Risk means that there is a possibility of loss or damage. It may or may not happen. Insurance is done against the contingency that it may happen. Insurance compensates the economic loss (though not fully).

Yes, living too long is as much as a risk as of dying too young. Death takes away income, old age reduces or takes away income. These risks are taken care off by life insurance. Annuity policies (Pension scheme) are available to take care of old age. Financial Independence during old age is an absolute necessity.

When the breadwinner dies, the family income dies. The economic condition of the family is affected and unless some arrangements are available, the family is pushed to lower strata of society. Life insurance comes in handy to restore the situation to some extent. Poor people cost the nation by way of subsidies and doles and so on. Life insurance tends to reduce such costs. In this sense, life insurance is complimentary in the state's efforts in social management.

The average sum assured of the group is called free cover limit of the group as a whole. The sum assured for the individual in the group is decided on a predetermined formula. The average sum assured is arrived at by dividing the total sum assured of the group by the number of members covered in the group.

Under this system, bonus is declared as so many rupees per thousand sum assured and stands attached to the policy. This is payable along with insured amount as and when payable (i.e either on death or on maturity).

Under this system, bonus declared for a particular year gets added to the sum assured and this figure is taken for calculation of bonus for the next year i.e. Bonus is also paid on the bonus additions to the sum assured.

An actuary is a technical person, who has passed specialised examinations conducted by Institute of Actuaries London or Actuarial Society of India. An Actuary in an insurance company determines the policies to be offered (plans of insurance) and the premium to be charged to the insuring public. He also advises the company about the policies to follow regarding investment of funds, deciding the bonus to be declared and so on.

A consumer (Policyholder) is to be informed of the benefits of the product sold in detail. He should also be educated about his duties and precautions to be taken by him. Eg. If the premium is not paid with in the days of grace, the policy will lapse and the valuable protection of insurance will be lost. This is to be made clear. Similarly if there is no nomination or change of nomination is needed on account of previous nominee is dead or policy is reassigned, the agent should advise immediately the policyholder to act. Otherwise there will be delay and problem at the time of Death claim.

Business profits at all times depend upon the successful combination of physical assets and personnel. Physical assets could never be profitably employed without competent personal to organise and manage. The human factor is vitally important for success in business. Every successful business has one or two keyman who possess the managerial skill and experience to direct the efficient use of material resources of the business, whose loss would be a severe blow to the continued success of the concern.

The loss of key man for an organisation will be a severe blow for the continued success of the concern. It will take quite some time for the organisation to replace the keyman and the organisation's profit will affect adversely. Therefore, while fixing the sum assured for insurance on the life of keyman by the company, his "Contribution in business" will be taken into account. The total sum assured for company under keyman can be "5 times of the net profit of the company". Advantage for the company is that the premium paid by the company on the keyman insurance can be claimed as expense in the company's account if the company can satisfy the ITO. The claim proceeds received under the policy is exempt from income tax and he company is able to create asset for itself. The keyman has to be necessarily the employee of the company.

An agent can represent only one insurer and do business for him.

A Broker can represent more than one insurer and do business for them. Detailed regulations have been framed by IRDA for Brokers and they govern them. Brokers are allowed to do insurance both Life and Non-life with more than one insurer.

A rider to a policy provides for some additional benefit or making certain stipulations.

In waiver of premium, the insurer waives his right to receive premiums, otherwise payable if the insured becomes disabled. The proposer should specifically ask for this benefit and pay necessary extra premium and the insurer should grant it.

If premiums have been paid for a period of 3 years but less than 5 years; and in case of death of policyholder within 6 months from the date of First unpaid premium (FUP), the full sum assured is paid to the beneficiaries. This is called “claims concession”. If the premiums have been paid for 5 years and above, the claim concession is extended for a period 12 months. This is called “Extended claims concession”. In both the above cases, unpaid premium that has fallen due/will be falling due in the policy year of death will be recovered.

