CHAPTER 2: FUNDAMENTALS OF INSURANCE INSURANCE TERMINOLOGY: WHAT IS INSURANCE?

In simple terms, insurance is a legal arrangement whereby - A person gets into a contract with a company - In this contract the person promises to pay the company a certain sum of money at fixed intervals - In return for this money, the person gets an assurance - This assurance states that if the person suffers a loss (as per contract) he will be reimbursed for it by the company. In other words, Insurance can be defined as a contract (policy) in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. Insurance is a special type of contract. One party is the insurance company who takes the insurance (insurer) and the other party is known as the insured WHAT IS A PREMIUM? Insurance premium is a periodic payment made on an insurance policy. It is the financial cost of obtaining an insurance cover, paid as a lump sum or in installments during the duration of the policy (monthly, quarterly, half-yearly, yearly or in one lumpsum) A failure to pay premium when due automatically cancels the insurance policy which, upon payment of the outstanding amount within a certain period, may be restored.

WHAT IS A POLICY? Insurance Policy is a written contract between the insurer and the insured known as the policyholder. It includes the terms and conditions of the insurance contract and the claim which the insurer is legally required to pay the insured, if an uncertain event takes place after taking the policy and before the expiry of the policy. WHAT IS A TERM? Term of the insurance can be defined as the specified time period for which the insurance is taken. For example : A person takes an insurance policy for 10 year, thus 10 years is the term or time period of his insurance. The amount of time for which the insured pays the premium is known as premium paying term

WHAT IS SUM ASSURED? At the time of signing an insurance contract, the insurer and the insured, agree on the maximum amount that would be payable if the insured dies or loss to property occurs. This amount is known as the sum assured. This sum assured is usually more than the total of the premiums paid This is because the company invests the premiums and distributes the profits among the insured. WHAT ARE RIDERS? Riders are the additional benefits that you may buy and add to your policy. They are options that allow you to enhance your insurance cover, qualitatively and quantitatively. Riders can be mixed and matched based on ones preferences for a small additional cost. As one size fits all approach does not apply to insurance it makes sense to cover risk based on factors that are unique to you. Eg: on a normal mediclaim policy you can take a critical illness rider WHAT IS A ULIP? ULIPs are the perfect combination of life insurance and a mutual fund. In this plan, the insurance company works on the principle of a mutual fund and invests the premiums in the market. It also provides insurance cover. The overall type of investment can be chosen by the policyholder (eg debt or equity) In other words, ULIP or Unit-Linked Insurance Plan is a type of life insurance where the cash value of a policy varies according to the current net asset value of the underlying investment assets. It allows protection and flexibility in investment, which are not present in other types of life insurance such as whole life policies. (Please note: LIC and life insurance are not the same thing. LIC is Life Insurance Corporation of India which is a company just like HDFC Standard Life or Aviva and life insurance is an insurance policy to cover someones life. Please do not use it interchangeably!)

WHAT IS RE-INSURANCE? Insurance works on the principle of odds (ie insurance companies calculate x number of people dying in a particular year) However, during a tsunami or any other catastrophe, the odds do not work since a large number of people die. If the company pays out on all its policies, it will have to file for bankruptcy. In order to avoid this situation, insurance companies take re-insurance policies. In simple terms, re-insurance is when an insurance company takes an insurance policy for itself. Reinsurance is a transaction in which one insurer agrees, for a premium, to insure another insurer against all or part of the loss that insurer may sustain under its policy or policy or policies of insurance. The company purchasing reinsurance is known as the ceding insurer: the company selling reinsurance is known as the assuming insurer, or, more simply, the reinsurer. Reinsurer can also be described as the insurance company of insurance companies Reinsurance provides reimbursement to the ceding insurer for losses covered by the reinsurance agreement. It enhances the fundamental objectives of insurance to spread the risk so that no single entity finds itself saddled with a final burden beyond its ability to pay. Reinsurance can be acquired directly from a reinsurance intermediary. Objectives of reinsurance are 1)To limit liabilities on specific risks 2)To stabilize loss expanses 3)To protect against catastrophes; and 4)To increase capacity. WHAT IS DOUBLE INSURANCE? In simple words, double insurance is a situation where many insurance policies are taken to cover one risk. These multiple insurance policies can be taken from the same company or from difference companies. Definition: Double Insurance is the situation in which the same risk is insured by two overlapping but independent insurance policies. It is not against the law to obtain double insurance, and the insured can make claim to both insurers in the event of a loss because both are liable under their respective polices. However, the insured cannot profit from this arrangement because the insurers are law bound only to share the actual loss (ie no insured can get more money than he has lost) So, in case of general insurance the various companies will estimate the actual loss and pay out in the ratio of their premiums. However, in the case of life insurance, since life cannot be measure in monetary terms, all the policies will be paid up in full.

