Chapter 1

Definition
Functional point of view
Insurance is a co-operative device to spread the loss caused by a particular risk over a
number of persons who are exposed to it and who agree to insure themselves against the
risk. That is, insurance is,
1. A co-operative device to spread risk
2. A system to spread risk over a number of persons who are insured against the risk.
3. The principle is to share the risk of each member of the society on the basis of the
probability of losing their risk.
4. The method to provide protection against losses to be insured
Contractual point of view
Insurance is defined to be that in which a sum of money as premium is paid in consideration
of the insurer's incurring the risk of paying a large sum on a given contingency. That
means, insurance is a contract whereby,
1. A certain sum, called premium, is charged in consideration
2. A large sum is guaranteed to be paid by the insurer who received the premium
3. The payment will be made at certain definite sum
4. Payment is made only upon a contingency

Function of insurance
Primary function
1. Insurance provides certainty
Insurance provides certainty of payment at the uncertainty of loss. There are different types
of uncertainty in a risk. These will occur or not, when will they occur and how much loss will
be there? Insurance removes all these uncertainty and the assured given certainty of
payment of loss.
2. Insurance provides protection
The time and amount of loss is uncertain and at the happening of the risk, the person will
suffer loss in absence of insurance. In this case, insurance guarantees the payment of loss
and thus protects the assured from suffering.
3. Risk sharing
When risk takes place, the loss is shared on the basis of loss by all the persons who are
exposed to it.

Secondary function
1. Prevention of loss
The insurance joins hands with those institutions which are engaged in preventing the losses
of the society because the reduction in loss causes lesser payment which will increase
savings which will assist in reducing the premium.
Lower premium invites more business which causes lesser share to the assured and more
protection to the masses.
2. Provides capital
The accumulated funds are invested in productive channels. As a result, the dearth of capital
of the society is minimized to a greater extent with the help of insurance investment.
3. Improves efficiency
The insurance eliminates worries and miseries of losses at death and destruction of
property. The carefree person can devote his body and souls together for better
achievement. As a result, it improves efficiency of the masses.
4. Helps economic progress
Insurance, by protecting the society from huge losses of damage, destruction and death,
provides an initiative to work hard for the betterment of the masses.
The property, valuable assets, the man, the machine, and the society cannot lose much at
the disaster.

The Role and Importance of Insurance – Explained!

1. Provide safety and security:

Insurance provides financial support and reduces uncertainties in business and human life. It
provides safety and security against particular events & sudden loss. For example, in case of
life insurance financial assistance is provided to the family of the insured on his death. In
case of other insurance security is provided against the loss due to fire, marine, accidents
etc.
2. Generates financial resources:
Insurance generates funds by collecting premiums. These funds are invested in government
securities and stock. These funds are gainfully employed in industrial development of a
country for generating more funds and utilized for the economic development of the country.
Employment opportunities are increased by big investments leading to capital formation.
3. Life insurance encourages savings:
Insurance does not only protect against risks and uncertainties, but also provides an
investment channel too. It enables systematic habits of savings due to payment of regular
premiums.
4. Promotes economic growth:
Insurance generates significant impact on the economy by mobilizing domestic savings.
Insurance turns accumulated capital into productive investments. Insurance enables to
mitigate loss, financial stability and promotes trade and commerce activities that result in
economic growth and development. Thus, insurance plays a crucial role in sustainable
growth of an economy.
5. Medical support:
Medical insurance is considered essential in managing risk in health. Medical Insurance is
one of the insurance policies that cater for different types of health risks. The insured gets
medical support in case of medical insurance policy.
6. Spreading of risk:
Insurance facilitates spreading of risk from the insured to the insurer. The basic principle of
insurance is to spread risk among a large number of people. A large number of persons get
insurance policies and pay premiums to the insurer. Whenever a loss occurs, it is
compensated out of funds of the insurer.
7. Reduction in inflation
The insurance reduces the inflationary situation in two ways.
By extracting money in supply to the amount of premium collected
By providing sufficient funds for production narrow down the inflationary gap
“Insurance is not to prevent risk, but to indemnify the losses arising from a certain
risk” – Comment.
Every risk involves the loss of one or other kind. The function of insurance is to spread the
loss over a large number of persons who are agreed to cooperate with each other at the time
of loss. The risk cannot be averted but loss occurring due to a certain risk can be distributed
amongst the agreed persons. They are agreed to share the loss because the chances of
loss, the time, and amount to a person are not known. Anybody of them may suffer loss to a
given risk, so the rest of the persons who agreed will share the loss. The larger the number
of such persons, the easier the process of distribution of loss.
 Chapter 2
Life Insurance
Feature/ Nature/ Elements/Principles of Life insurance
General contract
Since life insurance contract is a sort of contract, it contains general contract elements such
as:
Offer and acceptance: there must be one proposer and another who must accept the
proposal.
Competency of the parties: anyone is competent to contract who is of age of majority
according to the law,(2) who is of sound mind, and (3) who is not disqualified from
contracting by any law.
Free consent of the parties: both parties must be of the same mind at the time of contract.
Legal consideration: insurer must have some legal consideration in return of his promise to
pay a fixed sum at maturity or death whichever the case.
Legal object: the contract would be legal when the object is legal.

