may be only temporary. The past history is usually expected to be repeated. Therefore past history is very cautiously examined.
(iii) History of Occupation-If the proponent was employed in hazardous or unhealthy occupation, there is a possibility that he may still retain ill-effects therefrom or may revert to such occupation. An intimate association within a person suffering from a contagious may influence the health of the life proposed, The past hazardous occupations generally affect health slowly and occupational diseases are contacted. Inorganic dust may create silicosis.
(iv) Insurance History-The previous amount of insurance may disclose the degree of risk of the applicant. If he was refused insurance, it might be a suspicious factor of his insurability. If it was found that the applicant was already insured for adequate amount, the request for more insurance is regarded with suspicions.
(5) Family History-Like the personal history, family history also requires information of habit, health, occupation and insurance of other family members, particularly of the parents, brother and sisters. The children’s history of health is also required. Certain diseases, like tuberculosis and insanity, etc., and longevity of the parents will be relevant factors for determining the degree of risk of the proponents. The favourable family history, however, is not considered for offsetting the adverse effect of the personal history. The family history is considered significant to know the transmission of certain characteristics by heredity. Heart, lungs, build, etc,, follow family characteristics.
(6) Occupation-Occupation is an important factor to affect the risk. It affects the occupation in various ways. Firstly, the nature of work. Secondly, the morale of workers may go down. Thirdly, the chemical effect may be poisonous. Fourthly, the dusty or unventilated house, unhealthy or insanitary environments may deteriorate the health of the workers. Fifthly, in certain occupation, the occupational diseases are common. Sixthly, excessive mental and nervous strain may cause financial worries, and lastly, the lesser income may affect the health of the worker.
(7) Residence The residence also affects the risk. The risk will be lesser in a good climate area and more in a bad climate although the difference is narrowed down because of better medical and sanitary forcilities. Information about the previous residence is equally important. The geographical location, atmosphere, political stability, climate, construction of house, travel, etc., are important factors which may affect the risk.
(8) Present Habits-The general mode of living of the proposer affects the risk. Drunkards and non-temperate persons cause increase in mortality. Similarly, temperate habits tend to increase longevity of a person. Excessive and careless smoking tends to shorten the life due to development of nicotine poisoning. The past habits are also considered important. The intoxication affects the health of a person and consequently his mortality. The general mode of living is also considered in habits.
(9) Morals-It has been observed that the departure from the commonly accepted standards of ethical and moral conduct involve extra mortality. Infidelity and departure from the code of sex behaviour are seriously regarded because these may affect the health. Unethical conduct is considered to be another form of moral hazard. Insurance is not generally given to bankrupt and reputed dishonest persons.
(10) Race and Nationality-The mortality rate differs from race to race and nation to nation. In India, persons of high race or caste are expected to live longer than the scheduled castes or tribes. Similarly, countries near to equator have more mortality. The climate and way of life of a country affect the health conditions of the people.
(11) Sex-Mortality among female sex is, generally, higher than that of male sex because the physical hazard of maternity is present in the former case. Moreover, the ladies are physically more handicapped. The lesser education, conservatism and non-employment of the ladies also affect the mortality. The absence of proper examination of the ladies also count more hazard. The chances of moral hazard are also present in the female insurance. So, unless woman has good financial reasons for insurance, her proposal is not generally conceded.
(12) Economic Status It is essential to examine that the family and business circumstances of the proponents are such as to justify the amount of insurance applied for. This investigation also reveals whether the income of the applicants bears a reasonable relationship to the amount of insurance which he proposes to carry. The higher economic status generally provides a better field for insurance due to various reasons. Educational, financial and professional consciousness make the proponent insurance minded. The chances of death is also lower in higher strata of the society.
Q. 21. What are the various methods of treating sub-standard risks? Ans. Methods of treating sub-standard Risks-The sub-standard risks may be treated in five ways:
(1) Increase in premium,
(2) Decrease in death benefits
(3) Change in class and period of assurance,
(4) Any combination of the above-mentioned methods, and
(5) Postponement of risk
(1) Increase in Premium-The premium can be increased in any of the following manners-
(a) Rating up of Age-Under this method, the life assured is assumed to be a number of years older than his real age. The premium rate is calculated according to the assumed higher age. So, the cash value, loan, paid up and surrender values are also increased according to the increased premium. The extra number of years to be added is determined according to the extra risk involved with the life assured. The policies issued under this plan will be similar to those issued at standard premium.
