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Banking and Insurance

Course Content and Reading Material

Unit -1

Risk and Insurance:

Defining risk,

Concept and significance of insurance,

Classification of insurance – life and non-life,

General principles of insurance,

Insurance application and acceptance procedure,

Insurance terminology

RISK

Risk insurance refers to the risk or chance of occurrence of something harmful or unexpected that might
include loss or damage of the valuable assets of the person or injury or death of the person where the
insurers assess these risks and, based on which, work out the premium that the policyholder needs to
pay.

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Asst. Prof
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Put simply, insurance risks are risks or perils that the insurance company has agreed to provide
indemnity for. There are a wide range of events that are considered insurance risks. For example, an
auto accident is an auto insurance risk, a policyholder’s death is a life insurance risk, and water damage
is a homeowner’s insurance risk.

The risk is any event or happening that no one plans, but if it happens, it eventually causes life or
financial loss to any person. The risk is neither inevitable nor predictable. In the case of risk insurance or
risk in insurance, insurers assess the policy taken by the policyholder and pay the sum of money
(financial value of damages caused) based on terms and conditions covered in the approach to
compensate for the loss suffered by the policyholder.

Types of Risk

1. Financial Risk: Financial risk is a risk whose monetary value of a loss on a particular event can be
measured. The loss assessment can carry out; thus, proper monetary value can be given
regarding such losses. We can take, for example, the loss associated because of material
damage to the property upon the happening of an event. Therefore, these risks can be insured
and are the core subject while doing insurance.

2. Non-Financial Risk: Non-financial risk is a risk whose monetary value of a loss on a particular
event cannot be measured. Loss assessment is practically not feasible; thus, one cannot
measure the same in monetary terms. A wrong decision or choice may result in probable
disliking, discomfort, or embarrassment, which could not be measured in monetary terms. This
risk cannot insure. An example of non-financial risk is the wrong selection of the type of mobile
phone.

3. Speculative Risk: Speculative risk is the uncertainty regarding an event being considered and the
happening or non-happening of such event would lead to either profit or loss. This type of risk is
generally not insurable. An example of this type of risk is purchasing the call option of any stock.
The option’s price will depend upon the movement of the associated stock and the time to
expiry of the contract.

4. Pure Risk: Pure risk relates to the happening of any event which would lead to either loss to the
person or may end up in a break-even situation. It will not lead to profit in any circumstances.
These types of risks are insurable and non-controllable. This type of risk generally arises in a
natural calamity, fire, etc. Upon any natural calamity, it would not, under any circumstances,
end up generating profits because of such calamity.

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5. Fundamental Risk: Fundamental risk is the risk that is intrinsic to the state of being, or it may be
an absolute hazard, thus producing no such uncertainty about the loss. The happening of such
an event is not under the control of any person. The origin of this type of risk is on an individual
level, and its impact can also be felt at a localized level. We can take, for example, the event of
an accident on a bus.

6. Static Risk: Static risk is the risk that does not involve losses caused by changes in the business
environment and remains constant over the period, i.e., the risks associated with the losses that
would cause a stable economy. Any unexpected natural event or destructive human behavior
mainly causes it. For example, the risk that damage will be caused due to heavy rains is covered
under the static risk.

7. Dynamic Risk: Dynamic risk associates losses with a stable economy. It affects a large number
of individuals as it does not occur regularly. For example, the risk that failure will be caused due
to changes in the technology is covered under the dynamic risk.

8. Particular Risk: Particular risk can refer to the risks that affect only an individual & not everyone
in the community. For example, if any person’s assets are stolen, the loss falls on that person
only and not on anyone else. Thus risks are the responsibility of the person, not the society as a
whole.

INSURANCE

Insurance is defined as a contract, which is called a policy, in which an individual or organization receives
financial protection and reimbursement of damages from the insurer or the insurance company. At a
very basic level, it is some form of protection from any possible financial losses.