Insurable interest
Insurable interest is the pecuniary interest. The insured must have an insurable interest in
the life to be insured for a valid contract.
Insurable Interest in Own’s life
An individual always has an insurable interest in his own life. Its presence is not required to
be proved. He would be the policyholder and the insured at a [Link] insurable interest in
one's own life is unlimited because the loss to the insured or his dependents cannot be
measured in terms of money. Practically, no insurer will issue a policy for an amount larger
than the amount seems suitable to the circumstances. Generally, one can not purchase a
policy more than ten times of his one year’s income.
Insurable interest in others life
Life insurance can be effected on the lives of third parties provided the proposer has
insurable interest in the third party.

First, where proof is not required

When does insurable interest exist in a life insurance policy?
Insurable interest also extends to your direct dependents and relationships of blood and
marriage. This can include:
● Husbands and wives
● Children (including adoption)
● Grandparents and grandchildren
● Brothers and sisters
Above are all examples of direct blood relationships where insurable interest is always
present. Insurable interest can also exist in business and creditor-debtor relationships.

Second, proof is required

 1. Family relationship

When does insurable interest not always exist?

Insurable interest generally is present in blood relationship but would not exist in the
following scenarios unless there is proof of financial dependence:
•Aunts and uncles, Cousins, Nieces and nephews, Stepchildren and stepparents
Say, for example, you have an elderly neighbor who is 90 years old. You consider taking out
a life insurance policy on your neighbor as she does not have many more years to live. This
would not be a situation where an insurable interest would be present, as you would not
suffer a financial loss from the death of your neighbor.

2. Business Relationship
a) A creditor has in the life of his debtor;
b) A trustee has insurable interest in respect of which he is trustee;
c) A surety has insurable interest in the life of his principal;
d) A partner has insurable interest in life of each partner;
e) An employer has insurable interest in the life of a key-man;
f) An insurer has in the life assured.
Warranties
There are certain conditions and promises in insurance contracts which are called
[Link] are the base of the contract between the proposer and insurer and if any
statement is untrue the contract shall be void and premium paid by him may be forfeited by
the insurer. Warranties may two types
Informative: the proposer is expected to disclose all material facts to the best of his
knowledge and belief.
Promissory: Warranties relating to the future which may be statements about his
expectation and intention.
Breach of warranty
If warranties are not fulfilled, the contract may be cancelled by the other party. Insurer will
be free from his liability.

Proximate cause
The efficient and effective cause which causes the loss is called proximate cause. If the
cause of loss is insured , the insurer will pay; otherwise the insurer will not compensate.
This principle is not of much practical importance in life insurance, but in the following cases
the proximate causes are observed. war-risk, sucide and accident benefit.

Assignment and nomination

assignment
The policy in life insurance can be assigned freely for legal consideration or love and
[Link] assignment is completed it cannot be revoked by the assignor unless
reassignment is made by the assignee in favor of the assignor. Assignee will be owner of the
policy both on survival and death of life assured as per terms of transfer.
Nomination
Policyholder in life insurance can nominate the person or persons to whom the money
secured by the policy shall be paid at his death. When policy matures, or if the nominee dies,
the sum shall be paid to the policy-holder or his legal representatives.

Return of premium
Ordinarily, the premiums once paid cannot be refunded. Premium are returnable in the
following cases:
For reason of equity
Equity implies a condition that the insurer shall not receive the prices of running a risk he
runs. Thus , there the contract does not come into effect or it is held to be void from the
beginning(ab initio).

