Unit-3
Introduction to Insurance
Insurance is a legal agreement between two parties i.e. the insurance company (insurer) and the individual (insured). In this, the insurance company promises to make good the losses of the insured on happening of the insured contingency. The contingency is the event which causes a loss. It can be the death of the policyholder or damage/destruction of the property. It’s called a contingency because there’s an uncertainty regarding happening of the event. The insured pays a premium in return for the promise made by the insurer.
How does insurance work?
The insurer and the insured get a legal contract for the insurance, which is called the insurance policy. The insurance policy has details about the conditions and circumstances under which the insurance company will pay out the insurance amount to either the insured person or the nominees. Insurance is a way of protecting yourself and your family from a financial loss. Generally, the premium for a big insurance cover is much lesser in terms of money paid. The insurance company takes this risk of providing a high cover for a small premium because very few insured people actually end up claiming the insurance. This is why you get insurance for a big amount at a low price. Any individual or company can seek insurance from an insurance company, but the decision to provide insurance is at the discretion of the insurance company. The insurance company will evaluate the claim application to make a decision. Generally, insurance companies refuse to provide insurance to high-risk applicants.
It is a generally acknowledged phenomenon that there are enormous risks in every sphere of life. For property, there are fire risks; for shipment of goods, there are perils of sea; for human life, there are risks of death or disability; and so on. The chances of occurrences of the events causing losses are quite uncertain because these may or may not take place. In other words, our life and property are not safe and there is always a risk of losing it. A simple way to cover this risk of loss money-wise is to get life and property insured. In this business, people facing common risks come together and make their small contributions to the common fund. While it may not be possible to tell in advance, which person will suffer the losses, it is possible to work out how many persons on an average out of the group may suffer the losses.
When risk occurs, the loss is made good out of the common fund. In this way, each and everyone share the risk. In fact, insurance companies bear risk in return for a payment of premium, which is calculated on the likelihood of loss.
Insurance- Meaning and definition
Insurance is a contract between two parties. One party is the insured and the other party is the insurer. Insured is the person whose life or property is insured with the insurer. That is, the person whose risks are insured is called insured. Insurer is the insurance company to whom risk is transferred by the insured. That is, the person who insures the risk of insured is called insurer. Thus insurance is a contract between insurer and insured. It is a contract in which the insurance company undertakes to indemnify the insured on the happening of certain event for a payment of consideration. It is a contract between the insurer and insured under which the insurer undertakes to compensate the insured for the loss arising from the risk insured against.
The purpose of business insurance
Insurance is a contract in which an insurer promises to pay the insured party a sum of money if one or more specified events occur in the future, in return for regular small payments - known as premiums.
The purpose of insurance is to reduce your business' exposure to the effects of particular risks. These could include: damage to, or the loss of, physical assets such as your premises or equipment illness or death of key members of staff compensation claims against the business or its directors by employees or customers business interruption caused by external events such as terrorism volatility and cash flow pressures following an incident. Almost all businesses buy insurance, but the type and amount of cover purchased will vary according to the particular risks your business is exposed to and how much risk you are willing to personally bear.
Need for Insurance
Insurance plans are beneficial to anyone looking to protect their family, assets/property and themselves from financial risk/losses:
Insurance plans will help you pay for medical emergencies, hospitalisation, contraction of any illnesses and treatment, and medical care required in the future.
The financial loss to the family due to the unfortunate death of the sole earner can be covered by insurance plans. The family can also repay any debts like home loans or other debts which the person insured may have incurred in his/her lifetime
Insurance plans will help your family maintain their standard of living in case you are not around in the future. This will help them cover the costs of running the household through the insurance lump sum payout. The insurance money will give your family some much-needed breathing space along with coverage for all expenditure in case of death/accident/medical emergency of the policyholder
Insurance plans will help in protecting the future of your child in terms of his/her education. They will make sure that your children are financially secured while pursuing their dreams and ambitions without any compromises, even when you are not around
Many insurance plans come with savings and investment schemes along with regular coverage. These help in building wealth/savings for the future through regular investments. You pay premiums regularly and a portion of the same goes towards life coverage while the other portion goes towards either a savings plan or investment plan, whichever you choose based on your future goals and needs
Insurance helps protect your home in the event of any unforeseen calamity or damage. Your home insurance plan will help you get coverage for damages to your home and pay for the cost of repairs or rebuilding, whichever is needed. If you have coverage for valuables and items inside the house, then you can purchase replacement items with the insurance money.
