C S C - V L E T R A I N I N G

the
CONCEPTS  OF  BENEFITS  AND  
DEDUCTIBLES
Lorem Ipsum Dolor Sit Amet

In   insurance   there   are  

benefits   available   to   policy  
holders   in   addition   to   basic  
cover.   In   both   the   types,    
certain   policies   also   reduce   I)  LIFE  INSURANCE  
amounts   out   of   the   benefits  
 

1. Bonus  
available   under   the   terms   of    

policy.  In  this  module  we  will   1.1   In   Life   insurance   valuation   of   life   insurance   fund   is   done  
see  these  concepts.   by   an   Actuary,   periodically.   At   the   end   of   valuation,   the  
  surplus  [if  any]  is  distributed  to  the  policyholders  as  Bonus.  
 

Learning  Outcomes:     Policyholders,   who   have   opted   for   participating   [with   profits]  
I)  Life  Insurance   polices,  only,  are  entitled  for  bonus.  
 
1. Bonus   1.2  There  are  many  methods  of  paying  bonus.    
2. Guaranteed  Additions    
3. Surrender  Value     1.2.1     Simple   Revisionary   bonus   is   a   method   in   which   the  
4. Paid  up  Value   declared   bonus   is   added   to   the   basic   sum   insured.   If   sum  
5. Mortality  Tables   insured   Rs   50,000/-­‐   and   bonus   declared   for   the   year   is   Rs  
6. Premium   payment   5,000/-­‐  the  sum  insured  will  become  Rs  55,000/-­‐.  
Term    
7. Assignment  of  Policies   In   Compounded   Revisionary   bonus   the   bonus   is   calculated  
  not  on  basic  sum  insured     but  on  previous  year’s  sum  insured  
II)  Non  Life  Insurance   with  added  bonus  declared  up  to  last  year.  
1. No  Claim  Bonus    
2. Excess   /   Revisionary  bonus  declared  after  each  valuation,  are  paid  at  
Franchise/Deductible   the  end  of  the  policy  term  along  with  the  sum  insured.  
3. Depreciation    
  1.2.2   Insurers  also  declare  interim  bonus  on  policies,  which  
II)  Health  Insurance   become  claim  after  the  valuation  date  but  before  the  date  of  
1. Cumulative  Bonus     declaration  of  valuation  results.  If  valuation    results  are  
2. TPA  Fees   declared  in  September  for  the  year  ending  31st  March,  the  
3. Co-­‐pay   policy    becoming  claim  in  May  will  get  interim  bonus  so  
declared.    
 CONCEPTS  OF  BENEFITS  AND  DEDUCTIBLES   CSC – VLE TRAINING

3. Guaranteed  Additions  
 

2.1  In  some  life  insurance  policies  guaranteed  additions  are  

provided.   They   are   guaranteed   by   the   insurance   company.  
They   have   to   be   paid   whether   any   surplus   is   declared   or  
not.  
 

2.2  Guaranteed  additions  are  calculated  at  a  rate  per  every  

thousand  of  sum  assured.  They  are  added  to  the  basic  sum  
assured  and  are  payable  along  with  claim.    
 

4. Surrender  Value  
 

3.1   In   life   insurance   policies   if   policy   holder   wishes   to  

cancel  his  policy  and  take  back  his  money,  he  can  do  so.  The  
return   of   cash   value   attached   to   the   policy   is   called  
“Surrender  Value”.  
 
3.2  Surrender  value  is  generally  calculated  as  a  percentage  
of  paid-­‐up  value.  This  percentage  is  called  surrender  value  
factor.   The   surrender   value   factor   depends   on   type   of  
policy;   period   elapsed   from   the   start   of   policy:     age   of   the  
life-­‐assured  etc.    

3.3 The surrender value is paid, only if three annual premiums

have been paid.
3.2  In  Unit  linked  Insurance  policies  the  surrender  value  is  
Cash  value  [Net  Asset  Value  multiplied  by  number  of  units]  
reduced  by  surrender  charges.  IRDA  has  prescribed  
maximum  surrender  charge  under  ULIP  policies.  The  lock  
in  period  for  ULIP  is  minimum  5  years.

