Insurance

Insurance is a basic form of risk management which provides protection against possible loss to life or physical assets. A person who seeks protection against such loss is termed as insured, and the company that promises to honour the claim, in case such loss is actually incurred by the insured, is termed as Insurer. In order to get the insurance, the insured is required to pay to the insurance company (i.e. the insurer) a certain amount, termed as premium, on a periodical basis (say monthly, quarterly, annually, or even one-time).

Life Insurance: Insurance against risk of loss to one's life is covered under Life Insurance. Life insurance is also known as long term insurance or life assurance. It includes Whole Life Assurance, Endowment Assurance, Assurances for Children, Term Assurance, Money Back Policy etc.

General Insurance: Insurance against risk of loss to assets like car, house, accident etc. is covered under General or Non-life Insurance. General insurance includes fire insurance, marine insurance, motor insurance, theft insurance, health insurance, personal accident insurance etc.

WHY SHOULD I BUY INSURANCE: All assets have some economic value attached to them. No person can deny that there is also a possibilty that these assets may get damaged/destroyed or become non-operational due to risks like breakdowns, fire, floods, earthquake etc. Different assets are exposed to different types of risks like a car has a risk of theft or meeting an accident, a house is exposed to risk of catching fire, a human is exposed to risk of death/accident. Insurance is needed because of following reasons:

- Social Security: Tool Insurance acts as an important tool providing a sense of security to the society on a whole. It is the right of every human-being to have basic amenities like food, clothing, housing, medical care, standard of living necessary for his personal and family's well being, and right to security in case of unemployment, disability, sickness or any other circumstances out of his control.

In case the bread earner of a family dies, the family suffers from direct financial loss as family's income ceases. As a result, family's economic condition gets affected unless there are other arrangements to rescue the family from this situation. Life insurance is one alternate arrangement that offers some respite to the family from financial distress. Otherwise this family would have been pushed into the lower strata of the society, which would be an additional cost to the society. This is because subsidies would have to be given to the family so as to enable it to survive and enjoy the basic rights at par with other people. Moreover, a poor family is generally seen to have a large family size with family members being illiterate. This on a whole affects the society and is a cost to the society. Therefore, insurance compliments the state in social management efforts.

- Uncertainty: The basic need of insurance arises as risks are uncertain and unpredictable in nature. Getting insurance for an asset does not mean that the asset is protected against risks or its exposure to risk is reduced, but it actually implies that in case the asset suffers any loss in value due to such risk, the insurance company bears the loss and compensates the insured by making payment to him.

- Economic Development: The premium paid by people to the insurance companies is a part of their savings. Insurance, thus, acts as a useful instrument in promoting savings and investments, particularly within the lower-income and middle-income families. These savings are ultimately used as investments fuelling economic growth.

- General Purposes of Insurance: Insurance is widely popular and beneficial because of its following general purposes:

• Protection or safety (Term insurances): These plans are best suited for people aged upto 35 years as it provides higher protection at low cost. These plans are also beneficial for a person whose income is low and want to secure their family from financial default in case of his death.
• Marriage or education of the child (Children plans)
• Speedy growth of money & risk cover (Unit Linked Plans)
• Saving and Protection (Endowment type plans)
• Saving, protection & liquidity (Money back plans)

The above purposes apply for life insurance. In case of General insurance the basic purpose is to protect the insured against financial loss suffered by him or creation of liability, due to the causes covered by the policy.

TYPES OF INSURANCE POLICIES: Insurance provides compensation to a person for an anticipated loss to his life, business or an asset. Insurance is broadly classified into two parts covering different types of risks:

• Long-term (Life Insurance)
• General Insurance (Non-life Insurance)

Long-term Insurance

Long term insurance is so called because it is meant for a long-term period which may stretch to several years or whole life-time of the insured. Long-term insurance covers all life insurance policies. Insurance against risk to one's life is covered under ordinary life assurance. Ordinary life assurance can be further clasified into following types:

- Whole Life Assurance: In whole life assurance, insurance company collects premium from the insured for whole life or till the time of his retirement and pays claim to the family of the insured only after his death.

- Endowment Assurance: In case of endowment assurance, the term of policy is defined for a specified period say 15, 20, 25 or 30 years. The insurance company pays the claim to the family of assured in an event of his death within the policy's term or in an event of the assured surviving the policy's term.

- Assurances for Children: Child's Deferred Assurance: Under this policy, claim by insurance company is paid on the option date which is calculated to coincide with the child's eighteenth or twenty first birthday. In case the parent survives till option date, policy may either be continued or payment may be claimed on the same date. However, if the parent dies before the option date, the policy remains continued until the option date without any need for payment of premiums. If the child dies before the option date, the parent receives back all premiums paid to the insurance company.