Insurance today has several implications for people from different economic backgrounds, however the basic concept of life insurance still remains the same and universal – to provide for unforeseen contingencies of death and disability of a working or earning member of the family.
Financial Implications: Life Insurance is a financial arrangement, which redistributes the costs of unexpected loss of life among the members of the pool. The pool is a collection of people facing common risks. All members contribute a fixed amount towards a pool called premium. In exchange for the premium payment, the person gets an assurance that a certain sum of money is to be paid to him or his nominees on the happening of the event insured against
Legal Implications: Life Insurance can be defined as a contract between two parties by which one party undertakes to make good or indemnify any financial loss suffered by other party, in consideration of a sum of money, on the happening of a specified event e.g. Accident or death. The scope of life insurance can be broadly stated under the following aspects:
- Insurance of life is a risk sharing instrument.
- Life insurance is essentially a cooperative process in which a large number of people have to taken into the fold of the insuring agency and create a pool.
- The value of the life has to be estimated in order to estimate the share of each individual in terms of premium.
- Payment contingency in case of life insurance is either at death or at the expiry of term either of which will definitely occur. Thus this contract is a contract of certainty.
- Insurance is not a form of gambling and it rather serves the purpose of eliminating uncertainty of financial situation by providing for unforeseen events. It additionally serves to increase the productivity of the community by eliminating worry and increasing initiative.
- Insurance is not a form of charity as the sum assured is paid out against regular payment of stipulated premium.
A Tool for Social Security
Life insurance is one of the most effective tools of social security across the globe. In the absence of such a provision to the common people, the society will have no redressal for pitiful elderly masses, helpless widows, unprotected orphans; the factories will have to be scrapped after a fire; the houses will not be rebuilt after being struck by any calamity. With such events and more any economy cannot be stable leave alone the growth.
Our state, unlike the socialist or a developed capitalist society where states are responsible for the deprived and destitute, is ill-equipped to do so. Constitution of India has relevant clauses under the directive principles of the state policy. In article 41, it clearly dictates the state within its monetary and development capacity shall take effective measures to secure the elementary right of work, education, employment, health and any other undeserved want of every citizen.
Nevertheless, the failure of states is evident to all, with only a few schemes floated like the one for socially disadvantaged. Providing equal rights and opportunities for all is easier said than done. In the absence of the bread winner of the family there is little that the government or other social agencies can do to look after the welfare of those left behind. The same is true even in the most economically advanced nations.
Thus in order to ensure that the people left behind continue to enjoy the same privileges in society as before and thus stay with the mainstream, life insurance is a probably the best and only social security tool against unforeseen eventualities. It not only creates security but also goes ahead to foster a respect for savings to be able to secure future of the entire family.
Insurance has evolved as a process of safeguarding the interest of people from loss and uncertainty. It may be described as a social device to reduce or eliminate risk of loss to life and property.
Insurance contributes a lot to the general economic growth of the society by provides stability to the functioning of process. The insurance industries develop financial institutions and reduce uncertainties by improving financial resources.
1. Provide safety and security:
Insurance provide financial support and reduce uncertainties in business and human life. It provides safety and security against particular event. There is always a fear of sudden loss. Insurance provides a cover against any sudden loss. For example, in case of life insurance financial assistance is provided to the family of the insured on his death. In case of other insurance security is provided against the loss due to fire, marine, accidents etc.
2. Generates financial resources:
Insurance generate funds by collecting premium. These funds are invested in government securities and stock. These funds are gainfully employed in industrial development of a country for generating more funds and utilised for the economic development of the country. Employment opportunities are increased by big investments leading to capital formation.
3. Life insurance encourages savings:
Insurance does not only protect against risks and uncertainties, but also provides an investment channel too. Life insurance enables systematic savings due to payment of regular premium. Life insurance provides a mode of investment. It develops a habit of saving money by paying premium. The insured get the lump sum amount at the maturity of the contract. Thus life insurance encourages savings.
4. Promotes economic growth:
Insurance generates significant impact on the economy by mobilizing domestic savings. Insurance turn accumulated capital into productive investments. Insurance enables to mitigate loss, financial stability and promotes trade and commerce activities those results into economic growth and development. Thus, insurance plays a crucial role in sustainable growth of an economy.