2. Paid  Up  Value  

 

4.1  In  case  of  nonpayment  of  premium  the  policy  lapses.  However,  if  the  premiums  have  been  
paid   for   three   years,   the   policy   acquires   value,   this   value   is   called   paid-­‐up   value   and   the   policy  
becomes   paid   up.   The   policy   remains   in   force   for   the   remaining   term   with   reduced   sum  
insured.    
 
4.2   Normally   sum   assured   is   reduced   in   proportion   to   the   number   of   premiums   paid   and  
number  of  premiums  payable.  
 

Example:  Policy  with  sum  insured  of  Rs  50,000  if  number  of  premiums  payable  are  50  and  after  
payment  of  25  premiums  if  the  insured  cannot  pay  the  further  premiums  and  the  policy  becomes  
paid  up  the  sum  insured  will  be  reduced  to  Rs  25,000  as  paid  up  as  under:  
 
Premium  paid  
-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐-­‐              X  sum  insured  =  25/  50  X  50,000=  Rs.  25,000  
Premiums  payable  
 

4.3  In  ULIP  policies  the  concept  of  paid  up  value  does  not  apply.

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CONCEPTS  OF  BENEFITS  AND  DEDUCTIBLES   CSC – VLE TRAINING

5. Mortality  Tables   7. Assignment  of  the  policies  

 
5.1  Mortality  table  shows  the  rate  of  deaths   7.1   A   life   insurance   policy   is   a  
occurring  in  a  defined  population  during  a  selected   property.  It  represents  rights.  These  
time  interval.   rights  can  be  transferred  by  insured  
In  other  words  the  mortality  table  show  the   person   in   favour   of   other/s   by   way  
probability  of  a  person  dying  before  their  next   of   assigning   the   policy.   Assignment  
birthday,  based  on  their  age.     is   transfer   of   rights,   titles   and  
  interests   in   the   policy   to   other  
5.2  Mortality  table  helps  in  preparing  premium   person.  
tables.  These  premium  tables  are  used  for   7.2   Assignment   can   be   done   by  
determining  premiums  to  be  paid  by  individuals   endorsing   [signing]   policy   after  
for  purchasing  life  insurance.   writing   the   deed   of   assignment   i.e.  
  stating   that   policyholder   wishes   to  
A  mortality  table  is  also  known  as  a  "life  table,"   assign  the  policy  to  the  assignee.  It  is  
and  "actuarial  table"     to   be   witnessed   and   signed   by   him/  
 
her  and  sent  to  insurers,  along  with  
6. Premium  Payment  Term  
 
the   policy,   for   recording   the  
Premium   payment   term   is   the   period   up   to   which   assignment.   In   the   event   of   any  
the   insured   has   to   pay   the   premium   under   a   life   claim   policy   money   is   paid   to   the  
policy.   assignee.  
   
This   term   is   normally   equal   to   the   policy   period.   On   assignment   of   the   policy,  
However,   insurance   companies     give   the   insured,   previous  nominations  are  cancelled.
option   to   choose   a   premium   paying   term   lower  
than   the   policy   term.   If   entire   premium   is   paid   in  
lump  sum,  it  is  called  as  “Single  Premium”.  

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 CONCEPTS  OF  BENEFITS  AND  DEDUCTIBLES   CSC – VLE TRAINING

II)  Non  Life  Insurance  

 
2. No  Claim  Bonus  (NCB)  
 
1.1   No   claim   bonus   is   generally   given   under   the  
Motor  insurance  policy  for  every  claim  free  year.  
A   discount   in   premium   is   given,   for   every   claim  
free,   completed   policy   period,       If   any   claim   is  
made   during   any   year,   full   accumulated   NCB   is  
withdrawn   It   is   available   only   for   Own   Damage  
section  and  not  for  third  party  liability  section.  
 
