Definition:-
"Insurance" is a contract,
represented by a policy, in which an individual or entity receives financial
protection or reimbursement against losses from an insurance company. The
company pools clients' risks to make payments more affordable for the insured.
Insurance policies are
used to hedge against the risk of financial losses, both big and
small, that may result from damage to the insured or her property, or from
liability for damage or injury caused to a third party.
Types of insurance in
india :-
1.
Agriculture Insurance
Agricultural insurance
protects against loss of or damage to crops or livestock. It has great
potential to provide value to low-income farmers and their communities, both by
protecting farmers when shocks occur and by encouraging greater investment in
crops. However, in practice its effectiveness has often been constrained by the
difficulty of designing good products and by demand constraints.
Agricultural insurance can indemnify policyholders for losses,
though such indemnity products are relatively rare due to the high costs of
administration and the risk of fraud. More commonly, agricultural
microinsurance is index-based, providing farmers with payouts tied to the
performance of an index (such as a rainfall gauge), rather than indemnifying
them for crop losses actually experienced. While they avoid the need for costly
(and often impossible) verification of damage, index products have a
shortcoming in the form , the difference between the performance of the index
and the damage the policyholder actually suffered. In some cases, this basis
risk can be quite large, but can be reduced through improvements in the index.
·
Designing appropriate
products with limited or inaccurate data about the risk and about clients’
alternatives without insurance.
·
Designing sustainable
products (from the insurer’s perspective), given the risks of fraud, adverse
selection, and moral hazard.
·
Minimising
distribution costs, which often involves tapping into an existing distribution
infrastructure.
·
Explaining how these
relatively complex products work to overcome understanding and trust barriers
among target clients and to ensure that those who buy the product have a clear
understanding of what is covered.
·
Overcoming liquidity
constraints to purchasing insurance from farmers, who earn income seasonally
(this can be done through careful timing of enrolment or through creative
payment arrangements).
·
Retention of clients,
who may not receive a payout for years and lack tangible evidence that the
product will work as promised.
2. Health Insurance
A health insurance
policy is a contract between the insurance company and the
policyholder, wherein the insurer pays for the medical expenses incurred by the
life insured. The insurer will either provide a reimbursement for your medical
expenses or ensure you are eligible for cashless treatment for injuries or
illnesses covered under the policy at one of the network hospitals. You can
also get tax deductions on the premiums paid towards health insurance under
Section 80D of the Income Tax Act, 1961.
To get a health
insurance policy, an individual has to pay a premium amount at regular
intervals as selected by him/her during the inception of the policy. From the
commencement of the policy, if the insured person has any medical expenses to
bear, the insurer will be liable to pay them as per the terms and conditions.
Please note that few insurers have a waiting period within which no claims will
be entertained. The waiting period differs from one insurer to another.
Health insurance is usually
included in the benefits offered by an employer to the employees of an
organisation. However, the extent of coverage under such a policy may be
limited. So, it is advisable to buy a separate health insurance policy for
extended coverage
- Types
of Health Insurance
- Health insurance, also called, medical insurance or simply mediclaim, covers the cost of an individual's medical and surgical expenses. The individual pays a fixed sum (premium), every year for the health cover.
- There are broadly three types of health insurance in India:
- · Hospitalization Plans
- Hospitalization plans reimburse the hospitalization and medical costs of the insured subject to the sum insured. For this reason, the plans are also known as indemnity plans.
- The sum assured can be fixed -
- i- For a member of the family in case of individual health policies or
- ii- For a family as a whole in case of a family health insurance policy
- For instance, consider a three-member family with an individual cover of Rs 1 lakh each. Each member can claim reimbursement for a maximum of Rs 1 lakh as all three policies are independent.
- If the family applies for a family health plan cover of Rs 3 lakhs, then any family member can claim medical benefit for more than Rs 1 lakh so long as it is within the overall sum assured of Rs 3 lakhs.
- · Hospital Daily Cash Benefit Plans
- The daily cash benefit plan is a defined benefit policy. As evident from the name,the policy pays out a defined sum of money for every day of hospitalization regardless of actual costs. For instance, the hospitalization costs for a day may be Rs 2,000/day and the defined daily limit of the policy could be Rs 1,500/day, in which case the insured receives the latter. On the other hand, if the hospitalization cost is Rs 1,000/day, he still receives Rs 1,500/day.
