The business of insurance is related to the protection of the economic value of assets. Every asset has a value. The asset would have been created through the efforts of the owner, in the expectation that, either through the income generated therefrom or some other output, some of his needs would be met. In the case of a factory or a cow, the production is sold and income generated. In the case of a motor car, it provides comfort and convenience in transportation. There is no direct income. There is a normally expected life time for the asset during which time it is expected to perform. The owner, aware of this, can so manage his affairs that by the end of that lifetime, a substitute is made available to ensure that the value or income is not lost. However, if the asset gets lost earlier, being destroyed or made non-functional, through an accident or other unfortunate event, the owner and those deriving benefits therefrom suffer. Insurance is a mechanism that helps to reduce such adverse consequences.

Assets are insured, because they are likely to be destroyed or made non-functional, through an accidental occurrence. Such possible occurrences are called perils. Fire, floods, breakdowns, lightning, earthquakes, etc, are perils. The damage that these perils may cause the asset, is the risk that the asset is exposed to.

The risk only means that there is a possibility of loss or damage. It may or may not happen. There has to be an uncertainty about the risk. Insurance is done against the contingency that it may happen. Insurance is relevant only if there are uncertainties. If there is no uncertainty about the occurrence of an event, it cannot be insured against.

Conceptually, the mechanism of insurance is very simple. People who are exposed to the same risks come together and agree that, if any one of the 'members' suffers a loss, the others will share the loss and make good to the person who lost. All people who send goods by ship are exposed to the same risk related to water damage, ship sinking, piracy, etc. Those owning factories are not exposed to these risks, but they are exposed to different kinds of risks like, fire, hailstorms, earthquakes, lightning, burglary, etc. Like this, different kinds of risks can be identified and separate groups made, including those exposed to such risks. By this method, the risk is spread among the community and the likely big impact on one is reduced to smaller manageable impacts on all.

The manner in which the loss is to be shared can be determined before hand. It may be proportional to the likely loss that each person is likely to suffer, which is indicative of the benefit he would receive if the peril befell him. The share could be collected from the members after the loss has occurred or the likely shares may be 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.

A human life is also an income-generating asset. This asset also can be lost through unexpectedly early death or made non-functional through sickness and disabilities caused by accidents. Accidents may or may not happen. Death will happen, but the timing is uncertain. If it happens around the time of one's retirement, when it could be expected that the income would normally cease, the person concerned could have made some other arrangements to meet the continuing needs. But if it happens much earlier when the alternate arrangements are not in place, insurance is necessary to help those dependents on the income.

In the case of a human being, he may have made arrangements for his needs after his retirement. These would have been made on the basis of some expectations like he may live for another 15 years, or that his children will look after him. If any of these expectations do not become true, the original arrangement would become inadequate and there could be difficulties. Living too long can be as much a problem as dying too young. These are risks which need to be a safeguarded against. Insurance takes care of it.

Insurance does not protect the asset. It does not prevent its loss due to the peril. The peril cannot be avoided through insurance. The peril can sometimes be avoided, through better safety and damage control management. Insurance only tries to reduce the impact of the risk on the owner of the asset and those who depend on that asset. It compensates, may not be fully, the loses. Only economic or financial losses can be compensated.

The concept of insurance has been extended beyond the coverage of tangible assets. Exporters run the risks of the importers in the other country defaulting as well as losses due to sudden changes in currency exchange rates, economic policies or political disturbances. These risks are now insured. Doctors run the risk of being charged with negligence and subsequent liability for damages. The amounts in question can be fairly large, beyond the capacity of individuals to bear. These are insured. Thus, insurance is extended to intangibles. In some countries, the voice of a singer or the legs of a dancer may be insured, even though the advantage of spread may not be available in these cases.

Satisfaction of economic needs requires generation of income from some source. If the property, which is the source of such income were lost fully or partially, permanently or temporarily, the income too would stop. The purpose of insurance is to safeguard against such misfortunes by making good the losses of the unfortunate few, through the help of the fortunate many, who were exposed to the same risk but saved from the misfortune. Thus the essence of insurance is to share loses and substitute certainty for uncertainty.

There are certain basic principles, which make it possible for insurance to remain popular, and a fair arrangement. The first is the fact that people are exposed to risks and that the consequences of such risks are difficult for any one individual to bear. It becomes bearable when the community shares the burden. The second is that no one person should be in a position to make the risk happen. In other words, none in the group should set fire to his assets and ask others to share the costs of damage. This would be taking unfair advantage of an arrangement put into place to protect people from the risks they are exposed to. The occurrence has to be random, accidental, and not the deliberate creation of the insured person.