Term Insurance policy

1. In term insurance policy sum assured is payable to the insured’s beneficiaries only in
the event of death of the life assured occuring during the period.
2. This policy has no value other than guaranteed death benefit and no features of
savings components as found in whole life insurance products.
3. This policy is a short period of years ranging from 3 months to 7 years.
4. It is the cheapest policy.
5. Always without profits
6. Premiums are usually payable throughout the term of the policy or till the prior death
of life assured.
7. This policy is renewable for another term and convertible to permanent coverage.
Classification
Straight-Term (temporary) policy
1. This policy is issued for two years.
2. The sum assured will be payable only in the event of the life assured’s death within
two years from the commencement of the policy.
3. A single premium is required to be paid at the very outset.
4. The purpose is to pay the medical examination fee.
5. Having no surrender value and no loan can be granted on the security thereof
6. Cannot be converted into other plans.
Renewable Term policy
1. These policies are renewable at the expiry of term for an additional period without
medical examination; but the premium rate will be altered according to the age
attained at the time of renewal. premium rate will be increased as per attained age.
2. This policy is beneficial to those whose health is deteriorating.
3. It is renewable up to attained age 55.

Convertible term policy

1. Under this policy, the life assured has an option to convert the policy into either a limited
payment life policy or an endowment assurance policy without having to undergo fresh
medical examination, at any time during specified term except the last two years.

2. Persons aged over 40years nearer birthday at entry and those following hazardous
occupations including persons in Armed Forces will not be eligible for assurance under this
plan.

3. It is useful to those who are initially unable to pay the large premium required for a whole
life or endowment policy.
 Endowment policy

Pure Endowment policy

1. Pure Endowment — and endowment payable at the end of the policy period if the
insured is alive. If the insured has died, there is nothing paid in the form of benefits.
2. Unlike a more traditional life insurance policy, there are no beneficiaries to a pure
endowment, meaning that no benefits will be paid out by the insurance
company if the insured is not alive by the end of the endowment’s policy period.
3. Paid up and surrender values are allowed on this policy.
4. So, Pure Endowment policy is opposite of the term policy.
5. It has the elements of investment. Pure Endowment grants economic protection
against living long.
6. It is a sort of compulsory saving for old age.

Ordinary Endowment

1. It is taken out for a specified term of years, the sum assured being payable either on
the life assured’s death during the period or on his survival to the end of period.
2. It provides an ideal combination of both the pure endowment and term policy which
provides the family protection and the investment facilities.
3. Compulsory savings is possible due to this policy which is not present in other types
of savings.
4. Maximum age at entry is 60 years and
5. Premium rate is low in this plan.
6. The advantage of this plan is to meet at a time the marriage, education and other
requirements of the family.

Difference Between Term Insurance and Endowment Plan

Cover

Term insurance offers a pure life cover. It is a simple life insurance plan that promises to pay
a sum assured if the policyholder dies within the policy period. If he outlives the term, there
is no maturity benefit.

An Endowment plan offers a life cover as well as a savings option. Your nominee gets the
death benefit in case of your unfortunate demise. If you outlive the policy period, you get a
maturity benefit.
Price:

Since a term plan doesn’t offer any return and only provides risk cover, it is less expensive.

On the other hand, an endowment plan provides a maturity benefit, along with loyalty
additions. These additional features make an endowment policy more expensive.

Sum assured:

The sum assured in a term insurance plan is the highest. This is because it provides only
risk cover, fulfilling your need for protection.

The sum assured is not as high in an endowment plan as compared to a term insurance
plan. This is because an endowment plan fulfills the need for saving. You get a lower sum
assured, but you are also offered a maturity benefit.

Aim of cover:

Term life insurance aims at only providing financial help to your nominees in case of your
demise. The amount can work as an income replacement to manage your household
expenses and outstanding EMIs. It is essential to buy a term insurance plan if you have
dependent family members.

The endowment plan aims to help you save for your future goals. It provides guaranteed
returns and caters to the need of future savings.

Payout options:

In a term insurance, the nominee receives the sum assured in lump sum or equal
installments or a combination of both on the death of the insured during the policy period
The policyholder has the option to customize the payout option based on his/her family
needs it can be lump sum, monthly or a combination of both.

In an endowment plan, the payout is a lump sum either on the death of the policyholder
during the policy term or as a maturity benefit on completion of the policy term.

Protection

Term policy grants protection against living too short which is a family protection.
Endowment policy provides protection against living long, which is old-age protection.

Ordinary endowment = pure endowment + term policy. Prove the equation

Firstly, we have to know what these three policies actually mean?

Pure endowment policy— an endowment payable at the end of the policy period if the
insured is alive. If the insured has died, there is nothing paid in the form of benefits.
Term policy—Under this plan, The sum assured is payable only in the event of the death of
the insured occurring during the period; but the assurance comes to an end, if the life
assured survives.