DISTINGUISH BETWEEN DOUBLE INSURANCE AND RE-INSURANCE DOUBLE INSURANCE The insurer remains as the insurer of the original insured. Subject of the insurance is property. It is an insurance of the same interest. The insurer is the party in interest in all the contract. The insured has to give his consent. REINSURANCE Insurance company becomes the insured party It is the original insurers risk. It is an insurance of a different interest. The original insured has no interest in the contract of reinsurance which is independent of the original insurance contract. The content of the original insured (who is hardly even aware of the reinsurance transaction) is not necessary.

WHAT IS NOMINATION? Nomination is a right given to the life insurance policyholder to appoint a person or persons to receive the benefit under the policy in case it becomes a death claim. Simply put, if a person who is insured dies, the person who is nominated is entitled to receive the policy proceeds. The person in whose favour the nomination is effected is termed as 'nominee'. Policy proceeds under a death claim typically comprise the sum assured and the bonuses accrued, if any. For unit-linked plans it fetches the market value of units and the sum assured. A life assured who has attained 18 years of age can make nomination. Nomination ensures smooth transfer of policy proceeds when the life assured is not around. Nomination is a part of life insurance proposal. While applying for life insurance one can mention the nominee details in the proposal itself. On death of the insured, nominee has to produce ID, death certificate and policy details in order to claim proceeds.

WHAT IS ASSIGNMENT OF AN INSURANCE POLICY? The assignment is a transfer of rights, title and interest of the life insurance policy to a person or persons. 'Assignor' is the policyholder who transfers the title, and 'assignee' is the person who derives the title from the assignor. The assignment is of two types conditional and absolute. One can typically come across an assignment where the policyholder is trying to use the life insurance policy as collateral against a loan he intends to raise.

WHAT IS SURRENDER VALUE OF AN INSURANCE POLICY? Due to various reasons, policy-holders might want to discontinue a particular policy (eg: inability to pay premiums, want to switch to another insurance company) In such a situation, the policy-holder can choose to surrender his policy. Surrender value is the amount the policyholder will get from the life insurance company if he decides to exit the policy before maturity. A mid-term surrender would result in the policyholder getting a sum of premiums paid + profits earned. From this will be deducted a surrender charge, which varies from policy to policy. As per a recent Insurance and Regulatory Development Authority (IRDA) directive, life insurance companies have been asked not to levy surrender charges if the policyholder chooses to terminate the cover after five years. Surrender value is as per Section 113(1) of the Insurance Act 1938 Surrender Value = (Surrender Value Factor x Paid Up Value)/100 Surrender value factor is as given in the actuarial chart. WHAT IS LOAN VALUE? Insurance companies advance loans to the policyholders against the policy. The loan value is upto 85% of the surrender value The policyholders can get such a loan at concessional rate of interest from the insurance company Loans are not available on all types of policies WHAT IS BONUS? A plicy issued under a profit plan gets bonus it it is retained in force for full sum assured for a period of 5 years. For death claims, bonus will be paid if death occurs within 5 years from the date of policy. WHAT IS PAID UP VALUE OF AN INSURANCE POLICY? Sometimes, a policy holder wants to keep the policy in force but does not have the money to pay the premiums. In such cases he can opt to convert the policy to a paid up policy. In a paid up value policy, the company uses the accrued profits and bonuses to pay the remaining premiums on the policy. In this way, the insured does not have to pay premiums but the policy is still in force. Also, the company does not have to suffer loss since it is simply adjusting the insureds profits against his premiums. Eg: Mr Pele has to pay Rs 1000 every year for 20 years. He pays it regularly for 18 years. In this 18 years, the company has 18,000 in premiums + 4000 in profits on this policy. Mr Pele then retires and cannot afford to pay anymore. So he asks the company to make his policy paid up. The company agrees and pays the