5. Medical support:
A medical insurance considered essential in managing risk in health. Anyone can be a victim of critical illness unexpectedly. And rising medical expense is of great concern. Medical Insurance is one of the insurance policies that cater for different type of health risks. The insured gets a medical support in case of medical insurance policy.
6. Spreading of risk:
Insurance facilitates spreading of risk from the insured to the insurer. The basic principle of insurance is to spread risk among a large number of people. A large number of persons get insurance policies and pay premium to the insurer. Whenever a loss occurs, it is compensated out of funds of the insurer.
7. Source of collecting funds:
Large funds are collected by the way of premium. These funds are utilised in the industrial development of a country, which accelerates the economic growth. Employment opportunities are increased by such big investments. Thus, insurance has become an important source of capital formation.
The important principle of insurance are as follows:
The main motive of insurance is cooperation. Insurance is defined as the equitable transfer of risk of loss from one entity to another, in exchange for a premium
1. Nature of contract:
Nature of contract is a fundamental principle of insurance contract. An insurance contract comes into existence when one party makes an offer or proposal of a contract and the other party accepts the proposal.
A contract should be simple to be a valid contract. The person entering into a contract should enter with his free consent.
2. Principal of utmost good faith:
Under this insurance contract both the parties should have faith over each other. As a client it is the duty of the insured to disclose all the facts to the insurance company. Any fraud or misrepresentation of facts can result into cancellation of the contract.
3. Principle of Insurable interest:
Under this principle of insurance, the insured must have interest in the subject matter of the insurance. Absence of insurance makes the contract null and void. If there is no insurable interest, an insurance company will not issue a policy.An insurable interest must exist at the time of the purchase of the insurance. For example, a creditor has an insurable interest in the life of a debtor, A person is considered to have an unlimited interest in the life of their spouse etc.
4. Principle of indemnity:
Indemnity means security or compensation against loss or damage. The principle of indemnity is such principle of insurance stating that an insured may not be compensated by the insurance company in an amount exceeding the insured’s economic loss.
In type of insurance the insured would be compensation with the amount equivalent to the actual loss and not the amount exceeding the loss. This is a regulatory principal. This principle is observed more strictly in property insurance than in life insurance. The purpose of this principle is to set back the insured to the same financial position that existed before the loss or damage occurred.
5. Principal of subrogation:
The principle of subrogation enables the insured to claim the amount from the third party responsible for the loss. It allows the insurer to pursue legal methods to recover the amount of loss, For example, if you get injured in a road accident, due to reckless driving of a third party, the insurance company will compensate your loss and will also sue the third party to recover the money paid as claim.
6. Double insurance:
Double insurance denotes insurance of same subject matter with two different companies or with the same company under two different policies. Insurance is possible in case of indemnity contract like fire, marine and property insurance.
Double insurance policy is adopted where the financial position of the insurer is doubtful. The insured cannot recover more than the actual loss and cannot claim the whole amount from both the insurers.
7. Principle of proximate cause:
Proximate cause literally means the ‘nearest cause’ or ‘direct cause’. This principle is applicable when the loss is the result of two or more causes. The proximate cause means; the most dominant and most effective cause of loss is considered. This principle is applicable when there are series of causes of damage or loss.
Life Insurance
Life Insurance refers to a policy or cover whereby the policyholder can ensure financial freedom for his/her family members after death. Suppose you are the sole earning member in your family, supporting your spouse and children.In such an event, your death would financially devastate the whole family. Life insurance policies ensure that such a thing does not happen by providing financial assistance to your family in the event of your passing.
Types of Life Insurance Policies
There are primarily seven different types of insurance policies when it comes to life insurance. These are:
Term Plan - The death benefit from a term plan is only available for a specified period, for instance, 40 years from the date of policy purchase.
Endowment Plan - Endowment plans are life insurance policies where a portion of your premiums go toward the death benefit, while the remaining is invested by the insurance provider. Maturity benefits, death benefit and periodic bonuses are some types of assistance from endowment policies.
Unit Linked Insurance Plans or ULIPs - Similar to endowment plans, a part of your insurance premiums go toward mutual fund investments, while the remaining goes toward the death benefit.