The basic principle of insurance is that an entity will choose to spend small periodic amounts
of money against a possibility of a huge unexpected loss. Basically, all the policyholder pool their risks
together. Any loss that they suffer will be paid out of their premiums which they pay.

Insurance Contract (key Parties involved)

1. Insurer – The companies who provide the insurance.

2. Insured – The one who take the insurance, i.e. policyholder.
3. Premium – The amount which the insured pays to the insurer to get the insurance coverage.

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FUNCTIONS OF INSURANCE COMPANIES

1] Provides Reliability

The main function of insurance is that eliminates the uncertainty of an unexpected and sudden financial
loss. This is one of the biggest worries of a business. Instead of this uncertainty, it provides the certainty
of regular payment i.e. the premium to be paid.

2] Protection
Insurance does not reduce the risk of loss or damage that a company may suffer. But it provides a
protection against such loss that a company may suffer. So at least the organization does not suffer
financial losses that debilitate their daily functioning.

3] Pooling of Risk
In insurance, all the policyholders pool their risks together. They all pay their premiums and if one of
them suffers financial losses, then the payout comes from this fund. So the risk is shared between all of
them.

4] Legal Requirements
In a lot of cases getting some form of insurance is actually required by the law of the land. Like for
example when goods are in freight, or when you open a public space getting fire insurance may be a
mandatory requirement. So an insurance company will help us fulfill these requirements.

5] Capital Formation
The pooled premiums of the policyholders help create a capital for the insurance company. This capital
can then be invested in productive purposes that generate income for the company.

PRINCIPLES OF INSURANCE

The concept of insurance is risk distribution among a group of people. Hence, cooperation becomes the
basic principle of insurance.

To ensure the proper functioning of an insurance contract, the insurer and the insured have to uphold
the 7 principles of Insurances mentioned below:

1. Utmost Good Faith

2. Proximate Cause
3. Insurable Interest
4. Indemnity
5. Subrogation
6. Contribution
7. Loss Minimization

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1. Principle of Utmost Good Faith

The fundamental principle is that both the parties in an insurance contract should act in good faith
towards each other, i.e. they must provide clear and concise information related to the terms and
conditions of the contract.

The Insured should provide all the information related to the subject matter, and the insurer must give
precise details regarding the contract.

Example – Jacob took a health insurance policy. At the time of taking insurance, he was a smoker and
failed to disclose this fact. Later, he got cancer. In such a situation, the Insurance company will not be
liable to bear the financial burden as Jacob concealed important facts.

2. Principle of Proximate Cause

This is also called the principle of ‘Causa Proxima’ or the nearest cause. This principle applies when the
loss is the result of two or more causes. The insurance company will find the nearest cause of loss to the
property. If the proximate cause is the one in which the property is insured, then the company must pay
compensation. If it is not a cause the property is insured against, then no payment will be made by the
insured.

Example –

Due to fire, a wall of a building was damaged, and the municipal authority ordered it to be demolished.
While demolition the adjoining building was damaged. The owner of the adjoining building claimed the
loss under the fire policy. The court held that fire is the nearest cause of loss to the adjoining building,
and the claim is payable as the falling of the wall is an inevitable result of the fire.

In the same example, the wall of the building damaged due to fire, fell down due to storm before it
could be repaired and damaged an adjoining building. The owner of the adjoining building claimed the
loss under the fire policy. In this case, the fire was a remote cause, and the storm was the proximate
cause; hence the claim is not payable under the fire policy.

3. Principle of Insurable interest

This principle says that the individual (insured) must have an insurable interest in the subject matter.
Insurable interest means that the subject matter for which the individual enters the insurance contract
must provide some financial gain to the insured and also lead to a financial loss if there is any damage,
destruction or loss.

Example – the owner of a vegetable cart has an insurable interest in the cart because he is earning
money from it. However, if he sells the cart, he will no longer have an insurable interest in it.

To claim the amount of insurance, the insured must be the owner of the subject matter both at the time
of entering the contract and at the time of the accident.

