Unit 5 Life Insurance

Structure
5.1 Introduction
Objectives
5.2 Concept of Insurable Interest
5.3 Insurance and Wagers
5.4 Elements of a Life Insurance Organization
5.5 Life Insurance Plans
Some Popular Plans
5.6 Riders
5.7 Summary
5.8 Glossary
5.9 Terminal Questions
5.10 Answers
5.11 Case Study

Caselet

Policy Holders Need Safeguards in New Life Insurance Norms

According to industry experts, the insurance regulator has to put in a variety
of safeguards for the policy holder while changing rules to meet the terms
of the government’s recent decisions on life insurance.
The Insurance Regulatory and Development Authority (IRDA) has also to
ensure that the Reserve Bank of India (RBI) allow banks to become insurance
brokers. Presently, the RBI permits banks to function just as corporate agents
or referral partners.
The Finance Minister announced various measures to strengthen the life
insurance sector. These measures comprise the introduction of Use and File
system of issuing new policies by life insurers instead of File and Use for
standard policies and permitting banks to function as brokers instead of agents
and others. As per the current File and Use system, insurance firms can sell
the product only after availing endorsement from the insurance regulator.
In a country having low spread and penetration of life insurance, the aim
must be to sell simple and easily understood products and plans. Such
products will be automatically supposed to have been approved after 15
days of its intimation to the IRDA except when found in non-compliance
during that period.
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Sources at IRDA say that: ‘Use and file for simple products looks fine. But
from policy holders’ protection viewpoint some safeguards are required. If
on scrutiny or complaints, any product is found defective, IRDA should
explicitly provide for the right to recall with proviso for premium refund and
payment of intervening claims.’
In June 2012, IRDA fined HDFC Standard Life Insurance Company, a joint
venture between HDFC and Britain’s Standard Life, `1.05 crore for rejecting
many death claims under a policy condition which was asked to be scrapped
by the regulator as far back as 2003.
A member of the Malhotra Committee on Insurance Reforms, has opined
that ‘Unless the chairman and members of IRDA take continuous and personal
interest in the product approval system there cannot be any real improvement.’
A common complaint against the IRDA is the delay in approving new products
and the shortage of consistency in product approval. A few firms get the
clearance to launch a product while others do not get the approval to
introduce comparable policies.
The Finance Minister has asked the IRDA to consider notifying banks as
insurance brokers instead of corporate agents because as a broker the
bank might sell the products of multiple insurers, thus providing the
prospective policyholder a range of products to choose from and also prevent
mis-selling.
Sources at IRDA maintain that they unilaterally convert banks into brokers.
Banks are corporate agents because they voluntarily applied for corporate
agency licence and got their licences. They cannot unilaterally be ‘notified’
as brokers now. They have to apply for broker’s licence and obtain it. There
are also some points of law here. Agents represent insurance companies.
Their acts and omissions are those of the insurance companies. Brokers
are independent. They legally represent the customer and are liable for wrong
professional advice given. Will banks be willing and be permitted by RBI to
take on this liability? Permitting banks to function as brokers for more than
one life insurance firm has been common in Britain for three decades. The
question is when many of the major banks (like SBI, ICICI and others) have
their own life insurance companies, in what way this relaxation will help the
insurance industry?
Source: Adapted from http://zeenews.india.com/business/insurance-news/
policy-hol ders-need-saf eguards -in-new-lif e-insura nce-norms-
experts_61651.html (Retrieved on 16 October 2012)

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5.1 Introduction

In the previous unit, you learnt the regulations related to accounting and
investment management in insurance. This unit will introduce you to the role
and function of life insurance sector in the country.
In the short span after the privatization measures, private firms have come
to acquire 13 per cent of the life insurance market. In spite of the 13 per cent
premium contribution, the private companies garner just 6 per cent of the policies.
It proves that the average size per policy sold by the private insurer is `11,320 in
comparison to `4293 for the LIC. It proves that LIC still enjoys a strong base in
rural areas as well as in the middle and lower middle classes. The private players
have made their presence felt in urban areas.
Future prospects in the life insurance sector will be decided by a fresh
look at unit-linked plans, increase in pure protection products, adoption of
customized plans and enhanced service levels. In India, there is a shortage of
appropriate guidelines regarding the norms for reporting the performance of life
insurance firms. For instance, should one-time premium be incorporated as
part of yearly performance or not? It considerably distorts performance
comparison between insurance providers.
Insurance subject matter might include any kind of property or event which
may result in losing a legal right or the occurrence of a legal liability. Hence, for
example, the insurance subject matter in a fire policy might be a stock, building
or machinery; liability might comprise an individual’s legal liability for damage or
injury. On the other hand, in the case of a life assurance policy, the subject
matter is the life that is insured. It is necessary to understand one basic fact to
recognize insurable interest. It is not the ship, house machinery, life or potential
liability which is insured but the financial interest of the insured in that ship,
house or machinery that is insured. The contract’s subject matter comprises
the name related to the financial interest possessed by a person regarding the
subject matter of the insurance. The interest of the insured in the insurance
subject matter is thus insured, therefore proving the significance of insurable
interest.

