Commerce Education

Housing Board, Berhampur – 2, Cell: 99371-85395

For +2, First Yr. Commerce
UNIT - 3
Introduction to Insurance

Long and Medium Questions:

Q1) Give the concept of risk and explain the various kinds of risks.
Ans:- meaning:- By risk we mean uncertainty of losses. In other words one doesn’t know whether a loss
be caused by some peril or not. Risk is often understood in terms of chance or probability of loss.
Uncertainty is the reverse of probability in practice. The uncertainty of loss is the basic characteristic of
risk.
According to Irving Fisher “Risk may be defined as combination of hazards measured by probability.”
According to Frank knight “ Risk is a measurable uncertainty.”

Kinds of risks
1) Pure risk and speculative risk:- Pure risk are those risks which cannot be forecasted. The examples
of pure risks are theft, fire, strike, lockout, damage in transportation, charge in govt. policy, etc.
Speculative risks are those risks which arise in the form of fluctuations in demand or supply,
change in fashion, taste, etc. It is due to speculative risk that an entrepreneur is unable to maximize
profits.
In case of pure risk a person may or may not suffer any loss. But risk is always there. This non-
happening does not make any extra gain to the business. Such losses are generally compensated through
insurance policies. But in the case of speculative risk, there is a portability that he may gain due to
speculative risk. These risks are under the control of entrepreneur to a greater extent.

2) Internal risk and external risk:- Internal risk arise due to internal factors of business like loss
resulting from break down of machinery, fire, theft, strike, etc. Such risks are under the control of
management to a great extent.
External risks are caused by external factors over which the management does not have any
control. The examples are govt. policy, fluctuation in market prices, change in demand, natural
calamities etc.

3) Fundamental risk and particular risk:- fundamental risk are those which involve losses that are
impersonal in nature. These are group risks caused by economic, social and political factors. This effect
large segments of the population. Eg inflation.
Particular risk involves losses that arise due to individual events and which are felt by individual
rather than by the entire group. The burning of a house or a robbery in a bank are the example of
particular risks. Where as fire, earth quake, flood, cyclone, etc. are the examples of fundamental risk.
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4) Personal risk and property risk:- Personal risk result from loss of lives, loss of limbs, illness, mental
tension, health ailments etc.
Risk to property may be in the form of damage or destruction of assets due to human factors or
natural causes, e.g.:- loss of stock by fire.

5) Insurable risk and non-insurable risk:- The risk which can be covered through different types of
insurance policies are known as insurable risk. The probability of an insurable risk can be determined.
Such risk can be forecasted. It is arising out of the ordinary course of business. The incidence of risk is
capable of estimation.
Non-insurable risks are those risks whose probability cannot be determined and which cannot be
insured against. Fluctuations in demand and prices are the example of non-insurable risk. It cannot be
forecasted. Its incidence cannot be estimated.

Q2) Give the meaning and objectives of insurance. What are its advantages?
Or
Define insurance. What is the importance of insurance?
Or
Give the origin of insurance. State its merits & significance.
Ans:-
History of insurance:-
The origin of insurance is not known clearly. However there is some evidence that it has been practiced
in 14th century by the Italian merchants in some form. Marine insurance is considered as the oldest
forms of insurance. The merchants of Italy have practiced marine insurance. Then after marine insurance
was brought to England by Lombard merchants in the 15th century. The Lloyd’s association carried on
this business for quite a long period of time. In the 18 th century two important insurance corporations
were established in London. They are:-
1) The London assurance.
2) The royal exchange assurance.
In India the Sum Insurance Office Ltd. was established by the British in the year 1710. Next to marine
insurance the life insurance was developed. The first registered life insurance office in England was the
Hand-in-Hand Society established in 1909. Fire insurance is the latest form of insurance which was
developed after the great fire in London in 1606 a.d. Fire insurance was taken up in India by the
Britishers, Americans and other foreigners. The older to these companies is the Sum Insurance Office
Ltd. established in 1710 at Calcutta. Later on it was gradually developed in other countries like Canada,
Australia, France, Hongkong, Japan etc.
Meaning and objectives:-
There are many risks in business. Goods may be destroyed while in store or damaged during transit. So
the life of business is very risky and uncertain. There may be accidents, in business also. The risk is quite
common and unascertained. They cause loss to the businessman. This loss can be minimized or avoided
by the help of insurance. Where there is no insurance, businessman has to bear all the risks for himself.
As a result business operations become uncertain and hesitating. The goods would become very costly.
But when the risks are insured, the loss is shifted to the insurance company. The insurance company
collects premium from several businessmen and meets the claims of some of them who incur loss. It is a
co-operative idea of spreading risk over many persons.
Insurance may be defined as “a co-operative device to spread the loss on account of risk over
many persons who are exposed to them and who agrees to insure themselves against those risks.”
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It may also be defined as “insurance is a contract whereby the insurer undertakes to indemnify the
insured against a loss arising from the happening of event in consideration of a certain payment called
premium.”
Advantages or importance:-
1) Insurance provides security in the business houses. It protects the businessman against great losses. It
spreads the risk among many people.
2) Business operations are made certain and free from any risk. Thus they are carried on more efficiently.
3) Goods are made less costly.
4) Marine insurance helps in the development of the growing trade of a country.
5) Life insurance is a provision for old age or for the members of a family after the death of a person. In a
partnership a joint life policy can be taken to repay the share of deceased partner. A life policy is also
accepted as security for a loan.
6) Insurance encourages saving in the community.
7) It is a good investment. It serves as a basis of credit.
8) It gives benefits to the community in various ways.

Q3) Give the scope of insurance.

Or
Give short notes on:
 Marine Insurance  Fire Insurance
 Life Insurance  General..Insurance

Ans:- With the growth of man and trade, marine insurance came into existence. Then after fire, life and
several other kinds of insurance came into force with the object of reducing or avoiding risk. Now
insurance has become an integral part of business and human life. Insurance is the method of securing
protection against future calamites and uncertainties. At present the scope of insurance has so widened
that it covers every possible risk under its purview. As such insurance covers a variety of subject. But the
kinds of insurance in common practice are explained below.

1) Marine insurance:- Marine insurance is believed to be the oldest form of insurance. It is concerned
with the overseas trade conducted through sea routes. Marine risk generally relates to ship or cargo.
Trades are owners of the ship always like to ensure the safe arrival of their cargo and ships. Marine
insurance covers a large member of risk including sinking, burning of ship, accident, collision of ships,
barratry, piracy, stormy winds, sea docaities and many other perils of the sea. Thus marine insurance is an
arrangement by which the insurance companies or the underwriter agrees to indemnity the owners of the
ship and cargo against the risk involved.

2) Life insurance:- All contracts of insurance except life insurance are contracts of indemnity. Life
insurance provides an assurance to the insured to pay certain sum of money in lieu of premium on the
death of the insured or the maturity of the policy which ever is earlier. As such it provides financial
protection against the risk of early death. Life insurance involves both the elements of protection and
investment. Life insurance is usually referred to as “ life assurance”. The life insurance contracts can be
described as contingent contracts because the loss of life cannot be compensated and only a specified sum
of money is paid if the insured dies. In addition to this life insurance is considered as a better way of
making investment along with the benefits of protections against the risk of death.
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3) Fire insurance:- Basically fire insurance is a contract of indemnity and insured cannot claim anything
more than the goods lost and damaged by fire or the amount insured, which ever is less. The contract of
fire insurance does not help in controlling or preventing fire but it is a promise to compensate the loss
caused by fire. Fire insurance does not have a long history. The first fire institution was established only
after the great fire of London in 1606 ad. A fire insurance is an agreement between the insurer and a
insured under which the insurer agrees to indemnify the loss caused by fire to the insured in consideration
of certain payment called premium. In addition to the risk caused by fire, it also includes other reasons
that can customarily be included among risk insured under fire insurance contracts.