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4. Principle of Indemnity

This principle says that insurance is done only for the coverage of the loss; hence insured should not
make any profit from the insurance contract. In other words, the insured should be compensated the
amount equal to the actual loss and not the amount exceeding the loss. The purpose of the indemnity
principle is to set back the insured at the same financial position as he was before the loss occurred.
Principle of indemnity is observed strictly for property insurance and not applicable for the life insurance
contract.

Example – The owner of a commercial building enters an insurance contract to recover the costs for any
loss or damage in future. If the building sustains structural damages from fire, then the insurer will
indemnify the owner for the costs to repair the building by way of reimbursing the owner for the exact
amount spent on repair or by reconstructing the damaged areas using its own authorized contractors.

5. Principle of Subrogation

Subrogation means one party stands in for another. As per this principle, after the insured, i.e. the
individual has been compensated for the incurred loss to him on the subject matter that was insured,
the rights of the ownership of that property goes to the insurer, i.e. the company.

Subrogation gives the right to the insurance company to claim the amount of loss from the third-party
responsible for the same.

Example – If Mr A gets injured in a road accident, due to reckless driving of a third party, the company
with which Mr A took the accidental insurance will compensate the loss occurred to Mr A and will also
sue the third party to recover the money paid as claim.

6. Principle of Contribution

Contribution principle applies when the insured takes more than one insurance policy for the same
subject matter. It states the same thing as in the principle of indemnity, i.e. the insured cannot make a
profit by claiming the loss of one subject matter from different policies or companies.

Example – A property worth Rs. 5 Lakhs is insured with Company A for Rs. 3 lakhs and with company B
for Rs.1 lakhs. The owner in case of damage to the property for 3 lakhs can claim the full amount from
Company A but then he cannot claim any amount from Company B. Now, Company A can claim the
proportional amount reimbursed value from Company B.

7. Principle of Loss Minimization

This principle says that as an owner, it is obligatory on the part of the insurer to take necessary steps to
minimize the loss to the insured property. The principle does not allow the owner to be irresponsible or
negligent just because the subject matter is insured.

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Example – If a fire breaks out in your factory, you should take reasonable steps to put out the fire. You
cannot just stand back and allow the fire to burn down the factory because you know that the insurance
company will compensate for it.

SIGNIFICANCE OF INSURANCE

Insurance is significant to four stakeholders:

 Individual
 Business
 Society
 Nation

INDIVIDUALS

1. Distributes Large Risks

Insurance is a financial instrument. The risk of significant loss due to an event is borne by a large group
of people exposed to the same possibility in a business. Thus, the losses are distributed over a large
group making it bearable for each individual.

2. Provides Financial Stability

Without insurance, it will be extremely costly for businesses to bounce back after a major loss of
inventory. Natural hazards, accidents, theft or burglary can affect the financial status of a business or a
family. With Insurance compensating a large part of the losses businesses and families can bounce back
rather easily.

3. Helps Economic Growth

Insurance companies pool a large amount of money. Part of this money can be invested to support
investment activities by the government. Due to the safety concerns insurers only invest in Gilts or
government securities. On the other hand, governments can raise funds easily from insurers for large
public projects, which aid in economic growth.

4. Generates Long-Term Wealth

Insurance is often a long-term contract, especially life insurance. Life insurance plans can continue for
more than three decades. Within this time they will collect a large amount of wealth, which returns to
the investor if they survive. If not, the wealth goes to their family.

5. Tax Benefits

Any payments received from life insurance plans are completely tax-free if your investments have met a
few simple conditions. Most life insurance premium payments and investments are tax-deductible.
Thus, insurance reduces your tax liability in the present and future.

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6. Achieve Retirement Goals

Insurance plans like guaranteed savings plans and ULIPs are some of the best retirement saving options
available. You can also use deferred annuity plans to safeguard your post-retirement income when you
are close to retirement.

7. Stress-Free Life

With the right insurance plan, you can remain stress-free from unforeseen risks causing major financial
damage. Insurance will help you and your families bounce back to your normal financial life quickly after
a mishap. Insurance also keeps your long-term investments safe from sudden financial shocks caused by
emergencies.