Objectives
After studying this unit, you should be able to:
• define the concept of insurable interest
• differentiate between insurance and wagers

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• describe the role and functions of life insurance organizations

• evaluate the utility of different life insurance plans
• assess the significance of riders in insurance policies

5.2 Concept of Insurable Interest

Despite the conventional belief that everything is insurable, all risks are not
insurable. The risks must be financially measurable and there should be adequate
number of comparable risks for the purpose of rating. Further, there must be
pure and specific risks. The happening of the event insured against should not
be against public policy, the premium should be logical, and most importantly,
there must be insur-able interest on the part of the insuring individual.
There is no one specific, universally accepted definition of insurable
interest, but it can be similar to the following:
‘The legal right to insure arising out of a financial relation-ship recognised
under law, between the insured and the subject matter of insurance.’

Essentials of insurable interest

Four basic features are essential to insurable interest:
(a) Definite property, interest, life, limb, right or potential liability worth being
insured should exist;
(b) This insurable thing should be the insurance subject matter;
(c) There should be a relationship between the insured and the insurance
subject matter whereby he draws benefits from its well-being, safety or
freedom from liability and will be affected by its damage, loss or the
prevalence of liabil-ity;
(d) There should be a legalized relationship shared by the insured and the
insurance subject matter.
Creation of insurable interest
There are a number of ways in which insurable interest will arise or be limited:
(a) By common law: Where the essential elements of insurable interest are
automatically present, the same can be described as having arisen at
common law. The common law duty of care which one owes to the other
may give rise to a liability, which again is insurable.
(b) By contract: In some contracts a person will agree to be liable for
something which he or she would not ordinarily be liable for.
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(c) By statute: Sometimes an Act of the Parliament will create an insurable

interest either by granting some benefit or imposing a duty. While the statute
may create insurable interest where none would otherwise exist, there
can be statutes which restrict liability and thereby also restrict insurable
interest.
Application of insurable interest
There are three main categories of application of insurable interest as follows:
• life
• property
• liability
Every person has an unlimited insurable interest in his or her own life.
However, the obvious restriction in the application of this is the means with which
to pay the premium.
If a person is married then there is an automatic unlimited insurable interest
in the life of the person’s husband or wife. However, no other family relationship
will give rise to insurable interest by itself.
If family members are involved in business together or in the case of some
other financial relationship, then in these circumstances, it is not the family ties,
which create insurable interest, but it is the extent of the financial involvement.
There is a basic rule that insurable interest will exist to the extent of the financial
interest in another person or other persons. Thus, partners are capable of insuring
each other’s lives as they incur loss in the event of the demise of any of them. A
creditor may incur financial loss in case a debtor meets with death prior to the
repayment of a loan.

Self Assessment Questions

1. There is a specific and universally accepted definition of insurable interest.

(True/False)
2. Insurable interest is the legal right to insure arising out of a ________
relationship recognized under law, between the insured and the subject
matter of insurance.
3. The three main categories of application of insurable interest are life,
________, and _______.