FUP means, First Unpaid Premium i.e. immediate next premium that would fall due. Eg. If the last premium paid in respect of a policy, (where premium is payable half-yearly) is that due on 01.06.2000, the FUP in respect of this policy is 01.12.2000 i.e. next half-yearly due date of premium.

The price paid by the insured to secure the benefit of insurance is called premium.

The additional premium paid for securing the benefit of insurance where the proposer on account of Health reasons/Occupational Hazard is called extra premium. Extra premium is also charged for granting the benefit of Accident Benefit, Premium Waiver Benefit, etc. Such premium is called rider premium. Accident benefit, Premium waiver benefit etc. are riders and at the option of the proposer these benefits are granted.

When a policyholder decides to discontinue the policy and terminate the policy contract, the insurer offers to pay cash value on the cancellation of the policy contract. This amount is called “surrender value”. Section 113 of Insurance Act 1938, provides that if premiums have been paid for at least 3 consecutive years, the policy will acquire a guaranteed surrender value.

The minimum surrender value is 30% of total amount of premiums paid excluding the premiums paid for the first year and all extra premiums and/or additional premiums (extras charged by insurer for Health or Hazardous occupation and premiums paid for additional benefit). In addition, the surrender value of any existing bonus already attached to the policy is also paid. This surrender value is known as granted surrender value.

Sec.113 (2) provides that if a policy has acquired surrender value, it shall not lapse by non payment of further premium, but shall be kept alive to the extent of the paid up value acquired. The formula for paid up value is.

• No. of years premium paid

Paid up value = --------------------------------- x Sum assured

• Total No. of years premium payable

To this value, the already attached bonus is also added and total paid value is arrived at.

Surrender Value = Total paid up value x surrender value factor
Surrender value Factor is arrived by ready made separate chart, prepared by Actuarial Department.

The customer will be paid the guaranteed surrender value (sec.113) or the surrender value arrived, as per (sec.113 (2)) which ever is higher.

Eg: If the policy term is 20 years and 4 years premium is paid, sum assured 1,00,000, the paid up value = 4 x 1,00,000/20 = Rs.20,000 + Bonus accrued.

Surrender value = Paid up value x Surrender value factor

Special surrender value is more liberal (the amount is more) than the guaranteed surrender value. The surrender value factor depends upon the duration elapsed from the date of commencement of the policy and the policy term. As the duration elapsed increases, surrender value increases.

Surrender value = paid up value x surrender value factor.

Once surrender value is calculated, loan to the extent of 90% of surrender value can be granted to the policyholder after filling certain legal formalities such as executing a bond assigning the policy etc. In case of paid up policy i.e. lapsed policy, the loan % allowed is 85%. A paid up policy is a lapsed policy. It is entitled for the vested bonus (Bonus already accrued). It is not entitled for future bonus of future valuation. The % of loan granted varies from company to company.

A claim is demand for performance of promise made by the insurer (insurance company) while entering into the contract of insurance.

Under Endowment type of policies the insurer has to settle the amount due to customer (claim) on the date of Maturity i.e. the claim is to be settled after the selected term on the maturity date.

Settlement is to be done in respect a claim arising out of death of the life assured during the selected (under endowment type of policy) Term of the policy, to the nominee/assignee/legal heirs. This is called death claim. A claim preferred by the beneficiary on the death of life assured.

HUF means Hindu Undivided Family. It is a joint family where “KARTHA” is the Chief & Head of the family. Other members of the family are called as “co-parceners”.

Death claims occurring within 2 years from the date of commencement of the policy, or from the date of revival of the policy is called “Very Early Claim”. Death claims occurring and between 2 to 3 years from the date of commencement of policy or from the date of revival is classified as “Early claim”. In all cases of early claims and very early claims, investigation will be done by the insurer to make sure that the claim is genuine.

Investments mean avenues wherein one puts lumpsum amount to produce profit or to increase capital. But before one can invest such a lumpsum, one must possess it. One must first create it by savings regularly in a well-selected savings scheme. Many savings plans have both the elements of saving as well as investment combined. Life Insurance is both a savings plan with guaranteed amount and an investment plan.