(b) Flat Extra Premium-Under this method a flat annual extra premium of so many rupees per thousand sum assured per year is charged. Thus, a constant additional premium is added to standard premium; but unlike the rated up age, the extra premium is not taken into accounting for surrender and paid up values. The extra-premium is constantly charged up to the life of policy or up to the existence of the extra-risk.
(c) Extra percentage Plan-There are certain classes of sub-standard risks which are determined by numerical rating system. For each class of extra risk, a certain percentage of the standard premium is charged. This extra percentage is added to the standard premium and is charged along with the standard premium. The classes of sub-standard risks are divided on the basis of incidence of extra risk on the mortality. Once the extra premium is determined on the standard premium it would not vary later on and will be charged according to flat extra premium.
(2) Decrease in Death Benefits-The death benefits may be reduced in two ways:-
(a) Lien Method; and
(b) Restrictive Clause.
(a) Lien Method-The amount payable under this method would be the sum assured less the outstanding lien at the particular time of the policy. The lien is for a fixed number of years. If the life assured dies within this period, the amount of lien is deducted from the policy amount and rest is paid to the beneficiary but if the life assured survives the period of lien, the whole of the policy amount is paid at the claim.
(b) Restrictive Clause-Under this clause, the extra hazard is accepted with a restrictive clause which limits death benefit under certain circumstances. Such a clause usually states that the amount payable under this policy will be on a reduced basis which may be surrender value or return of premiums paid, in case death occurs due to the specified extra hazard. For example, the first pregnancy clause which excludes the risk of death arising from causes connected with first pregnancy is often applied to lives of ladies who have not undergone a normal full-time confinement and who do not wish to pay extra premium to cover the extra-hazard.
(3) Change in the Class and Period of Assurance-The life assured is not given all types of insurance and for a longer period. There is neither a lien on the policy nor any extra premium by way of flat nor rating up to ages. The policy is given at standard premium but all types of policies are not issued. The types of policies to which the choice is restricted are those which carry a higher rate of premium such as ordinary endowment policy. Whole life, multipurpose or triple benefit policies are not given because in these cases the degree of risk is higher as compared to accumulation of reserves. This plan is useful where the extra-risk is expected to occur later in life, such as the case of an over-weight unfavourable family history.
(4) Any combination of the above-mentioned Methods-For certain proponents, any of the above methods can be used which depends on the practical experience of the insurer. For example, a proposal for a multipurpose plan may be accepted under an Endowment Assurance Plan with a lien, if the proponent is young and underweight.
(5) Postponement Consideration of proposal is postponed for a period, when the initial risk is so heavy that there is little hope of offering insurance immediately and the proposal is postponed. In future when health will improve, the proposal can be accepted. Postponement in different types of risk are different. It has been observed that the postponement vary from 3 months to 3 years.
Q. 22. What do you mean by premium? Explain the various methods of premium calculation.
Ans. Premium is a consideration which is paid to the insurer by the insured in exchange of safety’s assurance. In other words premium is a consideration which an insured pays to the insurer for the benefits, financial protection and protection of his interests.
Insurer thus builds a fund by getting the premium and increases it by investing properly. This fund is called life-fund. The losses of insured are compensated through it. It also provides them financial protection.
Definitions of Premium:
(1) Premium is the “Monetary consideration for the policy.” -JOHN H. MAGE
(2) “The price charged by a life insurance company for an insurance or annuity contract is called the premium. -D. M. McG
(3) “The Premium is the consideration which the person insured pays to the insurance company for a life insurance policy.– J. B. MACLEAN
(4) “Premium is the monetary consideration paid by insurers for the insurance granted by the policy. the insured to the -W. A. DINSDALE
Types of Premium-The premium is of two types-
(1) Net Premium-Net premium is based on the mortality and interest rates. Net premium is the premium which is necessary for the maturity of policy or at the time of insured’s death. Net premium is of two types-
Net Single Premium-Net single premium is that premium which is received by the insurer in a lump sum and is exactly adequate, along with the return earned thereon, to pay the amount of claim wherever it arises whether at death or at maturity or even at surrender. It does not provide for expenses of management and for contingencies.