4) General insurance:- It is also a contract of indemnity like contract of fire insurance and marine
insurance. Under this all the risk that are general in nature are included. Eg:- loss arising on account of
theft, robbery, pilferage, misappropriation, natural calamities like draught, famine, epidemics etc., these
types of risk certainly makes the business difficult to continue. This type of risk is minimized through a
special kind of insurance known as general insurance. It also covers loss of profit, loss on account of
vehicle accident etc. In this case the promisor promises to indemnify the insured for the loss caused to
him on account of the above reason.

Q.4) State and explain the various functions of insurance.

Ans:-
Functions of Insurance

Primary functions Secondary functions Other functions

1) It provides certainty. 1) It provides capital. 1) Expansion of foreign trade
2) It distributes risks 2) It increases efficiency. 2) It provides funds to invest.
3) It provides security.3) It helps in loss reduction 3) It encourages savings.
4) It checks inflation
5) Self confidence & goodwill
6) Social security and publication
of education.

Insurance performs a variety of functions that are advantageous to the common people directly or
indirectly. As such function of insurance can be divided into three categories as per the above chart.

Primary functions:
1) It provides certainty:- The main function of insurance is to reduce the risk or uncertainty of events.
Risk involves usually when the event is uncertain. Insurance is a means to indemnify or compensate loss
caused by an uncertain event. The insured converts uncertainties into certainties by paying premium to
the insurer.
2) It distributes risks:- The concept of insurance is based on the law of co-operation. The function of the
insurance is the spread of the financial losses of insured members over the whole of the insuring
community. It is a plan by which large no. of people associate themselves and transfer to the shoulders of
others all the risk that attach to individuals. As such insurance is a means of distributing losses among a
large no of persons covered under the insurance.
3) It provides security:- Another function of insurance is to provide security to the person against the
risk of uncertain events. The insurance provides the feeling of security against the evil effects of the
uncertain events i.e. risk.
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Secondary functions:
1) It provides capital:- It provides capital, an important factor of production to the industry in
various forms. First it reduces financial risk and losses by providing facilities of capital
investment in various organisations. Certainly the amount received on account of premium by
various insurance companies is made available for industrial development of country on various
financing form such as by providing share capital, proving long term loans to the companies, etc.
More over company can avail loan on easy terms by hypothecating the insurance policies.
2) It increases efficiency:- Insurance by reducing the risks or fear of losses, increases efficiency in
business. It provides feeling of security in the business community that in turn becomes a source
for the growth and diversification. Management is relived to some extent and is able to give due
attention on other factors, such as labour force, material management, marketing etc. as such
insured person can work better for profit maximisation.
3) It helps in loss reduction:- Insurance not only saves the losses but also advises the adoption of
various methods and techniques which helps in reducing the risk or losses. Eg under fire
insurance, stress is laid on the prevention.

Other functions
1) Expansion of foreign trade:- Insurance provides security to the internationals traders, banking or
financial institutions which are the main functionaries of foreign trade. Insurance helps in promoting
foreign trade and secures valuable foreign exchange. Marine and fire insurance play a vital role in this
regard by providing much needed protection against the perils of the sea.

2) It provides funds to invest:- Insurance company collect funds by way of premium and invest it’s
profitability in the industrial development of the country. In India Life Insurance Corporation along
with other insurance companies provides large sums to various industrial concerns.

3) Encourages savings:- These days insurance is considered to be a better alternative technique of

making savings. Under the contract of insurance, the insured has to pay a definite premium
compulsorily. At the initial stage it seems to be a forced savings but later on it becomes the habit of
the insured to save a certain sum periodically so as to pay premium regularly.

4) It checks inflation:- Insurance is an important yardstick to check inflation. It takes out surplus
money form the circulation and saves the economy from its ill effects. Savings in the form of
premium paid reduces the spending capacity of the individual and it is utilized in a better way for the
national development.

5) Self confidence and goodwill:- Insurance by providing a feeling of security among the insured,
also creates self confidence in them. Thus insurance not only provides protection against risk but also
provides capital to the insured, which becomes a source of financial strength. Credit is also advanced
on insured properties and therefore insurance works as a security for the loan. In this way insurance
increase self-confidence and good will of the insured.

6) Social security and publication of education:- Insurance provides an instrumental force to fight
against evils of poverty, employment, disease, old age, accident and other calamites of nature.
Insurance has helped in a great way by establishing various types of insurance all over the country like
employees state insurance (ESI). On the other hand insurance helps in spreading education to the
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people regarding adoption of the techniques for minimizing the risk on the happening of uncertain
events.

Q5) Give a chart showing various types of insurance.

Ans:-
Classification of risk

On the basis of risk Commercial point of view Development point of view

1) Personal insurance 1) General insurance 1.Marine insurance

a. Life insurance a. Fire insurance
b. Personal accident ins. b. Marine insurance 2. Fire insurance
c. Health insurance.
2) Life insurance. 3. Life Insurance

2) Property insurance 3) social insurance. 4. Miscellaneous insurance.

a. Fire insurance a. Accident insurance
b. Marine insurance b. Sickness insurance 5. Social Insurance
c. Crop insurance c. Disablement insurance
d. Animal or livestock d. Maternity insurance
insurance. e. Old age insurance
e. Theft & docaties ins.
f. Machinery insurance
g. Aircraft insurance

3) Liability insurance
a. Re- insurance.
b. Workmen compensation
insurance.
c. Public liability insurance
d. Motor insurance.

4) Guarantee insurance
a. Fidelity insurance
b. Right insurance
c. Credit insurance
d. Purchase guarantee
insurance.

Q6) State and explain the fundamental principles of insurance.

Ans:-
1) Contract:- Insurance is a matter of contract. Most contracts are cumulative but the insurance contract
is aleatory i.e. the contracting parties know that the amount to be paid by each party is not equal. In the
insurance policy the insured pays the amount of the premium. If he suffers loss, he may receive a much
larger amount from the company than he paid in premiums. If he suffers no loss he will collect nothing.
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2) Utmost good faith:- Insurance contracts are contract uberrimai fidei or contract of utmost good faith.
It is a condition of every insurance contract that both the parties should develop good faith towards each
other in the contract. The insured is bound to disclose all material facts known to him but unknown to the
insurer. Eg in the case of life insurance if the insured is suffering from cancer he should disclose this
matter under the principle of utmost good faith. Similarly the insurer is bound to the insured the same
good faith in disclosing it’s scope of insurance which he is prepared to grant. Non-disclosure of material
facts by the insured gives an option to the insurer to avoid the contract.