- · Critical Illness Plans
- These are benefit-based health insurance plans which pay a lumpsum amount on diagnosis of predefined critical illnesses and medical procedures. The illnesses are specified at the outset. By nature, critical illnesses are high severity and low frequency and cost of treatment is higher compared to regular medical problems like heart attack, stroke, among others.
3. Deposit insurance
Protecting the deposits made by people in banks is very
important to ensure confidence in the banking system. In Most countries, there
are arrangements to protect the money deposited by the depositors. The common
form of providing safety to depositors is deposit insurance. Deposit insurance
is providing insurance protection to the depositor’s money by receiving a
premium.
Here, when the
bank fails, the depositors will get back their money. Insurance to deposits
will be provided up to a limit. For getting the deposit insurance protection,
the depositors should pay an insurance premium.
The first deposit
insurance scheme was the Federal Deposit Insurance Corporation (FDIC), launched
in the US during the Great Depression period when many banks failed and
depositors lost their money. The FDIC was established in 1933 to restore public
confidence in the US financial system and to protect small depositors.
In the later
period, many central banks have set up deposit insurance institutions
especially after 1960s. According to the International Association of Deposit
Insurance (IADI) as of January 1, 2015, 113 countries have deposit insurance
schemes.
Deposit Insurance in India
In India, the deposit insurance was started with the
launch of the Deposit Insurance Corporation and Credit Guarantee Corporation
(DICGC) of India in 1961.
DICGC is fully
owned by the RBI. Deposit insurance is mandatory for all banks. The premium
charged is on a flat rate basis which is 10 paise per Rs 100. The amount of
coverage is presently limited to Rs one lakh.
A Deposit
Insurance Fund (DIF) is built up from the premium received from insured banks
and the coupon received from investment in central government securities.
Deposit insurance
extended by DICGC covers all commercial banks, including Local Area Banks
(LABs) and Regional Rural Banks (RRBs) in all the States and Union Territories
(UTs). All Co-operative Banks across the country except three UTs of
Lakshadweep, Chandigarh, and Dadra and Nagar Haveli are also covered by deposit
insurance.
In the event of a
bank failure, DICGC protects bank deposits that are payable in India. The DICGC
insures all deposits such as savings, fixed, current, recurring, etc.
Institutions covered under deposit insuranceAll
commercial banks including branches of foreign banks functioning in India,
local area banks and regional rural banks.
All Co-operative Banks across the country – State,
Central and Primary cooperative banks, and urban cooperative banks.
But those in three UTs of Lakshadweep, Chandigarh, and
Dadra and Nagar Haveli are not covered by deposit insurance. Primary
cooperative societies are not insured by the DICGC.
What types of deposits are not insured by the
DICGC?
The following
types of deposits are not covered under deposit insurance by DICGC
(i)
Deposits of foreign Governments;
(ii) Deposits of Central/State Governments
(iii)
Inter-bank deposits;
(iv) Deposits
of the State Land Development Banks with the State co-operative bank;
(v) Any
amount due on account of any deposit received outside India
(vi)
Any amount, which has been specifically exempted by the corporation with
the previous approval of Reserve Bank of India.
4. Life Insurance
What is Life Insurance?
Life insurance can be
defined as a contract, in the form of a policy, wherein an insurance provider
undertakes to provide financial coverage to an individual in exchange for a
payment over regular periods of time called a premium. The insurance provider
will offer a lump-sum amount to the beneficiaries or nominees of a policyholder
in case of his / her untimely death. This payment will include the sum assured,
which is the amount you have purchased the policy for, and the minimum amount
of money that the company will pay you before adding bonuses. Apart from the
death benefit, a life insurance policy also offers maturity benefits in the
form of payouts in case the policyholder survives the entire policy term. In
addition, life insurance policies are also known for delivering tax benefits
under Section 80C of the Income Tax Act, 1961.
The premium payment that
a customer will have to make to an insurance company will be determined by the
insurance provider, but the applicant has the option to choose the sum assured
as well as the policy term. The insurance company usually determines the
premium amount for each individual by considering a number of factors. The sum
assured is one such factor, and the higher the sum assured, the higher the
premium amount.
Since the insurance
industry has been experiencing a strong surge over the past few years, life
insurance as a product has also begun attracting an
increasing number of buyers. Many individuals opt for term insurance plans as
they are designed in a manner such that financial protection can be availed for
a predetermined period of time, usually 10 or 15 or 20 years. In case of term
insurance plans, your premium payment amount will remain unchanged for the
entirety of the coverage term you have chosen. Once the coverage period has
passed, continued coverage can be availed for a slightly higher premium. The
main reason why term life insurance plans perform so well is due to the fact
that they are comparatively cheap in comparison with permanent life insurance
policies. Moreover, term life insurance policies are ideal for individuals who
cannot earn income during their employment years, as they offer a safety net
for the dependents of such individuals and help in ensuring that the financial
objectives of the family, such as payment of mortgages, meeting weeding or
education expenses of children, etc., can be safely met.