(2) Net Instalment premium-Net instalment premium is that premium which is received by the insurer in instalments at fixed time interval.
Gross Premium-The gross premium is that premium which is charged by the insured to meet the amount of claims and expenses. Thus, the gross premium includes the net premium and loading. Loading is the process to add the expenses to net premium. The loading may add a certain amount to meet the bonus charges on participating policies.
Steps for Calculation:
(1) Determine what constitutes a claim (a) death, (b) survival, or (c) both.
(2) Determine when claims are paid (a) at the beginning, (b) at the end, or (c) during the year.
(3) Determine the number of insured.
(4) Determine the duration of the policy.
(5) Determine the probable number of claims per year.
(6) Determine the value of claims per year.
(7) Determine the number of years of interest involved and find the present value of a rupee,
(8) Determine the present value of the claim for each year.
Calculation of Net Single Premium- The calculation of net single premium is discussed in different types of policies-
(1) Calculation of Single Premium for one year Term Insurance Policy-
This is the simplest type of contract whereby payment is made only when the life assured dies within the term specified. Some points of the one year term insurance are as follows-
(a) Death claims will be paid at the end of the year in which they occur and not at the end of the time.
(b) The rate of return on investment is 3 percent.
(c) The insurer will earn a fixed return on the investment.
Thus the net single premium for each year will be calculated;
Number of deaths X Amount of claims X Present value of Re 1 = Present value of claims.
(2) Calculation of Net Single Premium in whole life policies-A whole life policy continues for the whole of life and promises to pay the sum assured upon the death of the insured to his beneficiary. It has been assumed in most of the mortality table that the life will continue upto 100 years. So the calculation of premium will start from the date of commencement of risk to the 100th year.
(3) Calculation of Net Single Premium in pure Endowment Policy-In this policy, insurer promises to pay the insured value in case the holder survives a certain fixed period. So the holder of 5 years Pure Endowment will be paid only when he survives at the end of 5 years.
Net single premium in pure endowment policy is to be calculated through-
NSP = probability of survival x Policy-amount x Present value of 1 Re for the endowment period.
(4) Calculation of Net Single Premium in Ordinary Endowment Policy Under this policy payment of claim amount is made at the survival of the term or at the death of the life assured whichever is earlier. Payment in this case is certain.
For example-We have to complete Net Single Premium of Ordinary Endowment policy of 5 years, we can easily base our calculation on death and survival rates.
(5) Calculation of Net Single Premium for a Joint Life Policy Under this policy payment of claim will be made at the first death of the assured lives who may be two or more. Here, the process of calculation will be the same as term insurance. The compound probability of death is calculated by addition of the probability of deaths of one and other and all of the envisaged. It is calculated by multiplying the probability of death of each person.
Calculation of Gross premium- The gross premium is that premium which is charged by the insured to meet the amount of olaims and expenses. The policy holders are required to pay the gross premium and they even do not know the net premium. The gross premium is also known as ‘office premium The policy holders are required to pay amount to meet the cost of claim, expenses of business and loading for bonus if the policy is participating one. The gross premium is calculated through this formula-
Gross Premium Net Premium + Loading.
Q. 23. How will you select the best policy?
Or
Which policy is the best policy?
Ans. After the study of all kinds of policies the most important question arises that which is the best policy in all policies. Really, this question is also irrelevant because the supremacy of all policies depends on the will, power and need of the insurer. An insurance policy is useful to a person but it can be useless and unnecessary to other.
The selection of the best insurance policy is based not only on one but based on many factors. In other words at the time of taking the best policy the following points should also be remembered. These points are as follows-
(1) Need of an insured-At the time of taking an insurance policy insured must remember that why has he need of an insurance policy. Every person or family has different needs. So the selection of an insurance policy should be taken according to the needs of insurance. If any has to manage the amount for the education and marriage of children, then marriage endowment policy or education policy can be taken. Thus different policies can be taken for different needs.
(2) Size of Family At the time of selection of a policy the family size must also be remembered. The responsibilities of a big family are more so the policy is usually to cover most of the liabilities.
