All about Insurance

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.
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• There are broadly three types of health insurance in India:
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• ·   Hospitalization Plans
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• 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.
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• 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
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• 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.
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• 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
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• 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.
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• ·  Critical Illness Plans
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• 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.
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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:

1. Term Insurance Plans
2. Endowment Policy
3. Unit Linked Insurance Plans(ULIP)
4. Money Back Policy
5. Whole Life Policy
6. Annuity/Pension Plans

1. 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 24^th 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.