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IC-33 LIFE INSURANCE EBOOK

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The rapid expansion of the life insurance profession in India over recent years has . The IC Pre-recruitment qualication for life agents syllabus covers the. PRACTICE QUESTIONS AND ANSWERS. IC LIFE INSURANCE. Question 2. The measures to reduce chances of occurrence of risk are known as _____. The IC course material which is being published by Insurance Institute of India contains all the knowledge that a Life Insurance Agent needs to be equipped.

It has enabled families and individuals to protect themselves against some of lifes most serious risks, and to plan for their nancial security in retirement. However, the sector does not have an unblemished record. There have been high prole situations where, frankly, the consumer interest has been a second-tier priority. The future success of the life insurance profession depends, above all, upon the knowledge and integrity of the people who advise customers and are their rst, and most important, point of contact. At the IRDA, our goal is to see life insurers increasingly able to attract, motivate and retain outstanding people, committed to providing a needs-based approach to nancial advice. This new coursebook, and the revised qualication that agents now sit, is a vital part of our strategy. We have developed a syllabus that is challenging in its scope and depth.

If we could know in advance that an event is going to take place we could plan to prevent it or overcome it, and thereby limit or even remove the risk involved. As a general principle insurance is only available for risks that are uncertain. This statement raises a question: So how can this statement be true? It is true because, although we will all die one day, when we will die is uncertain. It is the uncertainty about the timing of death that makes death insurable. Once the timing of death becomes certain, when an individual is suffering from a fatal disease, for example, then an insurance company will not cover the risk.

The following case studies show how this works. Case studies 1.

Ic-33 life insurance ebook

Rishbah Agrawal is a year-old businessman who leads a healthy lifestyle. Every morning he practices yoga and abstains from smoking, tobacco and alcohol. There is a family medical history of diabetes and both his parents suffer from it. But Rishbah Agrawal himself has not been diagnosed with diabetes. Can Rishbah be provided with life insurance? The answer is Yes, because Rishbah maintains a healthy lifestyle and he has not been diagnosed with any disease. The timing of his death is uncertain.

Rakesh Sharma has been diagnosed with a brain tumour at a very advanced stage. The doctors know that they cannot save him and sadly Rakeshs death is almost certain in the near future. Can Rakesh Sharma be provided life insurance? The answer is No, life insurance companies will not take the risk of providing insurance cover for Rakesh as his death in a very short time span is almost certain. B2 Level of risk We know that there is a greater likelihood of some things happening than others and this affects the level of risk involved.

The level of risk is normally assessed in terms of the: Frequency The probability that a certain person will die within one year is calculated by actuaries, from the past data collected, and is made available as mortality tables. This allows insurance companies to determine the probability of a particular event, such as death, occurring under various circumstances. The probability of risk to life for individuals will differ on the basis of their age, medical wellbeing, family medical history, lifestyle, job prole etc.

The mortality rate is the chance of dying at a specied age based on the proportion of deaths among a specic number of a sample population. Example Lets look at two different groups of people. The rst group is aged Of these one person dies before the age of The second group is aged The frequency of death in the second group is therefore greater than in the rst group. Severity Insurance companies attempt to determine the amount of claims they would experience if the insured events were to actually occur based on the likely severity of the losses.

Be aware Life insurance companies determine the level of risk based on past data claims experience. If the past data indicates that individuals within a certain age group say, are more prone to heart attacks, then the level of risk will be considered to be higher for that age group. The total insurance claim for Air India is expected to run into crores of rupees for the plane crash victims. The nature of airline insurance can be categorised as low frequency but high severity impact since the probability of an air crash is low, but when it does occur, the extent of the loss is very high.

B3 Peril and hazard This is the nal aspect of risk and relates to the cause of losses.

Peril refers to a specic event which might cause a loss. This loss can be loss of life or loss of property. Natural disasters such as earthquakes, storms, oods etc. Perils are the risk being insured against, e. A hazard, on the other hand, is a condition that either increases the chance that a peril will happen or may cause its effect to be worse if it does. Be aware A hazard inuences the operation of the peril.

Example If lung cancer is a peril then smoking can be a hazard that may increase the chance that the peril lung cancer will occur. Case study On 26 January one of the worst earthquakes in Indias history hit Gujarat. Thousands of people lost their lives in this tragic event. Lakhs of people were injured and property worth thousands of crores of rupees was destroyed. The epicentre of the earthquake was located northeast of Bhuj Town in Western Gujarat.

In this case the earthquake was the peril and the poorly constructed houses and schools which were not earthquake resistant and easily collapsed were a hazard. Similarly in the event of a tsunami such as the one that happened on 26 December leading to widespread loss of life and property, the tsunami will be the peril and imsy houses and buildings constructed near the seashore which are washed away causing their occupants to drown will be a hazard.

Remember that while insurance cannot prevent the peril from happening, the resulting loss from the occurrence of the peril can be insured against. Types of hazard Hazards can be categorised into one of the following types: Physical hazards Moral hazards Refer to the dimensions and physical characteristics of the risk.

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Refer to the habits and activities of the individual that increase risks. They may also arise from a state of mind, i. This categorisation also extends to the assets owned by the policyholder if they wish to insure them as well.

