Life insurance basics
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Transcript of Life insurance basics
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LIFE INSURANCE
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“SECURITY CAN BE THOUGHT OF AS PEACE OF MIND AND FREEDOM FROM UNCERTAINTY. INSECURITY IMPLIES FEELINGS OF DOUBT, FEAR & APPREHENSION. SECURITY IS MEASURED BY THE PROBABILITY THAT MAN’S NEEDS WILL BE SATISFIED.”
S.S. HUEBNER
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Introduction• Man’s historical obsession with security
leading to concept of insurance• Need for insurance due to presence of risk &
uncertainty in life• Only certainty in life is uncertainty, taxes &
death• It can never repair/replace a loss since it is
impossible to put a price on grief, trauma and loss of a beloved one (LI)
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Contd…..
• Monetary value offered by insurance helps in adjusting to new circumstances
• Hence insurance is a risk- management mechanism which seeks to compensate loss of economic value of assets.
• Insurance relevant only in case of loss• Protection required because assets face
accidental occurences called PERILS.
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Contd…..
• Perils are earthquakes, accidents, theft, death, fire, floods.
• Perils cause loss.• Loss that perils cause is called RISK
NO UNCERTAINTY, NO RISK AND SO NO INSURANCE
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Life Insurance
• Modern concepts of insurance started with marine insurance
• Joint family system was best form of life insurance since ancient times
• Uncertainty & lack of security coupled with break-up of joint family system created need for LI
• Risks faced are DEATH, DISEASE, DISABILITY
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Contd…..
• Study of life insurance deals with risks of dying early and living too long
• First life insurance office in India opened by Bombay Mutual in 1870
• Insurance business nationalised in 1956 to form LIC, amalgamating 245 companies.
• LIC dominant market player till date• IRDA act passed in 1999, opening
insurance sector
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Contd…..
• Global players tied up with Indian partners in 26:74 participation to form joint venture companies….MaxNewYork life, TataAig, BirlaSunlife etc
• Competition has benefited customer/pub• Strategies were tech-savvy orientation,
product innovation, expanded distribution channels, operational efficiency and improved service to drive retention
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Contd…..
• Great potential for life insurance in India since premia is 4% of GDP.
• Increase in disposable income and increased purchasing power of people.
• Greater spread and awareness campaigns by companies with catchy slogans
• Availability of different distribution channels like bancassurance, alternate channels, agency,e-insurance, mallassurance
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7 A’s of life insurance
Agent Actuary Administrator Asset-manager Accountant Auditor Adjuster
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Economic Death
• Economic death of breadwinner.• Loss of chosen standard of living• Needs like a decent life, good
education for children, own house, marriage, healthcare, financial independence & stability in old age …….all fulfilled by breadwinner
• Greatest burden is empty purse. To rely on children difficult/impossible
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Contd…
• Death, disability, old age lead to ECONOMIC DEATH of individual ,i.e stoppage of regular income
• Most important asset of breadwinner – INCOME –PRODUCING ABILITY• Protection through life insurance may
save an individual/his dependents from misery.LI gives certainty & cash flow.
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Economic principles of life insurance
• Basic economic principle of life insurance is that RISK SUFFERED BY FEW IS SPREAD OVER A LARGE NUMBER OF PERSONS WHO FACE SAME RISK.
• Fund is created where those who face similar risk will each contribute small sum, out of which assistance is given to those suffering consequences of an economic death.
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Mathematical principle
• SPREADING OF RISKS IS ECONOMIC PRINCIPLE OF LIFE INS.
• How much each person contributes, depending on several factors, is PREMIUM
• Process of fixing premium is done by Mathematical principles
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Legal principles
• When several people contribute to the fund, it is necessary to establish relationship between each individual and the fund within provisions of law.
• Relevant laws of the land have to be abided to establish legally acceptable understanding, relationships & mutual responsibilities. Law of contract.
• This is done through legal principles
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Risks to economic security
• Economic security relates to man’s needs or wants
• These are never static• Threat of not being fulfilled• Satisfaction of these wants depends
on financial position of person, his decision-making & economic scenario.
• Hence risk related to satisfaction of one’s needs.
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Risks to stability & solutions
• For single individual - disease/disability• For family man- disease,death,disability• These threats can be solved by ….. Social security schemes of govt,
which is existent in India only for BPL people
Group insurance, available only in organised sector
Individual efforts.
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HENCE……….
“NOTHING MORE UNCERTAIN THAN LIFE AND NOTHING MORE CERTAIN THAN LIFE INSURANCE.”
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ECONOMIC USES OF LIFE INSURANCE
• Provides financial security to family• A potent instrument for savings• Makes dreams come true• Collateral security for housing/education
loan• Provides financial independence in old
age• Creditors can insure debtors for
recovery of loans after death of latter
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Contd….
• Partners can insure each other’s lives to the extent of capital invested in firm.In case of death of partner, to meet danger of withdrawal of capital by legal heirs.
• Employers can buy group insurance as part of employee welfare program to boost productivity
• Key man insurance
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Advantages of life insurance
• Life insurance creates an estate – amount paid to legal heirs is thrifges determined at beginning of policy
• LI encourages thrift • LI policies cannot be attached by court or income tax.• Can be assigned for personal loans• No stamp duty required in case of TP as a
result of assignment
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Contd….
• Payments are tax-free• Premium paid gets IT exemption• Safe and profitable investment with
regulatory presence• Different types of duration to suit
different ages• Claim payments are generally hassle-free• LI companies are largest institutional
investors.
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Contd….
• LI is a long-term contract. Lock-in period is long. Funds generated are used for housing, power, social security, water supply, transport ,i.e infrastructure development of country.
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THANK YOU !