Whole Life Insurance - As the name suggests, such policies offer life cover for the whole life of an individual, instead of a specified term. Some insurers may restrict the whole life insurance tenure to 100 years.
Child’s Plan - Investment cum insurance policy, which provides financial aid for your children throughout their lives. The death benefit is available as a lump-sum payment after the death of parents.
Money-Back - Such policies pay a certain percentage of the plan’s sum assured after regular intervals. This is known as survival benefit.
Retirement Plan - Also known as pension plans, these policies are a fusion of investment and insurance. A portion of the premiums goes toward creating a retirement corpus for the policyholder. This is available as a lump-sum or monthly payment after the policyholder retires.
Benefits of Life Insurance
If you possess a life insurance plan, you can enjoy the following advantages from the policy.
Tax Benefits - If you pay life insurance premiums, you are eligible for tax benefits in India, under Section 80(C) and 10(10D) of the Income Tax Act. Thus, you can save a substantial sum of money as taxes by opting for a life insurance plan.
Encourages Saving Habit - Since you need to pay policy premiums, buying such an insurance policy promotes the habit of saving money.
Secures Family’s Financial Future - The policy ensures your family’s financial independence is maintained even after your demise.
Helps Plan Your Retirement - Certain life insurance policies also act as investment options. For instance, pension plans offer a lump-sum payout as soon as you retire, helping you to fund your retirement.
Marine Insurance
Marine insurance provides protection against the loss of marine perils.
The marine perils are; collision with a rock or ship, attacks by enemies, fire, and captured by pirates, etc. these perils cause damage, destruction or disappearance of the ship and cargo and non-payment of freight. So, marine insurance insures ship (Hull), cargo and freight. Previously only certain nominal risks were insured but now the scope of marine insurance had been divided into two parts; Ocean
Marine Insurance and Inland Marine Insurance.
The former insures only the marine perils while the latter covers inland perils which may arise with the delivery of cargo (gods) from the go-down of the insured and may extend up to the receipt of the cargo by the buyer (importer) at his go down.
Fire Insurance
Fire Insurance covers the risk of fire. In the absence of fire insurance, the fire waste will increase not only to the individual but to the society as well. With the help of fire insurance, the losses arising due to fire are compensated and the society is not losing much. The individual is preferred from such losses and his property or business or industry will remain approximately in the same position in which it was before the loss. The fire insurance does not protect only losses but it provides certain consequential losses also war risk, turmoil, riots, etc. can be insured under this insurance, too.
Health /Medical insurance
Health uncertainties are part of life. Keeping in mind the rising cost of healthcare and an increasing number of diseases, it’s important to have the financial cushion to protect yourself against health contingencies. Health insurance policies are of many types such as individual health insurance, family floater health insurance, critical illness health insurance and senior citizen health insurance. It’s important to have adequate health insurance coverage that can protect you from financial crisis during medical emergencies. Health insurance plans cover the medical expenses which you incur if you fall ill or are injured and need medical assistance. Since the cost of medicine is very high, health insurance plans prove very beneficial. They pay for the medical expenses thereby saving your finances from the strain of the costs incurred on your treatments.
Features of health insurance plans
- Health plans can be taken to cover yourself as well as your family members
- Expenses incurred on room rent, surgery, nurse’s fees, doctor’s fees, ambulance, day care treatments, etc. are all covered under health insurance plans
- The premiums paid are allowed as a deduction. You can claim a deduction of up to INR 1 lakh by paying health insurance premiums for yourself, your family and dependent parents.
General insurance
General insurance is the insurance of assets, financial assets included. If, due to a contingency which is covered under the plan, there is an economic loss, the loss is compensated by general insurance policies.
Top advantages of general insurance plans
The plans cover financial losses and compensate you for the losses that you suffer. As such, general insurance plans provide you financial security even in the case of contingencies
In some cases,general insurance plans are mandatory by law. For instance, motor insurance plans are mandatory as per the Motor Vehicles Act, 1988. Similarly, if you are travelling to Schengen countries, you mandatorily need a valid overseas health insurance plan. When you buy such mandated plans, you fulfil the legal obligation and save yourself from violation offence. General insurance plans help in protecting your savings in emergency situations.
References
- Banking and Insurance system : Jyotsna Sethi
- Banking and Insurance system : Nishwan Bhatia