3) Insurable interest:- The insured must have an insurable interest in the subject matter insured. It
means there must be some pecuniary interest in the subject matter of insurance. Here expectation does
not contribute to insurable interest. There is no place for emotional feeling to constitute insurable interest.
Similarly mutual love and affection is not sufficient to constitute insurable interest. Eg a father can make
insurance policy on the life of his son and a husband can make a insurance policy on the life of his wife as
there is the presence of insurable interest. Again every person has an insurable interest in his own life
since the law presumes that each one desires to remain alive. A person has an insurable interest in the life
of another if he can expect to receive pecuniary gain from the continued life of the other person or will
suffer financial loss from the latter’s death. Thus a creditor has an insurable interest on the life of the
debtor. A businessman has an insurable interest in the life of the executive or an imp employee, because
his death would cause a financial loss to the organisation. A person has an insurable interest in the
properties if he is the owner. A contract of life insurance requires insurable interest at the time of the
contract and not at the date of the death. But in case of fire insurance it is necessary for the insured to
prove that he had an insurable interest in the subject matter both at the date of the policy at the time of
loss. In case of marine insurance, the insurable interest must exist at the time the loss occurs.

4) Indemnity:- All contract of insurance are contracts of indemnity except those of life insurance &
personal accident insurance. It means that the assured in the case of loss shall be fully indemnified but
never more than that. It means the policy holder cannot make a profit out of his loss. All policies on
properties are contracts of indemnity. If the value of goods insured increases after the date of the policy
the insurer is not liable to make good the loss in respect of the increase in value.

5) Cause proxima:- Under this principle, an insured can recover from the insurer the loss of the subject
matter only if it is caused by an event insured against. If there is only one cause of damage or loss, there
is no difficulty in fixing the liability of the insurer. But sometimes the loss or damage results on account
of a series of causes. In such a case the principle of cause proxima is applied. It mean the cause which is
direct, dominant and efficient one and if this cause is within the risk covered, the insurer is liable in
respect of loss. Otherwise the insurer is not liable.

6) Risk must attach:- Premium is the consideration for the risk run buy the insurance companies and if
there no risk, there should be no premium. It is a general principle of insurance that where the insurers
have never been on the risk, they cannot said to have earned any premium.

7) Mitigation of loss:- When the event insured against occurs, it is the duty of the insured to take all such
steps to mitigate or minimize the loss as if it was un insured. The insured should not become negligent or
inactive in the event of occurrence. He must act carefully to minimize the financial loss. But it does not
mean that while doing the best for the insurer, he should risk his own life.
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8) Subrogation:- As per this principle, the insurer who has agreed to indemnify the assured will be
entitled to step into the shoes of assured. It means the rights of the assured passes on to the insurer after
paying money. This right arises only the payment of policy money. This principle does not authorize the
insurer to sue the third parties in their own names but they can only enforce their rights in the name of the
assured.

9) Contribution:- There is nothing in law to prevent a person from effecting two or more insurance in
respect of the same subject matter. But in case there is a loss, insured will have no right to recover more
than the full amount of his actual loss. If he recovers the full amount of actual loss from one insurer he
will have no right to obtain further payment from the other insurer. In such a case the principle of
contribution will apply according to which the insurer who has paid the insured the full amount of
compensation will recover the proportionate contribution from the other insurer.

10) Term of policy:- An insurance policy specifies the term or period of time it covers. The period of the
policy is determined by the nature of risk. A life insurance policy may cover a specified no. of years or the
balance of the insured’s life. A contract of fire insurance is normally for a period of one year. A contract
of marine insurance may be either for a particular period within one year or for a voyage.

Q7) What do you mean by reinsurance and double insurance? Give the difference between the two.
Ans:-
Re-insurance:-
The insuring of a risk or a part there of already undertaken by one insurer with another insurer is known
as reinsurance. Under reinsurance, the contract is between two insurers. A insurer may resort to re-
insurance either with the object of spreading his risk or to earn some profit. When this is done, the
original insured is known as re-insured and the subsequent insurers are known as re-insurer.
The contract of re-insurance does not effect the insured, who is not a party to it. Neither the
insured has any remedy against the re-insurers. He can only make the original insurer liable for the loss
caused to him under the policy taken out of him. It is the insurer who can claim compensation from the
re-insurer. Suppose a shipping company has taken a policy of Rs 10 crores form an insurance company x.
If x thinks that the risk is beyond his capacity, it can re-insure for Rs 5 crores with another insurance
company y. In case of total loss, x will pay the shipping company a sum of Rs 10 crores and it will
reimburse itself from y a sum of Rs 5 crores. Re insurance is applicable to all kinds of insurance because
the insurer has an insurable interest in the subject matter insured to the exent of the amount insured by
him.
Double insurance
Double insurance means effecting more than one insurance by the insured in respect of the same life or
property. Any person is free to insure his life and property under more than one policy. In case of life
insurance one can insure his life with different insurance company and he will get full amount of all his
policies. But in case of property insurance (fire, marine, miscellaneous) the insured cannot recover more
than the amount of actual loss. The insurer will contribute prorata according to the amount insured toward
the loss caused. The insured can claim compensation from the co-insurer or from any insurer. Eg:- a
house worth Rs 5 lakhs has been insured against fire under two policies and each policy worth Rs 5 lakhs.
The house is destroyed by fire. The insured can claim only Rs 5 lakhs because according to principle of
indemnity he cannot make profit out of loss. Thus insured can claim Rs 2,50,000 each from both
insurance companies or Rs 5 lakhs from one insurance company. Later on the insurance company which
has paid compensation to the insured can claim contribution of Rs 2,50,000/- from other insurance
company.
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Distinction between:-
Re-insurance Double insurance
1)The contract of reinsurance is entered into by 1) But in double insurance the same
the original insurer with some re-insurer. insured can insure the subject matter
“There is no privity of contract” between with more than one insurer.
the insured and the insurer.
2) In re-insurance the insurer is liable to the 2) In double insurance each insurer
first insurer or original insurer. He is not is directly liable to the insured.
liable directly to the insured.

3) In re-insurance reinsured will claim his 3) In double insurance, loss will be

part of the loss proportionate to the risk shared by all the insurers.
incurred by him.

4) Re-insurance is a method of reducing the 4) double insurance is a method of

risk of the insurer. assuring the benefit of insurance.

Q8) Give a brief note on insurance organizations in India.

Ans:-
Departmental organisation:-
Departmental insurance is in operation in different departments of central and state govt. The postal
departments of the country have its own system of insurance on which the employees of post office are
insured. Similarly postal department as a carrier goods has also provided insurance for the goods to
despatch. Eg parcel insurance. This insurance is not compulsory in India. The state govt. of various
states have provided life insurance to their respective employees. Apart from these state govts. have also
provided sickness, maternity, disability, medical and pension insurances to respective employees.
Similarly the railway department provides insurance facilities on the goods or cargo which is being
transported. By charging an additional amount, the railway department undertake the liability of damage
or breakage in the transit. Many private organizations. recently been developed who undertake the
various risks associated with life and property. Those private organisations are financed, controlled and
managed by themselves.
Corporations

1) Life Insurance Corporation (LIC):- The life insurance corporation of India act 1956 has provided for
life insurance legislation for the life insurance business conducted by LIC of India established under the
said act. It started if its functions since 1 st September 1956. It owns all the LIC business (including
annuities) in India.

2) General Insurance Corporation:- The general insurance corporation of India established under GIC
of India act 1972 into four distinct companies namely:-
1) National Insurance Company Ltd.
2) The New India Assurance Company Ltd.
3) The Oriental Fire and General Insurance Company Ltd.
4) The United India Insurance Company Ltd.
These companies would work separately and maintain their distinct features but they are
controlled and guided by GIC of India. This is a neo-techno scheme of nationalization where the
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companies are also to work freely in the market. They will gain their own profit and will suffer their own
losses. These companies will be subsidiary to GIC.