BUSINESS

The uncertainty of Business Losses is Reduced

In the world of business, commerce, and industry, a huge number of properties are employed. With a
slight slackness or negligence, the property may be turned into ashes. The accident may be fatal not only
to the individual or property but to the third party also. New construction and new establishment are
possible only with the help of insurance; in the absence of it, uncertainty will be at the maximum level,
and nobody would like to invest a huge amount in the business or industry. A person may not be sure of
his life and health and cannot continue the business up to a longer period to support his dependents. By
purchasing a policy, he can be sure of his earning because the insurer will pay a fee amount at the time
of death.

Business Efficiency is Increased with Insurance

When a business owner is free from the botheration of losses, he will devote much time to the business.
The carefree owner can work better for the maximization of the profit.

The new and old businessmen are guaranteed payment of a certain amount with the insurance policies
at the death of the person, at the damage, destruction, or disappearance of the property or goods.

The uncertainty of loss may affect the mind of the businessmen adversely. Insurance, removing
uncertainty, stimulates businessmen to work hard.

Key Man Indemnification

The key man is that particular man whose capital, expertise, experience, energy, ability to control,
goodwill, and dutifulness make him the most valuable asset in the business and whose absence will
reduce the income of the employer tremendously and up to that time when such employee is not
substituted.

The death or disability of such valuable lives will, in many instances, prove a more serious loss than that
by fire or any hazard.

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The potential loss to be suffered and the compensation to the dependents of such an employee requires
an adequate provision that is met by purchasing adequate life policies.

The amount of loss may be up to the amount of reduced profit, expenses involved in the appointing of
such persons and payment to the dependents of the key man. The Term Insurance Policy or Convertible
Term Insurance Policy is more suitable in this case.

Enhancement of Credit

The business can obtain a loan by pledging the policy as collateral for the loan. The insured persons are
getting more loans due to the certainty of payment at their deaths.

The amount of loan that can be obtained with such pledging of policy, with interest, thereon will not
exceed the cash value of the policy.

In the case of death, this value can be utilized for setting the loan along with the interest.

If the borrower is unwilling to repay the interest, the lender can surrender the policy and get the
amount of loan and interest thereon paid.

The redeemable debentures can be issued on the collateral of capital redemption policies. The insured
properties are the best collateral, and adequate loans are granted by the lenders.

Business Continuation

!n any business, particularly partnership business, may discontinue at the death of any partner, although
the surviving partners can restart the business. In both cases, the business and the partners will suffer
economically.

The insurance policies provide adequate funds at the time of death. Each partner may be insured for the
amount of his interest in the partnership, and his dependents may get that amount at the death of the
partner.

With the help of property insurance, the property of the business is protected against disasters and the
chance of disclosure of the business due to the tremendous waste or loss.

Welfare of Employees

The welfare of employees is the responsibility of the employer. The former is working for the latter.

Therefore, the latter has to look after the welfare of the former, which can be provided for early death,
provision for disability, and provision for old age.

These requirements are easily met by life insurance, accident, and sickness benefit, and pensions which
are generally provided by group insurance.

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The employer generally pays for the premium for group insurance. This plan is the cheapest form of
insurance for employers to fulfill their responsibilities.

The employees will devote their maximum capacity to complete their jobs when assured of the above
benefits. The struggle and strife between employees and employers can be minimized easily with the
help of such schemes.

SOCIETY

1. Protects society’s wealth

Through various types of insurance schemes, the insurer protects the wealth of the society. Life
insurance offers protection against loss of human wealth. General insurance policies protect the
property against losses due to fire, theft, accident, earthquake, etc. As such, both general and life
insurances offer protection to stabilize business condition and financial position.

2. Removes social evils

All forms of insurance tend to reduce the extent of social evils that are meant to alleviate. The most
effective argument for reduction of fire losses is that smaller losses will make smaller premiums
possible.