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5.3 Insurance and Wagers

Wagering contract is formulated in the nature of a wager. Such contracts include

a range of common forms of applicable commercial contracts, e.g., contracts
of insurance, contracts dealing in futures, options, etc. The statutes against
gambling and betting have made many other wagering contracts illegal and
wagering in various cases is termed as a criminal offence.
Table 5.1 Difference between Wagering and Insurance

Contract of Insurance Wagering Agreement

1. A contract of insurance is a contract 1. A wagering agreement is an
to make good the loss of property agreement to pay money or
(or life) of another person against money's worth on the happening of
some consideration called an uncertain event.
premium.
2. In a contract of insurance the 2. No insurable interest is necessary
insured must have insurable in case of a wagering agreement.
interest. Without insurable interest it
will be a wagering agreement.
3. In a contract of insurance both the 3. In a wagering agreement, there is
parties are interested in the conflict of interest and in reality
protection of the subject matter, i.e., there is no interest at all to protect.
there is mutuality of interest.
4. Except life insurance, a contract of 4. In case of a wagering agreement
insurance is a contract of there is no question of indemnity.
indemnity, i.e., a contract to make On the happening of the event
good the loss. fixed amount becomes payable.
5. Contracts of insurance are based 5. Wagering agreements are not
on scientific and actuarial based on such calculations and
calculation of risks. are in the nature of gambling.
Source: http://www.preservearticles.com/2012012621517/difference-between-contract-of-
insurance-and-wagering-agreement.html (Retrieved on 17 October 2012)

Self Assessment Questions

4. A ________ is an agreement to pay money or money’s worth on the

happening of an uncertain event.
5. No insurable interest is necessary in case of a wagering agreement.
(True/False)
6. Except ________, a contract of insurance is a contract of indemnity, i.e.,
a contract to make good the loss.

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5.4 Elements of a Life Insurance Organization

An ‘organization’ is a legal entity which is created to do some activity or to achieve

some purpose. It is created under some law, which gives it a status and identity.
Because of the identity, the organization is considered to be a person in law.
Therefore, it can enter into contracts, be sued in courts, accumulate property
and wealth, and do business, in the same manner as any individual can do. The
way activities are grouped lead to the formation of offices, departments and
sections Responsibilities (for results) have to be clarified and authorities (to
take decisions and utilize resources) have to be defined. When all these are
clarified, there will be people holding various positions, with designations,
occupying places in offices and with clear authority and responsibilities.
Important activities
The important activities in a life insurance company are:
• Procuring applications or proposals from prospective buyers of life
insurance.
• Scrutinizing and making decisions on the proposals for insurance. This is
called underwriting.
• Issuing the policy document, incorporating the terms and conditions of
the insurance cover.
• Keeping track of the performance of the insurance contract by either party,
like payment of premium or payment of benefits.
• Attending to the various requirements that may arise during the term of
the contract like nominations, assignment, alteration of terms, surrenders
and payment of claims.
• Other supporting activities like advertising, investment of funds,
maintenance of accounts, management of personnel, processing of data,
compliance with regulations and laws
Internal organization
Within an insurance office, the following departments are likely to exist. These
may be located in the branch office (as in the LIC now) or in the Divisional / Head
offices (as in the LIC earlier and new companies now). These departments are
to be identified by the activities being carried out, although they may be called by
different names.

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• Business development or agency or marketing concerned with the

development of agency force, market development and business growth.
• New business, which would receive, scrutinize and take underwriting
decisions on the new proposals for insurance and also issue the policy.
• Policy-holders servicing which would be concerned with administration of
the policy, monitoring premium payments, lapses and revivals, attending
to alterations, nominations, assignments, surrenders, loans and claims.
• Accounts to handle the financial flows.
The following departments are likely to be centralized in the Head Offices,
as they require specialized skills and also because they impact the whole
organization.
• Actuarial, studying the experience, doing valuations, declaring bonuses,
monitoring the adequacy of premiums, setting underwriting standards,
studying mortality rates, etc.
• Investments of funds, studying the opportunities for maximizing returns.
• Advertisement, publicity and public relations.
Departments like personnel, HRD, training, purchases (of stationery and
office equipments), administration for office upkeep, etc., will be found in all
offices, sometimes catering to that office alone or sometimes catering to the
entire organization.
The distribution system
Life insurance is not compulsory under law. General insurance is frequently
purchased due to compulsions under the law (Motor Vehicles Act) or from the
financiers demanding insurance as collateral security. In the case of life
insurance, the compulsion is negligible. There is often a tendency of deferring
the decision. Death as a practical possibility is either ignored or not considered
imminent. The requirements of today take priority over the requirements of
tomorrow. Even if not absolutely essential, the requirements of today seem to
be more compelling. Life insurance has to be secured when in the best of health.
Otherwise, the insurer will refuse to grant the insurance cover.
Agents are the ones who do the job of meeting, explaining and persuading
people. They have to be licensed under the Insurance Act. A licensed agent can
work with only one life insurer of his choice and is paid commission on the
premiums collected through his agency. Another category of intermediary is the
‘broker’. In the rest of this unit, the word ‘agent’ is used to refer to all salesmen,
whether called an agent or insurance advisor or by any other name.

