Personal Needs of Insurance

Learning Outcomes

1. Life insurance
2. Health insurance
3. Property insurance
4. Travel insurance
5. Pensions
6. Group insurance

1. Life Insurance

Humanlife is perhaps the most important and invaluable asset. This asset is subject to risks of death and disability due to natural and accidental causes. When human life is lost or a person is disabled permanently or temporarily, there is a loss of income to the household.

Though human life cannot be valued, itis possible to estimate the loss of income that would be suffered in future years in the event of a risklike death or disability. Life insurers try to place a monetary value on such loss and provide insurance cover for such loss. Life insuranceis a financial coverfor a contingency linked with humanlife, like death, disability, accident and retirement. Life insurance products provide a definite amount of money in case the life insured dies during the term of the policy or becomes disabled on account of an accident.

Who needs life insurance?

1. Primarily, anyone who has afamily to support and is an income eamerneeds life insurance.
2. In view of the economic value of their contribution to the family, house wives too need risk cover.
3. Even children can be considered for life insurance in view of their future income potential that is at risk.

Basic types of life Insurance policies

1. Term insurance: Under this plan, the sum assured Is paid only on the death of the insured during the period specified. There is no maturity value in term insurance.
2. Endowment assurance: Underthis type of plans, the sum assured is paid at the end of the term as maturity or on the death of the insured during the term of the policy. This is available as With Profits (Bonus) or Without Profits type. Money-back plans are endowment policies with the provision for return of a part of the sum assuredin periodic installments during the term and balance of sum assured at the end ofthe term.
3. Whole life insurance: It offers to pay the sum assured when the life assured dies, no matter when the death occurs. There is no fixed term for cover of death. The premiumscan be paid throughout one’s life or for a specified limited period.
4. Unit Linked Insurance Plans: These are essentially life insurance plans where the premiums are invested in the capital markets and the returns are therefore linked to the performance of the specific fund and the overall market. The fund choice is made by the customer and therefore the investment risk is borne by the customer. There is also specified life insurance risk cover available for which premium will be deducted before investment. There are also various charges applicable in this type of policies.
5. There are other varieties among life insurance policies such as Variable Insurance Policies, Joint Life Policies and children's policies.

2. Health insurance

Health insurance covers expenses towards treatment of diseases and / or injury. A health insurance policy could be either on an indemnity basis which involves reimbursement of expenses up to a specified limit or on a fixed benefit basis where the insurer pays a fixed amount of benefit Irrespective of what the expenses are.

Ahealth insurance policy (on indemnity basis) would normally cover expenses reasonably and necessarily incurred underthe following heads in respect of insured person subject to overall ceiling of sum insured (for all claims during one policy period):

1. Room, boarding expenses
2. Nursing expenses
3. Feesofsurgeon, anesthetist, physician, consultants, specialists,

Anesthesia, blood, oxygen, operation theatre charges, surgical appliances, medicines, drugs, diagnostic materials, X-ray, dialysis, chemotherapy, radio therapy, cost of pace maker, artificial limbs, cost of organs and similar expenses.

Normally, health insurance policies are not issued for less than one year period.

A Personal Accident coveris also available for protection. In the event of death or disability, permanentor temporary, of the insured, arising as a result of an accident, it provides for compensation, whichis either the whole or a percentage of the sum insured depending on the kind of loss.

3. Property insurance

In respect of insurance relating to property, there are many products available.

1. Householder insurance is one of the most important insurance policies to buy as home is one of the largest financial investments made because of which it is very important to protect it.
2. Loss of or damage to property and assets may be covered against fire and perils of nature including flood, earthquake etc. Machinery of industries may be insured against breakdown. Goods in transit can be insured under a Marine Cargo insurance cover. Insurance coverage is available for loss or damage to ships and aircrafts as well. The indirect loss caused due to inability to use the property or assets as a result of peril, called consequential loss, can also be insured.
3. A Motor Insurance policy covers damage to the vehicle. Motor insurance covers your vehicle, be : it a motorcycle, a car or a lorry, in case of accidents or theft. Further, while driving a vehicle, it is possible that the vehicle hits someone and causes death/ injury or damage to someone's property. As per the law, the ownerof the vehicle is legally liable to pay compensation for any injury or damage to any person'slife or property caused by the use of the vehicle in a public place. As insurance is a contract, where the insurer and the insured are the two parties involved, this liability can be to any other person, or in other words, to any ‘third party’ to the contract. Hence, suchliabilities are generally called ‘third-party liabilities'. Driving a motor vehicle without third-party insurance in a public place is a punishable offence in terms of the Motor Vehicles Act, 1988. A motor third party insurance policy is mandatory according to Motor Vehicles Act, 1988.