Ordinary endowment policy—It is taken out for a specified term of years, the sum assured
being payable either on the life assured’s death during the period or on his survival to the
end of period.

Proof

In the above definition, We see ordinary endowment is the combination of both the pure
endowment and term policy. That's, in pure endowment sum assured payable only at the
survival of the life assured; in term policy sum assured payable only at the death of the life
assured; but in ordinary endowment these two facilities are available. As a result, the net
premium rate for an ordinary endowment policy is equal to the net premium of term and
pure endowment policies issued at the same age, for the same period of time.

So, Ordinary endowment policy = Pure Endowment Policy + Term Policy(proved)

Whole life policy

The policy amount will be paid at the death of the life assured.
The life assured can not get the policy amount during his life, only the dependent will get
advantage of this policy.
Mode of whole life policy
1. Single premium: A lump sum of money is paid into the policy holder in return for a
death benefit that is guaranteed until you die. This plan is cheaper and suits a young
person with limited resources and whose requirements for protections maximum.
2. Limited premium: The payment of premium is limited to a certain period, although
the amount secured under this plan is payable on death of the policy-holder. Since
premiums are payable for a selected period of years or until death if it occurs within
this period.
3. Continuous premium: Policy-holder must pay the policy premiums continuously for
as long as the insured is alive.
4. Convertible whole life: that can be converted into endowment policy without a
health test. Convertible policies will charge higher premiums than traditional policies,
and total premiums will increase again if and when the conversion is carried out. At
the end of 5 years of the existing contract this option will be used. This policy is
designed to meet the needs of the young man who is on the threshold of his career
and has prospects for increase in income after a short period.

Selection of Risk
The selection of risk is the process whereby inferior lives are “weeded out”. The function of
the selection process is to determine whether the degree of risk presented by the applicant
for insurance is commensurate with the premium established for persons in his category, or
some additional premium should be charged or the applicant should be rejected the
insurance.
Purpose of selection
1. To determine whether the proposal should be accepted or not.
2. To evaluate and to determine the degree of risk for the calculator of premium.
3. To determine the rate of premium to be charged from the assured. Premium depends
on the degree of risk. Higher the risk, higher the premium.
4. To avoid discrimination on the part of the lives assured. Since the degree of risk is
not the same to all persons, different premiums should be charged from different
groups. If one premium is charged from all proposers, it would be unjustified.
5. Selection of risk is very essential to check anti-selection or adverse-selection which
means selection of persons for insurance who are not insurable and charging a
lesser premium for those who are to be charged higher premium.

Source of risk information

1. Proposal Form
The first and important source of risk is Proposal form. The proposer is required to
disclose all material facts truly and fully. If any information is not asked by the insurer
, the prosper should reveal the information, if he thinks it to be material.
2. Examiner’s Report
Measurement of height, weight, conditions of teeth, gums, digestive, nervous system,
other details etc. are inquired by physical tests of life to be assured. Opinions of the
examiner for longevity, suspected health, and first class life are required. He has to
declare that the findings are true and correct.
3. Agent’s Report
Agent has to furnish information of sum assured, name, acquaintances with the
proposer, time and place of first introduction , income, occupation of the proposer
and other details. He has also to disclose financial and social position of the proposer
and all unfavourable information of the life proposed.
4. The inspection Report
The insurers generally verify the information obtained by an independent
[Link] amount of insurance is substantial , a deep and thorough inquiry of
habits, character, social condition , occupation and health are required. The main
advantage of this source is that the inspectors provide true and fair information.
5. Private Friend’s Report
Naturally, the real friend does not want to harm his friend .So the friend's report may
not always be correct. But for some checking purposes confidential reports of the
friends of the proposer are considered because they can give better information than
agents.
6. Attending/Family Physicians
The family physicians can give true and fair records of health, history of the proposed
life and his family after charging a certain amount of fees.
7. Medical Information
This organization, known as “MIB”, is an effective bureau for furnishing true and fair
confidential medical reports about reputed and distinguished persons.
 8. Commercial Credit Investigation Bureau
The bureau assembles financial and social information of businessmen. The credit
worthiness is decided by the bureau. These reports are expected to be correct and
fair to a greater extent.