Some of the hazards that would cause an individual to be categorised as high risk are: Risky job prole: For example, a person working in a chemicals factory, explosives factory, underground mine etc. Existing medical conditions: Lifestyle of the individual: In contrast, an individual who is a heavy smoker or drinker has a higher exposure to risk. Age group of the individual: If the individual is categorised as high risk, insurance companies can either accept or reject the proposal.

High risk proposals can be accepted on other than standard terms such as charging a higher premium, imposing restrictions on the sum insured, term or a lien etc. We will look at this topic in more detail in chapter 4.

Think Identify any three perils that can happen in an individuals life. What are the hazards that might give rise to these perils? Question 2. C Insurable risks The following types of risk can be insured against: C1 Financial risks The outcomes of risks that can be measured in monetary terms are known as nancial risks.

Some of the nancial risks for which an individual needs to plan are as follows: Loss of life this refers to risk of death of the income provider of the family with unfullled nancial liabilities.

To p ov de a sleadv sou ce ol ucome lo depeudauls alle dealH. To He p depeudauls u lu h uu va ous huauc a ab l es sucH as a home loan, car loan etc. Savings accumulation To p ov de lo cH d eu's H uHe educal ou. Retirement this refers to the risk of insufcient income following retirement. To accumu ale sulhc eul cap la lo ve comlo lab v posl- el emeul. To p ov de a sleadv sou ce ol ucome posl- el emeul. He is married with two children. His wife Kavya is a housewife.

His elderly father, Suhas, also lives with them. Suhas Mishra is a farmer and owns a small piece of farmland. However, income from the farmland is not sufcient to help him meet his expenses, hence he is reliant on Raghav.

Being the main earning member of the family, Raghav has a considerable responsibility to provide for different contingencies in the future, such as: Loss of life Raghav needs to make sure that his wife, children and father are able to have a steady source of income in case something happens to him. This income should be sufcient to meet liabilities such as daily living expenses, childrens school fees, managing his fathers medical expenses etc.

To protect against this, he should have sufcient funds for meeting medical expenses and also routine living expenses. Savings accumulation Raghav should make sure that his childrens education is not affected due to a shortage of funds.

He therefore needs to save for his childrens higher education and marriage expenses. Retirement Raghav needs to make sure that he receives a steady source of income post-retirement which should be sufcient to meet his medical and other living expenses. C2 Pure risks Pure risks are those risks where there is no possibility of making a prot.

In pure risks there can be a loss and the best possible outcome is one of breaking even. With a pure risk the possibility of any benet occurring as a result of the insured event taking place is nil.

This type of risk is associated with those events which are totally out of the control of an individual. C3 Particular risks Particular risks are personal or local in their effect. The consequences of these risks occurring affect specic individuals or local communities.

D Risk transfer As we saw in chapter 1, the primary function of insurance is to transfer the risk from an individual to an insurance company.

The insurance company which bears the risk is known as the insurer and the individual who transfers his risk is known as the insured. Risk transfer provides a sense of nancial security to the insured in that if anything happens to them or their nancial assets, the losses would be compensated for by the insurance company as per the policy terms and conditions.

Against this transferred risk, the insured will have to pay a certain amount consideration to the insurer, which is known as the premium. E Pooling of risks Pooling of risks is one of the fundamental principles of insurance.

With pooling of risks an insurance company pools the premium collected from several individuals to insure them against similar risks.

The insurance company maintains different sets of pools for different risks. Example Separate pools will be maintained by insurance companies for: When there is a claim to be settled it is paid out of this pool. The insurance company has to make sure that the premium that is collected is enough to meet the claim payments. The premium that is charged by the insurance company should also be sufcient to meet the administrative and other expenses for maintaining the pool.

The insurance company includes a certain percentage of the prot in the premium as well. Can the same pool be used for car insurance and life insurance for claims payment? E1 Law of large numbers Insurance companies apply the law of large numbers to determine the cost of total annual claims.

Insurance companies determine the probability that a certain amount of claims will have to be paid by them if a large number of people are insured for a similar risk. An insurance company will set the rates of its premiums according to the number of claims it will expect to pay over the term of the policy.

Concept of risk lu usu auce. Components of risk Compoueuls ol s uc ude uuce la ulv. Pe ele s lo a spec hc eveul wH cH m uHl cause a oss. Insurable risks R s s. Pooling of risks Au usu auce compauv poo s lHe p em um co ecled l om seve a ud v dua s lo usu e lHem aua usl s m a s s. Perils are the risks being insured against, e.

A hazard inuences the operation of the peril. To p ov de a sleadv sou ce ol ucome lo lHe depeudauls alle dealH. To He p lHe depeudauls u lu h uu va ous huauc a ab l es sucH as Home oau. To secu e lHe ud v dua huauc a v. The insurance company maintains different sets of pools for different types of risks.

The pool account for life insurance will be maintained separately from the pool account for car insurance. The pool account for one risk cannot be used to settle the claim for another type of risk. List the main components of risk. List the types of risks that can be insured. The main components of risk are: The following types of risks can be insured: Insurance principles Part 2: Insurance principles Contents Syllabus learning outcomes Learning objectives Introduction Key terms A Essentials of a valid contract of insurance 3.