1.2   The   no   claim   bonus   generally   ranges   from  
20%   to   50%.   An   example   of     rates   of   no   claim  
bonuses  is:-­‐                  
i) 1st  Claim  free  year  20%    
ii) 2nd  consecutive  claim  free  year  30%  
iii) 3rd  consecutive  Claim  free  year  40%  
iv) 4th  consecutive  claim  free  year  45%  
v) 5th  consecutive  Claim  free  year  50%  
 
1.3Example:   Ms.   Kavita   has   taken   a   motor  
insurance  policy  for  which  she  is  paying  premium  
of   Rs   15,000.   If   we   take   indicative   rates   given  
above,   in   case   there   is   no   claim   during   first   year,  
her   renewal   premium   in   second   year   will   be  
reduced  to  12,000.  If  n  second  year  also  there  is  no  
claim  for  third  year  premium  will  be  10,000.    

1. Deductible/  Excess  /  Franchise  

The   concept   of   Deductibles/Excess/Franchise   is   used   in   health  
insurance,   motor   insurance,   travel   insurance   and   fire   insurance,  
etc.    
 

2.1  Deductible  
The   deductible   is   the   portion   which   is   not   covered   by   the  
insurance.   If   the   claim   is   up   to   amount   of   deductible   it   is   not  
payable   by   insurance   company   and   if   it   is   higher,   then   only   the  
difference  between  the  claim  amount  and  deductible  is  payable.    
 
2.2  Excess  
The   excess   is   the   amount   of   expenses   that   must   be   paid   by  
insured,  before  an  insurer  will  pay  further  expenses.    An  excess  
is  an  amount  a  policyholder  must  bear  before  the  liability  passes  
to  the  insurer  (subject  to  sum  insured).    
 

The   effect   of   an   excess   or   deductible   are   the   same   if   the   claim  

amount   is   fully   covered,   but   differ   when   the   claim   amount  
exceeds  that  minimum  insured  value  

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 CONCEPTS  OF  BENEFITS  AND  DEDUCTIBLES   CSC – VLE TRAINING

II)  Non  Life  Insurance  –  Contd  

 

2  Excess  
The  excess  is  the  amount  of  expenses  that  must  be  paid  by  insured,  before  an  insurer  will  
pay   further   expenses.     An   excess   is   an   amount   a   policyholder   must   bear   before   the   liability  
passes  to  the  insurer  (subject  to  sum  insured).    
 

The  effect  of  an  excess  or  deductible  are  the  same  if  the  claim  amount  is  fully  covered,  but  
differ  when  the  claim  amount  exceeds  that  minimum  insured  value.  
 

Example:  
 
Policy  amount     Rs.  5,00,000    Deductible    Excess  
Deductible/Excess     Rs.  5,000      
Claim-­‐1     Rs.  4,000   NIL   Nil  
Claim-­‐2   Rs.  25,000   Rs.20,000(Rs.25,000   Rs.20,000   (Rs.  
less  Rs  5,000   25,000  less  Rs  5,000  
Claim  -­‐3   Rs.  5,,00,000   Rs  4,95,000   5,00,000  
 
2.3  Franchise  
In  case  of  franchise,  if  the  amount  of  claim  is  up  to  franchise  it  is  not  paid.  Once  it  reaches  
amount  of  “franchise”  it  is  paid  in  full,  without  any  deduction.  
 
Example:  
Policy  amount     Rs  5,00,000/-­‐   Payment    
Franchise   Rs  5,000/-­‐    
Claim  1   Rs.  4,000/-­‐   NIL  
Claim  2   Rs  25,000/-­‐   Rs.  25,000/-­‐  
Claim  3   Rs.  1,00,000/-­‐   Rs  1,00,000/-­‐  
 
The  purpose  of  deductible/  excess  and  franchise  is  to  avoid  smaller  claims  and  also  make  
the  insured  responsible.  
 

