Introduction to General Insurance
Insurance contract that do not come under life insurance contract are called general insurance.The different forms of general insurance are fire, marine, motor, accident and other miscellaneous non life insurance. General insurance provides protection against different areas of hazards including property, enterprises, vehicles, money lending other various forms of professional causalities, except the casualty of death.
Features of General Insurance
1. The policy can’t assigned to anybody else. 2. Policy is a contract of indemnity(Can’t claim more than the value of property)
3. The policy is usually renewable/ short contract
4. Insured must have insurable interest
5. No surrender Value
6. Compensation attached to the actual value of loss/ to the sum insured.
Type of General Insurance
Fire insurance
Marine insurance
Motor insurance
Aviation insurance
Miscellaneous Insurance
Fire Insurance:
Fire insurance is a type of insurance, which is taken for getting financial compensation against the loss by fire. It is a contract in which the insurer promises to pay a certain sum of money to the insured in case of loss of properties caused by setting a fire within specified period of time. On the other hand, the insured agrees to pay the amount of premium in consideration. Thus, fire insurance provides the financial compensation against the loss or damage of the physical goods or properties due to fire.
Causes of Fire
Fire damage is the result of two types of risk:
1. Physical Risk: It refers to the natural risk of fire in the property which may occur due to smoke, construction, artificial lighting and heating, etc.
2. Moral Risk: The moral risk depends upon the man as physical risk depends on the property. The property may be set on fire by the owner or by any person with his willingness, carelessness and lack of sense of duty may also increase the fire damage. Thus, where the property was destroyed with the willingness of the property owner, is known as moral hazard.
Types of fire policies:
Specific policy:
It is a policy in which the value insured against is specified. Under this policy a definite amount is insured on a specified property and in the event of loss, it will be paid if the loss falls within the specified amount.
For example, if a person has taken a policy of Rs. 10,000 against a property worth Rs. 15,000 and he suffers a loss of Rs. 9,000, he can realize the whole loss from the insurer. But if the loss amounts to Rs. 13,000, only Rs.
10,000 can be recovered.
Valued policy:
It is a policy under which the insured undertakes to pay the insured the amount of the value of the property declared in the policy.Under this policy, the value of the subject-matter is previously agreed between the insured and the insurer and this value forms the basis of indemnity.The actual market value is not taken into account. Thus, the amount payable under a valued policy may be more or less than the actual value of the property.Valued policies are not generally issued in fire insurance. They are usually issued on pictures, works of art, sculptures and such other things whose value cannot be easily determined.
Average policy:
Under this policy, if the actual value is greater than the insured amount, the insurance company will pay proportionately and the insured is deemed to be his own insurer, for the balance. The claim is arrived at by dividing the amount of insurance by the actual value of the subject-matter and multiplying it by the amount of loss.
For example, if a person insures his goods worth Rs. 40,000 for Rs.30,000 only, and the loss caused by fire is Rs 20,000, then the amount of claim to be paid by the insurer will be 30,000/40,000*20,000 = Rs. 15,000. The insured will have to bear his own loss for Rs. 5,000. Thus, under an average policy, the insured is penalized for under-insurance of the property. The object of this policy is to prevent under-insurance and to induce the insured to take out a fire policy for the correct value.
Floating policies:
This policy is taken out to over goods belonging to the same person but lying in different lots at different places under one sum for one premium.
For example, a manufacturer or a trader may take one floating policy for all his goods lying in part in warehouses, railway stations, port etc. The premium charged under such a policy is generally the average of the permit that would have been paid if each lot of the goods had been insured under specific policies for specific amount.This policy is useful when the insured is in a position to declare only the total value at risk and not separate values in separate risks. Floating policies cannot be issued to cover goods in unspecified buildings or places, nor can they be extended to more than one town or village. Floating polices are always subject to an average clause.
Replacement policies:
Under this policy the insurer undertakes to pay the full price of the property required to be replaced. Here it is possible to recover not the depreciated value of buildings or machinery, but the cost of replacement of the damaged property by new property but of the same kind. This policy is issued in respect of buildings, or plant and machinery.
Declaration policy:
Goods which are subject to frequent fluctuations in value or in volume, present a special problem for insurance. In such a case if a businessman takes out a policy for the maximum amount, he has unnecessarily to pay a high premium and if he takes out a policy for a lower amount, the large part of his stock may remain uncovered. So, to remove this difficulty, the declaration policy is introduced, which intends to provide maximum cover and at the same time to avoid over-insurance with consequent over-payment of premium.
This policy is issued with a provisional premium which is calculated on 75% of the sum insured. The insured must declare in writing the stocks covered under the policy during each month within 14 days of each calendar month (or any other date specified in the policy). At the end of the year the average amount of stock at risk is calculated on the basis of the total declarations and this average amount forms the amount insured. A minimum amount, however, is charged by the insurer under this policy.
Comprehensive policy:
A fire policy usually does not cover loss occurring as a result of riots, civil strife, rebellion, etc. But fire insurance companies do sometimes issue policies of a comprehensive nature to house-owners. Such policies usually cover the risks such as fire, explosion, thunderbolt, lightning, riots, strike etc. Such a policy is known as comprehensive policy or All Insurance policy.
Consequential loss policy:
It is a policy in which the underwriter agrees to indemnify the insured for the loss of profits which he suffers due to the dislocation of his business, caused by fire. It is also called loss of profits policy.
Marine Insurance:
Marine insurance is a type of insurance, which is taken for getting the financial compensation against the losses due to perils of the sea in the course of a sea voyage. It is the contract made between the insurers and insured to indemnify against the cursor damage of goods using a ship. There may be different risk such as accident ship, collision, jettison, barratry etc. The subject matter of the marine insurance is a ship, cargo, and freight. The premium is paid periodically or in a lump sum by the insured to the insurer
Types of Marine insurance:
Voyage Policy:
It covers the risk from the port of departure up to the port of destination. The policy ends when the ship reaches the port of arrival. This type of policy is purchased generally for cargo. The risk coverage starts when the ship leaves the port of departure.