premiums for the remaining two years from the Rs 4000 profits accrued on that policy. PRINCIPLES OF INSURANCE 1. UTMOST GOOD FAITH (Uberrimae fidei) Both the parties i.e. the insured and the insurer should be in good faith towards each other. The insurer must provide the insured complete, correct and clear information of subject matter. The insurer must provide the insured complete, correct and clear information regarding terms and conditions of the contract. The same way, the insurance company should also provide complete, correct and clear information. The principle is applicable to all types of contract i.e. life, fire and marine insurance. It is the duty of the client to disclose all material facts relating to the risk being covered. A material fact is a fact that would influence the mind of a underwriter while deciding whether or not to accept a risk for insurance and on what terms. This duty to disclose operates at the time of inception, at renewal as well as at any point mid term. Breach of duty of utmost good faith arises in two ways: Non-disclosure of material facts- oversight, Proposer thought its not essential etc. Misrepresentation-Intentional. Examples: Motor: Age of drivers, license status, details of any accidents, claims or convictions, exact model of vehicle etc. Household: Construction of house, location of house i.e. Close to river, any previous claims etc. 2. INDEMNITY Indemnity means security, protection and compensation given against damage, loss or injury. It means a guarantee or assurance to put the insured in the same position he was immediately prior to the happening of the uncertain event. The insurer undertakes to makes good the loss. According to the principle of indemnity, an insurance contract is signed only for getting protection against unpredicted financial losses arising due to future uncertainties. Insurance contract is not made for making profit else its sole purpose is to give compensation in case of any damage or loss. Under this the insurer agrees to compensate the insured for the actual loss suffered.

The amount of compensations is limited to the amount assured or the actual losses, whichever is less. The compensation must not be less or more than the actual damage. Compensation is not paid if the specified loss does not happen due to a particular reason during a specific time period. Thus, insurance is only for giving protection against losses and not for making profit. It is applicable to fire, marine and other general insurance. However, in case of life insurance, the principle of indemnity does not apply because the value of human life cannot be measured in terms of money.

3. SUBROGATION Subrogation means substituting one creditor for another. As per this principle after the insured is compensated for the loss due to damage of property insured, then the right of ownership of such property passes on to the insurer. This principle is corollary of the principle of indemnity. It also applies to all contracts of indemnity. This principle is applicable only when the damaged property has any value after the event causing the damage. The Insurer must exercise the right of recovery in the name of the Insured (prevents the Insured from obtaining more than one indemnity) The insurer can benefit out of subrogation rights only to the extent of the amount he has paid to the insured as compensation. Subrogation rights only apply where there is a legal liability under the policy i.e. where policy cover existed. For example: - Mr. John insures his house for $ 1 million. The house is totally destroyed by the negligence of his neighbour Mr. Tom. The insurance company shall settle the claim of Mr. John for $ 1 million. At the same time, it can file a law suit against Mr. Tom for $ 1.2 million, the market value of the house. If insurance company wins the case and collects $ 1.2 million from Mr. Tom, then the insurance company will retain $ 1 million (which it has already paid to Mr. John) plus other expenses such as court fees. The balance amount, if any will be given to Mr. John, the insured. 4. CAUSA PROXIMA This principle states that the insurer is liable only for those losses which have been proximately caused by the peril insured against. In other words, in order to make the insurer liable for a loss, the nearest or immediate or last cause is to be looked into, and if it is the peril insured against, the insured can recover. This is the rule of "Causa Proxima". Insurers are not liable for remote causes and remote consequences even if they belong to the category of insured perils.