3. Depreciation  
 

3.1   In   non   life   insurance   principle   of   indemnity   applies.   If   the   damaged   property   has  
depreciated   [natural   wear   and   tear],   the   insurance   company   will   pay   claim   which   is  
equivalent   to   depreciated   property   value.   An   amount   is   deducted   towards   depreciation  
depending  upon  the  life  of  property/machinery.    
 
3.2  In  motor  insurance  policy  the  percentage  of  depreciation  is  fixed  by  Policy  conditions.  
Different  percentages  for  metal,  rubber  and  fiber  glass  etc  parts  are  provided  in  policy.    
 
Some   insurers   issue   policies   under   motor   insurance   for   without   depreciation   for   which  
extra  premium  is  charged.  
 
3.3  Under  fire  policy  there  is  no  fixed  depreciation.  It  is  deducted  depending  on  total  and  
expected  balance  life  of  the  property/machinery.    Example:  for  machinery,  if  total  life  is  20  
years  and  if  5  years  are  over,  25%  depreciation  is  deducted  from  the  new  value  at  the  time  
of  claim.    
 
   

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 CONCEPTS  OF  BENEFITS  AND  DEDUCTIBLES   CSC – VLE TRAINING

Health Insurance
III)  Health  Insurance   It   is   paid   as   percentage   of   a   premium  
 
amount  for  the  policies  handled  by  him.  He  
1. Cumulative  Bonus  
  is   paid   fees   on   all   the   policies   and   not   only  
For   each   claim   free   year   the   policyholder   on   the   policies   on   which   the   claims   are  
gets   a   benefit   known   as   ‘cumulative’   bonus   lodged.    
 
and  is  similar  to  ‘no  claim  bonus’  in  concept.  
3. Co-­‐pay  
The   only   difference   being   that   instead   of    
giving   a   discount,   in   the   next   year’s   renewal   Co-­‐Pay   is   the   amount   which   the   insured  
premium   the   health   insurance   company   person   has   to   bear   out   of   the   medical  
adds   more   benefits   for   the   same   premium   expenses   incurred   by   him   for  
paid.   However,   the   overall   amount   of   hospitalization   of       a   particular   sickness  
benefits   will   not   exceed   a   certain   insured   under   a   health   policy.   It   is   like   an  
percentage   as   specified   in   the   health-­‐ excess   but   generally   higher   amount   and  
insurance  policy  cover.     always   expressed   in   terms   of   percentage  
 

Example:   Sum   Insured   is   Rs   1,   00,000   and   say   10%,   20%   etc.   Moreover   in   excess   if  
Cumulative  Bonus  is  5%  per  year.   claim   is   less   than   excess   then   it   is   not   paid  
  whereas  under  Co  Pay  whether  claim  is  big  
For  4  claim  free  years,  the  cumulative  bonus   or  small  it  is  payable  after  deduction  of  Co-­‐
will  be  20%.  [5%  x  4]   pay.  
In  fifth  year  sum  insured  will  be  Rs  1,  00,000    

+  Rs  20,000-­‐=  Rs  1,  20,000   Example:   Mr.   Shenoy   has   taken   a   health  
The  premium  charged  will  be  for  Rs  1,  00,000   insurance   policy   for   sum   Rs   1,00,000/-­‐   Co-­‐
sum  insured.   pay   is   10%.   Now   he   is   hospitalized   and  
  submits  claim  for  Rs  30,000/-­‐.  
 
If   claim   is   made   in   any   year   cumulative  
Claim   payable   will   be   Rs   30,000/-­‐   less   Rs  
bonus  is  lost.  
  3,000/-­‐  =  Rs  27,000/-­‐.  
 
2. TPA  Fees  
  The   Purpose   of   Co-­‐Pay   is   to   make   insured  
TPA   fees   is   the   amount   paid   by   insurer   to   exercise   economy   in   spending   on   medical  
the   Third   Party   Administrator   who   expenses.
processes   the   claims   under   health  
insurance  policies  of  the  company.