Time Policy:
This policy is issued for a particular period. All the marine perils during that period are insured. This type of policy is suitable for full insurance. The ship is insured for a fixed period irrespective of voyages. The policy is generally issued for one year. Time policies may sometimes be issued for more than a year or they may be extended beyond a year to enable a ship to complete a voyage.
Mixed Policy:
This policy is a mixture of time and voyage policies. A ship may be insured during a particular voyage for a period, e.g., a ship may be insured between Bombay and London for one year. These policies are issued to ships operating on a particular route.
Valued Policy:
Under this policy the value of the policy is decided at the time of contract. The value is written on the face of the policy. In case of loss, the agreed amount will be paid. There is no dispute later on for determining the value of compensation. The value of goods includes cost, freight, insurance charges, some margin of profit and other incidental expenses. The ships are insured in this manner.
Unvalued Policy:
When the value of insurance policy is not decided at the time of taking up a policy, it is called unvalued policy. The amount of loss is ascertained when a loss occurs. At the time of loss or damage the value of the subject-matter is determined. In finding out the value of goods, freight, insurance charges and some margin of profit is allowed to the policy in common use.
Floating Policy:
When a person ships goods regularly in a particular geographical area, he will have to purchase a marine policy every time. It involves a lot of time and formalities. He purchases a policy for a lump sum amount without mentioning the value of goods and name of the ship etc.
When he sends the goods, a declaration is made about the particulars of goods and the name of the ship. The insurer will make an entry in the policy and the amount of policy will be reduced to that extent. This policy is called an open or a floating policy. The declaration by the insured is a must. When the total amount of policy is reduced, it is called fully declared or run off. The underwriter will inform the insured who will take another policy. The premium is called on the basis of declarations made.
Block Policy:
Sometimes a policy is issued to cover both land and sea risks. If the goods are sent by rail or by truck to the departure, then it will involve risk on land also. One single policy can be issued to cover risks from the point of dispatch to the point of ultimate arrival. This policy is called a Block Policy.
Motor Insurance:
Motor insurance (also known as auto insurance, car insurance, or vehicle insurance) is insurance purchased for cars, trucks, motorcycles, and other road vehicles. Its primary use is to provide financial protection against physical damage and/or bodily injury resulting from traffic collisions and against liability that could also arise there from. Auto Insurance in Nepal deals with the insurance covers for the loss or damage caused to the automobile or its parts due to natural and man-made calamities. It provides accident cover for individual owners of the vehicle while driving and for passengers and third party legal liability.
Types of Motor Insurance:
Private Car Insurance:
Private Car Insurance is the fastest growing sector as it is compulsory for all the new cars. The amount of premium depends on the make and value of the car, and the year of manufacture.
Two Wheeler Insurance:
The Two Wheeler Insurance under the Auto Insurance in Nepal covers accidental insurance for the owner of the vehicle. The amount of premium depends on the current showroom price multiplied by the depreciation rate fixed by the Tariff Advisory Committee at the time of the beginning of policy period.
Commercial Vehicle Insurance:
Commercial Vehicle Insurance provides cover for all the vehicles, which are not used for personal purposes, like the Trucks and buses.
Third party only:
This cover is the legal requirement. This level of cover ensures that compensation is available in respect of injury to other people (including your passengers) or damage to other peoples' property resulting from an accident caused by you. It doesn't cover any costs incurred by you as the result of an accident.
Third party fire and theft:
This provides the same cover as third party only and also insures you if your vehicle be damaged by fire or stolen.
Comprehensive:
This provides the same cover as third party fire and theft. However, it also covers you if your vehicle be damaged in an accident. Many additions to this level of cover are available from insurance companies including:
- providing a courtesy car while your car is being repaired
- legal expenses insurance to recover your uninsured losses (such as your excess)
- roadside recovery schemes
- vehicle repairs in case of breakdown
Aviation insurance:
Aviation insurance is a policy that offers property and liability coverage for aircraft. It covers losses resulting from aviation risks that come about due to the maintenance and use of aircraft, property damage, loss of cargo, or injury to people. It protects both its owners and aircraft operators from unforeseen losses. Aviation insurance policies are distinctly different from those for other areas of transportation and tend to incorporate aviation terminology, as well as limits and clauses specific to aviation insurance. Aviation insurance is also known as aircraft insurance.
Types of aviation insurance:
Public Liability Insurance:
This insurance covers the expenses that can result from damage occurring to the third party entities and property, like houses, crops, other aircraft, cars, and airport facilities caused by the insured aircraft. This insurance is also known as third party liability. The insurance does not offer coverage to the insured aircraft or the injured passenger travelling in that aircraft. In most countries, this insurance is mandatory.
Passenger Liability Insurance:
As the name suggests, this insurance provides payments for injuries and final expenses in the event of death of a passenger travelling in the aircraft. This insurance is usually mandatory by law for commercial or large aircraft.
Combined Single Limit (CSL):
CSL insurance clubs the coverage provided by the public liability and passenger liability insurance into a single coverage. It sets an overall limit per payout per accident. By combining both public liability and passenger liability insurance into a single package, CSL offers more flexibility to the insurance holders in making payments for their liability.
Ground Risk Hull Insurance Not in Motion:
This type of aviation insurance provides coverage for damages sustained by the aircraft when it is on the ground and not in motion. So, the insurance provides coverage for damages that can be caused by fire, theft, flood, wind or hailstorms, animals, hangar collapse, and uninsured vehicles or aircraft colliding against the insured aircraft. The amount of payment to be made is usually decided at the time of purchasing the insurance.