In this chapter we will learn what the essential features of a valid contract are, including some unique principles that apply only to contracts of insurance. Offer and acceptance Consideration Consensus ad idem Insurable interest Key person insurance Utmost good faith Duty of disclosure Material facts Ab initio Indisputability clause Indemnity Capacity to contract Contract of indemnity Value contracts A Essentials of a valid contract of insurance An insurance contract is an agreement, enforceable by law, between the insurance company and the insured person; the insured person agrees to pay a premium to the insurance company and the insurance company agrees to pay a sum of money, on the happening of a specied event, to the insured person.

How do both parties enter into this legally binding agreement and what conditions must be satised by both parties to ensure that the contract is a valid one? To answer these questions, we will rst look at the essential features of a valid contract, and then we will move on to see how an insurance contract differs from other contracts.

A1 Features of a valid contract The following features are essential if a legal contract is to be valid: Figure 3. Chapter 3 Part 1: It is easier to see how unconditional acceptance works by looking at an example.

Lets consider the following conversation: Example ABC insurance company: On the basis of your proposal form we can offer you cover, with a sum insured of Rs. Ganesh, the proposer the person who wants to take out the insurance: I accept. In this example, Ganeshs acceptance does not alter any of the terms of ABCs offer and the acceptance is said to be unconditional.

A contract is formed, subject to the other essential elements being present. Now, consider an alternative response by Ganesh: I accept, but I would like to increase the sum insured to Rs.

In this case, a contract has not been formed as Ganesh has not unconditionally accepted the offer. Not until ABC accepts Ganeshs counter-offer, without further conditions, is a contract formed. A1B Consideration A contract must be supported by consideration in order to be valid. Consideration may be described as each persons side of the bargain which supports the contract. Consideration in contract law is merely something of value that is provided and which acts as the inducement to enter into the agreement.

The payment of money is a common form of consideration, although not the only form. In terms of insurance policies, we refer to the premium as the insureds consideration.

A1C Capacity to contract Persons entering into contracts should be competent to do so. An individual is said to be competent to enter into a contract if they are: In addition, people who are legally considered to be of unsound mind and any person who has been barred by law cannot enter into an insurance contract. Any contracts entered into by the above people will be null and void. A1D Consensus ad idem In simple terms this means both the parties to the contract must understand and agree upon the same thing, in the same sense.

The proposer should have understood the features of the insurance policy in the same sense manner in which it was explained to them by the agent. A1E Legality of object or purpose The objective of both the parties to the contract should be to create a legal relationship. The purpose of the contract should also be legal. Example It is illegal for a husband to insure his wifes life, and then to kill her and present it as a case of accidental death in order to benet from the claim amount that he will receive as the legal beneciary.

Insurance cannot be used for illegal purposes or to derive monetary benets from it. Another example of an illegal act is a person who is heavily in debt, taking out life insurance for a large amount and then committing suicide so that their family can benet from the claim money.

Claims for death due to suicide in the rst year are excluded by most life insurance companies. For example, a person requesting life insurance for a very high amount should be capable of paying the premium required. The agreement and its term must be certain and capable of performance and in a form that complies with the requirements of the laws of the land.

Consider this Jigar makes a proposal to an insurance company for life insurance cover of Rs. During the medical check-up the company nds out that Jigar is suffering from a disease and considers that he presents a higher than normal risk.

The insurance company therefore tells him that the premium chargeable will be Rs. How will you treat the above scenario in terms of offer and acceptance? Question 3. A2 The policy document In order that both the insured person and the insurance company are clear as to the terms that have been agreed between them, a policy is issued. The policy contains all the details of cover, period of cover, exceptions, conditions, the premium and other relevant information.

The policy is not the contract of insurance in itself; rather, it is evidence of the contract. The contract of insurance comes into effect once the insurance company has accepted the insurance proposal, terms have been agreed and the premium has been paid or agreed to be paid. Thus, the contract exists irrespective of the existence of an actual policy document. The absence or loss of the policy does not invalidate the contract, but the policy is useful as proof in the event of a dispute over the terms agreed.

We will examine the structure and contents of the policy in detail in Part 2 of this chapter. A3 The role of insurance agents in insurance contracts In the eyes of the law, anyone who acts on behalf of another person is an agent.

If we allow someone to act for us, we probably have to accept responsibility for whatever is done by them on our behalf within the terms of the arrangement.

This is true in insurance, and whenever there is the involvement of an intermediary, legal relationships are set up. We saw in chapter 1 that there are different types of intermediaries involved in the insurance industry and that the term agent is applied to a licensed intermediary hired by an insurance company to sell that companys products on its behalf. In doing so the intermediary becomes the legal agent and is deemed to be acting on behalf of the principal in this case, the insurance company.

Be aware You will also remember from chapter 1 that certain intermediaries called composite brokers are independant advisers. Their legal status is complicated because they do some things on behalf of their client and some on behalf of the insurer, and so they can be deemed to be both the agent of the insured and the agent of the insurer depending upon the nature of the function they are performing.

