Advantage of Insurance

Advantage of Insurance:Life Insurance has no competition from any other business. Many people think that life insurance is an investment or a means of saving. This is not a correct view. When a person saves, the amount of funds available at any time is equal to the amount of money set aside in the past, plus interest. This is so in a fixed deposit in the bank, in national savings certificates, in mutual funds and all other savings instruments. If the money is invested in buying shares and stocks, there is the risk of the money being lost in the fluctuations of the stock market. Even if there is no loss, the available money at any time is the amount invested plus appreciation. If life insurance, however, the fund available is not the total of the savings already made (premiums paid), but the amount one wished to have at the end of the savings period (which is the next 20 or 30 years). The final fund is secured from the very beginning. One is paying for it over the years, out the savings. One Has to pay for it only as long as one lives or for a lesser period, if so chosen. The assured fund is not affected. There is no other scheme which provides this kind of benefit. Therefore life insurance has no substitute.

A Comparison with other form of saving will show that life insurance has the following advantages.

1. In the event of death, the settlement is easy. The heirs can collect the moneys quicker, because of the facility of nomination and assignment. The facility of nomination is now available for some bank accounts, provident fund, etc..
2. There is a certain amount of compulsion to go through the plan of savings. In other forms, if one changes the original plan of savings, there is no loss. In Insurance, there is a loss.
3. Creditors cannot claim the life insurance moneys. They can be protected against attachments by courts.
4. There are tax benefits, both in income tax and in capital gains.

5. Maretability and liquidity are better. A life insurance policy is property and can be transferred or mortgaged. Loans can be raised against the policy.
6. It is possible to protect a life insurance policy from being attached by debtors. The deneficiarie's interests will remain secure.

The following tenets help agents to believe in the benefits of life insurance. Such faith will enhance their determination to sell and their perseverance.

1. Life Insurance is not only the best possible way for family protection. There is no other way.

2. Insurance is the only way to safeguard against the unpredictable risks of the future. It is unavoidable.

3. The terms of life are hard. The terms of insurance are easy.
4. The value of human life is far greater than the value of property. Only insurance can preserve it.
5. Life insurance is not surpassed by any other savings or investment instrument, in terms of security, marketability, stability of value or liquidity.

6. Insurance, including life insurance, is essential for the conversion of many business, just as it is in the preservation of homes.
7. Life Insurance enhances the existing standards of living.
8. Life insurance helps people live financially solvent lives.

9. Life insurance perpetuates life, liberty and the pursuit of happiness.
10. Life Insurance is a way of life.

Needs and Insurance

Risks arise because there are needs to be fulfilled. The risks attached to early death arise because of the need to maintain the family that is left behind. If there were no needs, there would be no risks. Insurance is therefore, related to the needs of individuals. Different plans are designed with different benefits, so that they may cater to the different needs of people. While selling life insurance, therefore, it is necessary to be aware of the needs of people.

Needs of Insurance for people are not the same. They vary. They depend on personal values, demands of society, family and other relationships, age, occupation, habits, place of residence, and so on. Someone could be seriously concerned about the welfare of a movement for tress or for animals, at some neglect of own personal comforts. It is necessary to be sensitive to the needs.

Broadly, the needs of individuals may be classified as follows

1. Protection of the standard of living of the family, which is at risk on early death. Insurance must provide the necessary income to maintain the standard, after providing for repayment of loans and other debts Modern lifestyles subject people to debts on account of car, house appliances and equipments at home, obtained on hire purchase arrangements.
2. Future Expenses on account of children's education, marriage, start of some business and so on, which are ambitions and dreams. Wanting to send one's some to a medical college is a dream. It is not a need as essential as being able to provide for food and clothing.
3. Continuance of business, when financiers ask for life insurance policies as collateral security, or partners need to rearrange finances on the death of partner.
4. Substitute income when earning capacity ceases due to old age or disabilities.

All the above needs have to be met, after meeting the costs of inflation. People would not be consciously aware of these as formidable problems in the future. Even if they do, they mat not be willing to sacrifice some of the pleasure of the present in order to provide for the future. The future is seen to be some distance away and there is no hurry to provide for it. This is the difficulty, which life insurance agents face.