Ground Risk Hull Insurance in Motion:
This aviation insurance provides coverage for damages that the aircraft may sustain while in motion. However, it excludes any damage that might occur while landing and taking off. This issue led to a lot of disputes between the aircraft owners and insurance companies, which eventually led many insurance companies to discontinue this type of coverage.
In-flight Insurance:
In-flight insurance provides coverage for damages that an aircraft may sustain when it is in motion. This is the most expensive aviation insurance as most accidents are likely to occur when the aircraft is in motion.
Engineering insurance:
Engineering insurance refers to the insurance that provides economic safeguard to the risks faced by the ongoing construction project, installation project, and machines and equipment in project operation.
Types of Engineering insurance:
Machinery Breakdown:
Any major manufacturing process involves heavy investment in a plant and/or machinery. Where a fire policy can cover loss or damage caused by fire and numerous other perils, it does not cover sudden and unforeseen breakdown of the plant and machinery. Such breakdown can prove to be extremely costly requiring import of parts and expert knowledge to repair or reinstate. A machinery breakdown policy will cover such eventualities.
Contractors All Risk:
Insurance against loss or damage to the contractor while undertaking construction activities for buildings, bridges, dams, plants, etc. is covered by the Contractors All Risk Policy. This policy can also be extended to third-party liability of the contractor during the construction period.
Boiler Explosion Insurance:
This policy covers the damage other than by fire, to boilers & pressure plant. It also covers damage to surrounding property and the third Party legal liability arising due to explosion and collapse of the plant during its normal course of working.
Machinery Breakdown Loss of Profits Insurance:
This policy covers loss of profit as a result of reduction in turnover / output and increased cost of working of a company due to accidental damage to machinery / boilers affected in stated premises.
Electronic Equipment Insurance:
This policy covers entire range of Electronic Equipments from a Personal Computer to sophisticated gadgetry.
Contractors Plant and Machinery:
This is an All Risk policy covering the plant and machinery of a contractor at specified work sites subject to some exclusions.
Miscellaneous Insurance:
Employer's Liability Insurance:
Insurance also includes employer's liability insurance which is made for the workers of factories or institutions by the employer to compensate the claim of the employees on the event of injury, accident, death and disability while they are at work. Institutions or factories pay the premium regularly for the compensation to the insurance company. The insurance company compensates at the time of injury, accident, disability or death of the workers.
Fidelity Guarantee Insurance:
Fidelity guarantee insurance is a process of making financial compensation against the loss caused by embezzlement, theft, error or fraud committed by the staff of the business. So, the loss which was caused knowingly or unknowingly by the staff can be compensated through this type of insurance.
Difference Between Life and General
Life Insurance
Life Insurance can be termed as an agreement between the policy owner and the insurer, where the insurer for a consideration agrees to pay a sum of money upon the occurrence of the insured individual's or individuals' death or other event, such as terminal illness, critical illness or maturity of the policy. Life policies are 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; common examples are claims relating to suicide, fraud, war, riot, and civil commotion.
Types of Life Insurance
Term Life insurance
Endowment Life insurance
Whole Life insurance
Term Life Insurance:
•Sum assured is payable only in the event of death during the term.
•In case of survival, the contract comes to an end at the end of term.
•Term Life Insurance can be for period as long as 40 years and as short as 1 year.
•No refund of premium
•Non-participating policies
•Low premium as only death risk is covered.
Increasing Term Insurance:
Life insurance cover under this plan goes on increasing periodically over the term in a predetermined rate.
Decreasing Term Insurance:
The sum assured decreases with the term of the policy. Normally decreasing term assurance plan is taken out for mortgaged protection, under which outstanding loan amount decreases as time passes as also the sum assured.
Convertible term assurance policy:
Under this plan a policyholder is entitled to exchange the term policy for an endowment insurance or a whole life policy. Conversion can be done at any time during the term except last 2 years.
Level Term Life Insurance:
The sum assured throughout the term of the policy does not change.
Renewable Term Life Insurance:
With renewable term insurance, the insurance company automatically allows you to renew your coverage after the term of the policy is over (generally 5 to 20 years)
Endowment Life insurance:
Endowment insurance plans is an investment oriented plan which not only pays in the event of death but also in the event of survival at the end of the term. It is a contract underwritten by a life insurance company to pay a Fixed term plus Accumulated profits that are declared annually.
Type of Endowment Plan
Joint Life Endowment Plan:
Under this plan, two lives can be insured under one contract. The sum assured is payable at the end of the endowment term or death of either of the two.
Money Back Endowment Plan:
In this plan, there is an additional advantage of receiving a certain amount of money at periodic intervals during the policy term.
Marriage Endowment Plan:
This plan has the specific condition that the sum assured is payable only after the expiry of the term even if death of the life assured takes place earlier.
Educational Endowment Plan:
These plans are specially designed to meet educational expense of children at a future date. If the insured parent dies before the date of maturity the installment is paid in lump sum with immediate effect which helps to meet the educational expenses.
Whole life Insurance
Whole life insurance is another type of endowment plan, which cover death for an indefinite period. When the policyholder dies, the face value of the policy, known as a death benefit, is paid to the person or persons named in the life insurance policy (the beneficiary or beneficiaries). It can be with or without profits. If you cancel the policy after a certain amount of time has passed, the insurance company will surrender the cash value to you.
Types of whole life insurance
Ordinary life insurance:
Ordinary life insurance provides lifetime protection to age 100, and the death claim is a certainty. If the insured is still alive at the age 100, the face amount of insurance is paid to the policy owner at the time. Premium do not increase from year to year but remain level throughout the premium paying period. The policy owner is overcharged for the insurance protection during the early years and undercharged during the later years. Ordinary life insurance also have an investment or saving element cash surrender value i.e policy may be surrender for its cash value, or the cash value may be borrowed under a loan provision. Finally, ordinary life insurance contains cash surrender or non forfeiture options, dividend options, and settlement options that can be used to meet variety of financial needs and objectives. An ordinary life policy is appropriate when lifetime protection is needed. It can also be used to save money.