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Agents are necessary for selling life insurance due to the following reasons:
• Insurance is an idea that has to be explained and its usefulness has to be
clarified personally.
• Each prospective buyer has special needs and requires specialized
solutions.
• Personalized guidance can be given only when there is a live interaction
with the agent.
• Significant amount of money is to be set aside immediately and regularly
for a long term in future, for a benefit, which is vague and far away.
• The insurer has to assess the risk involved in every proposal for insurance,
for which the necessary information would include details on personal life
styles, habits, family, etc. The agent, who gets to meet the proposer closely,
is in a position to provide some of this valuable information.
Agents have to obtain licences from the IRDA, without which they are not
allowed to procure business and to collect commission from the insurer.
Postal Life Insurance (PLI) appoints unemployed youth and extra-
departmental branch postmasters to procure business under the Rural PLI.
Retired employees of the Posts and Telegraphs department and the Railways
are employed as Field Officers, on commission basis, to procure business.
Development officers are fulltime employees, whose primary duty is to procure
business for PLI. None of them have to be licensed.
Functions of the agent
The major function of the agent is to solicit and acquire life insurance business
for the insurer, which has appointed him as an agent. While proposing a person
for insurance, the agent has to assess his needs and his paying capacity, make
all reasonable enquiries about the health and habits of the life to be insured and
get proof of his age to be admitted at the commencement of the policy. If medical
examination is required, the agent has to arrange for the same. After the proposal
becomes a policy, the agent has to ensure continuance of the policy by the
means of timely payment of renewal premiums, get nomination or assignment
effected and help in prompt settlement of claims.
Agents of the LIC are not authorized to collect premiums other than the
first premium along with the proposal. If a policyholder pays premium to an
agent, the LIC does not accept any liability for the same. The premium is treated
as paid only when it is paid into the office. However, in practice agents do collect
premiums from policyholders to ensure promptness in payment. Some agents

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may also pay the premium first, and then collect the same from the policyholder.
When he does so, he is functioning as the agent of the policyholder. The insurer
will not accept any liability for these actions of the agents.
The position is different in the PLI. Development Officers and Field Officers
of the PLI are authorized to collect first premium. Subsequent (renewal) premia
have to be paid into Post Offices. First premium will not be collected in the Post
Offices. Insurers other than the LIC may adopt different practices, like even
authorizing the agent to issue receipts on behalf of the insurer.

Self Assessment Questions

7. An ________ is a legal entity which is created to do some activity or to

achieve some purpose.
8. Scrutinizing and making decisions on the proposals for insurance is called
________.
9. ________ insurance is frequently purchased due to compulsions under
the law (Motor Vehicles Act) or from the financiers demanding insurance
as collateral security.

Activity 1
Study the life insurance plans offered by the LIC and other private insurers
in India. Prepare a report on the factors responsible for people’s preference
for the LIC life insurance plans in comparison to the ones offered by the
private insurance companies.
Hint:
1. LIC is the leading institution in the insurance sector. Its size is much
more than that of all private insurance firms. Although private insurers
are expanding their operations and are increasing their size but still are
much behind the LIC.
2. To have a better idea about the comparative strengths of the LIC plans,
visit the link http://www.scribd.com/doc/14651606/A-Comparative-
Analysis-between-LIC-and-Private-Insurance-Companies (Retrieved on
18 October 2012)

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5.5 Life Insurance Plans

Life insurance is intended to mitigate the adverse financial consequences that

may follow because a person does not live long enough or because he lives too
long. Every possible adverse consequence that requires to be taken care of
constitutes a need for insurance.
The needs of the people for life insurance can be classified according to
the following levels:

Level 5
Avoiding the loss of
wealth (assets) due
to depreciation or
inflation

Level 4
Level 1
Family: Protection Special Needs:
of the interests of Disability, accidents,
the family against expenses for
loss of income due treatment of
to death of the diseases, loss of
bread-winner income due to
sickness etc.