Property insurance is based on the principle of indemnity. The idea is to bring the insured to the same financial position as he /she was before the event occurred. It safe guards the investment in the property. Where there is no insurance, losses can destroy a project or an industry. Thus, general insurance offers stability to the economy and to the society.

4. Travel Insurance

Travel insurance is called by different names by insurance companies, but offers insurance protection while one travels. Travel insurance protects the insured person and his family from domestic and international travel related perils and losses like accidents, unexpected medical expenditure during travel, baggage loss, interruption or delays in fights etc.

The following covers are usually available undertravel insurance though the combination mayvary.

1. Medical expenses with or without cashless facility (most travel insurance products offer cashless facility)
2. Personal accident
3. Loss of baggage
4. Delay in baggage arrival
5. Loss of passport
6. Travel delay
7. Repatriation
8. Transportation of dead

The list, however, is not exhaustive.

5. Pensions

Consider this scenario

Anil was working as Senior Manager in a private company and was earning comfortably. He was living a luxurious life. After retirement, he received only provident fund amount which he invested in fixed deposits presuming that the interest would be sufficient for his needs after retirement. However,Anil fell seriousty ill immediately after retiring. He was admitted to hospital and most of his deposits had to be closed for making paymentto the hospital for treatment. The interest on remaining deposits was not sufficient to meet the expenses of Anil and his family. He had to depend on his children and relatives for his household expenses and health costs. Would it not be a good idea for Anil to create a mechanism by which his savings get accumulated when he was young so as to give a regular source of income to meet his old age expenses?

Financial independence during old age is a must for everybody. Many people provide for their old age, by setting aside a portion out of their regular income during their earning period, to take care of post-retirement days. However there is a risk that one may live too long after one’s retirement. In such a situation, one’s savings may run out and may not be sufficient to meet one's income needs. We should appreciate that when an employee retires, he no longergets his salary, but his need for a regular income continues. We should understand pension as a method of getting a regular incomeafter one's retirement.

A pension or an annuity is a fixed sum paid regularly to a person, typically following retirement from working life. Many countries create funds for their citizens and residents to provide income when they retire (or become disabled). Insurance companies allow people to create funds from their savings from which they can get pension when they are old.

Pension becomes an ideal method of meeting this risk of surviving for long period after retirement because the pensioner can get definite Income which is guaranteed throughout his lifetime.

There are two types of annuities (pension plans):

a. Immediate Annulty

In case of an immediate annuity, the annuity payment from the insurance company starts immediately. Purchase price (premium) for the immediate annuity is to be paid in lump sum in one installment only.

Example

Mira's grandfather retired from a private school at the age of 60 and received a sum of Rs. 15 lakhs as his provident fund. He invested Rs. 12 lakhs out of this for purchasing an immediate annuity from a life insurance company. Mira's grandfather would start getting his annuity payment every month from the next month itself.

b. Deferred Annulty

Under deferred annuity policy, the person pays regular contributions to the insurance company till the vesting age/vesting date. He has the option to pay as single premium also. The insurance company will take care of the investment of funds. The fund will accumulate with interest and the total amount will be available on the vesting date. The policyholder has the option to purchase an annuity for the entire amount or encash upto say 1/3rd of this corpus fund on the vesting date and purchase an annuity for the balance amount. This partial encashment is called commutation and the amount so received is tax-free.

Example

Shreyas saw a pension policy lying on his father’s table. When he asked about it, his father, who is 45 years old, said that he would be paying a regular contribution of Rs. 50,000 per year for fifteen years, so that when heretires at the age of 60, he will have a size able fund with which he would purchase an annuity so that pension would be paid to him till the end of his life.