The question, which is the causa proxima of the loss? can only arise where there has been a succession of causes. When a result has been brought about by two causes, you must in the insurance law, look to the nearest cause, although the result, no doubt, would not have happened without the remote cause CASE STUDY: In a marine policy, the goods were insured against damage by sea-water. Some rats on board bored a hole in a zinc pipe in the bath which caused sea-water to pour out and damage the goods. The underwriters contented that as they had not insured against the damage by rats they were not bound to pay. It was held that the proximate cause of damage being sea-water the insured was entitled to damages, the rats being the remote acuse (Hamilton vs Pandrof).

5. INSURABLE INTEREST The principle of insurable interest states that the person getting insured must have insurable interest in the object of insurance. A person has an insurable interest when the physical existence of the insured object gives him some gain but its non-existence will give him a loss. In simple words, the insured person must suffer some financial loss by the damage of the insured object. For example :- The owner of a taxicab has insurable interest in the taxicab because he is getting income from it. But, if he sells it, he will not have an insurable interest left in that taxicab. From above example, we can conclude that, ownership plays a very crucial role in evaluating insurable interest. Every person has an insurable interest in his own life or the life of a beloved person. A merchant has insurable interest in his business of trading. Similarly, a creditor has insurable interest in his debtor. 6. CONTRIBUTION Principle of Contribution is a corollary of the principle of indemnity. It applies to all contracts of indemnity, if the insured has taken out more than one policy on the same subject matter. According to this principle, the insured can claim the compensation only to the extent of actual loss either from all insurers or from any one insurer. If one insurer pays full compensation then that insurer can claim proportionate claim from the other insurers. For example :- Mr. John insures his property worth $ 100,000 with two insurers "AIG Ltd." for $ 90,000 and "MetLife Ltd." for $ 60,000. John's actual property destroyed is worth $ 60,000, then Mr. John can claim the full loss of $ 60,000 either from AIG Ltd. or MetLife Ltd., or he can claim $ 36,000 from AIG Ltd. and $ 24,000 from Metlife Ltd. So, if the insured claims full amount of compensation from one insurer then he cannot claim the same compensation from other insurer and make a profit. econdly, if one insurance company pays the full compensation then it can recover the proportionate contribution from the other insurance company.

7. LOSS MINIMIZATION According to the Principle of Loss Minimization, insured must always try his level best to minimize the loss of his insured property, in case of uncertain events like a fire outbreak or blast, etc. The insured must take all possible measures and necessary steps to control and reduce the losses in such a scenario. The insured must not neglect and behave irresponsibly during such events just because the property is insured. Hence it is a responsibility of the insured to protect his insured property and avoid further losses. For example :- Assume, Mr. John's house is set on fire due to an electric shortcircuit. In this tragic scenario, Mr. John must try his level best to stop fire by all possible means, like first calling nearest fire department office, asking neighbours for emergency fire extinguishers, etc. He must not remain inactive and watch his house burning hoping, "Why should I worry? I've insured my house."