3) Employees state insurance corporation:- This corporation was established in 1948. This corporation
provides social insurance to labourers of factories who are getting less than Rs 400 per month. They are
provided a definite assistance in sickness, maternity, disability, medical expenses and assistance to
dependents.
4) Deposit insurance corporation:- This corporation was established in 1962. It provides protection to
the depositors of a bank. In case the bank fails to pay the depositors can get return of their deposits up to
Rs 10,000/-
Govt. companies
Companies were established by the govt. according to the provisions of Indian Company’s act 1956. In
the year 1957 export risks insurance corporation (ERIC) was established to insure the export risk. The
name of this company was converted to Export Credit and Guarantee Corporation (ECGC) in the year
1964.

Q.9) Distinguish between co-insurance and reinsurance.

Ans:-
co-insurance re-insurance
1) It means two or more insurance companies 1) It means one insurance company
jointly undertake an insurance policy. transfer his part of liability to another
insurance company.
2) The joint insurers are known as co-insurer. 2) The insurers are known as re-insurer
and reinsured.
3) In this case both the insurers deal with 3) In this case the re-insurer alone deals
the insured directly. with the insured.

Q.10) ‘Proximate cause is not very essential in case of a life insurance contract’. Explain .
Ans:- Proximate cause is not very essential in case of life insurance contract. It is applicable to fire
insurance and marine insurance. It refers to the most approximate cause of the loss when loss arises
jointly on account both insured and non-insured causes. This principle of cause proxima is applied by
insurance company while deciding the payment of compensation. However this is not applicable to life
insurance because loss of life as such cannot be replaced by monetary compensation.

UNIT - 4
Life insurance & Other Insurance

Long and Medium Questions:

Q1) Give the nature and fundamental principles of life insurance contract.
Or
State and explain the characteristics features of life insurance contract.
Or
What do you mean by life insurance? Give the essential elements of a life insurance contract.
Ans:- Life insurance contract may be defined as the contract where by the insurer in consideration of a
premium undertake to pay a certain sum of money either on the death of the insured or an the expiry of
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the fixed period which ever is earlier. The definition of life insurance contract is enlarged by sec 2(ii) of
the insurance act by including annuity business. Since the life insurance contract is not a contract of
indemnity, the insurer has absolute liability to pay definite sum on maturity of the policy or at the death or
an amount on installment for a fixed period or during the life.

Principle/ characteristics of life insurance contract

1) Nature of general contract:- Since the life insurance contract is a sort of contract, it is approved by
Indian Contract Act 1872. The valid contracts must have the following essentials.
(a) Lawful offer and acceptance. (d) Free consent of the parties.
(b) Consideration. (e) Legal objectives
(c) Capacity of parities. (f) Legal formalities etc.

2) Insurable interest:- It is the pecuniary interest. The insured must have insurable interest in the life to
be insured. It arises out of the pecuniary relationship that exists between the policy holder and life
assured, so that the former stands to loose by the death of the latter and continues to gain by his survival.
If such relationship exists then the former has insurable interest in the life of the latter. The loss should be
monetary or financial. Mere emotion and expectations do not constitute insurable interest. There is no
place for emotional feeling to constitute insurable interest.
Insurable interest in life insurance may be developed into two categories namely:-
 insurable interest on own life.
 Insurable interest on others life.
Eg:- A husband can make the policy on the life of his wife. Similarly an employer can make policy on the
life of employees.

3) Utmost good faith:- Life insurance requires that the principle of utmost good faith should be preserved
by both the parties. This principles says that both the parties must be of the same mind at the time of
contract, because only then the risk may be correctly ascertained. Both insurer and assured should make
full disclosure and true disclosure of the facts influencing the risk. For instance the insurer should
disclose the scope, rights, duties and responsibilities of the parties to the assured and the assured in turn
should make his position clear by disclosing all material facts relating to his life. If he is suffering from
cancer he should disclose it to the insurer.

4) Warranties:- Warranties are the integral part of the contracts. If any statement whether material or
immaterial is untrue then the contract shall be invalid and the premium already paid by the assured may
be forfeited by the insurer. When the policy is issued it contains a representation that the proposal and
personal statement shall form part of the policy and be the basis of the contract. This representation is
known as warranty.

5) Proximate cause:- The efficient or effective cause which cause the loss is called proximate cause. It is
the real and actual cause of loss. If the cause of loss is insured, the insurer will pay. Otherwise the insurer
will not compensate. In the life insurance the doctrine cause proxima is not appropriately applicable
because the insurer is bound to pay the amount of insurance what ever may be the reason of death. It may
be natural or unnatural.

6) Assignment:- The policy in life insurance can be assigned freely for a legal consideration or love and
affection. The assignment shall be complete and effective only on the executive of such endorsement
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either on the policy itself or by a separate deed. The life policies are the only policies, which can be
assigned. Life policies are frequently charged, assigned or otherwise dealt with.

7) Nomination:- The holder of a policy of life insurance on his own life may either at the time of
effecting policy or at any subsequent time but before the policy matures, nominate the person to whom the
money secured by the policy shall be paid in the event of his death. A nomination can be cancelled or
altered before maturity. When the policy matures, or if the nominee dies, the sum shall be paid to the
policy holder or to his nominee.

8) Return of premium:- Ordinarily the premium once paid cannot be refunded. However, for reason of
equity the premiums paid are returnable. Eg:- On account of misrepresentation or breach of warranty, the
insured can claim the return of any premium paid to the insurer. But if the policy runs for a time and
becomes void later on the insured is not entitled to the return of any part of the premium. Similarly where
the insured is guilty of fraud in obtaining a policy, he will fail in his claim to the sum assured.

9) Other features:- Life insurance policies have the following additional features like:-
Life insurance contract is:
1) An alietory contract. 3) An unilateral contract.
2) A conditional contract. 4) Not a contract of indemnity.

Q2) What are the different types of life insurance policies?

Ans:- The life insurance policies are of many types. The principal types of policies are discussed below:

1) Whole life policy:- Under this policy premium is paid throughout life and the sum insured becomes
payable only at the death of the insured. The policy remains in force thoughout the life of the assured
provided he continues to pay the premium till his death. This is the cheapest policy as the premium
charged is lowest under this policy. This is also known as ordinary life policy. This policy is suitable to
persons who want to provide for payment of estate duty and to provide for their family after their death.

2) Limited payment life policy:- In the case of whole life policy there is one disadvantage that the
assured must continue to pay the premium even during his old age when he is no more employed. Under
the limited payment life policy, premium are payable for a selected number of years or until death, if
earlier. The assured knows how much he will be required to pay. It does not matter how long he lives.
The sum insured becomes payable only at the death of the insured. It is suitable to meet the family needs.

3) Endowment policy:- It runs only for a limited period up to a particular age. Under this policy the sum
assured becomes payable if the assured reaches a particular age of after the expiry of a fixed period called
the endowment period or at the death of the assured which ever is earlier. The premium under this policy
is to be paid up to the maturity of the policy i.e. the time when the policy becomes payable. Premium is
naturally higher in this type of policy than the whole life policy. This is a very popular policy as it serves
the dual purpose of family and old age pension.

