Thursday, January 18, 2007

Advantages of Life Insurance







No other product can compete with Life Insurance.
Myth, insurance is a saving tool or an investment. Let’s see how

Saving= Money Invested + Interest.

Above formula is true about Fixed Deposits, National Saving Certificates, Mutual Fund & other instruments. Stock market attracts risk of loosing funds. Even in no loss situations, money available is Investment + Appreciation.

However in Life Insurance, fund available is not total premium paid, but amount wished at the end of the saving period (over next 20 or 30 years).
The fund is secured from beginning. You are paying for it later, out of savings. That too as long as you live or even for lesser period (policy term).
No other scheme imparts such advantage. Thus Life Insurance cannot not be substituted.

In comparison with other saving tools, Life Insurance offers furthermore advantages.
*Easy settlement – Heirs can collect money quicker due to facility of Nomination and assignment.
*Creditors cannot claim the Life Insurance proceeds, also protected against attachment by courts.
*Double tax benefits – Income tax & Capital Gains.
*Liquidity – Insurance policy is a property, can be transferred or mortgaged. Loans are available against policy.

We can conclude……….
-Life Insurance is a way of Life
-Life Insurance is not only best option for Family protection, there is no other way.
-Only & only Insurance can safeguard against unpredictable risks. Unavoidable.
-Insurance preserve value of Human Life which is any time greater than property.
-Nothing can beat insurance in terms of Security, Marketability, Stability of value or Liquidity.
-The Terms of life are hard. Terms of insurance are easy.
-Life insurance helps people live financially solvent life.

Wednesday, January 17, 2007

Insurance Humor

Though Insurance is a complex subject, in real life it creates lot of Humor too. Just get lighter, read interesting anecdote
An American man, having purchased a case of rare, very expensive cigars, insured them against .... get this .... fire.
Within a month, having smoked his entire stockpile of fabulous cigars, and having yet to make a single premium payment on the policy, the man filed a claim against the insurance company.
In his claim, the man stated that he had lost the cigars in "a series of small fires." The insurance company refused to pay, citing the obvious reason that the man had consumed the cigars in a normal fashion.
The man sued ... and won!!
In delivering his ruling, the judge stated that since the man held a policy from the company in which it had warranted that the cigars were insurable, and also guaranteed that it would insure the cigars against fire, without defining what it considered to be "unacceptable fire," it was obligated to compensate the insured for his loss.
Rather than endure a lengthy and costly appeal process, the insurance company accepted the judge's ruling and paid the man $15,000 for the rare cigars he lost in "the fires."
After the man cashed his check, however, the insurance company had him arrested... on 24 counts of arson!
With his own insurance claim and testimony from the previous case being used as evidence against him, the man was convicted of intentionally burning the rare cigars and sentenced to 24 consecutive one year terms.

LI: A Social Security Tool


The United Nations Declaration of Human Rights 1948 provides that “Everyone has a right to a standard of living adequate for the wellbeing of himself and his family, including food, clothing, housing and medical care and necessary social services and the right to security in the event of unemployment, sickness, disability, widowhood or other lack of livelihood in circumstances beyond his control.”

When the earning member expires, the family’s income ceases leaving direct effect on family’s economic condition, unless other arrangements come into being to reinstate the situation. Life insurance provides such an alternate arrangement. Absence of Life Insurance can push another family into the lower section of society. Poor people cost the nation by way of subsidies and doles and so on. Lower strata also cost by way of larger population growth, poor education. Life Insurance tends to reduce such cost. Thus Life Insurance business is complimentary to the government’s efforts in Social Management.

Article 41 of Indian Constitution about social security requires state, within the limits of its economic capacity and development, to make effective provisions for securing right to work, education and assistance in case of unemployment. Parts of these obligations are met through the mechanism of Life Insurance.

Directives from regulator (IRDA) and law obligates insurance companies to extend benefits to weaker sections of the society.

Economic Development & Insurance
Investments are necessary for economic developments. Insurance company plays a major role in mobilizing savings mainly from middle and lower income groups which is channeled into investment for economic growth.