Universal life insurance
products have also been experiencing a resurgence in recent years as they offer
coverage for the entire lifetime of a policyholder. These policies are also
very flexible and allow customers to increase or decrease their coverage
amounts or premium payments depending upon the preferences of the policyholder.
However, since the policy offers lifetime coverage, the premium payments
associated with these policies are relatively high. Universal life insurance
policies are ideal for individuals who seek to preserve wealth with a view to
transfer the same to their beneficiaries, and also for individuals who want a
long-term income replacement in case their financial needs are significantly
greater than their working years.
Whole life insurance
policies are also great options for individuals who wish to avail lifetime
coverage, but they come at higher premium payments in comparison with term life
insurance policies. While the premium payments in such policies will remain
constant for the entirety of the policy term, whole life insurance policies
come with a cash value that can be used as a savings component as it has the
ability to accrue tax-deferred over a period of time. In the following section,
we will discuss the different types of life insurance policies in detail.
- Types of Life Insurance Policies:
- Term Insurance
Plans
- Endowment
Policy
- Unit Linked
Insurance Plans(ULIP)
- Money Back
Policy
- Whole Life
Policy
- Annuity/Pension Plans
- 1. Term Insurance Plans
Term insurance are those that can be
purchased for a fixed period of time. These policies do not have a cash value,
and are thus relatively cheap in comparison with other kinds of life insurance
policies. However, the policy will only turn out beneficial in case the policyholder
dies during the policy term. Most of the prominent life insurance companies in
India offer term life insurance policies for terms such as 10 or 20 or 30
years, and the most attractive feature about these policies is that they come
with a built-in option that allows the policyholder to convert them into
permanent life insurance policies
2. Endowment Policy
Endowment policies are
somewhat similar to traditional term life insurance policies in the sense that
they pay out a lump sum amount to the beneficiary or nominee in case of the
death of the policyholder. However, endowment plans also have an extra clause
that mentions that the policyholder will receive a lump sum amount in case he /
she survives until the date of maturity. The specified maturity period is also
called the survival term of the endowment policy term, and endowment policies
may be regular insurance policies with profits or unit linked insurance
policies.
3. Unit Linked insurance plans
Unit Linked Insurance Plans are basically
insurance policies that provide you with a chance to create wealth in addition
to offering the security of life cover. The premium payments made towards an
unit linked insurance plan are split and a part of it is sent toward the life
cover of the policyholder while the remainder is dedicated to a large pool of
money known as fund, and this money is then invested in debt, equity, or both,
and the returns of investment will be determined by how well the fund that you
have chosen performs.
Unit Linked Insurance Plans allow the
policyholder to select the amount of life cover they prefer, and the life cover
offered by most unit linked insurance plans is usually 10 times the yearly
premium amount. However, customers are free to choose their life cover to the
extent of 100 times their yearly salary, but the approval of the same will be
determined by the insurance company and the particular policy you have
purchased.
4. Money Back Policy
Money back insurance policies, as the name might suggest, are those that pay out a
lump sum amount to the beneficiary or nominee of a policyholder in case of the
untimely death of the policyholder. The maturity benefits offered by money back
insurance policies will be in the shape of many different guaranteed “survival
benefits” that are allotted proportionately throughout the policy. Simply put,
a money back insurance plan is just an endowment policy that comes offers the
benefit of regular liquidity.
5. Whole Life Policy
Ordinary life, or straight life
insurance plans as they are also called, whole life insurance
policies are those whose terms and conditions
remain unchanged for the entirety of the policy term provided that the
policyholder makes the required premium payments. A specific predetermined
amount will be paid to the beneficiary or nominee in case of the untimely death
of the policyholder while the policy term is in progress. The policyholder,
however, has the freedom to borrow money against a whole life insurance policy,
or withdraw the policy at any time. Since whole life insurance policies have a
maturity age of 100 years, the policyholder will receive the maturity benefits
in the form of a matured endowment if he / she is alive on the date of
maturity.