4) Double endowment policy:- Under this policy the insurer agrees to pay the assured double amount of
the insured sum if he lives on beyond the date of maturity of the policy. This policy is suitable for the
persons with physical disability who are otherwise not acceptable for other classes of assurance.
Premiums are to be paid for a selected terms of years or until death, if earlier.
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5) Joint life policy:- This policy covers the risk on two or more lives and is generally available to partners
in a business. Policies are however issued on the lives of husband and wife under specified
circumstances. The sum assured becomes payable at the end of the selected term, or on the death of either
of two lives assured, if earlier.

6) With or without profit policies:- Under with profit or participating policies, the policy holder is
allowed a share in the profits of the corporation in the form of bonus and it is added to the total sum
assured and paid at the time of maturity of the policy. In case of without profit or non-participation policy
no such profit is allowed. In case of with profit policy premium is little higher as compared to with out
profit policy.

7) Convertible whole life policy:- This policy initially provides maximum insurance protection at
minimum cost and offers a flexible contract which can be attained at the end of 5 years from the
commencement of the policy to an endowment insurance.

8) Convertible term assurance policy:- This policy meets the needs of those who are initially unable to
pay the larger premium required for a whole life endowment assurance policy but hope to be able to do so
within a few years. It would also enable such persons to take final decision at a later date about the plans
suitable for their future needs.

9) Marriage endowment policy and education annuity policy:- It is a policy suitable for making
provision for the marriage or education of children. Premium are payable for a selected terms or till prior
to death. The benefit are payable only at the end of the selected terms. In case of the marriage endowment
the sum assured is paid in lumpsum but in case of education annuity, it is paid in equal half yearly
installments over a period of 5 years.

10) Annuities:- It is a policy under which the insured amount is payable to the assured by monthly or
annually installments after he attains a certain period or a lumpsum money may be paid at the outset. This
policies are useful to person who wish to provide a regular income for themselves and their dependents.

11) Sinking fund policy:- Such a policy is taken with view to providing for the payment of liability or
replacement of an asset.

12) Multi purpose policy:- This policy needs several insurance needs of a persons like provision for
himself in old age, income for his family, provision for the education, marriage or start-in-life of his
children etc. It gives maximum protection to the benefits in the event of the early death of the assured.
Premium are payable during the selected term of till death, if earlier.

Q3) Give the importance and uses of life insurance.

Ans:-
Importance and uses of life insurance

Uses to individuals Uses to businessmen

1) Provides funds for the departments. 1) Business continuation.
2) Reduces the financial burden. 2) Insurance of keyman.
3) Encourage thrift. 3) Enhancement of credit
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4) Suitable for quick borrowings. 4) Employee welfare plans.

5) Provides peace of mind.
6) Training good citizenship.
7) Administering the legacy for beneficiaries.
8) Protection against the creditors.
9) Estate duty.
10) Tax relief.

Uses to individuals:-

1) Provides funds to the dependents:- Insurance provides funds to the dependents of the policy holder
after his death. When the policy is taken and surrendered for settlement, the family of the assured is
protected to the extent of the insured amount. Life insurance is much superior as compared to an ordinary
savings plan because it affords full protection against risk. Full sum assured will be paid to the
beneficiaries as against an ordinary savings plan.

2) Reduces the financial burden:- Life insurance reduces or removes the financial burden of certain
hazards. One can provide for education of his children, marriage of his daughter building a house, starting
ventures.

3) Encourages thrift:- As premiums are paid regularly and in easy installments, insurance encourages
thrift and forces savings which makes an individual a prudent consumer. Insurance plan bring about
compulsory savings and the payment of premium becomes regular part of their budget.

4) Suitable for quick borrowings:- In case of emergency needs of the family the loans can be obtained
on the basis of the security of life insurance policy. Policy holders can get loans for construction of their
houses against their policies. For meeting his short -term requirements, he can take loan.

5) Provides peace of mind- Life insurance reduces our fear about future and provides peace of mind. It
grants freedom from worries to the policy holders. The insured is sure that in case of his premature death,
his dependent will get financial support from the insurance company.

6) Training good citizenship:- Life insurance is a system of training for good citizenship as one provides
and arranges financial support for his family members in case of premature death. Life insurances helps
the policy holder himself and his dependents during rainy days.

7) Administering the legacy for beneficiaries:- In order to ensure that the policy amount is not invested
in speculative or unwise luxury projects, policy holder can arrange that in the event of his death the
beneficiary should receive the amount in monthly installments or some amount in installments and the
rest at the end there of.

8) Protection against the creditors:- By effecting a valid assignment of the policy, the sum assured can
be protected against the claims of the creditors of the life assured. In the event of his death, the person
whose name is inserted in the policy entitled to the benefits of the policy.

9) Tax relief:- The purchaser of a life insurance policy is given certain tax relief at the time of assessment
of tax. When this tax relief is utilised the insured is liable to pay tax less than what he is actually liable.
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Eg:- u/s 88 of Indian income tax act, 20% of life insurance premium paid during the year shall be given
deduction or relief from his actual tax liability.

10) Estate duty:- Finally, life insurance affords satisfactory means of making provision for payment of
estate duty. Hence it is the most practicable way to ensure definite payment at the time of one’s death
without selling the assets and properties at a loss for making such payment.

Uses to businessman

1) Business continuation:- Life insurance helps the sole proprietors and partners in partnership firms to
avoid possible interruption on account of death of the proprietor or of a partner and to continue their
business as before. A sole trader leave sufficient funds for his business so that after his death, his legal
heirs may continue his business without any difficulty. Similarly in the case of partnership firm, a joint
life policy on the life of partners solves the problems of financial strain on the firms.

2) Insurance of keyman:- Insurance helps the business man to insure the lives of its key employees, high
officials, technicians whose energy, skill, technical knowledge, experience or ability to plan is a valuable
asset to the organisation. For example the death of a chief engineer or managing director or sales
executives or production manager might disrupt for some time the work of the business

3) Enhancement of credit:- Life insurance policies on the lives of key employees increase the credit
worthiness of the business enterprise. The financial institutions, banks feel secure of financial helps in the
case of death of any one of these persons. Life insurance policy can also be pledged as a collateral
(additional) security for loan.

4) Employee welfare plans:- The policy may cover the payment of a specific sum on the death of the
employee or at the time of accident or sickness or at the time of retirement. Usually group insurance
policies are taken for this. At present there are various group insurance policies on the lives of teachers,
police personal, employee of the electricity board, defence personnel, railway men, coal miners etc.

Q4) State and explain the procedure for effecting life insurance.
Or
What are the various stages for taking the life insurance?
Ans:- The actual procedure for effecting the life insurance policy with LIC can be divided into the
following stages.
1) Filling in the proposal form:- The first stage in taking out a policy is to fill in a personal form of the
insurance company where various details about the prospective insurer are to be mentioned. The proposal
form is a printed document and can be obtained at free of cost from the insurance company or through the
agent. It can be had personally or through post. It contains the following details:
i) Name, nationality, permanent residential address, present occupation, nature of duties, name of the
present employer, length of service with the employer, father or guardian’s name in full.
ii) Sum to be insured (policy value), terms of insurance, mode of premium payments (monthly, quarterly,
half-yearly).
iii) Place and district of birth, date of birth, proof of age.
iv) Object of insurance.
v) Name of the nominee, his age relationship, full address.
vi) Height and weight.
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vii) Whether the life proposed is also proposed at any other company.
viii) Details of previous policies.
ix) Occupation of the policy holder.
x) History of father, mother, brothers, sisters, children, (living/ dead).
xi) Information regarding any hereditary disease like diabetes, asthma, TB, cancer, leprosy etc.
xii) Information regarding other diseases like accident, operation, injury, etc.
xiii) Habit of cigar, biri, liquor, opium, tobacco, etc.
If the applicant is a female adult, there is a further series of the questions regarding pregnancy,
maternity disturbances, indicator of troubles with the female generative organs etc. It should be
remembered that a contract of life insurance is a contract of utmost good faith and great care must be
observed while filing the proposal form. Any kind of misrepresentation or non-disclosure of relevant
information in the proposal form will make the policy voidable at the option of the insurer.