Be aware Insurance contracts are specialised contracts and are subject to additional principles as well as the essentials of a valid contract described above. We will now look at these additional principles in the following section. B1 What is insurable interest? The following case study will help you to understand the meaning of insurable interest: Case study Ganesh is a year-old man working for a multinational company MNC.

Ganeshs wife works for a domestic rm and she is a co-applicant in the loan on their home together with Ganesh. Whilst Ganesh has a well-paid job, as well as managing the monthly living expenses he has a running home loan and a car loan to take care of. Ganesh has worked hard to build these assets. So far everything has been going as Ganesh has planned. Imagine, however, the following scenarios: Scenario 1: Ganesh meets with an accident and is hospitalised for a month.

Scenario 2: Ganeshs wife dies unexpectedly. Let us have a closer look at the above scenarios and the possible solutions. Ganesh will not be able to work for at least a month. He will not receive a salary for that time and will also have to pay his hospital bills which could be very costly. To avoid this situation Ganesh should ensure that he has adequate health insurance to cover him against unexpected medical emergencies and to cover him against loss of pay if he is absent from work due to medical reasons.

Ganeshs wife, apart from contributing to the family income, also takes care of the family. Following her unexpected death, Ganesh will face nancial difculties in repaying the home loan and meeting other nancial commitments. To protect against the above scenario Ganesh can take out life insurance on his wifes life which will pay out in the event of her unexpected death, thus ensuring that the familys nances are not put in jeopardy.

Ganeshs wife can also take out life insurance on Ganeshs life which would pay out on his unexpected death. You will see from these scenarios that if either of the events happen, Ganesh and his familys nancial position will be adversely affected unless he has taken out insurance. Consider this How do these scenarios help us to understand insurable interest? Insurable interest is said to exist when an individual stands to gain or benet from the continued existence or well-being of another individual s or property, and at the same time the individual would suffer a nancial loss or inconvenience if there is damage to the other individual s or property.

We can see from the case study that Ganesh has insurable interest in his own good health and the life of his wife because he benets from the well-being of them, and he would be nancially adversely affected should there be damage to either or both of them. B2 Relevance of insurable interest Now that you know the meaning of insurable interest, you must be wondering what is the relevance or importance of insurable interest in insurance?

Insurable interest is a very important principle of insurance. In order to take out any kind of insurance, an individual has to have insurable interest in the subject matter they wish to insure. The subject matter is the item or event insured and can be a persons own life, the life of others or property. Insurable interest forms the legal basis for deciding whether insurance can be taken out or not.

To summarise: Insurable interest is the legal right of the person to insure the subject matter with which they have a legal relationship recognised by law. By common law, insurance interest is deemed to exist in the following circumstances: Own life: Example Ganesh can take out life insurance for an amount equal to the present value of his future earnings. Alternatively, he might assess how much would be needed to take care of all his liabilities in his absence such as the home loan, car loan, his familys living expenses etc.

Another method that can be used to calculate the amount of life insurance needed is to use a multiple of annual income, say, 15 times annual income or even 20 times annual income. Both benet from the well-being of each other and each would be adversely affected if something were to happen to the other. So a husband can take out life insurance cover for his wife and vice versa.

Children can also take out insurance for their parents when the parents are dependent upon them. Ganesh can, therefore, take out life insurance for his children. Similarly Ganeshs children can take out health insurance for Ganesh in his old age when he may be dependent on his children.

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Example If Ganesh has borrowed Rs. This is because if something happens to Ganesh then Kailash will not be able to recover his Rs. So in this case Kailash can take out life insurance on Ganeshs life for up to the loan amount of Rs. Employee employer: Employer employee: Keyman insurance: The company can take out keyman insurance on the lives of such people. In the event of a claim, insurable interest may or may not exist and is not required to be proved.

In the case of general insurance, insurable interest must exist at the time of inception of the policy and also at the time of making a claim. Different rules apply to marine insurance where insurable interest need only exist at the time of the claim. C Utmost good faith Utmost good faith must also exist for a contract of insurance to be valid.

C1 Importance of utmost good faith The following scenario will help you to understand the principle of utmost good faith: Scenario Rajesh had taken out a term insurance policy of Rs. While returning home from the ofce one day, Rajesh had a road accident and sadly died. Rajeshs wife Komal as the policy nominee made a claim with the insurance company.

To Komals surprise the insurance company rejected the insurance claim. Komal was obviously very distressed and asked for an explanation for the rejection of the claim. The insurance company had found out in its investigation that Rajesh had manipulated his proof of age documents and, in order to benet from a lower premium, declared his age to be ve years younger than he actually was.

Rajesh had deliberately misled the insurance company to obtain the insurance policy at better terms. Due to this the insurance company declared the policy null and void and rejected the claim made by Rajeshs wife. The proposer knows all the facts about themselves and has the moral responsibility to disclose all true information at the time of completing the insurance proposal form and submitting proper documents. The age of a person is a vital criterion in deciding the premium pricing of a life insurance policy which is what Rajesh manipulated.

In many contracts for the purchase of a tangible product, each party can examine the item. Provided that one party does not mislead the other party and answers questions truthfully, there is no question of the other party avoiding the contract.