The Human Asset


Every body will agree, a human being is an income generating asset. Every individual is unique with set of professional skills, business acumen and manual labour, capable of generating revenue. This asset can be lost due to unpredictably early death or through illness and disability caused by accidents.
Accidents are uncertain. Death will happen, but the time is uncertain.
If death occurs around retirement age, where normally income ceases, the person has generated earnings during productive years and has made legitimate post retirement arrangements. But if it happens much earlier without proper arrangements, there can be losses to the person and dependents. Insurance is necessary to help those dependent on the income.
Based on ones anticipation, a person has made provisions. Realisations of arrangements made are inadequate, can happen if s/he outlives planned years. Insurance is great help for those who live longer.
So, we can summarise, living too long can be as much a problem as dying too young.
Insurance is an exclusive instrument which reduces “risk of living too long or dieing too early.”

Human Life Value

The quantitative value of the future earnings of a wage earner. By calculating the human life value, one may determine the amount of life insurance to purchase on an applicant. By determining the average income of a wage earner, the number of years the wage earner is going to work and the present value of the income of the wage earner, one can calculate the human life value of a wage earner.

To illustrate the Human Life Value lets take an example,

A 30 years old gentleman works at an organization, willing to retire at age 55. His annual income wide salary is Rs. 2 lacs per annum. This means he will earn Rs. 2 lacs for next 25 years tallying the earning to whooping Rs. 50 lacs at present value. Thus his Human Life Value is considered as Rs. 50 Lacs.

(While calculating HLV, future increase in salaries are not considered, nor inflation. This is the simplest method of calculating HLV. Finance savvy can add up such factors to have more accurate HLV)

If this gentleman dies today, his dependents suffer loss of all the revenue he would have earned in future, which is Rs. 50 Lacs. Thus HLV gives a ballpark figure of basic Life Insurance Coverage required by an individual.

How Insurance Works?


Mechanism of insurance is very simple. People exposed to same risk come together and agree, any one of them suffer a loss, others will share the loss and make good to the person who lost.
People using marine transport for goods are exposed to same set of risks like storms, ship sinking, and vessel damages. Others like manufacturer don’t share same risks but are exposed to different risks like fire, earthquake. Accordingly different risk can be identified and separate groups can be formed exposed to such set of risks. By doing this, Heavy loss may suffered by one out of the group is apportioned into bearable small losses by whole group. (Considering the fact that all members of the group may not suffer such losses at the same time).

The risk is spread among the community and the likely big impact on one is reduced to smaller manageable impacts on all.
Insurance is a business of ‘sharing’.

Insurance follows certain principles, making possible insurance to remain a ‘Fair Arrangement’.
I) It’s difficult for any one individual to bear consequences of the risks, he is exposed to. Becomes bearable when community shares the burden.
II) Peril should occur in accidental manner. The occurrence has to be random, accidental, and not the deliberated creation of the insured person.

The manner in which the loss is to be shared can be determined before-hand. It may be proportional to risk that each person is exposed to. This would be indicative of benefits to be received if the peril befell him. The likely share is collected in advance, at the time of admission to the group.
Insurance companies collect in advance and create a fund from which the losses are paid. (In Life Insurance such fund is called as Life Fund).

To understand phenomena let see an example,
Example 1
In a village of 500 hundred households, each valued at Rs. 1,00,000. Every year, on an average, 5 houses get destroyed due to Peril. Aggregating total loss to Rs. 5,00,000. A fund of Rs. 5 lacs can be gathered, if each household contributes Rs.1000. This is adequate to pay Rs. 1,00,000 each to 5 disaster struck house owners.
Thus, the risk of 5 owners is spread over 500 owners.

Purpose & Need of Insurance


Assets are insured, as they are likely to be damaged through accidental occurrences.
Such occurrences are called Perils. Earthquakes, Floods, Fire, Tsunami, Lightning, Tornados, Breakdowns etc, are Perils. If such perils can cause damage to asset, it is said that the asset is exposed to that risk.
“Perils are events. The Risks are the consequential losses or damages.”
E.g. Due to torrential rains and flooding on 26th July 2005, damage was caused to numerous cars resulting loss to owner.

