Concepts and History of Life Insurance

Concept of Life Insurance

• 400 houses in a village, each valued at Rs 20,000
• 4 houses get damaged annually for a combined loss of Rs. 80,000
• Each homeowner contributes Rs. 200 to compensate for losses
• Perils covered include Flood, Earthquake, Lightening, and Fire

History of Insurance

• First Life Insurance Company in India: Oriental Life Insurance (1818)
• First Indian Life Insurance Company: Bombay Mutual Assurance Society (1870)
• First Life Insurance Company in the World: Amicable Society for perpetual assurance (1706, London)
• Nationalization of Life Insurance in India: 1st September 1956 (LIC formed)
• Origin of Modern Insurance Business: Lloyd’s Coffee House, London
• Oldest Insurance Company in India still operating: National Insurance Company Limited (1906)
• Nationalization of General Insurance in India: 1972 (GIBNA Act, 1972)
• First legislation regulating insurance companies in India: Insurance Act 1938 (effective 1st July 1938)

Insurance Contract

• Insurance is a contract between the Insurer and Insured under the Indian Contract Act 1972
• A contract is an agreement between two or more parties
• Elements of a valid contract: Offer & acceptance, Consideration, Agreement between the parties (consensus ad idem), Capacity of the parties, and Legality

Principles of Insurance

• Principle of Utmost Good Faith (Uberimma Fides): Disclose all material facts influencing the underwriter's risk assessment.
• Breach of Utmost Good faith: Non-disclosure and Misrepresentation of material facts.
• Principle of Insurable Interest: For whom you can take Insurance.
• Insurable Interest (pecuniary / financial): Present at the inception of Life Insurance, at the time of a claim in Marine Insurance, and at both the time of inception and claim in Non-life Insurance.
• Insurable interest exists in: Self (one's own financial interest), Husband-Wife, Parent-Children, Creditor-Debtor, & Employer-Employee.
• Principle of Indemnity: Indemnifying the loss or compensating up to the amount of loss. Applicable only for non-life insurance.
• Coercion: Pressure applied through criminal means.
• Section 45 - Indisputability Clause: Protects the Insured after 3 years, preventing disputes.

Types of Products

• Insurance is an intangible product
• Transactional Product: Bank Deposits
• Contingency Products: Life Insurance
• Wealth Accumulation product: Shares (Equity)
• Best time for Financial Planning: When an individual receives their first salary
• Death Benefit under ULIP Plan: Sum Assured or Fund Value, whichever is higher
• Investment risk in ULIP policies: Borne by the Insured
• House Holders Insurance: Covers Gold and Silver ornaments
• Bonus types: Simple & Compound Reversionary, Terminal Bonus

Insurance Products

• Traditional Products
  • Pure Term Assurance (Term Plan)
  • Endowment Plan: Pays both maturity and death benefits
  • Money Back Plan: Pays a portion of the Sum Assured (SA) at regular intervals as survival benefits
  • Whole Life Plan
  • Domiciliary Hospitalization: Requires at least 3 days of home treatment to claim expenses.
• Non-Traditional Products
  • ULIP (Unit Linked Insurance Plan)
  • Variable Life Insurance (USA)
  • Universal Life Insurance (USA)
  • CHC (Community health center): Requires at least 30 beds, 1 operation theatre, X-ray machine, labour room & laboratory facilities with 4 specialists and 21 paramedical & other staff for every 1 lakh population.

Documents

• KYC: Know Your Customer
• Standard Age proof:
  • Passport
  • Pan Card
  • Birth Certificate
  • Baptism Certificate
  • School leaving certificate
  • Defense ID card
• Non-Standard Age proof:
  • Ration card
  • Horoscope
  • Voter id card
  • Village Panchayat certificate
  • Education proof
• The Prevention of Money Laundering Act, 2002: Effective from 2005. Three stages: Placement, Layering, & Integration.
• Money laundering is an offense with penalties: Imprisonment from 3 to 7 years and a fine up to 5 lakhs.