INSURANCE

LIFE INSURANCE

NON-LIFE (GENERAL) INSURANCE

TERM LIFE INSURANCE

MARINE INSURANCE

WHOLE LIFE INSURANCE

FIRE INSURANCE

ENDOWMENT PLANS

MOTOR INSURANCE

ANNUITY PLANS

MEDICAL INSURANCE

MONEY BACK POLICIES

ACCIDENT INSURANCE

SPECIAL INSURANCE

Life insurance is a contract between the policy holder and the insurer, where the insurer promises to pay a designated beneficiary a sum of money (the "benefits") upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger payment. In return, the policy holder agrees to pay a stipulated amount (the "premium") at regular intervals or in lump sums. In some countries, death expenses such as funerals are included in the premium; however, in the United States the predominant form simply specifies a lump sum to be paid on the insured's demise. TERM INSURANCE Term assurance provides life insurance coverage for a specified term of years in exchange for a specified premium. The policy does not accumulate cash value. Term is generally considered "pure" insurance, where the premium buys protection in the event of death and nothing else. There are three key factors to be considered in term insurance: 1. Face amount (protection or death benefit), 2. Premium to be paid (cost to the insured), and 3. Length of coverage (term). Term policy has the premium fixed for a period of time longer than a year. These terms are commonly 5, 10, 15, 20, 25, 30 and even 35 years. Term is often used for long term planning and asset management because premiums remain consistent year to year and can be budgeted long term. At the end of the term, some policies contain a renewal or conversion option. A policy holder insures his life for a specified term. If he dies before that specified term is up, his estate or named beneficiary receives a payout. If he does not die before the term is up, he receives nothing. Generally, if an insured person commits suicide within the first two policy years, the insurer will return the premiums paid. However, a death benefit will usually be paid if the suicide occurs after the two year period.

ENDOWMENT An endowment policy is a life insurance contract designed to pay a lump sum after a specified term (on its 'maturity') or on death to the person who is insured. Endowment policies cover the risk for a specified period at the end of which the sum assured is paid back to the policyholder along with all the bonus accumulated during the term of the policy. It is this feature - the payment of the endowment to the policyholder upon the completion of the policys term - which rightly accounts for the popularity of endowment policies.

Typically, ones responsibility for the financial protection of the family reduces significantly once the children are grown up and independently settled. The focus then shifts to managing a smaller family - perhaps only oneself and ones spouse - after retirement. This is where the endowment - the original sum assured and the accumulated bonus - received back comes handy. You can either use the endowment amount for buying an annuity policy to generate a monthly pension for the whole life, or put it in any other suitable investment of your choice. ANNUITY An annuity is an investment that you make, either in a single lump sum or through instalments paid over a certain number of years, in return for which you receive back a specific sum every year, every half-year or every month, either for life or for a fixed number of years. Annuities can be purchased to provide an income during retirement. The payment stream from the issuer to the annuitant has an unknown duration based principally upon the date of death of the annuitant. After the death of the annuitant or after the fixed annuity period expires for annuity payments, the invested annuity fund is refunded, perhaps along with a small addition, calculated at that time. At this point the contract will terminate and the remainder of the fund accumulated is forfeited unless there are other annuitants or beneficiaries in the contract. Thus a life annuity is a form of longevity insurance, where the uncertainty of an individual's lifespan is transferred from the individual to the insurer, which reduces its own uncertainty by pooling many clients. Annuities differ from all the other forms of life insurance discussed so far in one fundamental way - an annuity does not provide any life insurance cover but, instead, offers a guaranteed income either for life or a certain period. Typically annuities are bought to generate income during ones retired life, which is why they are also called pension plans. Annuity premiums and payments are fixed with reference to the duration of human life. Annuities are an investment, which can offer an income you cannot outlive and provide a solution to one of the biggest financial insecurities of old age; namely, of outliving ones income.

WHOLE-LIFE POLICY A typical whole life policy runs as long as the policyholder is alive. In other words, the risk is covered for the entire life of the policyholder, which is why they are know as whole life policies. The policy monies and the bonus are payable only to the nominee of the beneficiary upon the death of the policyholder. The policyholder is not entitled to any money during his or her own lifetime, i.e. there is no survival benefit.