Level 2 Level 3
Children: Provision Old age: Post-
for higher education, retirement income
marriages, start-in for self and family/
life. dependants.

Figure 5.1 Classification of the Needs for Insurance

Usually, life insurance products are termed as insurance ‘plans’. These

possess two key elements:
(a) Death cover or risk cover: It gives the benefit of being paid on the death
of the insured person within a stipulated time period.
(b) Survival benefit: It ensures the benefit of being paid on survival over a
stipulated time period.
‘Term assurance’ plans provide death cover only. ‘Pure endowment’ plans,
on the other hand, provide survival benefits only. If the insured does not die
within the stipulated time, payment is not ensured under a term assurance plan.

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Likewise, if the insured dies within the stipulated time period, a pure endowment
plan does not ensure payment.
All insurance plans are the combinations of these two fundamental plans.
‘Whole life policy’ is a ‘term assurance plan’ with an indefinite period. It provides
for the sum assured (SA) to be paid on death, not dependent upon the time of
death. A term assurance plan in grouping with a pure endowment plan, when
provided as a single product, is known as an ‘endowment assurance plan’. Under
this plan, the SA is paid on survival till a specific time period or on earlier demise.
A term assurance plan with a pure endowment plan of double the value is termed
as a ‘double endowment assurance plan’. As per this plan, the amount payable
on survival is double the amount payable on death. A ‘money back’ or ‘anticipated
endowment policy’ is a combination of a term assurance plan for 20 years for
the entire SA and four different pure endowment plans.

5.5.1 Some Popular Plans

Term assurance plans are the cheapest form of assurance. Under these plans,
the SA is paid on the death of the insured within the stipulated time period. If
death does not occur, the insurer is not liable to make payments. Since only
death is covered, the premium is relatively less in this simple contract.
In a ‘whole life plan’ the SA is to be paid just in the case of death.
Nonetheless, dissimilar to a ‘term assurance plan’, some payment is made at
some point of time. In case of an ‘endowment plan’, the SA is paid on surviving
to the end of the specified term or on earlier death.
Term insurance plans are essential due the following reasons.
• There is a requirement for risk cover as protection against loss because
of death.
• Some terminating or temporary insurance requirements (e.g., mortgages)
can be met with terminating or temporary insurance.
• Some individuals can be adequately insured for the least amount of their
real-life values without the benefit of low-premium term insurance.
Hence term insurance fulfils the following requirements.
• The low income people can meet family obligations at lesser costs.
• People starting new careers or business can avail term insurance policies
to cut costs to use their remaining income or capital to develop their career
or business.

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• The individuals who have made huge investments in new ventures through
borrowing at high interest rates or property mortgages can cover the risk
of investment loss, in the case of untimely death, by the mechanism of
term insurance at low premium.
• Term insurance is useful as a complement to endowment or whole life
policies with the aim of availing bigger risk cover.
• The probable loss to the business due to the untimely death of an important
person on whom business success is dependent can be protected by a
term assurance policy. However, the savings factor is not substantial.
Limited payment plans
All plans except term assurance plans are the variations of the ‘whole life’ and
‘endowment’ plans. Generally, the premiums are payable till the SA becomes
payable, i.e., until a claim is put up. It is possible to limit the premium-paying
period for a shorter period. Such policies are referred as ‘limited payment policies’.
Participating policies
At the policyholder’s choice, whole life as well as endowment policies can be
made to participate in profits. These are also termed as ‘with profit’ policies.
These policies are entitled to bonuses to be declared after every valuation.
Normally, term assurance plans are not issued as participating polices,
mostly because they are issued for brief periods of one year. However, insurers
have started to insure term assurance plans for longer durations of 30 or 40
years, having uniform premium during the whole period. Under these situations,
these are not different from whole life policies. In such cases, the choice of
participating in profits is available.
Convertible plans
In ‘convertible’ plans of assurance, it is possible to convert them to other plans
after, or within, a specific period from its beginning. For example, it is possible to
change a convertible ‘term assurance’ plan into a ‘whole life’ policy or an
‘endowment’ policy within a timeframe as specified in the initial plan. Similarly, a
convertible ‘whole life’ plan can be changed into an ‘endowment’ plan. If the
choice to convert is not used, the policy stays along the original terms.
Convertible plans have the advantage that, when the option of conversion
is exercised, no further underwriting decision is made. There is no medical
examination. Hence, even though the insured might not be in a good medical