Limited- payment life insurance:
A limited-payment policy is permanent and the insured has life time protection. It provides the same benefit as above but premiums are paid for a limited period. Premiums are sufficiently higher to cover the risk.
Variations of Whole Life Insurance
Life insurance has experience keen competition from mutual funds, commercial bank financial institutions. To remain competitive and to overcome the criticism of traditional cash policies, insurers have developed a wide variety of whole life products than combine insurance protection with an investment component. Important variations of whole life insurance include the following:
1.Variable life insurance
2.Universal life insurance
3.Variable universal life insurance
4.Current assumption whole life insurance
1. Variable life insurance:
Variable life insurance can be defined as a fixed premium policy in which the death benefit and cash values vary according to the investment experience of a separate account maintained by the insurer. Variable life policy is a permanent whole life contract with a fixed premium. The entire reserve is held in a separate account and is invested in common stocks or other investments. Cash-surrender values are not guaranteed, and there are no minimum guaranteed cash values.
2.Universal life insurance:
Universal life insurance (also called flexible premium life insurance) can be defined as a flexible premium policy that provides protection under a contract that unbundles the protection and saving components. Except for the first premium, the policyholder determines the amount and frequency of payments.
3.Variable universal life insurance:
Most variable universal life policies are sold as investments or tax shelters.It is similar to universal life policy.The policyholder determines how the premiums are invested, which provides considerable investment flexibility.
4.Current assumption whole life insurance:
Current assumption whole life insurance (also called interest sensitive whole life) is a nonparticipating (doesn't pay dividend) whole life policy in which the cash values are based on the insurers current mortality, investment, and expense experience. If the policy is Surrendered, a surrender charge is deducted from the accumulation account.
Other Types of Life Insurance
Modified life insurance
Preferred risks
Second-to-die life insurance
Savings bank life insurance
Juvenile insurance
Industrial life insurance
Group life insurance
Modified life insurance:
A modified life policy is a whole life policy in which premiums are lower for the first three to five years and higher thereafter. The initial premium is slightly higher than for term insurance, but considerably lower than for a whole life policy issued at the same age. The major advantage of a modified life policy is that applicants for insurance can purchase permanent insurance immediately even though they cannot afford the higher premiums for a regular whole life policy. Modified life insurance is particularly attractive to persons who expect that their incomes will increase in the future and that higher premiums will not be financially burdensome.
Preferred risks:
Most life insurers sell policies at lower rates to individuals known as preferred risks.These people are individuals whose mortality experience is expected to be lower than average. The policy is carefully underwritten and is sold only to individuals whose health history, weight, occupation, and habits indicate more favorable mortality than the average. A discount for nonsmokers is a current example of a preferred risk policy.
Second-to-die life insurance:
Second-to-die life insurance (also called survivorship life) is a form of life insurance that insures two or more lives and pays the death benefit upon the death of the second or last insured. Because the death proceeds are paid only upon the death of the second or last insured, the premiums are substantially lower than if two individual policies were issued.
Savings bank life insurance:
Savings bank life insurance (SBL) is a type of life insurance that was sold originally by savings banks in New York, and Connecticut.
The objective is provide low-cost life insurance to consumers by holding down operating costs and payment of high sales commissions.
Juvenile insurance:
Juvenile insurance refers to life insurance purchased by a parent or adult on the lives of children younger than a certain age, such as age 14 or 15. Generally required the children to be at least one month older before he or she can be inured. It protects children from future insurability.
Industrial life insurance:
Historically, industrial life insurance was a class of life insurance that was issued in small amounts; premiums were payable weekly or monthly; and an agent of the company collects the premiums at the insured's home. More than nine out of ten policies were cash value policies. Today, industrial life insurance is called home service life insurance. In most cases collections are no longer made. The policyholder remits the premium to the agent or the company.
Group life insurance:
Group life insurance is a type of insurance that provides life insurance on a group of people in a single master contract. Physical examinations are not required, and certificates of insurance are issued as evidence of insurance.
Life Insurance Contractual Provisions
Ownership Clause:
The owner of a life insurance policy can be the insured, the beneficiary, a trust, or another party. Under the ownership clause, the policy owner possesses all contractual rights in the policy while the insured is living. Rights include naming and changing beneficiary, surrendering the policy for its cash value, borrowing the cash value, receiving dividend, and electing settlement options. The policyholder can designate a new owner by filing an appropriate form.
Entire-contract Clause:
The entire-contract clause states that the life insurance policy and attached application constitute the entire contract between the parties.It prevents the insurer from making amendments without the policyholder's knowledge or consent. It also protects beneficiary.
Incontestable Clause:
The incontestable clause states that the insurer cannot contest the policy after it has been force two years during the insured's lifetime. It protects the beneficiary if the insurer tries to deny payment of the claim years after the policy was first issued.The insurer has two years to detect fraud, concealment, or misrepresentations. The insurer can contest a claim after the incontestable period if: The beneficiary takes out the life insurance policy with the intent of murdering the insured. The applicant has someone else take a medical examination
An insurable interest does not exist at the inception of the policy.
Suicide Clause:
The suicide clause states that if the insured commits suicide within two years after the policy is issued; the face amount of insurance will not be paid; there is only a refund of the premiums paid.
Grace Period:
A life insurance policy contains a grace period during which the policy owner has a period of 31 days to pay an overdue premium. The insurance remains in force during the grace period. If the insured dies within the grace period, the overdue premium is deducted from the policy proceeds. It prevents the policy from lapsing by giving the policy owner additional time to pay and overdue premium.
Reinstatement Clause:
The reinstatement provision permits the owner to reinstate a lapsed policy. To reinstate the lapsed policy, the following requirements must be met:
-Evidence of insurability is required.
-All overdue premiums plus interest are paid.
-Any policy loans must be repaid or reinstated with interest.