3. Maintains standard of living

Insurance rescues many people in the society who are rendered destitute through misfortune. They are
able to maintain the standard of living due to high returns. They reduce the destitution and misery.
These could lower the ideals and standards of conduct of entire communities.

4. Social security benefits

Insurance plays a pivotal role in fulfilling certain needs for which state might have to provide. The
provision for old age, sickness and disability of persons in general. Those who have their insurance do
not become a burden on state insurance plan.

In case of fire, explosions and other calamities that would tend to impoverish (render poor) families
would have been relieved of the financial loss if adequate insurance had been maintained.

5. Equitable distribution of loss

Insurance distributes the cost of accidental events in a equitable manner. In the absence of insurance,
this would have been paid in a haphazard manner. For example, the cost of fire insurance is reflected in
house rent. In the absence of insurance, some tenants would pay higher rents than others.

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NATION

 Provides Safety and Security to Individuals and Businesses: Insurance provides financial support and
reduces uncertainties that individuals and businesses face at every step of their lifecycles. It provides an
ideal risk mitigation mechanism against events that can potentially cause financial distress to individuals
and businesses. ). For instance, with medical inflation growing at approximately15% per annum, even
simple medical procedures cost enough to disturb a family’s well-calculated budget, but a Health
Insurance would ensure financial security for the family. In case of business insurance, financial
compensation is provided against financial loss due to fire, theft, mishaps related to marine activities,
other accidents etc.

 Generates Long-term Financial Resources: The Insurance sector generates funds by way of premiums
from millions of policyholders. Due to the long-term nature of these funds, these are invested in building
long-term infrastructure assets (such as roads, ports, power plants, dams, etc.) that are significant to
nation-building. Employment opportunities are increased by big investments leading to capital
formation in the economy.

 Promotes Economic Growth: The Insurance sector makes a significant impact on the overall economy
by mobilizing domestic savings. Insurance turn accumulated capital into productive investments.
Insurance also enables mitigation of losses, financial stability and promotes trade and commerce
activities those results into sustainable economic growth and development. Thus, insurance plays a
crucial role in the sustainable growth of an economy.

 Provides Support to Families during Medical Emergencies: Well-being of family is important for all and
health of family members is the biggest concern for most. From elderly parents to newborn children,
medication and hospitalization play important role while ensuring well-being of families. Rising medical
treatment costs and soaring medicine prices are enough to drain your savings if not well prepared.
Anyone can fall victim to critical illnesses (such as heart attack, stroke, cancer etc.) unexpectedly. And
rising medical expense is of great concern. Medical Insurance is a policy that protects individuals
financially against different type of health risks. With a Health Insurance policy, an insured gets financial
support in case of medical emergency.

 Spreads Risk: Insurance facilitates moving of risk of loss from the insured to the insurer. The basic
principle of insurance is to spread risk among a large number of people. A large population gets

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insurance policies and pay premium to the insurer. Whenever a loss occurs, it is compensated out of
corpus of funds collected from the millions of policyholders.

TYPES OF INSURANCE

 Life insurance and general insurance are two different forms of insurances. General insurance
covers any other risk except for life-risk of the person injured. Life Insurance covers only the life-
risk of the person insured.

 In a table below, we have covered all the key points between Life Insurance and general
Insurance:

Key Points Life Insurance General Insurance.

It is an insurance contract, which covers the life-risk of

Meaning It is an insurance that is not covered under Life insurance.
the person insured.

Form It is a form of investment. It is a contract of indemnity.

Term of
It's a long term contract. It's a short term contract.
Contract.

Premium Premium has to be paid over the year. Premium has to be paid lump sum.

Insurance Insurable amount is paid either on the occurrence of Loss is reimbursed, or liability will be repaid on the
claim the event, or on maturity. occurrence of uncertain event.

Insurable
Must be present at the time of contract. Must be present, at the time of contract and loss both.
Interest.