(3) Age-All types of policies are not for all age group at the time of selecting a policy.
(4) Regularity and certainty of income-The certainty of income also affects the selection of an insurance policy. The person of ascertained income can take any type of policies but in the case of uncertainty of income, taking special type policy is useful.
(5) A saving condition-The decision of taking an Insurance policy is changed according to the rate and amount of saving. Those persons who save much money can take a policy of big amount.
(6) Conditions for paying insurance amount-It is also remembered at the time of taking an insurance policy, that when and under what conditions the insurance amount will be paid. Persons do prefer those policies under which they can get the amount at the time of need.
(7) Debt facility Many policies have a special procedure of debt facility. To get share in profits is also a special attraction of policies. These factors affect the selection of a policy.
(8) Other factors-Some other factors to select a policy are-
(i) Life style of a family
(ii) Nature of insured.
(iii) Attitude of a person.
(iv) Capacity of a person.
Thus, an insured should select a policy on the basis of different profits, aims, needs, attractions and limitation.
Q. 24. What are the various conditions of an insurance policy?
Ans. The policy conditions are studied in four forms:
(1) Conditions relating to commencement of risk,
(2) Conditions of Premium,
(3) Conditions relating to continuation of policies,
(4) Lapse Conditions
Conditions Relating to Commencment of Risk:
(1) Commencement of Risk-The letter of acceptance is not a cover note, it only intimates that the risk will commence when the first premium is offered to and accepted by the insurer. If premium was paid along with the proposal form, the date of letter of acceptance will be the date of commencement of risk. After acceptance of risk, policy is issued. The policy contains terms and conditions of the insurance and is a document which can be used as a proof of insurance.
(2) Proof of Age-The proof of age must be produced at the time of proposal or immediately after the proposal because the rate of premium depends upon the age of the life assured. The insurer does not withhold the issue of the policy for want of proof of age, but does not admit any claim unless the age is proved to the satisfaction of the insurer. However, if it is subsequently found that the age at entry was mentioned lower than the correct age, the assured sum is reduced to such amount as would have been purchased at the true age.
If the actual age comes out to be lower than the stated age, the difference is either refunded or adjusted towards future premium or policy amount. The proof of age is very essential at the time of proposal in the term policies. Multi- purpose policy, Children’s Deferred Endowment Assurance, Immediate Annuity and deferred annuity, where the life assured has not completed 20 years or where the life to be assured has completed 50 years of age or the proposal is under the Salary Saving Scheme.
Conditions of Premium- Following are the conditions of premium-
(1) Payment of Premiums-The premium rate is calculated annually, but for the convenience of the assured, it can be paid half-yearly, quarterly or even monthly. It should be remembered that these premiums are not just the portion of yearly premium because the insurer losses interest on the unpaid premium of a year and expenses are involved for frequent calculation of premium. When premiums are not annual but fractional and if death takes place before all the premiums have fallen due for the current policy year, the Corporation deducts the unpaid instalments from the assured sum at the time of settling the claim.
(2) Days of Grace-Premium is paid at or before the due date. But, for convenience of the policyholders, certain additional period called days of grace, is allowed to pay the premiurn. The insured can pay the premium within the days of grace and the policy would not lapse up to the days of grace. However, the policy will lapse if the due premium is not paid even within the days of grace.
(3) Premium Notice-In order that the policyholder may not forfeit the benefit of his policy, notice of premiums falling due will be regularly sent to him except in the case of policies under which the mode of payment of premium is monthly where no such notice is required, the insured is not bound to give any such notice and the want of it cannot be admitted as an excuse for not paying the due premium in time.
Conditions relating to the continuation of policies:
(1) Indisputable Clause-In order to protect the interests of the assured, indisputable clause is added which provides that the policies shall be indisputable after a stated period, viz., two years from the date of issue except for non-payment of premiums or for fraud. Section 45 of the Insurance Act has provided that the policy will not be disputed on ground of unintentional misstatement, misrepresentation or non-disclosure of a material fact after two years of the issue of the policy. However, on ground of fraud it can be disputed at any time during the currency of the policy.