-The policy was not surrendered for its cash value.
-The policy must be reinstated within a certain period, usually 3-5 years after the date of Lapse
Although it may require a large outlay of cash, It may be cheaper to reinstate a lapsed policy than to purchase a new policy.
Misstatement of age or sex clause:
Under the misstatement of age or sex, if the insured' s age or sex is misstated, the amount payable is the amount that the premium paid would have purchased at the correct age and sex.
For example, assume that suman, age 45, applies for Rs.500,000 ordinary life policy, but his age is incorrectly stated as age 44. If the premium is Rs.40 per Rs.1000 at age 45 and Rs.39 per Rs.1000 at age 44, the insurer pay = 39/40*500,000= Rs.487,500 only of the death proceeds. Thus, only Rs.487,500 would be paid.
Exclusions and Restrictions:
A life insurance policy contains remarkably few exclusions and restrictions. Suicide is excluded for two years. Insurers might insert a war clause to exclude payment if the insured dies as a direct result of war. Some policies contain aviation exclusions. In some case may be covered only by payment of extra premium or high premium. E.g.Military aviation, Private pilot
Payment of premiums:
Premiums can be paid annually, semiannually, quarterly, or monthly. If premiums are not paid annually, a carrying charge is applied, which can be relatively expensive when the true rate interest is calculated.
Policy loan provision:
A cash-value life insurance contains a policy loan provision that allows the policy owner to borrow the cash value. The policy owner must pay interest on the loan to offset the loss of interest to the insures.
Advantages:
-Policy loan is relatively low rate of interest that is paid.
-Creditworthiness of policy owner is not carried out.
-No fixed repayment schedule, flexibility in determining amount and frequency of repayments.
Automatic premium loan:
Under the automatic premium loan provision, an overdue premium is automatically borrowed from the cash value after the grace period expires, provided the policy has a loan value sufficient to pay the premium.It prevents the policy from lapsing because of nonpayment of premiums. Policy owner may become lazy and exhaust all cash value. The policy proceeds will be reduced if the premium loans are not repaid by the time of death.
Assignment clause:
A life insurance policy is freely assignable to another party.Under an absolute assignment, all ownership rights in the policy are transferred to a new owner. For example: policy owner may wish to donate a life insurance policy to a church, charity, or educational institution. Under a collateral assignment, the policy owner temporarily assigns a life insurance policy to a creditor as collateral or a loan. Only certain rights are transferred to the creditor and the policy owner retain the remaining rights.
Change of plan provision:
A change-of-plan provision allows policy owner to exchange their present policies for different contract.
A. If the change is to a higher-premium policy (ordinary life to limited payment policy), Policy owner must pay difference in the policy reserve. Evidence of insurability is not required, because the pure insurance protection (net amount at risk) is reduced.
B. If the change is allowed to a lower-premium policy (limited payment policy to ordinary Life policy), Insurer refunds the difference in cash values. Evidence of insurability is required because the pure insurance protection is increased higher net amount at risk.
Beneficiary Designation:
The beneficiary is the party named in the policy to receive the policy proceeds. The principle types of beneficiary designation are as follows:
Primary and contingent beneficiary
A primary beneficiary is the beneficiary who is first entitled to receive the policy proceeds on the insured's death.
A contingent beneficiary is entitled to the proceeds if the primary beneficiary dies before the insured.
Revocable and irrevocable beneficiary
A revocable beneficiary means that the policy owner reserves the right to change the beneficiary designation without the beneficiary's consent
An irrevocable beneficiary is one that cannot be changed without the beneficiary's consent.
Specific and class beneficiary
A specific beneficiary means the beneficiary is specifically named and identified.
A class beneficiary is not named but is a member of a group designated as beneficiary, such as "children of the insured". A class designation is appropriate whenever the insured wishes to divide the policy proceeds equally among members of a particular group.
Advantages of Life Insurance
Covers Risk of Death:
Unlike any other ordinary saving plan, the insurance scheme covers the risk of death. In case of death, insurance company pays full sum assured, which would be several times larger than the total of the premium paid. Thus, it saves the family from the financial strain due to unforeseen and premature death.
Encouragement of Compulsory Savings:
After taking an insurance policy, if the premium is not paid the policy lapses. So, it becomes compulsory for the insured to pay the premium. This builds the habit of longtime savings thereby developing the attitude of savings. Thus it possesses a tremendous psychological advantage as a method of saving because it is semi-compulsory in nature. Moreover, regular savings over a period of time ensures that a decent corpus is built to meet the financial needs at various stages.
Assistance in Odd Situations:
Life insurance is a necessity for a person having responsibilities of the family. Middle age people with children have potential expenses of their children's education, settling them and their marriage. It assists the family in case of sudden illness, death or accident of the bread earning member of family and helps the dependents of insured by providing for education, housing, medical treatment and marriage of children.
Easy Settlement and Protection against Creditors:
The procedure of settlement of claims is very simple and easy. After the making of nomination or assignment, a claim under the life insurance can be settled in a simple way. The policy money becomes a kind of security which cannot be taken away even by the creditors
Facilitation of Loan:
Policyholder have the option of taking loan against the policy. This helps you meet your unplanned life stages needs without adversely affecting the benefits of the policy they have bought.
Tax Relief:
Life insurance plans provide attractive tax benefits under most of the plans, both at the time of entry and exit. Tax benefits are also available on the premiums paid and also on the claim proceeds according to the tax laws in force. The money paid toward, insurance premium is deducted from the gross income and this is really an investment.
Facilitation of Liquidity:
Insurance facilitates and maintains liquidity. If the policyholder is not able to pay the premium, he can surrender the policy for a cash sum.
Provision of Profitability:
Insurance is a kind of investments. The element of investment i.e. regular saving, Capital formation, and return of the capital along with certain additional return are perfectly observed in life insurance. It provides economic security and better family life. The element of profitable investment has made insurance more attractive.