It can be done for any value based on the premium The amount payable under life insurance is confined to
Policy Value.
policy. the actual loss suffered.

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INSURANCE APPLICATION AND ACCEPTANCE PROCEDURE

The insurance application process in 3 steps

There are so many people who are under-insured or don’t have adequate insurance to cover exactly
what they want it to. Many don’t have insurance at all, and it has been found that this is partly due to
them not knowing much about it.

Life insurance – this will pay a lump sum to your loved ones in the event of your death. This type of
policy is usually taken out if you have any dependents, such as young children that rely on your income,
or have a mortgage that will need to be paid off.

Critical illness cover – this pays a cash lump sum of money, if you are diagnosed with a medical
condition that is listed in the insurer’s claims set e.g. cancer, stroke, heart attack. This policy is all about
supporting you financially if you are really ill. You can use the money for any number of things, people
usually choose to pay off their mortgages or debts, pay for private treatment or adaptations to their
home.

Income protection – this pays you a percentage of your monthly income, if you are unable to work
because of ill health. This can be for any medical reason which means you cannot carry on doing your
normal job.

Though there are a few types of protection insurance, you might not necessarily need all of them,
though they are worth looking into. These aren’t the only types of cover we offer advice for, as we also
help with group and business insurances.

Step 1. The application

When you apply for insurance, you will be asked basic questions such as your name, date of birth,
address, and often a question about your occupation. The application will then move on to ask about
your health. This will usually include some general questions which everybody is asked, and then some
more specific questions if you have mentioned a medical condition or have seen a medical professional
recently.

After the health related questions, it’s likely that you will be asked about any hazardous hobbies, such as
sky diving or deep sea diving. The application will then move on to ask about your travel history.

Step 2. Underwriting

The next step is underwriting. If you’re not familiar, this is when the insurer will assess your application
to see if anything else is needed, such as further information from yourself or a report from your GP.
Sometimes you will be offered cover straight away, in which case no further information is required.

If a medical report is needed, the insurer will ask for your permission and then request this from your GP
or other health care professional, and the cost is usually covered by the insurer. Once the request is with

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your GP, it’s in their hands and the insurer will chase this up until it has been completed and returned.
Sometimes reports can be returned within just a few days, but it has been known for reports to take a
few weeks, even months.

If the insurer has requested further information from yourself, this will usually just be a few questions
over email or they may ask you to have a tele-interview, which sounds much more daunting than it
actually is. There are times where an insurer might ask for some medical tests to be conducted, in which
case a third party would contact you to arrange a time and day that suits you. The tests don’t usually
take too long, and can even be carried out in your own home if you wish.

Once this information has been sent back to the insurer, it will then go back to their underwriters to
make an informed decision on your application, using all the information that they have gathered. It can
be that the insurer has a couple more questions or needs to clarify something with your GP again, if they
have not received everything the first time around.

Step 3. Terms

After reviewing your application, the insurer will now have a decision in mind.

Accepted – the insurer may offer you standard terms (no price increase), or there may be a price
increase due to a disclosure made on your application. Depending on the type of policy you have applied
for, some insurers may add an exclusion to the policy due to a health condition that you have, your
occupation or something else that they class as a “risk”. Generally life insurance will be a premium
increase instead of an exclusion. For income protection and critical illness cover, it could be a price
increase and/or exclusion.

Postponed – sometimes an insurer may postpone your application, and suggest that you apply in a
certain number of months. This is often the case if you’re awaiting any investigations or test results, or if
there hasn’t been much time passed since a diagnosis.

Declined – depending on your circumstances, an insurer might decline your application. I know that
doesn’t sound great, and it isn’t nice when this happens. If you’re using a protection adviser then they
should be able to find out why the application was declined, and do some research in order to apply
elsewhere. It’s really important to know that just because one insurer has said no, it doesn’t mean that
they all will.

Once you have accepted the terms you have been offered, your policy will be set up and it is then down
to you to pay the monthly premium.