2) Medical examination :- After submitting the proposal form, the proposal had to undergo a medical
examination through one of the approved medical doctors of the insurer regarding his health. He has to
fill ion a personal statement in presence of the doctor. The doctor examines the proposal with particular
reference to heart and living in the lights of information supplied regarding any previous illness, family
tendency, height and weight, chest, abdomen. The doctor notes physical defects and gives a report to the
company whether the life is average. It also contains examination of blood pressure and general
examination of the assured.

3) Agent’s confidential report:- After the proposal is medically examined, the agent’s confidential report
(ACR) is submitted to the company. The insurance company relies exclusively on its agent’s reports. The
report contains details relating to the personal history of the assured and indicates how long and how well
he has known the life assured. He has to state any unfavorable information regarding assured health,
habit,. Character etc. In case of female application he has to verify her sources of income and has to
mention the amount of policies purchased by her husband. When applicant is a widow, the cause of her
husband’s death is be reported by the agent. Since the purpose of ACR is to convince the company
regarding the object of insurance, financial standard, risk attached to the life etc., the agent should answer
all questions to the best of his knowledge and integrity.

4) Acceptance of the proposal:- After receiving the ACR insurance company considers the same and
informs the applicant accordingly. While accepting the proposal form the following factors are
importantly considered:- 1) age of the applicant 2) health 3) occupation and habits 4) male or female.
In life insurance mortality tables are prepared and the rate of premium directly depends on age. The age
can be of great help in fixing up premium rate and for accepting or rejecting the form. In the same
manner the medical examiners report is also considered in order to accept or reject the proposal form.
Like wise occupation and habits also effect the decision of the insurer. Smokers, drunker, drug addicts
and users of mandrex, ganja, morphia are having a shorter life. Insurance Company considers this matter
deeply before accepting their proposal form. Similarly occupations like industrial employment on mines,
army, navy, air force effect the judgement of insurance company. Proposal forms of pregnant women are
generally not accepted because of the risk attached to their life.
5) Proof of age:- The proposal also requires the proof of age. This should be submitted along with the
proposal form or subsequently when demanded by the insurance company. In case the insured does not
furnish the proof of his age at the time the policy is issued, he will have to furnish it when the policy
matured or in the case of his death, his successors will have to produce it. It is desirable to furnish the
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proof of age at the time the policy is taken. The following proofs are acceptable by the insurance
company.
 A copy of certificate from college, school or university records if age or date of birth is stated there in.
 Certified extract from municipal records made at the time of birth.
 Original horoscope if it was prepared at the time of birth.
 Entry in the family records, extract from the birth register, certified copy of the first page of the
service book of an employee of govt. or semi-govt. institutions.
6) Payment of premium:- The premium is a consideration of the insurance contract and is regularly paid
to the insurance company. A premium may be paid either in one premium or in easy periodic
installments. Generally the premium is paid monthly, quarterly, half yearly or yearly. The insurance
company sends intimation when the premium is due. Usually a grace period of one month on annually,
half yearly and quarterly premium is given where as 15 days of grace is given on monthly premium. The
grace days are allowed for the payment of the premium beyond the due date. If the premium is not paid
within days of grace, the policy may lapse and can be revived only under certain conditions. The rates of
premium are different for different kinds of risk.
7) Commencement of risk:- After the payment of the first premium, the risk commences and the
proposal becomes insured. The insurance company will pay the sum assured, even if the insured dies just
after paying the first premium. Premium must be paid with in the due date or within the days of grace.
Otherwise the risk will not be covered.
8) Issue of policy:- After completion of all the formalities, the insurance company prepares the life
insurance policy and sends it to the assured. In fact the policy is a document which contains all the terms
and conditions of the insurance contract and is properly stamped according to the value of the policy. It
contains details relating to the name of the insured, his address, occupation, age, sum assured, class of
policy, date of maturity, premium and mode of premium, nominee, lapse and revival of the policy,
settlement of claim etc. The policy bears the seal of the LIC and signature of its officials.

Q5) State and explain the various policy condition and privilege of a policy holder in case of life
insurance.
Ans:-
Conditions relating to commencement of risk:-
1) Commencement of risk:- The letter of acceptance intimate that the risk will commence when the first
premium is offered to the insurer is accepted by the insurer. If premium was paid along with the proposal
form, the date of letter of acceptance will be the date of commencement of risk.

2) Proof of age:- The proof of age must be produced at the time of proposal or immediately after the
proposal because the rate of premium depends upon the age of the life assured. However if it is
subsequently found that the age mentioned is lower than the correct age, the assured sum is reduced to
such amount as would have been purchased at the true age.

Conditions of premium:-
1) Payment of premium:- The premium rate is calculated annually but for the convenience of the assured
it can be paid half yearly, quarterly or monthly. When premium are not annual and if death takes place
before all the premium have fallen due for the current policy, the LIC deduct the unpaid installments from
the assured sum at the time of settling the claim.

2) Days of grace:- Premium is paid on or before the due date. But for the convenience of the policy
holders, certain additional period called days of grace is allowed to pay the premium. The insured can
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pay the premium within the days of grace. However the policy will lapse if the premium due is not paid
even within the days of grace. One calendar month but not less than 30 days of grace is allowed for the
payment of yearly, half yearly and quarterly premium and15 days for payment of monthly premium is
allowed. The days of grace are to be counted excluding the due date of the premium. When the days of
grace expire on a Sunday or a public holiday, the premium must be paid on the following working day to
keep the policy in force.

3) Premium notice:- Notice of premium falling due will be regularly sent to all the policy holders except
in the case of policies under which the mode of payment of premium is monthly.

Conditions relating to the continue policies:-

1) Indisputable clause:- In order to protect the interest of the assured indisputable clause is added which
provides that policies shall be indisputable after two years from the date of issue. Sec 45 of insurance act
has provided that the policy will not be disputed on the ground of fraud or misstatement,
misrepresentation or non-disclosure of the material fact after the two years of the issue of the policy.
However on the ground of fraud or non-payment of premium it can be disputed at any time during the
continuance of the policy.

2) Alterations in policies:- The insurer permits certain alterations in terms and conditions of the policy at
the request of the policy holders. The insurer preserves the rights to decline such request without
mentioning any reason. There may be alterations in class or terms, reduction in sum assurance, increase
in sum assured, change in mode of payment and so on.

3) Exclusion conditions:- Ordinarily, the insurer does not assure the hazardous (dangerous or riskfull)
occupation. If any insured has taken up or intends to take up hazardous occupations he has to pay extra
premium. It has been listed by the LIC. Eg:- The policies issued to students are on the terms of
hazardous occupations because a student’s occupations is not determined till he completes his education
and hence the degree of risk is not known.