Now comes the interesting part,
The risk only means possibility of loss or damage. The damage may or may not happen. “There has to be an uncertainty about the Risk. Insurance is pertinent only if there are uncertainties.” If there is no uncertainty about the occurrence of an event, it cannot be insured against.
In the case of human being, death is certain, but the time of death is uncertain.
A person who is terminally ill (as per medical professional’s person may not live beyond stipulated period), the time of death is not uncertain, though not exactly known cannot be insured.

Insurance does not protect the asset nor does it prevent its loss due to peril. Peril cannot be avoided through insurance. Insurance tries to lessen the impact of the risk to owner or dependents. Insurance only compensates the losses – and that too, not fully.

What's Insurance?


Insurance business is related to the protection of economic value of assets.
The asset is valuable to the owner considering benefits generated by it, which can be in terms of income or convenience. Factory manufactures products and sales of such products generate revenue. Cars and vehicles offer transportation in comfort.
Every product has lifespan during which it performs optimum. The owner has to arrange alternate native making sure there is no loss of value or income. However asset may get lost earlier due to accident or unfortunate event making it dysfunctional. An adverse or unpleasant situation can crop up due to such mishap, depriving owner from benefits or income without accessibility to substitute.
Insurance is an instrument that helps to reduce the effect of such adverse situations.

Insurance or Assurance?


Life insurance (life assurance in Queens English) is a contract between the policy owner and the insurer, where the insurer agrees to pay a sum of money upon the occurrence of the insured's death. In return, the policyowner (or policy payor) agrees to pay a stipulated amount called a premium at regular intervals.
As with most insurance polices, life assurance is a contract between the insurer and the policy owner (policyholder) whereby a benefit is paid to the designated Beneficiary (or Beneficiaries) if an insured event occurs which is covered by the policy. To be a life policy the insured event must be based upon life (or lives) of the people name in the policy.
Insured events that may be covered include:
-- death,
-- diagnosis of a terminal illness,
--diagnosis of a
critical illness,
--disability due to ill health,
--permanent disability,
--accidental death
--requirement for long term care. (This list is not exhaustive).


Life policies are typically presented as types legal contracts and the terms of the contract describe the limitations of the insured events. Specific exclusions are often written into the contract to limit the liability of the insurer; for example claims relating to war, riot and civil commotion.
Life based contracts tend to fall into two major categories:
Protection policies - designed to provide a benefit in the event of specified event, typically a lump sum payment.
Investment policies - where the main objective is to facilitate the growth of capital by regular or single premiums.

Concept of Life Insurance


Life Insurance is a contract under which insurer (Insurance Company) in consideration of premium paid undertakes to pay fixed sum of money (sum assured) on the death of the insured or on the expiry of a specified period (term) of time whichever is earlier.

In case of life insurance, the payment for life insurance policy is certain. The event insured against is sure to happen only the time of its happening is not known. So life insurance is known as ‘Life assurance’. The subject matter of insurance is life of human being. Life insurance provides risk coverage to the life of a person. On death of the person insurance offers protection against loss of income and compensate the titleholders of the policy.

To put it in simple terms, insured (policy holder) and insurer (insurance company) with mutual understanding sign a contract and thereby agree to pay...

Insured - agrees to premium towards covering risk (Death in case of Life Insurance)

Insurer - agrees to pay sum assured on death or maturity benefits of completion of specified period.

Life Insurance Glossary


This section will give excess to meaning of Insurance Parlance. Many of the time advisors and common people use many terms without the complete knowledge and meaning. Though there are many more, please find enclosed frequently used. If you wish to know something more, do post your comment.


Accident: An event or occurrence causing damage/injury to an entity, and is unforeseen and unintended.

Accident Benefit: Provides for payment of an additional benefit equal to the sum assured in installments on permanent total disability and waiver of subsequent premiums payable under the policy.

Age Limits: Stipulated minimum and maximum ages below and above which the company will not accept applications or may not renew policies.

Agent: An insurance company representative licensed by the state, who solicits, negotiates or effects contracts of insurance, and provides service to the policyholder for the insurer.