This represents a serious drawback in the case of whole life policies. Suppose, for instance, you buy a whole life policy at the age of thirty when your children are young and the family needs protection. Conceivable, by the time you are 55 or 60 or so the children may be well settled, no longer truly needing the protection the whole life policy provides. On the other hand, you would probably require the money for yourself and your wife in your retired life but this would not be possible since the sum assured is payable only when the policy holder dies. In this sense whole life policies are fairly rigid and inflexible and are suitable only in a few, very specific cases. However, given the rigidity pointed out above we would advise you to be careful about buying a whole life policy when you are young. Your insurance portfolio is best built around endowment policy. The one exception is the Convertible Whole Life Policy. On the whole, whole life policies may be best considered after the age of 45 either for the purpose of leaving behind an estate for ones heirs or for covering the possibility of premature stoppage of pension income in the case of relatively early death after retirement.

MONEY-BACK POLICY Unlike ordinary endowment insurance plans where the survival benefits are payable only at the end of the endowment period, money back policies provide for periodic payments of partial survival benefits during the term of the policy, of course so long as the policy holder is alive. An important feature of this type of policies is that in the event of death at any time within the policy term, the death claim comprises full sum assured without deducting any of the survival benefit amounts, which may have already been paid as money-back components. Similarly, the bonus is also calculated on the full sum assured. Under money back policies premiums can be paid as per the insurance companys policy. These could be quarterly, half yearly or annually. The premiums for these policies are payable for the selected term of years, or till death if it occurs earlier. By buying such policies one can receive income at regular intervals other than the risk cover it provides. Also a good amount of bonus on the full sum assured is quite a good bargain.

Such plans are particular popular with individuals for whom income at regular intervals is a necessity in addition to an insurance cover. The minimum age is 12 years to be eligible for a Money-Back Policy.

GENERAL INSURANCE Non-life insurance is known as general insurance. General insurance policies are of one year. If the loss occurs in that year, then the payment is made. Otherwise the premium amount is lost. The various types of general insurance are as follows: MARINE INSURANCE Marine insurance covers the loss or damage of ships, cargo, terminals, and any transport or cargo by which property is transferred, acquired, or held between the points of origin and final destination. A contract of marine insurance is an agreement whereby the insurer undertakes to indemnify the assured, in the manner and to the extent agreed, against losses incidental to marine adventure. There is a marine adventure when any insurable property is exposed to maritime perils i.e. perils consequent to navigation of the sea. The term 'perils of the sea' refers only to accidents or causalities of the sea, and does not include the ordinary action of the winds and waves. Besides, maritime perils include, fire, war perils, pirates, seizures and jettison, etc. In a contract of marine insurance, the insured must have insurable interest in the subject matter insured at the time of the loss. Under marine insurance, the following persons are deemed to have insurable interest: The owner of the ship has an insurable interest in the ship. The owner of the cargo has insurable interest in the cargo. A creditor who has advanced money on the security of the ship or cargo has insurable interest to the extent of his loan. The master and crew of the ship have insurable interest in respect of their wages. If the subject matter of insurance is mortgaged, the mortgagor has insurable interest in the full value thereof, and the mortgagee has insurable interest in respect of any sum due to him. A trustee holding any property in trust has insurable interest in such property. In case of advance freight the person advancing the freight has an insurable interest in so far as such freight is repayable in case of loss. The insured has an insurable interest in the charges of any insurance policy which he may take. FIRE INSURANCE

A fire insurance is a contract under which the insurer in return for a consideration (premium) agrees to indemnify the insured for the financial loss which the latter may suffer due to destruction of or damage to property or goods, caused by fire, during a specified period. The contract specifies the maximum amount , agreed to by the parties at the time of the contract, which the insured can claim in case of loss. This amount is not , however , the measure of the loss. The loss can be ascertained only after the fire has occurred. The insurer is liable to make good the actual amount of loss not exceeding the maximum amount fixed under the policy. A fire insurance policy cannot be assigned without the permission of the insurer because the insured must have insurable interest in the property at the time of contract as well as at the time of loss. The insurable interest in goods may arise out on account of (i) ownership, (ii) possession, or (iii) contract. A person with a limited interest in a property or goods may insure them to cover not only his own interest but also the interest of others in them. Under fire insurance, the following persons have insurable interest in the subject matter:Owner Mortgagee Pawnee Pawn broker Official receiver or assignee in insolvency proceedings Warehouse keeper in the goods of customer A person in lawful possession e.g. common carrier, wharfinger, commission agent.