TRADITIONAL PLANS:

Agents, as "Plans of Assurance" sell Life Insurance products in the market. The plans are the combination of two basic plans namely (a) Term Assurance (makes provision in case of death) and (b) Pure Endowment (makes provision in case of survival) - i.e. provision for old age. Dying early is as much a risk as living too long.

Traditionally insurance policies are sold as Whole Life Plans and Endowment Plans. Under Whole Life Policy the premium is low and large amount of coverage is available as insurance. Under Whole Life Plan premium is to be paid till death and sum assured is payable immediately after death. Normally the earning power/paying capacity would cease or reduce considerably after superannuation age of 58 or 60. The customer (policyholder) would find it difficult to pay the premiums. Such policies would lapse due to non-payment of premiums and would become paid-up for reduced sum assured. The valuable protection of insurance cover for full Sum Assured would be lost. As a modification of this plan, Limited Payment Whole Life Policies were introduced. Under this scheme the premium payment can be restricted to certain Age (usually up to the end of earning period) and the benefits are payable only on death.

On the other hand, Endowment Assurance policies have become most popular. Under this policy, the Sum Assured is paid to the nominee/assignee/legal heirs in case of unfortunate death during the selected term. On survival the S.A. is paid as Maturity Value to the Life Assured. If the policy is With-profits (Participating) bonus additions are also paid. Endowment Assurance Policy (With Profit) is most popular plan.

The Unit Trust of India has Unit Linked Insurance Plans (1971). This plan is designed for any resident in India between age 12 and 55 for a period of 10 to 15 years with a target savings amount between Rs.60,000/- to Rs.75,000/- to be contributed in equal half yearly/annual installments over the chosen period. Persons over 50 years can go in for 10 years plan. No medical examination is necessary. A small part of the contribution is utilized for providing life cover, the balance being invested in units. There is provision of free accident insurance of Rs.7,500/- to Rs.15,000/- depending on the nature of injuries. In case the member dies before the end of the plan period, his legal heirs will be entitled to units to his credits and the amount of Insurance cover.

UNIT LINKED PLANS:

The Unit Trust of India has also a Retirement Benefit Plan (RBP) which provides for investments as well as pension benefit through the same scheme of investment. The holding period for investors between age 18 and 52 is up to age 58, while for those investors whose age is between 53 and 60, the holding period is 5 years. The benefits starts at age 58 for the first category of investors, while it starts between ages 58 and 65 for the second category of persons. The minimum investment at one time is Rs.500 (subject to minimum total contribution of Rs.10,000/- up to age 52) and Rs.10,000/- respectively. The pension starts on completion of age 58 under first category and after 5 years from participation in the second category. The contributions up to Rs.70,000/- are eligible for tax rebate u/s 88 of Income Tax Act.

The Actuary, taking into consideration of three factors namely, mortality, interest and expenses, determines the premium to be charged by the life insurer. If the actual experience on these aspect tallies with the assumptions made, it can be assumed that everything is going on expected lines and working smoothly. If the actual experience on these counts is worse than expectations, the insurer can suffer loss.

Surplus generated through favourable experience on these counts (mortality, interest & expenses) has to be maintained by the insurer. A major portion of surplus is distributed to policyholders as bonus. For this purpose, policies are divided into two categories - With Profits (Participating) and Without Profits (Non-Participating) Policies.

Different methods of distribution of bonus are followed. The one, easy to understand, is "Simple Reversionary Bonus". The bonus is declared as so many rupees per thousand sum assured per annum and this stands attached to the policy (reverts). This is payable along with sum assured as and when it becomes payable. LIC of India follows this method. The bonus declared after the valuation of 31.3.2002 according to the plan and term were as follows:

Term	Rate of Bonus per thousand S.A.(per annum)
	Endowment Policy	Money Back/Anticipated
Less than 10 years	Rs. 49/-	-
11 - 15 years	Rs. 58/-	Rs. 48/-
16 - 20 years	Rs. 65/-	Rs. 58/-
More than 20 years	Rs. 71/-	>Rs. 65/-

The whole life policies were allotted bonus at Rs.95/- to Rs.106/- per thousand S.A., depending upon the date of commencement of the Policy, i.e. Policies which have commenced earlier say on or before 31.3.1975 were given higher bonuses compared to policies commenced on or before 4/1980. These bonuses are in the nature of simple reversionary bonus.