School fee policy: School fee policy can be availed by effecting an endowment policy, on the life of the parent with the sum assured, payable in instalments over the schooling period.

- Term Assurance: The basic feature of term assurance plans is that they provide death risk-cover. Term assurance policies are only for a limited time, claim for which is paid to the family of the assured only when he dies. In case the assured survives the term of policy, no claim is paid to the assured.

- Annuities: Annuities are just opposite to life insurance. A person entering into an annuity contract agrees to pay a specified sum of capital (lump sum or by instalments) to the insurer. The insurer in return promises to pay the insured a series of payments untill insured's death. Generally, life annuity is opted by a person having surplus wealth and wants to use this money after his retirement. There are two types of annuities, namely:

• Immediate Annuity: In an immediate annuity, the insured pays a lump sum amount (known as purchase price) and in return the insurer promises to pay him in instalments a specified sum on a monthly/quarterly/half-yearly/yearly basis.
• Deferred Annuity: A deferred anuuity can be purchased by paying a single premium or by way of instalments. The insured starts receiving annuity payment after a lapse of a selected period (also known as Deferment period).

- Money Back Policy: Money back policy is a policy opted by people who want periodical payments. A money back policy is generally issued for a particular period, and the sum assured is paid through periodical payments to the insured, spread over this time period. In case of death of the insured within the term of the policy, full sum assured along with bonus accruing on it is payable by hte insurance company to the nominee of the deceased.

General Insurance

Also known as non-life insurance, general insurance is normally meant for a short-term period of twelve months or less. Recently, longer-term insurance agreements have made an entry into the business of general insurance but their term does not exceed five years. General insurance can be classified as follows:

- Fire Insurance: Fire insurance provides protection against damage to property caused by accidents due to fire, lightening or explosion, whereby the explosion is caused by boilers not being used for industrial purposes. Fire insurance also includes damage caused due to other perils like strom tempest or flood; burst pipes; earthquake; aircraft; riot, civil commotion; malicious damage; explosion; impact.

- Marine Insurance: Marine insurance basically covers three risk areas, namely, hull, cargo and freight. The risks which these areas are exposed to are collectively known as "Perils of the Sea". These perils include theft, fire, collision etc.

Marine Cargo: Marine cargo policy provides protection to the goods loaded on a ship against all perils between the departure and arrival warehouse. Therefore, marine cargo covers carriage of goods by sea as well as transportation of goods by land.

Marine Hull: Marine hull policy provides protection against damage to ship caused due to the perils of the sea. Marine hull policy covers three-fourth of the liability of the hull owner (shipowner) against loss due to collisions at sea. The remaining 1/4th of the liability is looked after by associations formed by shipowners for the purpose (P and I clubs).

- Miscellaneous: As per the Insurance Act, all types of general insurance other than fire and marine insurance are covered under miscellaneous insurance. Some of the examples of general insurance are motor insurance, theft insurance, health insurance, personal accident insurance, money insurance, engineering insurance etc.

HOW TO CHOOSE AN INSURANCE PLAN: A wide range of insurance products are available in the market. Each insurance product is different from the others having some unique attributes which are devised to meet specific needs of different individuals. However, with such a wide range of products available, it becomes very difficult for an individual to choose an insurance plan that is best suited to meet his requirements. Based on the financial plans and needs and one's affordability to pay premium, an individual can choose any of the plans available in the market. Some of those plans are listed in the table below:

ULIP:

• Need / Purpose: Savings & capital appreciation, Protection (Risk cover).
• Best Suited for: Moderate to high income, Have dependents.

Term policy:

• Need / Purpose: Security to dependents, Risk cover
• Best Suited for: Young individuals, Low income, Have dependents

Children plans:

• Need / Purpose: Child's future studies, Child's marriage
• Best Suited for: Couples having small kids

Pension plans:

• Need / Purpose: Retirement Benefits, Risk cover
• Best Suited for: Persons aged above 40 , Persons not having a pension provision from their employer.

Money back policy:

• Need / Purpose: Risk cover, Periodic payments
• Best Suited for: Persons having recurring financial requirements, Low to moderate income

Endowment Plans:

• Need / Purpose: Risk cover, Savings
• Best Suited for: Requirement of fixed sum after lapse of certain period

INSURANCE FAQs

Que: Which insurance plan should I choose?

Ans: Individuals have different needs at different phases of their life-cycle. Therefore, the most important factor to be considered while choosing an insurance plan is your age. People needing protection for short-term death benefits and is exposed to short term debt obligations like loans etc are recommended to choose Term assurance. For people seeking long-term death benefit protection are recommended to opt for whole-life insurance plan.