4) Lost policy:- The insured must inform the insurer when ever the policy is lost or destroyed or defaced
or mutilated or turned. On the satisfactory evidence of loss or destruction, the insurer will issue a
duplicate copy after advertising the fact and will charge the assured the fee for issuing the duplicate copy.

5) Loans:- The insurer may grant loans on the security of the surrendered value of the policies. In India
loans are granted on the policies up to 90% of the surrender value.

6) Nomination:- According to sec 39 of insurance act, the holder of a policy of life insurance on his own
life may nominate a person or persons to whom policy money will be paid in the event of his death.
Nominee is the person named by the policy holder to whom the policy amount may be paid. Nomination
can be made at the time of taking policy or at any time before the policy matures. When such nomination
is made for the first time, the corporation will register it even if no notice is served. The nomination must
be in order.

7) Assignment:- A transfer or assignment of a policy whether with or without consideration may be made
by an endorsement upon the policy itself or by a separate instrument. It must be attested by at least one
witness specially stating the fact of transfer or assignment.
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8) Suicide:- In the event of suicide committed by the assured within one year from the date of
commencement whether insured or not, the liability of the corporation shall be limited to the extent of the
beneficial interest.

9) Double accident benefits:- This provides for payment of double of the sum assured on death by
accident. If the life assured sustain any bodily injury resulting from accident caused by outward violent
and visible means, then double of the sum assured will become payable. This benefit is available only to
limited proposals.

10) Disability benefit:- This benefit will be granted to all the lives assured under all plans except
endowment policies, term assurance, children’s deferred endowment, deferred and retirement annuity.
The assured disabled from earning his livelihood will be exempted from paying premium on the policy
falling due after the day of disablement. Examples are permanent disablement, loss of sight of both eyes,
amputations of both hands above the wrist, amputations of both feet etc.’

11) Extended disability benefit:- It provides for waiver of premiums and also for payment of an amount
equal to the sum assured on permanent total disability as a result of an accident. This benefit is available
by paying extra premium of Rs. 2/- per thousand of sum assured.

Lapse conditions:-
1) Lapse of policies:-The insurer shall remain liable for the payment of the claim so far the assured
continues to pay the premium when they fall due. If the policy holder fails to pay any of the premiums
due within the days of grace, the insurers liability ordinarily seizes under the policy and the contract
comes to an end.

2) Revival of lapse policies:- If a policy lapses by non-payment of premium within the days of grace, it
may be revived to the full policy amount at any time during the life time of the life assured, but within a
period of 5 yrs. from the due date. However it must be paid before the date of maturity.

3) Special revival: - Many policy holders find it difficult to pay the arrears of premium with interest to
revive their policies. For them the special revival scheme is beneficial to gain the cover of insurance.
Under this scheme the date of commencement of policy will be fixed by dating back the policy.

4) Surrender value:- When the assured is unable to revive his policy, he can surrender his policy and can
get cash surrender value. With this payment the contract comes to an end and the assured will get cash
value without any liability to pay the further premium. In India the corporation has guaranteed the
surrender value if the premium have been paid for at least two years or to the extent of 1/10 th of the total
number of premium stipulated in the policy.

5) Automatic premium loan:- The assured may use the option of automatic premium loan before the
maturity of the policy. In this case if the assured is unable to pay the premium the insurer will not allow
the policy to lapse but will automatically pay the premium out of the net surrender value. The assured can
repay the unpaid premiums with interest at any time during the policy.
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6) Reduced paid up insurance:- When the policy holder is unable to pay further premiums and does not
want cash immediately, the sum assured is reduced in the same proportion as the amount of premium,
paid bears to the total premium payable.

Claim conditions:-
1) Settlement of claims:- The policy amount becomes payable either on assured’s death during the term
of insurance or on his surrendering or till the end of the term i.e. on maturity. In case of death claims,
proof of death, proof of title and age proof are required. The age is required only when the age was not
mentioned or proved before the claims. In maturity claims, the policy holder is generally advised well
before the actual date of maturity, so that the necessary papers may be completed. The proof of death
may be certified by the doctor who attended the diseased in his last illness or certificate of registration of
death by the official registrar of deaths or certificate from employer identifying the diseases, etc.

2) Settlement option:- The claim amount may be paid in cash or installments. The installment payment
may be of different types. Payment of interest annually for a particular period or up to survival may be
paid. Annuity may be purchased for life or for a particular period.

Q6) What is the difference between Annuity contacts and Life insurance policies?
Ans:- Apart form various life insurance polices, there are various annuities which are issued by the life
insurance corporation. Strictly speaking, annuities are not the contracts of life insurance but a form of
pension provided to the annuitant from their own savings. Annuity may be defined as a contract whereby
the insurer in return for a certain sum of money paid in lump sum or by installment, agrees to pay the
annuitant an annuity payment (annuity) either for a specified period or for as long as the annuitant is alive
as may be determined by the contract of annuity. The person during whose life the annuity is paid is
called the annuitant while the amount charged for benefit is called purchase price.
According to Prof. John H., Magie, Annuity may be defined as “ a periodic payment to commence
at a stated or a contingent date and to be continued to a designated person or persons entitled to receive
payment.”
1) The annuity contract liquidates gradually the accumulated funds where as the life insurance contract
provides gradually accumulation of funds.
2) The annuity contract is taken for ones own benefit but the life insurance is taken generally for benefits
of the dependents.
3) In annuity contract generally the payment stops at death whereas in life insurance the payment is
usually given at death.
4) The premium in annuity contract is calculated on the basis of longevity of the annuitant but the
premium in life insurance is based on the mortality of a policy holder.
5) Annuity is protection against living too long where as the life insurance contract is protection against
living too short.

Q7) State the various types of annuity contracts.

Ans:-
1) Immediate life annuity:- It is an annuity which is purchased by a single premium. The payments
commence as soon as the insurance company receives the lumpsum. If the amount is payable annually,
the first payment is made one year after the sum received by the company. If the annuity is payable half
yearly, quarterly or monthly, the first payment is a made after the 6 months., 3 months, or 1 month
respectively. The cost of an annuity increases with the increase in the frequency of its payment. It
continues until the death of the annuitant.
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2) Deferred annuity:- A deferred annuity may be secured by a single payment, but periodic payment
commence at some time in the future. If annuitant dies before the date upon which the first payment of
the annuity falls due, nothing is paid by the company. But once the annuity begins it continues until the
death of the annuitant. Thus this annuity is useful to those who desire to provide a regular income for
themselves and their dependents after the expiry of a specified period.

3) Cash refund annuity:- In this case the insurer promises to pay the annuity payments until total
payments equal to the purchase price have been made to the beneficiary named in the contract, if the
annuitant dies at an early date. Under this plan the executors (legal heir or nominee) of the annuitant are
paid the balance of the purchase money which was not returned in the form of annuity payments.

4) Installment refund annuity:- It is an agreement that the insurer will on the death of the annuitant,
continue payment to the beneficiary equal to the consideration paid to the insurer.

5) Single life annuity:- Under this annuity the insurer agrees to make the periodical payment of specified
amount during the remainder of the life of a certain person called nominee in return of a sum of money
called purchase money. This type of annuity can either be proportionate of non-proportionate.