This is a deferred annuity. The vesting date would be the date when Shreyas's father would attain 60 years. On that day he would have an option to either purchase an annuity forfull amount or commute a portion of the amount and purchase annuity for the balance amount.

While term insurance policies offer protection against the risk of early death, annuities are insurance policies that offer protection against the risk of surviving for too long.

6. Group Insurance

Another kind of insurance is group insurance. In group insurance, schemes are offered by insurance companies to provide certain classes of individuals, the benefit of insurance coverage at moderate cost.

Example

Shri Kishore, an account holder of X Bank, has taken a credit card of the bank. He is exposed to the risk of loss of card andits fraudulent usage by another person. He has to approach an insurance company for this purpose. Similarly the bank has issued credit cards to thousands of other account holders. In this case, the risk to which all the card holders are exposed Is similar. Issuing of individual policy for each card holder would be cumbersome and involving huge cost for the insurer. Similarly, the ability of Kishore to bargain with the insurer for a better rate for insurance for his credit card would be much less than that of the bank negotiating for its thousands of card holders. The bank can secure a cheaper insurance cover from the insurer. The insurer would be willing to offer cheaperrate because of reduced cost of acquiring business and better administration of the policies through the bank.

From the example,it can be seen that Kishore as a memberof the groupof credit card holders of X Bank can secure an insurance policy from the insurer on better terms. The policy taken by the bankis called a Group Policy. X bankis called Master policyholder or Group administrator. The cardholders like Kishore and others are called members or beneficiaries. A certificate will be issued to Kishore and other group members as an evidence of insurance.

Groups should consist of persons who assemble together with a commonality of purpose or engaging in acommonactivity. Examples of groups are employees of an organization, depositors, account holders or borrowers of a bank, members of a professional group or associationetc.

Group policies can be issued for the above groups. Group policies could be group life insurance policies, group health policies or group non-life policies. However, the group should not be formed solely for the purpose of obtaining group insurance policy.

Group insurance taken by a bankforits customers

Case study: Group Insurance

All villagers of Rudrapur assembled near the Chabutara. While villagers were sitting on their haunches, the Mukhia was sitting on a make shift stage. The farmers of the village were there to discuss the serious problems faced by them yearafter year. One year it was loss of entire crop due to sudden downpourof rain at the time of harvest. The second yearit was inundation as the river owing nearby suddenly swelled, resulting in submerging of crops and many households, killing cattle, damaging tractors, agriculture pump setsetc. Mostrecently, last year there was a severe drought in the village.

There was a distraught look on everyone's face to find a solution for mitigating such losses atleast this year.

The only graduate of the village had come today from the city and all of them gathered to hear from him if he could provide any solution. “Certainly”, said Mr. Graduate. “We can protect ourselves through insurance. For protection from the losses to crops, agricultural machinery and cattle, each farmer can take agricultural insurance and other general insurance policies."

The Mukhia enquired “Is protection only for our agricultural activity? What about loss of life, treatment in case of diseases etc.?”

Mr. Graduate answered “For protection of life and health all you need is to have a group insurance, covering all households of this village".

“Why is group insurance better than individual insurance"? Onegentleman asked.

“Group insurance is offered to a homogenous group whose members are similar. For e.g. we are all part of this Gram Panchayat and the Gram Panchayat can take a group insurance covering all the villagers. Further, as it saves lot of administration work of issuing multiple insurance policies for the same risk, it is cheaper in comparison to individual insurance".

“It is a very good idea” everyone nodded in agreement.

“Can we get health treatment under insurance for our families"? asked one lady sitting in one corner.

“Of course", said Mr. Graduate. “But you have to purchase a group health insurance for availing such facility. One more thing you may be interested to know is about cashless facility under health insurance. Nowadays, mostof the insurance companies have tie-ups with a network of hospitals and the claim amounts are directly paid to them in case of hospitalization so that hospitals do not charge money from you.It means, you just have to walk in with your proof of insurance to the network hospital to have free access to healthcare as per the policy under cashless facility”.

The Mukhia then rose from his chair and told. “Now we are going to take agricultural insurance for our crops and live stock and insure the entire village under Group insurance for our health and life”. Everyone applauded the decision.