Life Insurance

Breathing New Life…

Life insurance made its debut in India well over 100 years ago. Its salient features
are not as widely understood in our country as they ought to be. What follows is an
attempt to acquaint readers with some of the concepts of life insurance, with special
reference to Life Insurance. It should, however, be clearly understood that the
following information is by no means an exhaustive description of the terms and
conditions of an LIC policy or its Life Insurance?

History

The origin of insurance is lost in antiquity. The earliest traces of insurance in the
ancient world are found in the form of marine trade loans or carriers’ contracts,
which included an element of insurance. Evidence is on record that arrangements
embodying the idea of insurance were made in Babylonia and India at quite an early
period. In ‘Rigveda’, the most sacred book of India, references were made the
concept ‘Yogakshema’ more of less akin to the well-being and security of the people.
The codes of Hummurabi and of Munu had recognized the advisability of provision for
sharing the future losses. However, there is no evidence that insurance’s in its
present form was practiced prior to the twelfth century.

Life Insurance benefits or privileges.

A contract for payment of a sum of money to the person assured (or failing him/her,
to the person entitled to receive the same) on the
happening of the event insured against. Usually the
You cannot be contract provides for the payment of an amount on the
substituted date of maturity or at specified dates at periodic
physically or intervals or at unfortunate death, if it occurs earlier.
emotionally but you Among other things, the contract also provides for the
payment of premium periodically to the Company by the
can be substituted assured. Life insurance is universally acknowledged to
financially. be an institution, which eliminates 'risk', substituting
certainty for uncertainty and comes to the timely aid of
the family in the unfortunate event of the death of the
breadwinner. By and large, life insurance is civilization’s partial solution to the
problems caused by death.

Life insurance, in short, is concerned with two hazards that stand across the life-path
of every person: that of dying prematurely leaving a dependent family to fend for
itself and that of living to old age without visible means of support.

Why is it superior to other forms of Savings?

(i) Protection: Savings through life insurance guarantee full protection against risk of
death of the saver. In life insurance, on death, the full sum assured is payable (with
bonuses wherever applicable) whereas in other savings schemes, only the amount
saved (with interest) is payable.

(ii) Aid to thrift: Life insurance encourages 'thrift'. Long term saving can be made in
a relatively 'painless' manner because of the 'easy installment' facility built into the
scheme (premiums can be paid through monthly, quarterly, half-yearly or yearly
instalments). The Salary Savings Scheme, popularly known as SSS, provides a
convenient method of paying premium each month by deduction from one's salary.
The deducted premium is remitted by the employer to the LIC. The Salary Savings
Scheme can be introduced in an institution or establishment subject to specified
terms and conditions.

(iii) Liquidity: Loans can be raised on the sole security of a policy which has
acquired loan value. Besides, a life insurance policy is also generally accepted as
security for even a commercial loan.

(iv) Tax Relief: Tax relief in Income Tax and Wealth Tax is available for amounts
paid by way of premium for life insurance subject to the Income Tax rates in force.
Assesses can avail themselves of provisions in the law for tax relief. In such cases
the assured in effect pays a lower premium for his insurance than he would have to
pay otherwise.

(v) Money when you need it: A suitable insurance plan or a combination of
different plans can be taken out to meet specific needs
that are likely to arise in future, such as children's “A life-saving pill
education, start-in-life or marriage provision or even
periodical needs for cash over a stretch of time. when you need it,
Alternatively, policy moneys can be so arranged to be you must have it
made available at the time of one's retirement from
service to be used for any specific purpose, such as for – irrespective of
the purchase of a house or for other investments. Subject the cost.”
to certain conditions, loans are granted to policyholders
for house building or for purchase of flats.