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condition at that point of time, the policy opted by him cannot be denied to him.
After conversion, there is a change in the premium to be paid for the post-
conversion period. Also, the earlier payments are not revised.
Other variations
In endowment policies, the amounts to be paid on death and on survival are not
essentially the same. There is a probability of numerous variations. Survival
benefits might be paid at intervals during the course of the term, without affecting
the SA to be paid on death. These ‘anticipated endowment’ plans are also termed
as ‘money back’ or ‘money saver’ plans. Certain endowment plans exist that
allow the availability of a death benefit once the last survival benefit is paid at the
end of the policy’s term.
A term assurance plan is an interesting plan for a particular term, at the
end of which the premiums paid till that time get refunded. However, the cover
continues for an unspecified period thereafter.
Joint life policies
Under these policies, two or more lives can be covered under one policy.
Following are the features of joint life insurances:
• A joint life declaration essentially creates a joint interest in the policy.
• In partnership insurance, the partnership deed is scrutinized to ascertain
the nature of financial interest of all the partners.
• Each life is underwritten individually.
• Bonuses accumulate just on the single basic SA.
Children plans
The lives of children, who are not adults, can be insured. In this case, the proposal
has to come from a parent or guardian.
In these plans, the risk on the life of the insured child commences only
when the child attains a particular age. There can be wide variations in practices.
Deferment period is the time gap between the date of beginning of the policy
and the commencement of risk. Suppose the child is 6 years of age at the time
of taking the policy and insurance is to start when he reaches 15 years of age. In
this case the deferment period is 9 years. Deferred date is the date of the start
of risk at the end of the deferment period. During the course of the deferment
period there is no insurance cover. The premiums get refunded if the child dies
during the course of the deferment period.

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Such policies are characterized by the conditions wherein the title is

automatically transferred to the insured child after he turns a major. The process
is referred as ‘vesting’. The policy anniversary corresponding to the age of
majority, or any later date as selceted, of the insured child is the ‘vesting date’.
Variable insurance plans
In spite of the fact that life insurance is not an investment and the condition of
return or yield being unsuitable, there is a real concern, mainly under the pretext
of inflation. The SA, viewed as sufficient presently, might achieve a much lower
value on maturity.
The Unit Trust of India offers the Unit Linked Insurance Plan (1971). It is
designed for all Indian residents between the ages of 12 and 55 planning to save
between `6000 and `75000. The amount has to be contributed in half-yearly or
annual instalments over a time period of 10 or 15 years. Individuals above 55
years can take a 10-year plan. Medical examination is not essential. A small part
of the contribution is used to ensure life cover and the rest is invested in units. If
the individual dies before the close of the plan period, the legal heirs get entitled
to the units in his credit and the amount of the insurance cover.
To a certain extent, the money-back kind of policies are advantageous for
the policyholders. The lump sum amount paid at intervals, without affecting the
amount covered by insurance, can be invested. Further, insurers have formulated
inventive plans to handle this problem of returns or yield. The technique comprised
grouping a term insurance plan with an investment plan. Unit-linked policies
issued by the LIC, called Bima Plus, are the examples of such a plan. It offered
the option of three funds (secured, balanced and risk) characterized by various
risk profiles, on the basis of the varieties of investment patterns in equities,
debts and liquid assets. The policyholder was allocated units valued on a weekly
basis.
Plans covering differently able people
There are insurance plans for the differently abled persons. In some cases there
are additional charges, such as complete deafness, loss of arms and complete
blindness. Partly handicapped individuals are generally accepted without
additional premium, except certain plans, the details of which can be availed
from the company’s underwriting departments.

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Self Assessment Questions

10. Death cover ensures the benefit of being paid on survival over a stipulated
time period. (True/False)
11. ‘Term assurance’ plans provide death cover only. (True/False)
12. _______ plans are the cheapest form of assurance.