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INSURANCE TERMINOLOGIES

1. Policyholder:

The policyholder is the one who proposes the purchase of the life insurance policy and pays the
premium (see #7 Premium). The policyholder is the owner of the policy and s/he may or may not be the
life assured (see # 2 Life assured).

2. Life assured:

Life assured is the insured person. Life assured is the one for whom the life insurance plan is purchased
to cover the risk of untimely death. Primarily, the breadwinner of the family is the life assured.

Life assured may or may not be the policyholder. For instance, a husband buys a life insurance plan for
his wife. As the wife is a homemaker, husband pays the premium, thus the husband is the policyholder,
and wife is the life assured.

3. Sum assured (coverage):

Life insurance is meant to provide a life cover to the insured.

The financial loss that may arise due to the passing away of the life assured is generally chosen as a life
cover when buying a life insurance plan. In technical terms, ‘Sum Assured’ is the term used for an
amount that the insurer agrees to pay on death of the insured person or occurrence of any other
insured event.

You may come across the term ‘sum assured’ at the time of comparing policies online, when buying life
insurance plan, and in the policy document. The sum assured is the amount that the life insurance
company will pay to the nominee (see #4 Nominee) if the insured person dies during the policy tenure
(see #5 Policy tenure).

The sum assured is chosen by the policyholder at the time of purchase. To know more and to choose the
right coverage, read this.

4. Nominee:

The ‘nominee’ is the person (legal heir) nominated by the policyholder to whom the sum assured and
other benefits will be paid by the life insurance company in case of an unfortunate eventuality. The
nominee could be the wife, child, parents, etc. of the policyholder. The nominee needs to claim life
insurance, if the life assured dies during the policy tenure (see #5 Policy tenure).

5. Policy tenure:

The ‘policy tenure’ is the duration for which the policy provides life insurance coverage. The policy
tenure can be any period ranging from 1 year to 100 years or whole life, depending on the types of life
insurance plan and its terms and conditions. Many a times, it is also referred to as policy term or policy
duration.

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The policy tenure decides for how long the company is providing the risk coverage. However, in the case
of whole life insurance plans, the life coverage is till the time life assured is alive.

6. Maturity age:

Maturity age is the age of the life assured at which the policy ends or terminates. This is similar to policy
tenure, but a different way to say how long the plan will be in force. Basically, the life insurance
company declares up front the maximum age till which the life insurance coverage will be provided to
the life insured. For instance, you are 30 years old, you opt for a term plan with a maturity age of 65
years. That means the policy will have a coverage till you are 65 years old, which also means, the
maximum policy tenure for a 30-year-old is 35 years.

7. Premium:

The premium is the amount you pay to keep the life insurance plan active and enjoy continued
coverage. If you are unable to pay the premium before the payment due date and even during the grace
period (#13 Grace period), the policy terminates.

There are various options on how you can pay the premium – regular payment, limited payment term,
single payment (discussed below #8 Premium payment mode).

8. Premium payment term/mode/ frequency:

You can pay the life insurance premium as per your convenience.

Regular Premium Payment - You can pay premium regularly throughout the policy term either –
monthly, quarterly, half-yearly or yearly. Limited Premium Payment – You can choose to pay the
premiums for a limited amount of time. In this option, you do not pay till the end of the policy term, but
for a certain pre-fixed number of years. For example, 10 years, 15 years, 20 years, and so on.

Single Premium Payment – You can also choose to pay the premium for the entire duration of the plan
as a lumpsum in one single go.

9. Riders:

Riders are an additional paid-up feature to widen up the scope of the base life insurance policy. Riders
are bought at the time of purchase or on policy anniversary. There are different types of riders that can
be bought along with the base plan. However, number and type of riders will differ from insurer to
insurer.

Plus, the terms and conditions may differ from one insurance to another. However, here’s the list of
some well-known riders offered by life insurance companies.

Accidental Death Benefit Rider

Accidental Total and Permanent Disability Benefit Rider

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Asst. Prof
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Critical illness Cover

Hospital Cash

Waiver of Premiums

For more in-depth guide read – life insurance riders and how to choose one.