(2) Alterations in Policies-The insurer permits certain alterations in terms and conditions of the policies at the request of the policyholders. The insurer reserves the right to decline such requests without assigning any reason. Alteration may be change in class or term, reduction in sum assured, increase in sum assured, change in mode of premium payment, splitting up of a policy into two or more policies and so on. The insurer, generally, does not permit alterations which increase the amount of risk to the insurer.
(3) Exclusion-Ordinarily, the insurer does not assure the hazardous occupation. If any insured person has taken up or intends to take up hazardous occupation, he has to pay extra-premium. The hazardous occupations have been listed, by the Corporation in India. The policies issued at standard rates are free from all restrictions to change in occupation. However, the policies issued to students are on the term of hazardous occupation because a student’s occupation is not determined till he completes his education and hence the degree of risk is not known. Standard premium rates are not sufficient to cover the risk of war mortality, therefore, war clause is included in such policies where it is mentioned that if the death will occur due to war the liability of the insurer is limited to the premium paid or surrender value whichever is higher. The total sum assured will not be paid in this case.
(4) Lost Policy-The insured must inform to the insurer whenever the policy is lost or destroyed. On the satisfactory evidence of loss or destruction, the insurer will issue a duplicate copy after advertising the fact and will charge the assured the fee for issuing the duplicate copy.
(5) Loans The insurer may grant loan on the security of the surrender value of the policies. In India, loans are granted on unencumbered policies up to 90 per cent of the surrender value in case of policies which are in force for full sum assured and 85 per cent of the surrender value in the case of policies which are paid up being in force for reduced sum assured. In case, policies are due to mature within three years a larger percentage may be granted. The minimum amount for which a loan can be granted is Rs. 150 and the interest is rate is per annum payable half-yearly. Loans are not granted on certain types of policies where surrender values are not accumulated.
(6) Disability Benefit-This benefit will be granted to all lives assured under all plans except Pure Endowment, Term Assurances, Children’s Deffered Endowment, Deferred and Retirement Annuities. Life assured disabled by accident from earning his livelihood, will be exempted from paying premiums on his policy, falling due after the date of disablement. This benefit is granted on the first Rs. 20,000 of assurance. The example of permanent disablement are loss of sight of both eyes, or amputation of both hands at or above the wrists or amputation of both feet and hands.
(7) Extended Disability Benefit-It provides for waiver of premiums and also for payment of an amount equal to the sum assured on permanent total disability as a result of an accident. The example of permanent total disability is given above. This benefit is available by paying extra premium of Rs. 2/- per thousand of sum assured.
Lapse Conditions:
(1) Lapse of Policies-The insurer shall remain liable for the payment of the claim so far the assured continues to pay the premiums when they fall due. If the policyholder fails to pay any of the due premiums within the days of grace, the insures’s liability ordinarily ceases under the policy and the contract comes to an end. Thus the policy is lapsed and all the benefits related to the policy are terminated. The insurer, however, provides certain alternatives to help the insured at the time of lapse.
(2) Revival of Lapsed Policies-If a policy lapses by non-payment of premium within the days of grace, it may be revived to the full policy amount at any time during the life time of the life assured, but within a period of five years from the due date of the first unpaid premium and before the date of maturity,
Q. 25. Discuss the conditions of claims.
Ans. There are two conditions of claims which are explained in the matters related to the insurance-
(1) Settlement of Claims-The policy amount becomes payable either on the assured’s death during the term of insurance or on his surviving till the end of the term, i. e., on maturity. In case of death claims, proof of death, proof of title and age proof are essential. In case of maturity, proof of title and age proof are required. The age proof is required only when the age was not admitted before the claims. In maturity claim, the policyholder is generally advised well before the actual date of maturity in order that the necessary papers may be completed. The proof of death may be certificate from the doctor who attended the deceased in his last illness, or certificate of Registration of the Death by the Official Registrar of Deaths, or Certificate from employer identifying the deceased or if the deceased was not in service, a certificate of identity from a responsible person acquainted with the deceased.
(2) Settlement options The claim amount may be paid in cash or in instalment. The instalment payment may be of different types: payment of interest annually for a particular period or up to survival and the sum assured at a time may be paid. Annuity may be purchased for life or for a particular period and life thereafter.