Types of insurance

Insurance

Life Insurance Non Life Insurance

Marine Fire Motor Miscellaneous

The deregulation of Indian insurance has opened new vistas before this
sector. The first stirrings of change are visible in two areas. The insurance
regurelotary & development authority (IRDA) has granted license to many private
players to commence life & non-life insurance business in India, the state owned
non-life megacorp, has witnessed to the first phase of restructuring wherein its
subsidiaries have been delinked from GIC, which itself has been converted into a
National Reinsurer. Clearly, the Indian insurance sector is coming alive.
 The spotlight could not have been more sudden. Within days of coming
together under the common banner of GIPSA (Association of General Insurers-Public
Sector), the officials of the newly formed body of non-life insurers in India camped at
Bhuj, a small town in the state of Gujarat. The town had been hit by the worst
earthquake in independent India on the mooring of January 26. The circumstances
were tragic. But they were also ominous for the independent, but still state-owned,
non-life companies. Customer service, fast response,
speed of delivery etc. were no longer empty jargon.
“The liberalization of They were now loaded. They were real. The insurers
Indian insurance were on trial.
With the enactment of the IRDA Act in November
industry is an idea 1999 by the Indian parliament, Indian joined the
whose time has come.” growing list of countries where insurance is open to the
- Yashwant Sinha, former Union private sector. In fact, only three nations in the world –
Finance Minister Cuba, Myanamar and North Korea-have the dubious
distinction today of having total state control over
insurance.

The million dollar question

Does deregulation benefit the customer and the policyholder ? The jury is still
out on that one. But as the then Union Finance Minister Yashwant Sinha said in the
parliament while piloting the bill, “The liberalization of Indian insurance
industry is an idea whose time has come.”

At last the season has changed, there was a time when many Indians believed that
whoever bought life insurance would, in fact, die prematurely. Many families were
thus left in penury by their superstitious breadwinners who died uninsured at an
early age.

Fortunately, those days are now gone and Life Insurance does roaring business. The
insurance business is concerned with three basic functions:

i. Indemnification of the loss of value.

ii. Scientific approach to risk management.
iii. Equitable distribution of the costs among the insured.

Today there are many reasons for investing in life insurance policies, such as:
Protection for the Family:
The most important objective of life insurance is to provide financial protection for
the family in case of an unexpected and premature death of its breadwinner. The
purpose is to protect the dependents against the loss of earning power of the insured
through death or disability. Those who have insured their lives for an adequate sum
can live in peace and comfort, free of the gnawing worry of what would happen to
their families in the event of their sudden and premature death. Life insurance has
long been recognized as a necessary and essential element in a family’s total
financial program.

1. Regular Savings:
Saving is not a physical need, unlike hunger or sleep. Many of us may not save
unless there is compulsion to do so. For such people, life insurance is a compulsory,
regular savings scheme, especially the monthly salary savings schemes. Even if you
do not subscribe to the salary savings scheme, you can issue standing instructions to
your bankers to pay the premium regularly without reference to you.
The element of savings in a life insurance contract should be understood in a proper
perspective. Typically, life insurance is made available on the basis of equated
periodical payments. In the initial years, you tend to pay more compared to the risk
factor. Strictly, speaking, the 'savings' aspect in a life insurance policy should not be
compared with other pure savings media.
2. Bonus from LIC:
LIC pays bonus to policy-holders on all with-profits policies. The bonus becomes
payable at the maturity of the policy or on death, whichever is earlier. Once in two
years, the Life Insurance Companies undertakes valuation of its assets and liabilities.
The 'surplus,' if any, is passed on to the policy-holders by way of a bonus.

The bonus declared by Life Insurance Corporation of India on its policies has
been steadily increasing.

3.Tax Benefits:
There is a tax rebate under Section 88 on life insurance premium. Many investors,
especially those in higher tax brackets, used to buy life insurance mainly to take
advantage of these tax benefits. Additional tax benefits are available under Section
80DD and Section 80CCC applicable to specific schemes. Hence, attractiveness from
the tax angle has come down.

4. Housing Finance:
One of the easier ways of acquiring a house property is through a loan under the
various scheme of Life Insurance, under which a life insurance policy is accepted as a
collateral security. The proceeds of the policy can be adjusted towards the housing
loan. To enjoy this loan facility, many people even go in for additional life insurance.
However, with the advent of HDFC and various other housing finance schemes, you
have alternatives to choose from.

5. Annuities for Regular Income During Retirement:

If the life-insured survives till the maturity of a policy, the maturity value represents
a sizable estate for the insured person. Normally, this estate would be available
around one's age of retirement. Insurance money comes quite handy for investment
so that retirement may not create any undue financial worries. It is also possible to
buy annuity policies from Life Insurance Company.
It is quite likely that some people may invest in life insurance for various other
purposes - such as their son's education, a daughter's marriage, etc. Most of
these objectives may be met in a wide variety of policies offered by the Insurance
Company.