5.6 Riders

A rider is a clause or condition added to a basic policy providing an extra

advantage, at the choice of the proposer. Some of the riders offered by the
insurers in India are:
• Increased death benefit, being twice or more than the survival benefit.
• Accident benefits allowing double SA, in case of occurrence of death as a
result of accident.
• Permanent disability benefits, providing for additional payments in the event
of loss of limbs, eyesight, hearing, speech, etc., as a result of an accident.
• Premium waiver, which would be beneficial in the case of children’s
assurances, if the parent dies before the vesting date or in the case of
permanent disability and sickness.
• Dreaded disease cover, providing additional payments (lump sum or in
instalments), if the person insured requires medical attention because of
specified conditions such as cancer, cardiac or cardiovascular surgeries,
stroke, kidney failure, major organ transplants, major burns, total blindness
caused by illness or accident, etc.
According to the regulations made by the IRDA in April 2002 and amended
in October 2002, the premium on health-related riders cannot exceed 100 per
cent of the basic premium under the policy. The premium on the other riders in
combination shall not exceed 30% of the premium of the main policy.

Self Assessment Questions

13. A ________ is a clause or condition added to a basic policy providing an

extra advantage, at the choice of the proposer.

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14. According to the regulations made by the IRDA in April 2002, the premium
on health-related riders cannot exceed _______ per cent of the basic
premium under the policy.

Activity 2
Search appropriate sources and find out the popular choices for the car
insurers in India. Prepare a list of top five car insurers in India.
Hint:
1. Car insurance is a necessary component while purchasing a car. It
covers you and your car against any damage as well as damage to the
third party.
2. To know more about the top car insurance companies in India, visit the
link http://www.carazoo.com/article/1908200901/Top-10-Car-Insurance-
Companies-in-India (Retrieved on 18 October 2012)

5.7 Summary

Let us recapitulate the important concepts discussed in this unit:

• The definition of insurable interest, which is universally accepted, but it
can be similar to the following: ‘The legal right to insure arising out of a
financial relation-ship recognised under law, between the insured and the
subject matter of insurance.’
• There are three main categories of application of insurable interest: life,
property and liability.
• The Insurance Regulatory and Development Authority (IRDA) was
established in 1999 ‘to regulate and ensure the orderly growth of the
insurance industry’. The IRDA was authorized to allow companies
incorporated in India to transact life insurance business, provided the foreign
shareholding did not exceed 26 per cent.
• The major function of the insurance agent is to solicit and acquire life
insurance business for the insurer, which has appointed him as an agent.
While proposing a person for insurance, the agent has to assess his needs
and his paying capacity, make all reasonable enquiries about the health
and habits of the life to be insured and get proof of his age to be admitted
at the commencement of the policy.

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• ‘Convertible’ plans of assurance provide that it can be converted to another

plan after, or within, a certain period from its commencement.

5.8 Glossary

• Insurable interest: The legal right to insure arising out of a financial

relation-ship recognized under law, between the insured and the subject
matter of insurance
• Organization: A legal entity which is created to do some activity or to
achieve some purpose
• Insurance agents: Those who do the job of meeting, explaining and
persuading people about insurance policies
• Rider: A clause or condition that is added onto a basic policy providing an
additional benefit, at the choice of the proposer

5.9 Terminal Questions

1. What do you understand by insurable interest? Explain the essentials of

insurable interest.
2. Differentiate between insurance and wagering.
3. What are the important activities of life insurance organizations? Give an
explanatory note on the internal organization of the LIC.
4. Discuss the role of insurance agents in the domain of life insurance in the
country.
5. Describe various types of insurance plans available to meet the various
categories of needs of the Indian people.
6. What do you understand by the term ‘rider’? Provide some of the riders
offered by the insurers in India.

5.10 Answers

Self Assessment Questions

1. False
2. Financial
3. Property, liability

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4. Wagering agreement
5. True
6. Life insurance
7. Organization
8. Underwriting
9. General
10. False
11. True
12. Term assurance
13. Rider
14. 100

Terminal Questions

1. Insurable interest stands for the legal right to insure arising out of a financial
relationship recognized under law, between the insured and the subject
matter of insurance. For more details, refer section 5.2.
2. Wagering contract is formulated in the nature of a wager. Such contracts
include a range of common forms of applicable commercial contracts,
e.g., contracts of insurance, contracts dealing in futures, options, etc. For
more details, refer section 5.3.
3. An ‘organization’ is a legal entity which is created to do some activity or to
achieve some purpose. It is created under some law, which gives it a
status and identity. For more details, refer section 5.4.
4. Agents are the ones who do the job of meeting, explaining and persuading
people. They have to be licensed under the Insurance Act. A licensed agent
can work with only one life insurer of his choice and is paid commission
on the premiums collected through his agency. For more details, refer
section 5.4.
5. Life insurance is intended to mitigate the adverse financial consequences
that may follow because a person does not live long enough or because
he lives too long. Every possible adverse consequence that requires to
be taken care of constitutes a need for insurance. For more details, refer
section 5.5.