In the case of buying a refrigerator, its features can be examined and switched on to check that it works properly. The rule governing the sale and purchase of goods and services is caveat emptor, or let the buyer beware. But insurance cannot work like this.

We can read the policy but the only point at which we will nd out how it works is when a claim is made. There is nothing to touch or see. Equally the insurance company is relying entirely upon the proposer for much of the information that it will use to decide whether it wants to accept the risk, and if it does, on what terms. The above scenario shows that the intentional suppression of a material fact is not permissible. That is why a different set of rules apply to insurance contracts and a higher duty is required called utmost good faith.

C2 Denition of utmost good faith We can dene utmost good faith as: A positive duty voluntarily to disclose, accurately and fully, all facts material to the risk being proposed, whether requested or not. This means that the parties to a contract must volunteer material information before the contract is concluded. The principle applies equally to both the proposer and the insurer throughout the contract negotiations, but the law sees the proposer as the main supplier of material facts to the contract.

We shall be explaining what material facts are in section D. Breach of the duty of utmost good faith Breaches of the duty of utmost good faith can be categorised as: Non-disclosure, or the omission to disclose a material fact, either inadvertently or because the proposer thought it was immaterial. For example, Ajay, while applying for life insurance with Company ABC, does not disclose that he had undergone surgery during his childhood.

He feels it is immaterial to disclose this information to the insurance company as the surgery was done during his childhood, some 15 years ago, and he had completely recovered from the incident a long time ago. For example, Ajay consumes alcohol regularly. However, before applying for life insurance he does not consume alcohol for a month, thinking that by doing so it will not be detected during the medical test and he will get insurance at better terms.

Fraudulent misrepresentation or statements made with the intention of deceiving the insurer. For example, Ajay declares his age to be ve years less than he actually is. To support this he forges the proof of age documents and submits them to the insurance company to get insurance at better terms.

Innocent misrepresentation or inaccurate statements which are believed to be true. C3 Duty of disclosure As we have explained, there is a duty to disclose material facts implicit in all insurance negotiations; this is particularly important at the proposal stage, before the contract comes into existence. The duty of disclosure is revived at each renewal date.

Insureds duty of disclosure It is important that the proposer makes full and complete disclosure of all the material facts relating to the contract since, in the vast majority of cases, the full circumstances of the subject matter are only known to the proposer. The insured should also act towards the insurer in good faith throughout the duration of the insurance contract.

THe p opose musl dec a e lHe co ecl aue aud suppo l l w lH p ope p ool ol aue documeuls. Insurers duty of disclosure The insurer also has a duty of disclosure to the insured. In order to full this duty, the insurer must also behave with utmost good faith. Examples THe usu e sHou d ma e su e lHal l d sc oses a ulo mal ou e aled lo lHe usu auce p oducl u a ls le alu e. Think about some other instances where there might be a duty of disclosure on the insurer towards the insured.

Or Search the internet for some cases or examples where the insured has not followed the duty of disclosure and their claims have been rejected by the insurer on the grounds of non-disclosure. Study the reasons for such a rejection of claims. From the above denition we can see that material facts are important because they help the insurance companys underwriter to decide two things: If the proposer is in any doubt about facts which may be considered material, they should disclose them, regardless of whether there is a specic question on the proposal form.

This is because the proposer alone is in possession of the full facts and these must be presented to the insurer when the insurer is underwriting the business. Any facts which render the risk greater than normal are clearly material, as are those that explain the exceptional nature of a risk, or suggest some special motive for insurance.

D2 Consequences of non-disclosure If the insured is in material breach of the duty of disclosure, the insurer may avoid the contract entirely, ab initio from the beginning. In other words, no claims are payable. If the non-disclosure is fraudulent often termed concealment the insurer may keep the premium. The legal rule is that non-disclosure arises and gives grounds for avoidance by the second party to the contract the insurer where a fact is: D3 Indisputability clause section 45 As specied in section 45 of the Insurance Act, in the rst two years of the policy, if the insurance company comes to know that some material fact has not been disclosed by the proposer, it can declare the policy to be null and void.

The insurance company can also keep all the premiums paid. This right can be enforced by the insurance company only during the rst two years of the policy. After two years, fraud must be established by the insurance company if it wishes to make the policy void. This clause is referred to as the indisputability clause and applies to life insurance.

D4 Life insurance: Be aware In the event that a lapsed policy is revived, the insurance company may ask the insured to disclose all material facts along with proof of continued good health. More details about policy lapse and revival are discussed in Part 2 of this chapter.

Arjun took out a whole of life policy from an insurance company at the age of At the time of completing the proposal form Arjun declared all the material facts. Five years later Arjun is diagnosed with diabetes.

Even if Arjun does not disclose this fact to the insurance company it will not affect his policy cover in any way as it happened ve years after the policy cover had started. If Arjuns policy lapses and he revives the policy then, at the time of reviving it, the insurance company may ask him to disclose all material facts again.

At the age of 35 Arjun wants to take out another policy term insurance but he is now a diabetic. This time while making the proposal, in accordance with the principle of utmost good faith, Arjun will have to disclose that he is suffering from diabetes. Based on the disclosures made by Arjun, the insurance company will assess his proposal and may decide to accept or reject the risk.