Classification of risk on the basis of insurability

Uninsurable risk
Practically, there are two reasons why some persons are not insurable.
1. The premium would be higher for these persons which will violate the insurance
policy because higher premium will stimulate only those who are at death bed. If they
are allowed, it would be a case of speculation because after payment of a few
premiums he will be gaining. It would be unhealthy for other policyholders.
2. Unknown risk cannot be insured to avoid the existing policy holders. So in order to
protect the existing policy holders, the insurance company must accept those risks
against which it can assess adequate and fair premiums to provide for claims.
Insurable Risks
The insurable risks are those which after the selection process can be carried out by an
insurer.
Standard risk: The standard risk is related to normal life where there is no much or less
[Link] group does not include those persons who are under serious illness nor those
persons who are free from all impairments.
Sub-Standard Risk: Sub-standard risks are those risks which are higher though insurable
than the standard risk. It is above the standard risk and below the uninsurable risk. If the life
proposed crosses the maximum limit of sub-standard risk that will be treated as uninsurable.
It charges an additional premium.
Super standard risk: The super standard risk is present where there is lesser risk than
standard risk. Insurers do not prefer to issue super standard risk policies because it
increases the premiums on standard risk which may cause reduction in loss of business.

Mortality Table
A mortality table is a statistical table that shows how long people of each age are expected
to live and how frequent deaths are for a given age or occupation.
Insurers use a mortality table to determine the average duration of the life remaining to a
number of persons of a given age.
By listing the mortality experience of individuals by age, a mortality table permits an actuary
to calculate, on average, how long a male or female of a given age group may be expected
to live.

Characteristics
(i) Observation of Generation :
In preparation of the mortality table, persons of a generation (i.e., persons of a single age)
are selected and they are observed up to death. No new entries or withdrawals are assumed
at any stage of the study.
(ii) Start from a point :
The mortality table starts from a point, which depends on the requirement of the insurer, and
will continue up to the point all of them have been dead.
(iii) Yearly Estimation :
The mortality table records the yearly death or survival rate. Each and every year is
considered for calculating the rates.
(iv) Mortality and Survival Rates :
The mortality and survival rates of the generation who are selected at a particular age are
considered each and every year. Any table giving mortality rates only is not a mortality table
unless the mortality rate of a generation is calculated every year.
Each year’s number, living is the previous year’s number of living minus previous year’s
number dying and, therefore, as people go on dying year after year the number of living
goes on shrinking till it is reduced to zero and the modality table ends there.
What does Mortality table show & why do insurers use the mortality table?
A mortality table is a statistical table that shows how long people of each age are expected
to live and how frequent deaths are for a given age or occupation.
Uses:
● To predict the future mortality.
● To calculate the yearly mortality rate and survival rate.
● Insurers use a mortality table to determine the average duration of the life remaining
to a number of persons of a given age.
● To determine prices for insurance products.

Sources of mortality information

1. Population Statistics
The insurers get the number of living at each age from the census records and the number
of deaths from municipal and other death records. The population statistics reveal how many
people have died at what age. So, the radix of the total number of persons at the beginning ,
it can be calculated how many died in a particular age.
Limitation
● Doubt about the accuracy of population;
● Having overestimation and underestimation;
● Lack of exact information of mortality;
● Lack of recent information because census are available only after 10 years;
● Lack of well arranged information;
● Mixed information.

2. Records of Insurers
It provides correct figures because the death rates can be correctly recorded.
Collection of figures is done from the records of as many as insurers as possible in
large numbers but not more than 10 years covering.
The counting of persons is done very cautiously, withdrawal and lapsation are
excluded.
Subclassification is possible according to age , sex, marital status,occupation,
geographical area etc.
Procedures of effecting life insurance policy
Offer and acceptance: anyone who wants to buy insurance policy is to collect the proposal
form.
Consideration of proposal: at this stage, insurance companies observe the proposal on
the basis of occupation , age , health, family health etc.
Collection of medical report: Measurement of height, weight, conditions of teeth, gums,
digestive, nervous system, other details etc. are inquired by physical tests of life to be
assured. Opinions of the examiner for longevity, suspected health, and first class life are
required. He has to declare that the findings are true and correct.
Collection of agents report: Agent has to furnish information of sum assured, name,
acquaintances with the proposer, time and place of first introduction , income, occupation of
the proposer and other details. He has also to disclose financial and social position of the
proposer and all unfavourable information of the life proposed.
Proof of age: proposer must provide some documents such as, academic certificate,
passport, birth certificate etc. as a proof of his age.
Selection of proposal: insurer divides the policy in different classes based on information
collected.
Acceptance of proposal: insurer sends acceptance paper to proposer.
Payment of first premium: Insurer informs the proposer to pay first premium.
Issue of policy: After getting the first premium, the insurer provides an insurance policy to
the proposer as fast as possible.