Mental Peace:
Insecurity and uncertainty in life is the main cause of mental worries. Life insurance helps in reducing this uncertainty and security as it is known that insurance company will come to his rescue in case the risk fear occurs. A person insured against such risks can get rid of all his Worries and lead a peaceful life.
Awareness Towards Good Health:
Life insurance creates awareness towards maintenance of good health in the society. Insurance companies have started health improvement movement throughout the world, by distributing useful materials for health education.
Dividends Options
Many whole life insurance policies provide dividends representing a portion of the insurance companys profits that are paid to policyholders. Whole life insurance dividends may be guaranteed or non-guaranteed depending on the policy, which means it is important to carefully read through the details of the plan before purchasing a policy. Often times, policies that provide guaranteed dividends have higher premiums to make up for the added risk to the insurance company. Those that offer non-guaranteed dividends may have lower premiums, but there is a risk that there wont be any premiums in a given year.The original four options policyholders have for a whole life dividend are:
- Paid in Cash
- Reduce/Pay Premium
- Purchase Paid-up Additions
- Accumulate at Interest
Paid in Cash:
This option to receive the dividend in cash is pretty selfexplanatory. Each year the life insurer pays the policyholder the dividend in the form of a check. The payment comes directly to the policyholder who can then use the cash for whatever purpose he or she sees fit.
Reduce/Pay Premium:
Choosing to reduce or pay the premium with the dividend means the policyholder chooses to pay a part or all of the premium due with the dividend. If the dividend payment is less than the total premium due, the policyholder will need to pay the rest of the premium either with money out of pocket or with cash values from the whole life policy. It's much more common for the policyholder to pay with out-of-pocket money.
Purchase Paid-up Additions:
The dividend option to purchase paid-up additions instructs the insurance company to take the annual dividend and purchase paid-up additions with it. Paid-up additions are mini whole life insurance policies that attach to a main whole life policy. They earn dividends themselves and have immediate cash value.
Accumulate at Interest:
This dividend option to accumulate at interest means the insurance company places the dividend payment in an interest bearing account and adds interest to the account each year. The insurer sets the interest rate on these accounts annually and usually, announces it with other information regarding interest rates such as loan rates, universal life interest rates, and annuity rates. If you have trouble locating these announcements, a quick call to the insurance company can answer what the current rate is.
Nonforfeiture Options
A nonforfeiture option is a clause in your policy that allows you to receive full or partial benefits from your life insurance if the policy lapses or you want to cancel the plan. For most types of insurance, the policy terminates after the grace period, but if the policy has cash value, then state law prevents life insurance companies from simply terminating the contract and keeping the cash value. Insurance companies can provide 4 different nonforfeiture options:
I. paying the cash surrender value to the insured:
- If the cash surrender option is chosen, then the insured receives the cash value of the policy, which is taxed as ordinary income.The policy cannot be reinstated.
II. convert the insurance to term life insurance:
- If the policy is converted into term life insurance (aka extended-term option), then it will have the same face value as the original policy, but the term will be determined by the cash value of the policy. The greater the cash value and the lower the face amount of the policy, the longer the term. A policy converted to term insurance can be reinstated under the reinstatement provision of the contract.
III. convert to a reduced paid-up insurance policy:
-The cash value can also be used to pay for reduced paidup insurance. The face value of the paid-up policy will be commensurate with the amount of the cash value of the policy, but will be less than the original policy. Under this option, the original policy can also be reinstated under the reinstatement provision.
IV. convert it to an annuity:
-Most insurance companies will also allow the insured to buy a single-premium, immediate annuity, which pays the policyholder an amount commensurate with the cash value of the policy and the policyholder's age for the rest of his life.
Settlement Options
Settlement refers to the method by which the policy proceeds are paid:
1. a lump-sum cash payment:
Generally, for a lump-sum cash payment there may be several weeks or months after the insured's death before the insurance company pays the claim to the beneficiaries, so interest earned on the face value during this interim is also paid to the beneficiaries.
2. interest earned on the face amount and paid periodically:
The interest income option is usually selected if the insurance proceeds are not needed until sometime later to pay for college, perhaps. The insurer retains the money and pays a minimum interest rate on it, and if the policy is participating, then the interest rate paid may be higher than the contractual minimum. Interest can be paid monthly, quarterly, semi-annually, or annually. The contract may provide the beneficiary with withdrawal rights, where part or the entire amount can be withdrawn, or the beneficiary may have the right to choose another settlement option.
3. fixed period:
The fixed-period option (aka installment time option) pays the beneficiary principal and interest over a fixed duration. If the beneficiary dies before receiving all the payments, then the remaining payments are sent to the contingent beneficiary, or to the estate of the primary beneficiary, if there is no contingent beneficiary. The amount of the payments will be commensurate with the face amount of the policy, the interest earned, and inversely related to the length of the payment period the greater the face amount of the policy and interest earned, and the shorter the payment period, the greater the amount of each payment. Most policies do not allow the beneficiary to withdraw a partial amount, but will allow the beneficiary to withdraw all the money, if desired.
4. fixed amount:
The fixed-amount option (aka installment amount option) pays the beneficiary a fixed amount periodically until both principal and interest are fully paid. The fixed-amount option provides greater flexibility in payments than the fixed-period option. The beneficiary may have the right to increase or decrease the amount of the payments, or to change to a different settlement option. The beneficiary may also have the right withdraw part or the entire amount at one time. This settlement option can also be structured so that the payments increase for a specific time period, such as when the beneficiary is in college.