10. Death Benefit:

You will come across ‘Death Benefit’ quite frequently whenever you are either planning to buy a life
insurance plan or comparing different insurance plans online.

The ‘Death Benefit’ is what life insurance company pays to the nominee in case the life assured dies
during the policy tenure. If you are thinking whether the sum assured and death benefit are one and the
same, then do not be confused. Because the death benefit can be sum assured or even higher than that,
which may include rider benefit (if any), and/or other benefits. Except in the case of term insurance –
where there is no accrued bonus or guaranteed additions.

11. Survival/Maturity Benefit:

Maturity benefit is the amount that the life insurance company pays when the life assured outlives the
policy tenure. Survival benefit is paid when the life assured completes the pre-defined number of years
under the policy.

There is no survival or maturity benefit in term plans. However, in other life insurance policies you may
find survival benefit or the maturity benefit paid under the plan.

12. Free-look Period:

It is applicable to all new life insurance policies purchased. Free-look period is a time frame during which
one may choose to return the purchased policy.

If you are not comfortable with the terms and conditions, you can return the policy within the Free-look
period. The insurance company after deducting the expenses incurred on medical examination, stamp
duty charges and other charges will refund the remaining premium. IRDA specifies free-look period in
life insurance is 15 or 30 days after receiving the policy document.

13. Grace Period:

If you couldn’t pay the renewal premium for your policy on time, life insurance company gives you an
extension in the number of days after the premium payment due date. A ‘Grace Period’ can be period of
15 days in case of monthly premium payment mode, and 30 days in case of annual premium payment
mode.

If the policyholder does not pay the premiums even before the end of grace period, the policy gets
lapsed.

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Asst. Prof
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14. Surrender Value:

If the policyholder decides to discontinue the plan before the maturity age, the life insurance company
pays an amount to the policyholder, this is called Surrender Value.

But you must clearly read the terms and conditions whether a plan offers any surrender value or not.
And if there is a surrender value, how much it will be. Not all life insurance plans have surrender value.

15. Paid-up Value:

In case the policyholder discontinues to pay the premium after a specified period of time, Insurance
companies will offer the policyholder an option to convert his policy into a reduced paid-up policy.
Under this option the sum insured is reduced in proportion to the number of premiums paid. If other
benefits related to the sum insured are payable, these benefits will now be related to the reduced sum
insured, which is the paid-up value.

16. Revival Period:

If the policyholder does not pay the premium even during the grace period, the policy lapses.

However, if the policyholder still wants to continue, the insurance company provides an option of re-
activating the lapsed policy. This must be done within a specific period of time after the grace period
ends. This specified period is known as a revival period. To reinstate the lapsed policy, the life insurance
company will put forward the request to the team of Underwriters (see #17 Underwriters) for approval.

17. Underwriters:

Underwriters evaluate the risk involved in insurance. The process of risk evaluation starts before the
issuance of insurance policy, and ends with settlement of the claim (see #20 Claim Process).

Only with the approval of Underwriters, policy is issued to the policyholder. And only after clearance
from the Underwriter, the company pays the claim benefit to the nominee.

18. Tax benefits:

All the premiums paid towards the life insurance plan are eligible for deductions under Section 80 (C) of
Income Tax Act, 1961. The maximum amount that one can claim as deductible is Rs.1.5 lakh.

The benefits paid to the policyholder/nominee are tax-free under Section 10 (10D) of Income Tax Act,
1961.

19. Exclusions:

Before you buy any life insurance, read ‘Exclusions’ carefully. These are things that are not covered
under a life insurance policy, and against which if claimed, insurance company wouldn’t pay any benefit.

For instance, Suicide, is an exclusion in any life insurance plan.

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Asst. Prof
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20. Claim Process:

In case, the life assured passes away during the policy tenure, the nominee needs to lodge a claim to
receive the death benefit as mentioned in the policy.

Author- Seema Hussain

Asst. Prof