There have been two significant developments in the few years after the opening up of life insurance industry to private players. One is the result of demographic changes, caused by better health care and longer life expectancies. The number of aged people is more in absolute numbers as well as proportion to the total population. Therefore, there is an increasing need and demand for pension plans, whereby the elderly persons can get a steady income. The second development is the demand for linked insurance policies, arising out of the need to compensate for the falling value of money. Pension plans and linked products are becoming increasingly popular. The terms and conditions of these policies are different from the traditional life insurance products.

What is an Insurance Premium

What is an Insurance Premium: The Insurance Premium is calculated on the basis of assumptions relating to future experiences on mortality, interest rates and expenses. These assumption are based on the insurer's own experience in the past and therefore, not arbitrary. Yet, they are assumptions as far as the likely future experience is concerned. The margin for contingencies is provided because of the uncertainty that these assumptions will turn out to be valid, as the future unfolds.

Level Premiums

        If it is expected that out of 10,000 persons at a specified age, the probability is that one may die within one year, the mortality rate at that age is said to be 0.01%. The Risk Premium  chargeable  for persons at that age would be Rs 0.01 per Rs. 1,000 SA. If a policy has a term of 20 years, the risk premium and therefore, the Insurance Premium charged would vary for each of 20 years. It would be increasing steadily from year to year. It would be difficult to administer annual changes in a continuing contract. A part from that, the Insurance Premium at later ages, towards the end of the policy term, would be very high and people may find it beyond their ability to pay. 

         They will then be without the protection of insurance at times when they need it most. To offset this problem, insurers spread the Risk Premium  on a uniform basis, throughout the term of the policy. The Insurance Premium  remains constant for 20 years. Such uniform premium is called Level Premium. This implies that the Insurance Premium collected would be more than necessary for the risk in the early ages, and less than necessary towards the latter part of the policy.

Office Premium

          The premium figures arrived at after loading the Net Premium or Pure Premium, is called the Office Premium. They are now ready for use. The Insurance premium figures printed in the promotional literature and brochures and Office Premium. They are also referred to as the Tabular Premium.

Extra Premiums

          Extra Premiums may be charged on any particular policy.. This may happen because of the grant of some benefit in addition to the basic benefits under the plan, like accident benefit or premium waiver benefit. Riders provide additional or supplementary benefits. Extra Premium may become chargeable because of decisions relating to the extent of risk in any particular case. If the risk of the person to be insured is assessed as more than normal, because of healthy or because of occupation or habits, insurers may charge Extra Premium. These are usually stated as say, Rs.2 per thousand, and will be added to the Insurance Premium otherwise chargeable.

What is Premium

In a contract of insurance, the insurer promises to pay to the policy holder a specified sum of money, in the event of a specified happening. The policy holder has to pay a specified amount to the insurer, in consideration of this promise."Premium" is the name given to this consideration that the policyholder has to pay in order to secure the benefits offered by the insurance contract. It can be looked upon as the price of the insurance policy. It may be a one-time payment. That is not common. Ofter, it has to be paid regularly over a period of time. A default in premium can endanger the continuance of the policy. If that happens, the policy will be treated as "lapsed" and the expected benefits may not be available. The consequences of default are specified in the policy conditions.

The calculation of premium is a complex technical process, involving actuarial and statistical principles. Only trained professionals, called actuaries, do it. Tables of premium rates for each plan of insurance are made available by insurance companies for the use of agents, who are required to quote the premium for a particular policy being offered to a prospect.

The risk premium is calculated on the basis of an expectation as to how many persons are likely to die within a year in an age group. This expectation, regarding the number of persons likely to die within a year at each age, is calculated by actuaries on the basis of past experiences and made available as "Mortality Tables".

 The risk premium would be adequate to pay the claims that would arise, if all the policies provided benefits only in the event of death within one year. Such policies are called term insurance policies. This premium will not be adequate for policies which provides also for amounts payable on the person survival, are called Endowment Policies. The actual premium collected in such policies would have to be more than the risk premium. Here also, the mortality tables would be used to estimate the number of persons who may survive the specified periods or terms.

The premium collected by insurers every year are not utilised for payment of claims. This so for many reasons. One is the real experience may be different from the probabilities indicated by the mortality tables. Secondly, the portion of the premium is meant to meet the survival benefits and must be kept aside. The balance premium kept aside, after outgoes of various kinds, will be invested and will earn some interest. To the extent of these interest earnings, the premium charged can be reduced. The premium worked out after taking into account the interest likely to be earned, is called the Net premium or Pure Premium.