6. Annuity/Pension Plans
Annuity Life Insurance Policies are long-term contracts that can be purchased from
insurance providers. Annuities are designed in a manner such that they help in
accumulating assets with a view to collecting income for retirement. However,
they do have their limitations. In case of early withdrawals, customers will have
to pay penalties and the earnings under annuities are taxable in the same
manner as ordinary income.
5. Self Insurance
Self-insure is a risk management technique in
which a company or individual sets aside a pool of money to be used to remedy
an unexpected loss. Theoretically, one can self-insure against any type of
loss. In practice, however, most people choose to purchase insurance against
potentially large, infrequent losses. For example, most people choose to
purchase auto insurance and health insurance from
an insurance company rather than self-insure against car accidents or serious
illness.
There are a
raft of benefits which come with self-insurance. That said, don’t take these as
only the reason to jump in. Opting to self-insure is a big decision,
and you should weigh up the benefits against the risks detailed in the next
section.
1. Lower
insurance premiums: By having
a proportion self-insured, your premiums on insured risks will
reduce, as your insurance company is not exposed to risks which have
a high likelihood of being claimed on. Also, your premiums may reduce due to a
lower rate of claims. Just sit back and wait for a pat on the back from
your boss!
2. Increased
budget certainty: The
insurance market is an unpredictable one. Premiums can fluctuate dramatically
from one year to the next. This can have serious implications for your
budget. Self-insurance helps to smooth the peaks and troughs.
3. Faster
claims resolution: No
small print loopholes or sluggish insurers are involved to scupper proceedings.
By managing things yourself, you can be confident that the claim will be processed as quickly as
possible.
4. Bespoke
insurance packages: You
can tailor your cover to fit your organisation perfectly. This means not only
will you remove any unnecessary or duplicate cover, but you will
have better cover to suit the risks to which you are exposed.
5. Faster
settlement (happier claimants): As you control the fund, you are able to pay settled
claims much more quickly. This helps the claimant as they receive payments
due quicker, and you as claims are completed more swiftly.
6. Charge
internal departments: You
can share the burden of insurance premiums by charging internal departments for
insurance relating to them. This way the full cost doesn’t come out of your
budget.
7. More
control: By meeting
the cost of claims yourself, you have more control over the whole claims
process.
8. Ownership
of the risk: Being
responsible for risk gives self-insureds a strong incentive to minimise it!
This often improves health and safety practice in the organisation
which, in turn, makes employees feel more valued and improves
productivity.
9. Tax
benefits: IPT adds 9.5% to
your insurance bill (10% in October). Your self-insurance fund (if kept in the
UK), is classed as ‘operating profit’ and subject to Corporation Tax of 20%. So
effectively your ‘insurance bill’ is 20% of your fund.
6.
Property
insurance
The property insurance is the insurance that protects the
physical goods and the equipment of the business or home against any loss from
theft, fire, and any other perils. It can be an all-risk coverage policy that
gives protection against all the risks, or it can be named-risk coverage policy
that gives protection against only those perils that are specified in the policy
document.
The property insurance is considered as an umbrella or
package cover that offers a combination of covers through single policy. It may
include the homeowner’s policy, renter’s policy, flood insurance, shopkeeper’s
policy, office package policy, and earthquake insurance policy. Such policies
instead of just covering the risk of the property might also include some of
the personal liabilities also.
Generally, the property insurance covers
the risks of all the damages caused by fire, theft, wind, smoke, snow,
lightning, etc. But, the property insurance does not cover any damages that are
caused by water due to flooding, water seepage, standing water, tsunamis,
cyclones, etc. Some of the property insurance covers also exclude the losses
due to earthquakes, molds, and the acts of war like terrorism, etc.
- Case of Property
Insurance
On the night of 24th December 2014, a
sudden fire erupted in the home of Mr. and Mrs. Shah, and the whole house was
filled with smoke. The fire spread so quickly that nothing could be done to
limit the damages and the whole house burned down. The good thing is no one was
hurt, and the only loss was the property. Thankfully, Mr. and Mrs. Shah had a
home insurance policy.
They filed their claim with the insurance company and
submitted all the necessary documentation. Since the house has been beyond
repairable conditions and needed to be built again from scratch, they also got
an estimated quote for rebuilding the house again.
The insurance company appointed a claim adjuster to review
the claim which, after the site visits, collecting necessary evidence, and
consulting the experts finalized the amount of a claim at Rs. 25,00,000 should
be paid to the Shah’s. That is approximately 85% of the total rebuilding cost.
Had there been no insurance cover for the house,
Mr. and Mrs. would have to incur the entire cost of rebuilding out of their own
pockets.
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