5. life income:
A life income option is basically a single-premium annuity, providing the beneficiary with lifetime income. The amount of the payments depends on the amount of the insurance and the expected lifetime of the beneficiarythe longer the expected lifetime, the smaller the payments. Thus, in most cases, this option only makes sense for older beneficiaries. This option provides variations that are similar to those offered for annuities. All life income options pay the beneficiary for life. The differences in the following options arise when the beneficiary dies.
a) The life income option pays the beneficiary regularly as long as she lives, but ends when the beneficiary dies. Although this option provides for the largest periodic payment amount, a large amount of money may be forfeited if the beneficiary dies early, because there is no refund of the money and no guaranteed amount of payment.
b) The life income with period certain option provides the beneficiary with a lifetime of income, and a guaranteed number of payments. If the beneficiary dies before receiving the guaranteed payments, then the remaining payments will be paid either into her estate or to a contingent beneficiary.
c) The life income with refund option pays at least the face value of the policy. If the beneficiary dies before receiving all the money, then the rest is paid either to her estate or to a contingent beneficiary.
d) Joint-and-survivor income pays a couple as long as either of them is alive. When the 1st beneficiary dies, then the remaining beneficiary either gets the same amount or a reduced amount, depending on the policy.
Social Insurance
Social insurance has been defined as a program whose risks are transferred to and pooled by an often government organisation legally required to provide certain benefits. Social insurance is one of the devices to prevent an individual from falling to the depths of poverty and misery and to help him in times of emergencies. Insurance involves the setting aside of sums of money in order to provide compensation against loss, resulting from particular emergencies. Social insurance is a public insurance that provides protection against economic risks. Participation in social insurance is compulsory. Social insurance is considered to be a type of social security.
Features of Social Insurance
(1) It involves the establishment of a common monetary fund out of which all the benefits in cash or kind are paid, and which is generally built up of the contribution of the workers, employers and the State.
(2) The contribution of the workers is merely nominal and is kept at a low level so as not to exceed their paying capacity, whereas the employers and the State provide the major portion of the finances.
(3) Benefits are granted as a matter of right and without any means test, so as not to touch the beneficiaries sense of self-respect.
(4) Social insurance is now provided on a compulsory basis so that its benefits might reach all the needy persons of the society who are sought to be covered.
(5) The benefits are kept within fixed limits, so as to ensure the maintenance of a minimum standard of living of the beneficiaries during the period of partial or total loss of income.
Self-Insurance
Self-Insurance is risk management approach in which an entity sets aside a sum as a protection against a probable loss, instead of transferring the risk by purchasing an insurance policy. This term is a misnomer because no insurance is involved. Insurance of oneself or one's interests by maintaining a fund to cover possible losses rather than by purchasing an insurance policy. A method of managing risk by setting aside a pool of money to be used if an unexpected loss occurs.Theoretically, one can self-insure against any type of loss. However, in practice, most people choose to buy insurance against potentially large, infrequent losses
Basic Characteristics of Self-Insurance
The organization should be big enough to permit the combination of a sufficiently large number of exposure units so as to make losses predictable.The plan must be financially dependable. In most cases, this will require the accumulation of funds to meet losses that occur with a sufficient accumulation to safeguard against unexpected deviations from predicted losses. The individual units exposed to loss must be distributed geographically in such a manner as to prevent a catastrophe.
Adavantages of Self-Insurance
Flexibility
Avoid State Mandated laws
No Loading Cost
Time Value of Money
Disadvantages of Self-Insurance
Catastrophic Loss Possibility
Limits on Claims
Tax Treatment
Old-Age, Survivors, and Disability Insurance (OASDI)
The federal Old-Age, Survivors, and Disability Insurance (OASDI) system was developed pursuant to the federal Social Security Act of 1935 to provide government benefits to eligible retirees, disabled individuals, and surviving spouses and their dependents.
OASDI benefits are monthly payments made to retired people, families whose wage earner has died, and workers who are unemployed because of sickness or accident. Workers qualify for such protection by having been employed for the mandatory minimum amount of time and by having made contributions to social security.
There is no financial need requirement. Once a worker qualifies for protection, his or her family is also entitled to protection. The OASDI program is geared toward helping families as a matter of social policy.
The OASDI program is funded by payroll taxes levied on employees, their employers, and the self-employed.
The rate of the contributions is based upon the employee's taxable income, up to a maximum taxable amount, with the employer contributing an equal amount.
The self-employed person contributes twice the amount levied on an employee. In 1996 a tax rate of 6.2 percent was levied on earned income up to a maximum of $62,887 to fund OASDI.
Old-Age Benefits
Old-age benefits were the cornerstone of the original social security act, which was passed in 1935. More than 25 million Americans receive old-age benefits each month, and those payments amount to almost $20 billion a year. Because of the increasing median age of the adult population, these figures are constantly increasing. To be eligible for Social Security old-age benefits, a person must have worked a minimum number of calendar quarters, which increases with the worker's age. Forty quarters is the maximum requirement. Once a person earns credit for the required number of calendar quarters, she or he is insured. Workers born before 1950 can retire at age 65 with full benefits based on their average income during working years.
For those workers born between 1950 and 1960, the retirement age has increased to age 66. Workers born in 1960 or later will be awarded full benefits for retirement at age 67. A person may retire at age 62 and receive less than full benefits. A worker's spouse who has not contributed to Social Security receives, at age 65, 50 percent of the amount paid to the worker.
Survivors' Benefits
Survivors' benefits are payments made to family members when a worker dies. The payments are intended to help ease the financial strain caused by the loss of the worker's income. Survivors can receive benefits if the deceased worker was employed and contributed to Social Security long enough to be considered insured.
When a wage earner dies, his or her spouse and unmarried minor children are entitled to receive benefits. In addition to monthly checks, the worker's surviving spouse, or if there is none, another eligible person, may receive a lump-sum payment of $255.
Disability Benefits
A person who becomes unable to work and expects to be disabled for at least twelve months or who will probably die from the condition can receive Social Security payments before reaching retirement age.