No . Maturity claim/Death claim amounts under an insurance policy including the bonuses are non-taxable as per subsection 10(D) of Section 10 of I.T. Act.

No. The maturity proceeds under an insurance policy are not subject to capital gains tax.

No. Medi Claim is part of non-life insurance. However, alongwith ordinary life insurance policy, health related insurance in respect of certain critical illness can be covered as a rider along with traditional life insurance policy. The coverage is in addition to life insurance policy. In case a policyholder with critical illness rider is afflicted with specified diseases, on production of proof and subject to certain regulations, certain fixed percentage of sum assured is paid to the life assured. The amount paid has no relation or connection to the actual expense incurred by the policyholder.

Every company recognise certain serious diseases as critical illness/dreaded disease. These diseases are of serious nature. For Eg. LIC recognises 4 major diseases as critical illness/dreaded diseases, namely Cancer, Kidney Failure needing transplantation, Heart problem needing by-pass surgery or paralysis. The company can decide, the critical illness for their plan.

Query 1 - In what way is investing in PPF and bonds different from investing in insurance? I am 48 years old. Can I avail an insurance policy? How much should I insure myself ?

PPF and Bonds are totally different from insurance. The main objective of investing in PPF and bonds is to provide regular returns. However, the objective of investing in insurance should not be to get returns. The main purpose of investing in insurance is to ensure financial protection in the wake of any unforeseen calamity. Hence insurance offers a sense of financial security which is unparallel in the financial world.

Insurance is always best when it is taken at an early age. Insurance taken at a later stage would involve higher outgo as premiums. Hence in case you want to take up an insurance policy you will have to pay significantly high premiums. But all said and done insurance is indeed a must in any person's financial portfolio. You should insurance yourself for 8 -9 times your annual income. Another method is to consider your expenses, your income level, factoring an increase in your income level, and all your future expenses. The net difference should be the amount for which you should insure yourself.

Query 2 - My income is more than Rs.5,00,000. Since section 88 is not applicable is it still worth while for me to invest in insurance ?

First of all, insurance should not be taken for the tax benefits that they provide. They should be taken for the risk cover and as a shied against all future exigencies.

Come to the issue of tax benefits, section 88 has now been abolished. Under the new regime contribution towards any insurance plan will be entitled to a deduction under section 80C up to a maximum of Rs.1,00,000, irrespective of the income level.

Query 3 - I have decided to take up an insurance policy. What are the various kinds of insurance plans that are available in the market ?

Deciding upon an insurance scheme requires a close introspection of your own needs and requirements. We shall highlight the salient features of the 4 major varieties of insurance schemes that are available in the market today. Based on this we hope that you will be able to take an informed decision:

Term Plan - This is the cheapest variety of insurance plan. Under such a plan there are no death benefits. However, on death the policy holder will get the sum assured. But in case of certain policies like ICICI Prudential's term plan the premiums are returned on death.
Endowment Plan - In this case the money is returned after death or maturity whichever is earlier. The sum assured is topped with attractive bonuses. However, it is important for the policyholder to note that the bonuses are not guaranteed and they depend upon the performance of the company.

Money Back Plan - Insurance is generally a long term financial commitment, lasting for a period of 10 - 20 years. Under other policies the money is returned only after the entire period or on death (whichever is earlier). But in case of a money back plan the money is returned at intermittent intervals. In case you will be in need of cash for various expenses then you can consider a money back plan. Needless to say, since this plan offers a certain amount of liquidity, these plans are the most expensive.

Unit linked plans - These plans are the new generation products of the insurance industry. These policies seek to combine the best features of insurance and mutual funds. A portion of the premium is invested in securities depending upon the scheme that you select. You have equity centric schemes, debt centric schemes and balanced schemes. The investor may choose whichever scheme he/she considers best suited to his risk appetite.