Annuity Plans: These plans provide for a "pension" (or a mix of a lumpsum amount and a pension) to be paid to the policy holder or his spouse. In the event of death of both of them during the policy period, a lumpsum amount is provided for the next of kin.

Application Form: Supplied by the insurance company, usually filled in by the agent and medical examiner (if applicable) on the basis of information received from the applicant. It is signed by the applicant and is part of the insurance policy if it is issued.

Assignment: Assignment means legal transference. A method by which the policy holder can person on his interest to another person. An assignment can be made by an endorsement on the policy document or as a separate deed. Assignment can be of two types Conditional absolute

Beneficiary: The person(s) or entity (ies) (e.g. corporation, trust, etc.) named in the policy as the recipient of insurance proceeds upon the death of the insured.

Business Insurance: A policy which primarily provides coverage of benefits to a business as contrasted to an individual. It is issued to indemnify a business for the loss of services of a key employee or a partner who becomes disabled.

Cancelable: A contract of health insurance that may be cancelled during the policy term by the insurer or insured.

Coinsurance: 1) A provision under which an insured who carries less than the stipulated percentage of insurance to value, will receive a loss payment that is limited to the same ratio which the amount of insurance bears to the amount required; 2) a policy provision frequently found in medical insurance, by which the insured person and the insurer share the covered losses under a policy in a specified ratio, i.e., 80 per cent by the insurer and 20 per cent by the insured.

Convertible Whole Life Policy: A mix of "whole life policy" and "endowment policy", it provides for very low insurance premiums with maximum risk cover while the life assured is just beginning his working career, and the possibility of converting the policy to an "endowment" policy after five years of commencement. Coverage The scope of protection provided under a contract of insurance; any of several risks covered by a policy.

Days Of Grace: Policy holders are expected to pay premium on due dates. a period is 15-30 days is allowed as grace to make payment of premium; such period is days of grace.

Deferment Period: Period between the date of subscription to an insurance-cum-pension policy and the time at which the first installment of pension is received. Such policies generally prescribe a minimum and maximum limit on the deferment period.

Depreciation: A decrease in the value of property over a period of time due to wear and tear or obsolescence. Depreciation is used to determine the actual cash value of property at time of loss. Double/Triple Cover Plans: These offer to the beneficiaries double/triple the sum assured on death of life assured during the term of the policy. On survival to the date of maturity, the basic sum assured is paid to the assured. These are low-premium plans, most useful for situations such as housing.

Embezzlement: Fraudulent use or taking of another's property or money which has been entrusted to one's care.

Endowment Policy: The assured has to pay an annual premium which is determined on the basis of the assured’s age at entry and the term of the policy. The insured amount is payable either at the end of specified number of years or upon the death of the insured person, whichever is earlier. Excess and Surplus Insurance: 1) Insurance to cover losses above a certain amount, with losses below that amount usually covered by a regular policy. (2) Insurance to cover an unusual or one-time risk, e.g., damage to a musician's hands or the multiple perils of a convention, for which coverage is unavailable in the normal market.

Exclusions: Specific conditions or circumstances for which the policy will not provide benefits. Facultative Reinsurance: A type of reinsurance in which the reinsurer can accept or reject any risk presented by an insurance company seeking reinsurance.

Family Insurance: A life insurance policy providing insurance on all or several family members in one contract, generally whole life insurance on the principal breadwinner and small amounts of term insurance on the other spouse and children, including those born after the policy is issued

Fiduciary: A person who holds something in trust for another. Fire Insurance Coverage for losses caused by fire and lightning, plus resultant damage caused by smoke and water. Flood insurance Coverage against loss resulting from the flood peril, available at low cost under a programme developed by the Central government.

Franchise Insurance: A form of insurance in which individual policies are issued to the employees of a common employer or the members of an association under an arrangement by which the employer or association agrees to collect the premium and remit them to the insurer.

Guaranteed Insurance Sum (GIS): A lump sum purchase price is given to purchase future pensions under the Jeevan Akshay Plan of Life Insurance Corporation of India. This amount is referred to as GIS. The monthly pension that is payable one month after payment of first premium is calculated on the basis of the age at entry.