6) Annuity certain:- It is that annuity which is payable for a fixed no. of years even if the annuitant dies
before the period is complete. It may be either an immediate or a deferred annuity. It ensures that no part
of the capital sum is lost on the death of the annuitant. It is in no way connected with the duration of the
life of annuitant.

7) Annuity for life:- It is a straight forward pension, payable as long as the annuitant lives. Upon the
death of the annuitant the liability of the insurance company terminates and there are no payments or
benefits due either to a beneficiary or to the estate of the annuitant.

8) Guaranteed annuity:- Under this plan, the annuity is payable for fixed no. of years or until the
annuitant dies which ever comes later. E.g. if payment is guaranteed for 20 years and the annuitant dies at
the end of 5 yrs, payment will be made for a period of 15 years more to a designated beneficiary.
However if the annuitant outlives the no. of years guaranteed, payment will be made to him during entire
life but nothing is paid to the beneficiary upon his death.
9) Reversionary annuity:- When it is arranged, payments of the annuitant do not commence until the
death of another specified person. Thus under this plan, an annuity for the rest of life is payable if the
annuitant survives. In other words insurance is placed upon life of one person and upon his death the
proceeds are to provide an annuitant for a designated beneficiary.

10) Personal pension annuity:- This is a special deferred annuity which carries certain tax concession to
persons who are not in pensional employment. However such an annuity shall be non assignable and its
value is non commutable for a cash payment.

11) Group annuity:- Under this pension plan, a no. of employees or group of persons are covered under a
single policy insured to their employer. The payments are made to each member f the group at retirement
or after the attainment of a certain age by the member. The individual members of the group hold
certificates as evidence of their coverage.
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For +2, 1st Year Commerce # Insurance # UNIT – 3 & 4

Q8) State and explain the various methods of premium computation.

Ans:-
Assessment plan:-
Under this assessment plan of premium computation, the rates of premium (known as contribution or
assessment) are not fixed in the policy but are collected from the surviving member or a group in order to
pay for the sum assured to other beneficiary. This is an unscientific and a rude method of premium
computation, which was applied in the early stages of insurance development. The members of a group
are required to contribute to a fund which could be utilized in rendering assistance at the time of death to
the surviving dependants of a deceased member of a group. Initially, the contribution was voluntary and
the death benefits varied with the requirements for the payments to individuals. Subsequently the benefits
to be paid was fixed and the contributions varied with the needs of the organisation. This method suffers
from a number of defects. Firstly there is uncertainty regarding the individual contributions because such
assessments depend upon the frequency of death. Therefore the members do not know as to how many
assessments are payable during the year. Secondly, this system is inequitable as it ignores the ages of the
members and all of them have to pay the same assessment irrespective of their ages. Hence, this system
proved inequitable and unscientific and was therefore dropped.

Natural premium plan:-

Under this plan, the amount of the premium is arrived at after taking into account the mortality rate of
particular age to which the policy holder belongs. This method gives due recognition to the interest
accumulations on the invested funds and the management expenses. It also provides for the payment of a
different premium rate at different ages. In a way it gives the most representative amount that can be
charged at different ages. Hence it is most scientific method of calculation of premium and is widely used.
A man of 20 years, for example will pay comparatively less premium then a man of 50 yrs of age because
his chances of death are relatively remote. At the age of 50 or 60, a person would be required to pay a
larger amount by way of premium, which in many cases prove to be prohibitive. Therefore this method
links the premium with the age. For this purpose the mortality tables are used which gives the detailed
account of the number of persons died at a particular age in a year. On the basis of the past trend it is
assumed that the same will be repeated. Thus on the basis of the advance calculation, the total premium
to be contributed by the insured will be found out.
Let us take an illustration to make this point clear. Suppose in a particular area there are 1000
persons each of 40 years of age and are interested of taking policies. Out of 1000 persons in this age
group only 10 person die in a year. Each of then will be paid Rs 1000/-. In the 1st year Rs 10000/-
(1000 x 10) will be required to pay the claims. Dividing this amount among the 1000 insures the
premium per head comes to Rs 10/- i.e. 10000 / 1000. As against this a person of 50 years of age will pay
more premium because his chance of death are comparatively higher. Suppose at the 50 years of age,
1000 persons want to the take life policies for Rs 1000/- each. It is found from the past experience that at
this age group, out of 1000 persons 15 persons die in a year and each of them will be paid a sum of Rs
1000 for the sum assured. Then in the first year a sum of Rs 15000/- will be required to meet the claims.
Dividing this amount among the 1000 insured at the age of 50, the premium per head comes to Rs 15
which is more than the premium required at the age of 40. Thus as a man advances in age, his chances of
death increase and with that the premium also increases accordingly.
This system suffers from the defect that the rate increases with the age i.e. the risk is considerably
less at 30years of age than at 60 or 70 years of age. Since under this method the premium are directly
based on the mortality rate it is called Natural premium plan or yearly renewal term plan. This system is
also not very popular because of the above limitation.
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For +2, 1st Year Commerce # Insurance # UNIT – 3 & 4

Level premium plan:-

Under this plan the total premium payable is divided equally over the no. of years, over which the policy
holders agree to pay the premium. The premium always stands at a particular level through out the
period. But the total premium over the period is exactly the same payable under the natural premium
plan. In other words, the premium to be paid are leveled up so that usually the same premium is paid
every year. The difference between the two types is that in the case of natural plan, the amount of
premium constantly increases every year while in the case of level premium plan, the amount of premium
remain at a constant figure throughout the term of the policy. This is mainly because under the level
premium plan, the insurance company receives greater amount by way of premium during the early years
of the policy than is really necessary for the insurer. But during the later years of the policy the insurance
company receives lower amount.
As it is evident from the graph the policy holder is required to pay more than what was required
under the natural premium plan up to 51. After this age the policy holder pays less than what he was
expected to pay under the natural plan. Both these (-) and (+) compensate each other and the surplus is
applied towards later year. In the aggregate the whole amount is received from the insured. Hence this
system is known as level premium plan. Since this system removed the defect of the previous method, it
is widely used by the insurance companies for computing premiums.

Medium Questions:

Q1) What is the difference between annuity contract and life insurance policy?
Ans:- refer long Q. no. 5.

Q2) Why is level premium plan considered superior to natural premium plan?
Ans:- Under level premium plan total premium payable is divided equally over number of years, over
which the policy holders agree to pay the premium. Premium always stands at particular level through
out the period. In case of natural premium plan, amount of premium constantly increases every year
while in case of level premium plan amount of premium remains constant. During later yeas of policy the
insurance company receives lower amount in real sense under level plan. Where as under natural
premium plan rate of premium increases with the age. During later years of policy, premium burden is
more where as paying capacity reduces. Hence level premium plan is superior to natural premium plan.

Q3) “Life insurance policy carry surrender value but fire insurance and marine insurance do not
carry surrender value”. Explain.
Ans:- Life insurance policy is made for a long period of time that ranges from 15-25 years. If policy
holder is unable to review this policy then he can surrender his policy after a minimum period of 2 years
and will get in return some money named cash surrender value. But fire and marine insurance are
contracts of indemnity which are made for one year only and total premium is paid at the time of
undertaking the policy it self. Hence there is no question of revival of policy and so there is no question
of surrender value.

Q4) Comment the following statement:

1) Insurance protects the wealth of society.
2) Insurance facilitates the economic growth of the country.
3) Insurance helps to curtail inflation.
Ans:- Refer functions of insurance.
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