In order to compensate those policyholders, who are loyal to the company (display better mortality) - say more than 15 years and thus help the company to accumulate more surplus, Final (Additional) Bonus or Terminal Bonus is declared. This is one time bonus at the maturity date. The rate depends upon the valuation results. This bonus is in addition to the usual bonus already declared. As per 31.03.2002 LIC has declared the rate which depended upon the term of the policy and sum assured, varied between Rs.25%o to Rs.1400%o. This bonus is per thousand sum assured for the entire duration of the policy which were in force for 15 years or more (subject to certain exemptions).

Term assurance with return of premiums: Under Term Assurance if death of the life assured takes place during the selected term the assured amount is paid. If death does not take place, during the selected period the assurance comes to an end and premiums collected are not refunded. However, a variation of this plan can be devised by insurers wherein refund of premiums collected may be made in case the death does not take place within the term. LIC's Bima Kiran Plan is a term assurance with return of premium. This policy provides for (a) refund of premium if the assured survives the term (b) loyalty additions, if any, will be paid depending upon the working experience of LIC and (c) free term assurance for a period of 10 years after the date of maturity on a graded basis, depending upon the term of the policy.

Combination of Plans: The insurer has to look after the needs of different types of customers. Though Endowment and Whole Life Plans are two basic plans, it has become necessary for the insurer to bring changes in the plans to suit the needs of the customers. Sometimes, a combination of plans would be necessary. Under LIC's Jeevan Mitra Policy, the risk element is twice as that of the survival element i.e. on survival the insured amount is paid, while in case of unfortunate death during the selected term double the sum assured is paid. Recently, LIC has come out with Triple Cover Jeevan Mitra, where the death benefit is thrice the sum assured. Accidental Death cover would result in payment of 4 times the basic sum assured under the policy. Similarly, under LIC's New Janaraksha Plan and Jeevan Sneha Plan a temporary term assurance cover is granted for a period of 3 years, even though the policy may be in a lapsed position due to non-payment of premium (subject to certain conditions). Joint Life policies on the lives of husband and wife, on the partners of a firm are some of the combinations made to make insurance flexible.

Types of Annuities: Annuity means pension. The risk of living too long is covered by the Annuity Plans. In insurance contract the policyholder pays the price called "Premium". In annuity contracts the price paid by the policyholder is called "Purchase Price". In ordinary insurance contract, the policyholder pays the premiums in instalments and the insurer pays the lump sum amount according to the contract. In annuity contract the prospect agrees to pay to the insurance company a specified lump sum amount in return for a promise from the insurer to make series of payments to him as long as he is alive. Thus, Annuity is the reverse of life insurance. There are two types of annuities - (i) Immediate Annuity, (ii) Deferred Annuity.

Immediate Annuity: Here the customer, who is the purchaser of an annuity, pays a lump sum amount called "purchase price", in return for a promise made by the insurer to receive monthly/quarterly/half-yearly/yearly, as the case may be. The purchaser of the annuity is called "Annuitant". The annuity is paid according to the choice of the customer. LIC's Jeevan Akshay is an immediate annuity plan. Annuity can be paid for 5, 10, 15 or 20 years certain and thereafter life. That is the annuity will be paid certainly for the selected period whether the annuitant is alive or not (in case of death of the annuitant during the selected term, annuity will be paid until the end of selected term to his legal heirs) and if he is alive annuity will be continued to be paid as long as he is alive.

Deferred Annuity: Here the customer, who is the purchaser of the annuity, pays the purchase price in instalments or in a lump sum and the annuity payment starts after the selected period (which is called deferment period). Here also the customer can select the mode of payment of annuity. LIC's Jeevan Dhara is an example of deferred annuity. During the earning period of the customer/prospect, he pays the purchase price and the annuity starts from the selected age after the deferment period.

There are other options available for the purchaser of an annuity.

Annuity for life: Here the annuity will be paid as long as the annuitant is alive. If the annuitant dies early it will be a loss.

Annuity for life with return of purchase price: In this case, the annuity will be paid as long as the annuitant is alive and after his death, the purchase price will be returned to the nominee/legal heir of the annuitant. Annuities can be offered as Joint Life annuity payable to the last survivor. Thus, if a joint life annuity is purchased the annuity is payable until the death of the second life.