If the company decides to accept the risk it will advise Arjun of the premium it requires. If Arjun does not disclose that he is suffering from diabetes and the insurance company nds out about this fact 6 months later, it may declare the policy to be null and void and keep all the premiums paid by Arjun to date.

E Indemnity Indemnity can be dened as: In short, this means that in the event of a loss the insurance company indemnies compensates the insured for the loss they incur, under the terms and conditions of the policy. Example Suresh has taken out an individual health insurance policy with a sum insured of Rs.

Suresh falls ill and has to be hospitalised, resulting in a hospital bill of Rs. So in this case the insurance company will compensate indemnify Suresh with Rs. Insurance cannot be used to make a prot The principle of indemnity makes sure that the insured is compensated only to the extent to which they have suffered a loss. Thus the insured cannot prot from insurance.

Example Rajesh has taken out an individual health insurance policy with a sum insured of Rs. Rajesh also has health cover of Rs.

Rajesh falls ill and has to be hospitalised, resulting in a hospital bill of Rs. So in this case Rajesh cannot make a claim of Rs. Rajesh will get a total claim of only Rs. So the principle of indemnity ensures that insurance cannot be used to make a prot. It also makes sure that neither the insured benets at the cost of the insurer, nor that the insurer benets at the cost of the insured. E1 Indemnity and life insurance General insurance policies and health insurance policies are contracts of indemnity whereby the insured is compensated for the loss incurred in line with the principles explained above.

But the same does not apply to life insurance. Example If Ajit has taken out an endowment policy of Rs. Therefore life insurance contracts are also known as value contracts and the principle of indemnity does not apply to them. In the case of life insurance, even if a person takes out multiple policies, the insureds death will result in all the insurance companies paying the full sums insured.

In the event of his death, within the policy term, both insurance companies will pay Manishs nominee. So Manishs nominee will get a total insurance amount of Rs. Insurable interest lusu ab e ule esl s lHe eua uHl ol a pe sou lo usu e a subjecl malle wH cH cau be lHe owu le. Utmost good faith lu au usu auce coul acl bolH pa l es lo lHe coul acl musl acl u uood la lH.

THe e s a dulv lo d sc ose male a lacls mp c l u a usu auce ueuol al ous, lH s s pa l cu a v mpo laul al lHe proposal stage, before the contract comes into existence. THe e a e some lacls. Indemnity ludemu lv meaus p ac uu lHe usu ed u lHe same huauc a pos l ou alle lHe oss. Cous de al ou. Capac lv lo coul acl. Consensus ad idem. Leua lv ol objecl o pu pose. Capab lv ol pe lo mauce. Self-test questions 1.

Dene utmost good faith and explain the meaning of it. What is indemnity? Utmost good faith can be dened as: Indemnity can be dened as: This means that in the event of a loss the insurance company indemnies compensates the insured for the loss they incur, under the terms and conditions of the policy.

Insurance practices Contents Syllabus learning outcomes Learning objectives Introduction Key terms F How insurance policies are bought and written 3. In this second part we are going to build on this by looking at how insurance, and life insurance in particular, is bought.

We will do this in two ways. We will rstly look at the key documents that anyone who has insurance will become familiar with, and discuss their importance. These documents will be exchanged between the insurance company and the policyholder during the policy term. Secondly, we will look at some of the important terms used in life insurance that you will need to be able to explain to your clients.

To put these topics into their proper context we will begin by giving a brief overview of how insurance is bought and written. Assignment Cancellation Lapse Premium receipts Assignor Cooling-off period Nomination Policy document Assignee Conditional assignment Notices Prospectus Absolute assignment Exclusions Paid up value Revival Appointee Endorsements Proposal form Surrender value F How insurance policies are bought and written We have already established in earlier chapters why an individual should have insurance, what insurance is and the principles behind it.

So, how does an individual go about buying an insurance policy? Well, rst of all they will need to have heard that insurance is available. F1 Source of preliminary information Insurance companies spread awareness of, and generate interest in, their products through mass media advertisements.

As we will see later section G5C , the IRDA has issued specic guidelines on what prospectuses and advertisements issued by insurance companies should say. An individual may conclude from this information that they need insurance and approach the company or one of its agents. We will look at prospectuses in more detail in section G5C. Alternatively, an individual may be approached by a life insurance agent who will introduce them to the products of the life company they represent.

F2 Purpose of buying insurance Insurance should be bought by a person based on their needs. There are many insurance products available in the market, and which to buy should be decided after careful consideration.

Based on their requirements, an individual may choose to purchase a whole life insurance policy, an endowment policy, a money-back policy, a child plan or a retirement plan etc. We shall look at these products in detail in later chapters.

F3 How life insurance is written Most policies are written on what is known as a single life basis, with only one life insured. Usually, but not always, the person taking out the policy and the life insured are one and the same person. This is known as an own life policy. Policies can also be taken out jointly by two insureds for example a husband and wife can take out one policy, with both being the policyholder and the life insured.