Gross Insurance Value Element (GIVE): The amount payable on the deferred date under Jeevan Dhara Life of Life Insurance Corporation of India. An annuity of 1% of the GIVE is payable per month after the deferment period. And the entire GIVE is payable on death after deferment period.

Group Life Insurance: Life insurance usually without medical examination, on a group of people under a master policy. It is typically issued to an employer for the benefit of employees, or to members of an association, for example a professional membership group. The individual members of the group hold certificates as evidence of their insurance

Guaranteed Policies: These are policies where the payment stays fixed.

Indemnity: Legal principle that specifies an insured should not collect more than the actual cash value of a loss but should be restored to approximately the same financial position as existed before the loss.

Insurable Interest: A condition in which the person applying for insurance and the person who is to receive the policy benefit will suffer an emotional or financial loss, if any untouched event occurs. Without insurable interest, an insurance contract is invalid.

Insurability: All conditions pertaining to individuals that affect their health, susceptibility to injury and life expectancy; an individual's risk profile.

Insurance: Social device for minimizing risk of uncertainty regarding loss by spreading the risk over a large enough number of similar exposures to predict the individual chance of loss.

Insured: The person whose life is covered by a policy of insurance.

Joint Life Endowment Assurance Plans The sum assured (plus any accrued bonuses) under this type of policy is payable on the end of the endowment term or on the first death of the two lives assured, whichever is earlier. Typically (though not a necessity) taken out by a couple, a variation is available for couples only. In this case, the sum assured will be payable on first death and then again on the second death (along with all vested bonuses) if both deaths occur during the term of the policy. If one or both lives survive to the maturity date, the sum assured along with all vested bonuses will be payable on maturity date. Premiums during this plan cease on the first death or the expiry of the selected term, whichever is earlier. Another variation provides for annuity to both/surviving spouse, or a lumpsum amount to the legal heirs.

Keyman Insurance Policy: A life insurance policy taken by a person on the life of another person who is or was his employee/connected to his business in any manner whatsoever.

Lapsed Policy: A policy which has terminated and is no longer in force due to non-payment of the premium due Limited Payment Life Policy Premiums need to be paid only for a certain number of years or until death if it occurs within this period. Proceeds of the policy are granted to the beneficiaries whenever death of the policy holder occurs. Again, this policy can also be of the "with profits " or "without profits" type.

Loyalty Additions: The loyalty addition is given upon the maturity of the policy, and not before. It's a small percentage of the sum assured. Broadly speaking, loyalty addition is the difference between the performance, of the insurance company and the guaranteed additions. It is LICs effort to further share its surplus after valuation with the policy holders, as LIC is a non-profit organization.

Life Assured: The person whose life is insured by an individual life policy is called life assured. Maturity: The date upon which the face amount of a life insurance policy, if not previously invoked due to the contingency covered (death), is paid to the policyholder.

Maturity Claim: The Payment to the policy holder at the end of the stipulated term of the policy is called maturity claim.

Misrepresentation: Act of making, issuing, circulating or causing to be issued or circulated an estimate, an illustration, a circular or a statement of any kind that does not represent the correct policy terms, dividends or share of surplus or the name or title for any policy or class of policies that does not in fact reflect its true nature.

Money Back Policy: Unlike endowment plans, in money back policies, the policy holder gets periodic "survivance payments" during the term of the policy and a lump sum amount on surviving its term. In the event of death during the term of the policy, the beneficiary gets the full sum assured, without any deductions for the amounts paid till date, and no further premiums are required to be paid. These types of policies are very popular, since they can be tailored to get large amounts at specific periods as per the needs of the policy holder. Moral Hazard Risk depends on the need for insurance, state of health, personal habits standard of living and income of insured person.

Moral Hazard: is the risk factor that affects the decision of the insurance company to accept the risk.

Nomination: An act by which the policy holders authorises another person to receive the policy moneys. The person so authorised is called Nominee.