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6. A rider is a clause or condition added to a basic policy providing an extra

advantage, at the choice of the proposer. For more details, refer section
5.6.

5.11 Case Study

Unit Linked Insurance Products (ULIP) and Regulatory Tangle

Securities and Exchange Board of India (SEBI) and Insurance Regulatory
and Development Authority (IRDA), two regulators in India have locked horns
over Unit Linked Insurance Products (ULIP). This product which was
regulated by IRDA hitherto was claimed by SEBI to be a collective investment
scheme defined in SEBI Act, and SEBI banned 14 insurance companies
from issuing fresh products in ULIP scheme without the insurance
companies issuing these products obtaining a registration from SEBI for
marketing collective investment products. IRDA on the other hand issued
directive to the insurance companies to ignore SEBI directive. The wrangle
got so murky that the Central Government had to intervene and ask both
regulators to maintain status quo till a final binding legal decision comes
from a competent legal forum. IRDA and the insurance companies have
approached various courts and the matter is pending a final decision.
President Pratibha Patil, by the Securities and Insurance Laws (Amendment
and Validation) Ordinance 2010, amended the four laws to clarify that life
insurance business shall include ULIPs or scrips or any such instruments.
The ordinance inserted an explanation to Section 2 of the Insurance Act
1938 declaring ‘life insurance business shall include any unit linked insurance
policy or scrips or any such instrument or unit, by whatever name called,
which provides a component of investment and a component of insurance
issued by an insurer . . .’
In order to remove any ambiguity, the ordinance inserted an explanation to
Section 2 of the Securities Contract (Regulation) Act declaring ‘securities
shall not include any unit linked insurance policy or scrips or any such
instrument or unit, by whatever name called, which provides a combined
benefit risk on life of the persons and investment by such persons and
issued by an insurer referred to in clause (9) of section 2 of the Insurance
Act 1938’.
In the SEBI Act, an explanation to Section 12 has been inserted to the effect
that collective investment scheme or mutual fund shall not include any ULIP

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or scrips or any such instrument or unit, by whatever name called, which

provides a component of investment besides the component of insurance
issued by an insurer.
Nullifying the SEBI’s order, the ordinance categorically declared that the
amendments made in the four acts ‘. . . shall have and shall be deemed to
always have effect for all purposes as if the provisions of the said acts, as
amended by this ordinance, had been in force at all material times...’
In order to sort out the jurisdictional issues regarding hybrid products – like
insurance and mutual fund – a high level committee under the chairmanship
of finance minister has been constituted.
Discussion Questions
1. What were the basic reasons for causing a rift between Securities and
Exchange Board of India (SEBI) and Insurance Regulatory and
Development Authority (IRDA) regarding Unit Linked Insurance Products
(ULIP)?
2. State the actions taken by the Central Government to remove this logjam
between the two regulators.
Source: http://www.policymantra.com/blog/tag/unit-linked-insurance-plan/
(Retrieved on 19 March 2013)

References
• Sadhak, H. 2009. Life Insurance in India: Opportunities, Challenges and
Strategic Perspective. New Delhi: Sage Publications.
• Ray, R.M. 1982. Life Insurance in India: Perspectives in Social Security.
New Delhi: Indian Institute of Public Administration.
• Bawa, Sumninder. 2007. Life Insurance Corporation of India: Impact of
Privatization and Performance. New Delhi: Regal Publications.
E-References
• http://www.lifeinscouncil.org/ (Retrieved on 27 November 2012)
• http://tips.thinkrupee.com/articles/life-insurance-policies-in-india.php
(Retrieved on 27 November 2012)
• http://business.rediff.com/report/2009/may/15/perfin-types-of-life-
insurance.htm
• http://www.licindia.in/ (Retrieved on 27 November 2012)

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• http://zeenews.india.com/business/insurance-news/policy-holders-need-
safeguards-in-new-life-insurance-norms-experts_61651.html (Retrieved
on 27 November 2012)
• http://www.policymantra.com/blog/tag/unit-linked-insurance-plan/
(Retrieved on 19 March 2013)

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