This is known as a joint life policy. F4 Proposal form Advertisements and the prospectus are the means by which insurance companies invite proposals. The person seeking insurance is called the proposer they are proposing themselves for life or indeed any kind of insurance.

The proposer will complete the proposal form and submit it to the insurance company. The information in the proposal form is evaluated by underwriters who will then choose to accept or reject the proposal, or to accept it on modied terms.

We will look at what the proposal form looks like and its importance in section G1. Chapter 3 Part 2: It will often be held open for a set period, during which the proposer can choose to take the policy or decide that it is not for them.

If the proposer accepts the quotation, then the insurance company is bound to the terms and price that were offered in it. However, if a material fact relating to the proposer changes during the period of the quotation, then the insurance company is not bound to it.

F6 Insurance contract An insurance contract commences from the date on which the insurance company issues the rst premium receipt see section G3A. The policy document can be sent later see section G4. If a person dies before the issue of the policy document, but after the issue of rst premium receipt, the insurance company is liable to pay the death claim. F7 Renewals Life insurance policies are long-term policies, running for a set period of often many years.

Health insurance policies on the other hand, issued by non-life companies, are short-term policies that run for only one year. At the end of the year the policyholder is advised to renew the policy so that they do not lose the benet of the protection that the insurance provides, and also because the insurance company will not want to lose the customer.

The insurance company will therefore invite the policyholder to renew their policy. We will look at renewal in a little more detail later in the chapter. F8 Summary Now that we have set the scene by giving an overview of how insurance is bought, we can build on this knowledge by looking at the documents that are necessary in insurance and at some of the technical terms used in them.

To put all this into a practical context we will follow the case study of Nitish Sharma and his life insurance agent, Mr Kumar. Case study Nitish Sharma has just been appointed to the position of lecturer in a degree college. He is 28 years old and is married to Sumedha who is a housewife. One day he is approached by an insurance agent, Mr Kumar.

During their conversation, Mr Kumar demonstrates to Nitish his need for life insurance. Nitish says that he has already been thinking about this as he recently saw a prospectus issued by a life insurance company and so he agrees to purchase an insurance plan. G Key documents There are many important documents associated with insurance we have already been introduced to some of them in the previous section.

These documents provide information on the insured and on the insurance itself and sometimes provide proof that the insurance exists and, when it comes to making a claim, that a loss has occurred.

We will look at what these documents are in this section. G1 Proposal form The rst thing that Mr Kumar does on hearing that Nitish has seen the advantages of having life insurance and is willing to buy a policy, is to give Nitish a proposal form to complete.

Case study When Nitish looks at the proposal form, he is perplexed at the amount of information that it asks for. He wonders why he needs to ll in a proposal form when he is already prepared to pay the price to purchase the insurance plan.

He also makes the comment that this is all very well for him, as an educated man, but what if he had been illiterate could he still buy an insurance plan? Let us look at how Mr Kumar would answer Nitishs questions. The proposal form or application form is the rst document that the proposer needs to ll in and submit to the insurance company.

In our case study Nitish is the proposer. The proposer should ll in the proposal form themselves in their own handwriting. However, there can be a few exceptions to this, for example where the proposer is illiterate or does not understand the language used in the form.

Care therefore needs to be taken to ensure that the proposer is fully aware of and is in agreement with the purchase of the insurance plan. Therefore it is important that the information provided by the proposer is correct.

You should think back to the importance of utmost good faith and the relevance of material facts in the rst part of chapter 3. The insurance company collects the following information through the proposal form: He uHl.

G1A Declaration in the proposal form At the end of the proposal form there is a declaration for the proposer to sign. By signing this declaration the proposer states that the information they have provided in the form is correct and that they have fully understood the questions before answering them. The signing of this declaration is important. By agreeing to this declaration the proposer is recognising that: What about Nitishs question about illiterate proposers how can they complete a proposal form and sign the declaration?

If the proposer is illiterate, then an impression of the left thumb is taken and a third party has to attest the thumb impression. The person third party attesting the thumb impression has to declare that they have fully explained the questions to the proposer, in their language, and that they have correctly entered the answers after consulting the proposer.

In this case the address of the declaring person may also be taken. Sometimes the proposers language will be different to that of the proposal form.

In these cases, where the proposer completes the proposal form and also signs the declaration in their own language, then the proposer has to declare, in their own handwriting above their signature, that all the questions were explained to them and that they answered them only after fully understanding them.

This proposal form and the proposers signature of the declaration will form the basis of the insurance contract and so are very important documents legally.

This is why it is so important that the proposer understands the questions and answers them truthfully. Example Rakesh Chawla is an illiterate person. He is 48 years old and only speaks and understands the Hindi language. He has decided to purchase a life insurance policy, for which he contacts a life insurance agent.

The agent provides Rakesh Chawla with the form which he needs to ll in. The form is in English and Rakesh is not well versed in this language. So the insurance agent advises him to ask his friend Nilesh Tandon, who is a school teacher and well versed in both Hindi and English, for help with lling in the form.

Nilesh Tandon agrees to ll in the form on behalf of Rakesh. He explains each question one by one to Rakesh in Hindi and duly records the answers provided by Rakesh on the form. Once the form is complete, Rakesh Chawla needs to put his thumb impression on the form, declaring that he has understood all the questions and given the answers accordingly.