Que: How can I pay the premium?

Ans: Premium can be paid through ECS facility (if available), or dropping the check at any of the drop-boxes of the insurance company, or by visiting the local branch office personally and paying in cash or by cheque.

Que: What is ECS and how can I avail it?

Ans: Electronic Clearing Service (ECS) is a facility offered by banks which facilitates automatic payment on a selected date in the future. The advantage of ECS is that one does not need to remember payment due dates and writing periodic cheques to make paymenta and late payment charges can be avoided. ECS facilty (provided it is offered by your bank with which you have an account) can be availed by completing the ECS mandate form provided by insurance companies.

Que: Can I change the mode of paying premium?

Ans: Mode of premium payment can be changed if the insurance company has an arrangement for such change. It is recommended that the insured contact the insurance company to know whether such change is allowed. However, most companies do allow their clients to change the mode of premium payment.

Que: How can I track the performance of my ULIP policy?

Ans: Performance of a ULIP policy can be tracked by visiting IRDA's website (http://www.irdaindia.org) or website of the respective insurance company.

Que: Can I take loan against my insurance policy?

Ans: An insured can take loan against his policy if such a provision is specified in the policy document and the insured meets the requirements of the policy document.

Que: Does a mediclaim policy covers reimbursement of medical expenses due to accidental injury?

Ans: Yes, generally all mediclaim policies cover reimbursement of medical expenses due to accidental injury subject to the terms and conditions of the policy.

Que: Is cumulative bonus in my existing individual mediclaim policy from one insurer transferable to an individual or floater mediclaim policy from any other insurer?

Ans: Yes, cumulative bonus in case of individual mediclaim policy is transferable if the policy has not lapsed (subject to documentary proof). However, in certain cases, relaxation upto seven days may be provided subject to fitness proof.

Que: Are there any additional costs to avail value added benefits?

Ans: Yes, additional costs are needed to be paid.

Que: Is my pre-existing disease covered in a medicalim policy?

Ans: Generally, pre-existing diseases are excluded from the mediclaim policy. However, some policies do cover pre-existing diseases after a specific time period.

Que: Is critical illness covered under individual mediclaim policy?

Ans: Yes, critical illness is covered under individual mediclaim policy.

Que: Is 24 hours hospitalisation necessary in all cases?

Ans: Generally it is necessary. However, in many policies there is a provision for Day Care Treatment under which medical expenses towards specific technologically advanced day care treatments/surgeries are covered. For such treatments, 24 hour hospitalisation is not required.

Que: Is maternity benefit available under individual or family cover (floater) policy ?

Ans: No maternity benefit is not available. However, it is available as an extention in Group mediclaim policy.

Que: Are expenses for treatment in a non-network hospital reimbursable?

Ans: Yes, the expenses are reimbursed by the insurance company.

Que: Are medical expenses covered under personal accident policy?

Ans: The policy provides the medical expenses coverage extention on payament of 20% additional premium and subject to the 20% of CSI or 40% of claim whichever is lesser.

Que: Can claim be made within the first 30 days of buying the individual / family floater policy?

Ans: The claim can be made only if the medical expenses are incurred due to an injury. However, medical expenses due to illness are not covered within the first 30 days of buying the policy. This condition does not apply in case of renewal.

Que: Is sickness like fever, cold, cough etc. covered under the policy?

Ans: Any illness/disease until it requires hospitalisation is not covered under the policy. However pre and post hospitalisation expenses for specific number of days are covered under different plans.

Que: Can I buy a policy for somebody else's vehicle?

Ans: Yes, it is possible to take an insurance policy for a vehicle in registered in somebody else's name. Policy can be bought by anybody acting on behalf of the insured.

Que: Why should I get my vehicle insured?

Ans: Motor insurance provides protection to your vehicle against risks like accident, theft or damage. Insurance also provides financial protection against risk to driver and passengers in the vehicle, pedestrians, other people on the road etc. Moreover, it is mandatory in India to have the vehicle insured before it can be driven on the roads.

Que: Under what circumstances am I supposed to report to the police?

Ans: It is recommended that a police complaint be filed at the nearest police station for incidents like damage to property of third party, bodily injury to third party or self and theft of vehicle.

Que: What is meant by a No Claim Bonus (NCB)?

Ans: No claim bonus refers to a discount that an insured receives from the insurance company on renewal of the policy in case he has not made any claims during the previous year.

Que: Is my no claim bonus transferable if I change my insurer?

Ans: Yes, the insured is entitled to get the no claim bonus from the new insurer if it stands accrued as per the records of the previous insurer.