A worker is eligible for disability benefits if she or he has worked enough years under Social Security before the onset of disabilities. A disability is any physical or mental condition that prevents the worker from doing substantial work. Examples of disabilities that meet the Social Security criteria include brain damage, heart disease, kidney failure, severe arthritis, and serious mental illness. The social security administration (SSA) determines whether a person's disability is serious enough to justify the awarding of benefits. The SSA determines whether the impairment is so severe that it significantly affects "basic work activity." If the answer is yes, the worker's medical data are compared with a set of guidelines known as the Listing of Impairments. If the claimant is found to suffer from a condition contained in this list, payment of the benefits will be approved. If the condition is less severe, SSA determines whether the impairment prevents the person from doing his or her former work. If not, the application will be denied. If so, a determination is made as to whether the impairment will prevent the applicant from doing other work present in the economy.
Workers' compensation
Workers' compensation is a form of insurance providing wage replacement and medical benefits to employees injured in the course of employment in exchange for mandatory relinquishment of the employee's right to sue his or her employer for the tort of negligence. The trade-off between assured, limited coverage and lack of recourse outside the worker compensation system is known as "the compensation bargain". One of the problems that the compensation bargain solved is the problem of employers becoming insolvent as a result of high damage awards. The system of collective liability was created to prevent that, and thus to ensure security of compensation to the workers. While plans differ among jurisdictions, provision can be made for weekly payments in place of wages (functioning in this case as a form of disability insurance), compensation for economic loss (past and future), reimbursement or payment of medical and like expenses (functioning in this case as a form of health insurance), and benefits payable to the dependents of workers killed during employment. General damage for pain and suffering, and punitive damages for employer negligence, are generally not available in workers' compensation plans, and negligence is generally not an issue in the case.
Reinsurance
In simple terms reinsurance is insurance for insurance companies. Reinsurance is insurance that is purchased by an insurance company directly or through a broker as a means of risk management, sometimes in practice including tax mitigation and other reasons. The ceding company and the reinsurer enter into a reinsurance agreement which details the conditions upon which the reinsurer would pay a share of the claim incurred by the ceding company. The reinsurer is paid a "reinsurance premium" by the ceding company, which issues insurance policies to its own policyholders.
Functions of Reinsurance
1. Stabilization of profitability
2. Provides large limit capacity
3. Catastrophe protection
4. Supports high growth in premium volume
5. Provides help with the underwriting process
6. Facilitates withdrawal from a particular risk or line of business
Stabilization of profitability:
As captive owners and risk managers know, losses incurred sometimes fluctuate widely from year to year. Large swings in losses incurred can make it difficult, if not impossible, to forecast profitability of a particular line of business, or in total. While showing profitability in a pure captive may not be as critical as it is to say, a risk retention group or commercial insurer, most business owners like to see a reasonably steady flow of profits to protect their capital and surplus and to support growth, if necessary. Purchasing reinsurance is particularly helpful in smoothing the peaks and valleys of a captives loss experience, as generally the law of large numbers doesn't apply to captive operations
Provides large limit capacity:
Captives frequently provide a high limit of insurance on one or a limited number of policies. For example, a hospital captive may wish to insure the excess professional liability exposure of its parent. A captives capacity for retaining such coverage is limited by capital and surplus, regulatory and other factors. Partnering with a reinsurer to accept a particularly high risk allows the captive to provide lines of coverage and limits that would otherwise not be feasible.
Catastrophe protection:
Captives insure property-liability coverages which are frequently concentrated in geographic or economic regions.
Catastrophic exposures such as hurricanes, industrial explosions or the like can tremendously effect loss experience. Purchasing "cat" coverage is therefore also related to the stabilization function described above.
Supports high growth in premium volume:
As with any business, new endeavors are particularly risky. As a company enters into a new line of business, geographic region, or adds significant premium volume, it may wish to purchase some kind of reinsurance. Risk retention groups, in particular, may wish to temper the risk of accepting large increases in premium volume, as their writings are generally more sensitive to market forces than pure captives.
Provides help with the underwriting process:
Partnering with a reinsurer can greatly improve a captive's ability to accurately underwrite a risk. Reinsurers accumulate vast underwriting knowledge working with large numbers of primary insurers across a wide variety of business lines. This expertise can be particularly helpful to captive insurers who generally have limited in-house underwriting capacity.
Facilitate withdrawal from a particular risk or line of business:
For a variety of reasons, a captive may decide to withdraw entirely from a particular risk or line of business. Once a decision is made to withdraw, management frequently enter into agreements with reinsurers to accept all outstanding loss and loss expense reserves associated with that book of business, at an agreed upon price.
Types of Reinsurance
1.Facultative Coverage:
This type of policy protects an insurance provider only for an individual, or a specified risk, or contract. If there are several risks or contracts that needed to be reinsured, each one must be negotiated separately. The reinsurer has all the right to accept or deny a facultative reinsurance proposal.
2. Reinsurance Treaty:
Unlike a facultative policy, a treaty type of coverage is in effect for a specified period of time, rather than on a per risk, or contract basis. For the duration of the contract, the reinsurer agrees to cover all or a portion of the risks that may be incurred by the
insurance company being covered.
3.Proportional Reinsurance:
Under this type of coverage, the reinsurer will receive a prerated share of the premiums of all the policies sold by the insurance company being covered. Consequently, when claims are made, the reinsurer will also bear a portion of the losses. The proportion of the premiums and losses that will be shared by the reinsurer will be based on an agreed percentage. In a proportional coverage, the reinsurance company will also reimburse the insurance company for all processing, business acquisition and writing costs. Also known as ceding commission, such costs may be paid to the insurance company upfront.
4. Non-proportional Reinsurance:
In a non-proportional type of coverage, the reinsurer will only get involved if the insurance company's losses exceed a specified amount, which is referred to as priority or retention limit. Hence, the reinsurer does not have a proportional share in the premiums and losses of the insurance provider. The priority or retention limit may be based on a single type of risk or an entire business category.
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