Nilesh Tandon also signs a declaration provided in the form to conrm that the questions in the proposal form have been explained to the proposer, in a language that he fully understands, and the answers have been recorded accordingly. Nitish says that he will have to look for this are there any other documents that he can submit as proof of age and why does he need to prove his age anyway? Age is one of the factors that insurance companies use to determine the risk prole of the proposer and thus the premium amount to be charged.

This is why it is important that insurance companies verify the correct age of the proposer. Documents that can be accepted as valid age proofs can be classied as standard age proof documents and non-standard age proof documents.

Some of the documents that can be taken as standard age proofs are: Some of the non-standard age proof documents that can be accepted as a valid age proof are: Along with proof of their date of birth an individual is required to submit proof of their address, a photograph and a deposit towards the premium.

The insurance company may also ask the individual to submit bank statements for six months to a year. Apart from cash or cheque, the premium deposit payment can also be made by credit card, a direct debit from the proposers bank account or through online payment gateways, electronic clearing system ECS etc.

To prove their identity in accordance with the KYC process, the customer needs to submit: The above documents are to be obtained to establish clearly the identity of the customer and their source of income for the premium being paid.

More details about anti-money laundering will be discussed in chapter He also gives him a cheque, in favour of the insurance company, for the premium. He asks Mr Kumar how and when he will hear whether or not his proposal has been accepted.

Mr Kumar tells Nitish that IRDA regulations state that the insurance company has to tell him of its decision within 15 days. He also tells Nitish that the insurance company will show its acceptance by issuing him with a rst premium receipt and, maybe at the same time or later, the policy document. In this section we will discuss the two premiums receipts the rst premium receipt and the renewal premium receipt. We will look at the policy document in the next section G4.

G3A First premium receipt FPR As we have just seen in Mr Kumars response to Nitish, the insurance company will inform the proposer that their proposal has been accepted and that it has received the premium through issuing the rst premium receipt FPR. The FPR is important as it is the evidence that the insurance contract has begun.

The policy document, which is the evidence of the contract, may be issued some time later. The rst premium receipt contains the following information: The original Act was amended in , , , , and also in and following the establishment of the IRDA see section D. The Act broadly contains provisions relating to the: Until the Controller of Insurance a person appointed by the Central Government to exercise all the powers, discharge the functions and perform the duties of the Authority was responsible for administration of the Insurance Act A1A Section 40 1 — Prohibition of payment by way of commission or otherwise for procuring business.

Section 40 1 of the Insurance Act prohibits any form of remuneration for soliciting or procuring insurance business in India to any person other than a licensed insurance agent or an insurance intermediary. Section 40 1 No person shall after the expiry of six months from the commencement of this Act, pay or contract to pay any remuneration or reward whether by way of commission or otherwise for soliciting or procuring insurance business in India to any person except an insurance agent or an intermediary or insurance intermediary.

So Prashant cannot be paid for soliciting or procuring insurance business as he is neither a licensed insurance agent nor an insurance intermediary.

In fact, Prashant is not authorised to solicit or procure any life insurance business for any life insurance company until he is awarded the licence to do so from the Authority.

Section 40A 1 stipulates the limits on the remuneration or reward by way of commission or otherwise that can be paid to an insurance agent, the details of which have already been discussed in chapter Section 40B 1 also prescribes limits for expenses of management of life insurance business.

The section also prohibits any person from accepting any such rebates offered for taking out insurance. Section 41 1 No person shall allow or offer to allow, either directly or indirectly, as an inducement to any person to take or renew or continue an insurance in respect of any kind of risk relating to lives or property in India, any rebate of the whole or part of the commission payable or any rebate of the premium shown on the policy, nor shall any person taking out or renewing or continuing a policy accept any rebate, except such rebate as may be allowed in accordance with the published prospectuses or tables of the insurer.

Santosh approaches Karan to buy life insurance based on his lifecycle needs. Similarly Karan has been approached by agents of other life insurance companies to consider their products.

In this case, as per section 41 of the Insurance Act , Santosh cannot offer any rebates from the commissions he will receive from ABC Insurance Company to Karan as an inducement to buy life insurance from him and ignore the products of other companies.

Similarly Karan cannot ask for any rebates from the agents of any company as an inducement to buy life insurance from them. The section covers the following: Figure Pass in The fee specified test. Undergoing The licence is specific training. The renewal application and fee Any person who should reach the acts as an insurance IRDA at least 30 days agent without holding before the licence a licence shall be expiry date.

A fee applies for duplicate licences issued when the original has been lost, damaged or destroyed. A1D Section 44 — Prohibition of cessation of payments of commission As we saw in chapter 10, under section 44 of the Insurance Act , no insurance agent can be refused payment of renewal commission due to him on renewal premium, in respect of life insurance business conducted in India under the agreement.

Even after the termination of agency the renewal commission is payable, except for fraud, provided that: Be aware In the event of the death of an agent, any commission payable to him under the above points a and b , is payable to his heirs for so long as such commission would have been payable had he been alive.

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