MOTOR INSURANCE Motor insurance is insurance purchased for cars, trucks, motorcycles, and other road vehicles. Its primary use is to provide financial protection against physical damage and/or bodily injury resulting from traffic collisions and against liability that could also arise therefrom. The specific terms of vehicle insurance vary with legal regulations in each region. Motor insurance can cover some or all of the following items: The insured party (medical payments) The insured vehicle (physical damage) Third parties (car and people, property damage and bodily injury) Third party, fire and theft In some jurisdictions coverage for injuries to persons riding in the insured vehicle is available without regard to fault in the auto accident (No Fault Auto Insurance) Different policies specify the circumstances under which each item is covered. For example, a vehicle can be insured against theft, fire damage, or accident damage independently.

MEDICAL INSURANCE Medical insurance is insurance against the risk of incurring medical expenses among individuals. By estimating the overall risk of health careexpenses among a targeted group, an insurer can develop a routine finance structure, such as a monthly premium or payroll tax, to ensure that money is available to pay for the health care benefits specified in the insurance agreement. The benefit is administered by a central organization such as a government agency, private business, or not-for-profit entity. ACCIDENT INSURANCE Accident insurance provides a cash cover to a policyholder when s/he suffers injuries as a result of an accident. While insurance helps a policyholder pay off hospital and medical bills in case of accident injuries, it provides cash benefits to family members if the policyholder dies in the accident. This insurance, applicable 24 hours a day, 365 days a year, is also commonly referred to as personal accident insurance. Under personal accident insurance, the policyholder, if injured, receives cash benefits every month, just like income, for as long as s/he is unable to work due to the accidental injuries. This income is non-taxable and does not exceed the policyholders after-tax earnings minus the state benefits s/he can claim. In case of death of the policyholder due to an accident, the family receives a specific lump-sum amount. SPECIAL INSURANCE New, innovative types of insurance policies are being introduced all the time. These include things like insurance of concerts, body parts of celebrities, key man insurance, comprehensive risk policy etc.

ANNEXURE: Term Insurance lost its popularity because of the fact that all the money is lost if death does not occur during the policy term. However, term insurance was resurrected when the concept of linking term insurance and home loans was introduced. Nowadays, most banks insist that the home loan-applicant take a term insurance of the loan amount. This is to make sure the bank gets its principal back even if the borrower dies. This is how it works: Ajay takes a home loan of Rs 50 lakhs and has to pay Rs 10,000 every month for x years as EMI His bank makes him take a home insurance (term insurance linked to a home loan). This policy has a cover value of Rs 50 lakh and a nominal premium The cover value of the policy is the current balance of the loan at that point of time Examine the illustration below (all calculations taken on annual basis for simplicity. EMIs and premiums are usually paid on a monthly basis) YEAR EMI PAID CURRENT BALANCE OF LOAN 50,00,000 4,90,000 4,80,000 4,70,000 4,60,000 4,50,000 4,50,000 PREMIUM PAID 750 700 650 600 550 500 n/a CURRENT COVER ON TERM INSURANCE 5,00,000 4,90,000 4,80,000 4,70,000 4,60,000 4,50,000 4,50,000

Loan taken 1 2 3 4 5 6

10,000 10,000 10,000 10,000 10,000 EMI supposed to be paid but borrower dies

In our example, the balance on the loan and the cover on the policy is 4,50,000 when the borrow dies The insurance company will pay the claim amount of 4,50,000 to the bank In this way, the loan will be paid off in full and Ajays family is now the owner of the house