Policy Conditions

• FPR (First Premium Receipt): Evidence of the policy contract commencement.
• RPR (Renewal Premium Receipt)
• Grace period: 1 month or 31 days (after the due date).
• Revival: Process to reinstate a lapsed policy due to non-payment.
• Death during Grace Period: Pays the total claim amount after deducting the unpaid premium.
• Lapse: Premium not paid during the grace period; insurance cover ceases.
• Policy Document: Contains 4 parts (Schedule, Standard provision, Specific policy provisions, Claim procedure)
• Loan: Up to 90% of the Surrender Value.
• Free look period: Allows a customer to cancel the policy within 15 days of receiving the document if the terms and conditions are not as expected.

Underwriting

• Risk selection and Risk pricing.
• Proposal form: Underwriter gathers data to assess risk; forms the basis of the insurance contract.
• Substandard Lives: Higher risk than standard lives; an extra premium is charged.
• Preferred Risk: Lower risk than standard lives.
• Insurance on Pregnant Women: Accepted with a Restrictive Clause (Lien).
• Agents are Primary Underwriters.
• Hazards: Physical, Moral, and Occupational.
• Types of underwriting: Medical underwriting and Financial underwriting.
• Decision on the proposal: Made within 15 days.
• Decision methods: Judgmental method and Numerical Method (Rating Method).

MWP Act - Married Women's Property Act 1874

• Trustee benefits from the policy.
• Protection from Creditors, Court attachments, and even the Life Assured.
• Nomination and Assignment not permitted.
• Beneficiary under MWP Act Section 6:
  • Only the wife
  • Wife and one or more children jointly
  • One or more children
• If no trustee appointed: Amount goes to the official Trustee of the State.

Claim

• Claim: Demand, where the Insurer fulfills their promise.
• Intimation: First Step in Claim Process.
• IRDA mandates: Death claim settlement within 30 days of receiving documents.
• Investigated claims: Settled within 180 days (within 3 years of policy for Early Death).
• Delay in settlement: 2% interest on the claim amount above the bank rate is paid to the Nominee.
• Inquest report: Mandatory for accidental death claims.
• Presumption of Death: Missing for 7 years (Indian Evidence Act 1872) from the date of the court decree (Section 107 & 108).
• Insurer request for additional documents: Made within 15 days.
• Death due to suicide: Covered after 1 year (365 days).

Nomination & Assignment

• Nomination: Section 39 of Insurance Act 1938
• One or more Nominees allowed.
• Appointee required if a Nominee is a Minor.
• Nominee does not have full rights to the entire claim amount.
• Assignment: Section 38 of Insurance Act 1938
• Assignment types: Absolute and Conditional.
• Assignment: Transfer of rights.
• Nomination is canceled when a policy is assigned.

Insurance Ombudsman

• Ombudsman works within a territorial limit.
• Ombudsman's limit: Up to 30 Lakhs.
• Complaint filing period: Within 1 year of the insurer's claim rejection.
• Complaints filed: In writing (no fee).
• Award: Made within 3 months (90 days).
• Ombudsman offices: 17 in India.
• Award honoring: By the insurer within 15 days.
• Complaints to Ombudsman prohibited: If a complaint is pending in any court, consumer forum, or arbitration.

Consumer Protection Act 1986 (COPA)

• Amended by Act, 2002.
• District Forum: Insurance claim amount up to 1 Crore.
• State Commission: Insurance claim amount between 1 Cr and 10 Cr.
• National Commission: Insurance claim amount exceeding 10 Crore.
• Resellers: Not considered consumers under COPA.
• Complaint filing period: Within 2 years of the dispute date.

Insurance Agents

• Qualification: 10th for rural areas (less than 5000 population) and 12th for urban areas.
• Composite agent: Life & Non-Life License (requires 75 hours of training). Fee: Rs 350. Renewal: 35 hours of training required.
• Online training: 25 hours required.
• License validity: 3 years (issued by IRDA).
• Appointment letter dispatch: Within 7 days.
• Issuance of appointment letter: Within 15 days.
• Communication of refusal of appointment: Within 21 days.
• Penalty for contravention of provisions: Max. Rs 10,000 for agents. Max 1 Crore for insurers.
• Appointment Authority: Designated Official of the company.
• CASA agents: Not regulated by IRDA.
• Section 41: Prohibition of Rebate (Fine Rs 500/- if agent shares commission).
• Section 42: Agent code of conduct.
• License renewal fee: Rs 250/-.
• Lost license card replacement fee: Rs 50.