Non-cancelable policies: Such policies stay in effect regardless of whatever that might happen and as long as the premium is paid from time to time

Premium: The payment, or one of the regular periodic payments, that a policy holder makes to an insurer in exchange for the insurer's obligation to pay benefits upon the occurrence of the contractually-specified contingency (e.g., death). Premium Back Term Insurance Plans These provide for refund of all the premiums paid, in the event of th life assured surviving to the end of the policy term. The total sum assured is paid to the beneficiaries in the event death occurs during the policy term.

Reinstatement: The restoration of a lapsed policy to in-force status. Reinstatement can only occur after the expiration of the grace period. The company may require evidence of insurability (and, if health status has changed, deny reinstatement), and will always require payment of the total amount of past due premium.

Risk: The obligation assumed by the insurer when it issues a policy. The spreading of risk across a broad base of the population, adjusted for statistical probability, and the protection against catastrophic loss, is the entire purpose of insurance. For risk assumption purposes, death is viewed as a contingency. That is, although death is certain, its timing is unknown. The process of evaluating and selecting risk is known as underwriting.

Salary Saving Scheme: This scheme provides for payment of premiums by money deduction from the salary of the employees by one employer.

Sub Standard Risk: Person who is considered an under-average or impaired insurance risk because of physical condition, family or personal history of disease, occupation, residence in unhealthy climate or dangerous habits.

Surrender Value: The value payable to the policy holder in the event of his deciding to terminate the policy before the maturity of the policy.

Survival Benefit: The payment of sum assured to the incurred person which has become due by installments under a money back policy.

Vesting Age: The age at which the receipt of pension starts in an insurance-cum-pension plan. Whole Life Policy: Premiums are paid throughout the life time of life assured. This can be with profits or without profits ( A "with profit" policy is eligible for various bonuses declared by LIC every year, while a "without profits" policy does not have this privilege )

With-Profit policy: Policies entitled to bonus, which is paid at the time of claim-death or maturity one with-profit policies.

Without-Profit policy: These policies are not entitled to participate in bonuses.

History of Life Insurance



Life insurance reflects one of the best parts of human beings; caring for others. One buys life insurance because he or she loves their spouse and children. There are benefits while living but the real reason is to make sure others are financially taken care of in ones absence.

One of the first records of life insurance was in Rome. There, groups came together called Fratres (burial clubs). These were set up by the poor to pay for the funerals of the members and to help the surviving family members financially. Members would contribute little amounts (Premium) to pool and help the deceased funeral. The middle ages had guilds for the various types of highly skilled labor. There are accounts that show that these guilds helped their members with various types of insurance including life insurance and disability insurance.

Life insurance came into its own in England in the late 1600's and became popular from that time on. During this time period Lloyd's of London was growing. Lloyd's whose name came from Lloyd's Coffee House where insurance was transacted by ship owners with the underwriters (backers) who met to put together insurance contracts and other shipping and merchant related business.

Some people think of insurance as gambling. It really isn't gambling even though it has the similarities of probability and odds. Insurance serves a public good of sharing the financial risks of existence and life and death among many to serve those who have experienced a loss.

The first life insurance company in the United States started in 1735. This company was started for the benefit of Presbyterian ministers' families. Life insurance was originally dominated by the mutual life insurance companies. These are life insurance companies that are owned by the policyholders and thus those policyowners receive their pro-rata share of the company's profits. There are also stock life insurance companies where the profits are made for the benefit of the stockholders.

Similar to the mutual life insurance companies are fraternal life insurance companies which were started by the various fraternal orders to assist their members. Today the insurance business has evolved to a multi-faceted business with various programs and numerous distribution methods. The internet and the insurance industry is in its infancy with most insurance companies having a web site and now with web sites able to do life insurance quotes online. There are choices today that differ greatly from the choices of even a few years ago. The internet has made information on life insurance accessible just as any subject. But you still need the right knowledge. That may come from a qualified insurance professional who knows their business or from a great life insurance web site that provides great information for you to study. Glad to inform readers, on this website you can avail benefit of both.

All About Life Insurance

This website will educate common customer of Life Insurance on various aspects of Life Insurance, right from history to selecting insurance policies. If you seek additional information, do visit websites mentioned in ads displayed or search web through Google.