How much should one Insure?

Having decided to invest in life insurance, one is usually undecided about how much.
There are many factors that may decide the size of the life cover you would like to
buy.

1.Need For Minimum Protection:

It is essential that a particular level of income should be maintained for the family
even when its breadwinner is not around. Suppose a family's present needs are
Rs. 2,000 per month. The husband may insure his life for Rs. 2,40,000 so that the
bank interest at 10 per cent on the sum assured (i.e. Rs. 2,40,000) will be equal to
Rs.2,000 p.m. If one also wants to provide for the future fall in the purchasing power
of rupee due to inflation, one must necessarily take policies for higher amounts. No
widow, they say, has ever complained that her husband bought too much
insurance.
2. Present Income Level:

Payment of insurance premium results in an outflow of disposable income. You may,

therefore, not like to buy too much insurance. One should decide the quantum of
insurance keeping in mind the cash-flow problems that will be created as a result of
the obligation of regular outgo from salary on this account.

3.Tax Benefits:

You should also take into account the tax rebate under Section 88, for instance. As
insurance premium, along with contributions to Provident Fund, etc, are eligible for
tax rebate upto a maximum of Rs.12,000, one may like to take full advantage of this
option every year.

4.Specific Schemes:

If you expect to spend a particular sum of money for the education and wedding of
your children, you may like to buy an insurance policy for a specific sum to meet that
commitment.

5.Present Age:

The rates of premium go up with the advancing age of the life-assured. For example,
the annual premium for a 20-year term, with-profits endowment policy is Rs.50.80
per Rs.1,000-sum assured at the age of 25. It goes up to Rs.58.60, if the policy is
taken at the age of 45. The increase in premium is greater for the 35-45 age bracket
than that for 25-35. Hence, one can buy more insurance for the same premium at a
younger age than at an older age.

By paying an annual premium of Rs.1,000, you can buy with-profits insurance

policies with varying sums assured (rounded off to the nearest Rs.1,000) depending
upon the age.

Therefore, your present age is a critical factor in deciding the quantum of insurance
that you can afford. The final decision rests upon a careful consideration of all these
factors. The need for minimum protection may be quite high, but the current need
for disposable income may not immediately permit buying adequate insurance. You
then have to make a compromise and buy the extra insurance as and when you can
afford it.

Two Different Approaches:

Experts point out that there are mainly two approaches to determine the quantum of
life insurance that you should have.

a. Human Life Value Approach:

It suggests capitalization, through life insurance, of a part of an individual's potential

earning capacity for the maintenance of dependents. It involves calculating the
discounted value of future net earnings that would be lost in the event of death.
b. Capital Fund Approach:

If you need Rs.60,000 per annum for your family needs and if you do not have any
income-generalising assets, you may like to create a Capital Fund of Rs.5.45 lakh
which may yield Rs.60,000 at 1 per cent per annum. You may therefore buy a life
insurance policy for Rs.5.45 lakh.

You may also like to keep in mind that if your family is reasonably wealthy and its
protection needs relatively low, you may buy a smaller amount of insurance.
Similarly, if your family members have independent earning capacity, you may
reduce your insurance. You should always remember that insurance is a protection
and not really an investment; there could even be a negative rate of real return at
the time of maturity of your insurance policies.

There is a broad relationship between needs and assets over a period of time.

Not much life insurance is needed in the initial stage. So, too, in the empty next
stage. The maximum need for life insurance arises during the mid-phase, when one
is married and has children. In other words, one may go for life insurance so long as
the asset-level is lower than the need-level. Once the asset-level surpasses the
need-level, the importance of insurance declines.

Stage of Life Needs Assets

Premature death leads to No worthwhile assets. Just a
1.Initial stage, no
minimal needs like funeral beginning. Maybe some cash
family Responsibilities.
expenses. balance.
Premature death causes serious
2. Married, with Some assets available.
financial problems as most of the
children Growing assets.
needs continue.
The needs decline once children Strong assets base,
3. Empty nest grow up and settled down. No surpassing the financial
major financial problems. needs.