Role of Insurance in Economic Development

For economic development, investments are necessary. Investment are made out of savings. A life insurance company is a major instrument for the mobilization of saving of people, particularly from the middle and lower income groups. These saving are channeled into investments for economic growth. The Insurance Act has strict provisions to ensure that insurance funds are invested in save avenues, life Government bonds, companies with record of profits and so on.This is most important Role of Insurance in Economic Development.

A life insurance company's funds are collected by way of premiums. Every premium represents a risk that is covered by that premium. In affect, therefore, these vast amounts represents pooling of risks. The funds are collected and held in trust for the benefit of the policy holders. The management of life insurance companies are required to keep this aspect in mind and make all its decisions in ways that benefit the community. This applies also to its investments. That is why successful insurance companies would not be found investing in speculative ventures. Their investments, as in the case of L.I.C., benefit the society at large.This is another Role of Insurance in Economic Development

Another Role of Insurance in Economic Development, A part of investment, business and trade benefit through insurance. Without insurance, trade and commerce will find it difficult to face the impact of major perils like fire, earthquake, floods, etc. Financiers, like banks, would collapse if the factory, financed by it, is reduced to ashes to ashes by a terrible fire. Insurers cover also the loss to financiers, if their debtors default.

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Business of Insurance

Business of Insurance of Companies are called insurers. The Business of insurance is to (a) bring together persons with common insurance interests (sharing the same risks), (b) collect the share or contribution (called premium) from all of them, and (c) pay out compensations (called claims) to those who suffer from the risks. The premium is determined on the same lines as indicated in the examples above, but with some further refinements.

In India, Business of Insurance is classified primarily as life and non-life or general. Life Insurance includes all risks related to the lives of human beings and general insurance covers the rest. General insurance has three classification viz., Fire (dealing with all related risks), Marine (dealing with all transport related risks and ships) and Miscellaneous (dealing with all others like liability, fidelity, motor, crop, engineering, construction, aviation, personal accident, etc.).  Personal accident and sickness insurance, which are related to human beings, is classified as "Non-life" in India, but is classified as "life", in many other countries. What is "Non-Life" in India is termed "Property and Casualty" in some other countries.

In India, IRDA has, in 2005, issued Regulations enabling micro-insurance (broadly meaning insurance for small Sums Assured, like 5 to 50 thousands) to be done by both life and general insurers on the basis of mutual tie-ups. A policy may be issued by a life insurer covering both life and non-life risks, but premium on account of the non-life business will be passed on to a general insurer and the claim amount collected from the latter. 

In the Business of Insurance, premium for insurance is based on expectations of the losses. These expectations are based on studies of occurrences in the past and the use of statistical principles. There is, in statistics, a "Law of Large Numbers". When you toss a coin, the chance, or probability, of a head or tail coming up is half. If the coin is tossed 10 times, one cannot be sure that the head will come up 5 times. If the coin tossed 1 million times, the number of heads will be closer to half a million proportionately than in the case of 10. The variation will be less as a percentage. So also, the larger the numbers (of risks) included in the pool, the better the chances that the assumptions regarding the probability of the risk occurring, will be realized in practice.

The Business of Insurance is one of sharing. It Spreads losses of an individual over the group of individuals who are exposed to similar risks. People who suffers loss get relief because at least part of their loss is made good. People who do not suffer loss are relieved because they were spread the loss.

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The Human Asset

The Human Asset: A human being is an income generating asset. One's income generating ability depends on one's skills, (manual, professional, problem solving, entrepreneurial, etc). These are the assets. The value of the asset can be measured by considering the income that is generated by the person concerned. The concept of Human Life Values, provides scientific ways to determine the asset value of the human life and therefore, the amount of life insurance required. These techniques, like other techniques related to selling, will have to be learnt on the job.

The Human Asset also can be lost through unexpectedly early death or through sickness and disabilities caused by accidents may or may not happen. Death will happen, but the timing is uncertain. If it happens around the time of one's retirement, when it could be expected that the income will normally cease, the person concerned could have made some other arrangements too meet the continuing needs. But if it happens much earlier when the alternate arrangements are not in place, there can be losses to the person and dependents. Those dependent on the income are helped to overcome their difficulties, by insurance.

The Human Asset:A person, who may have made arrangements for his needs after his retirement, also would need insurance. This is because the arrangements would have been made on the basis of some expectations like,  likely to live for another 15 years, or that children will be able to look after the aged parents. If any of these expectations do not become true, the original arrangement would become inadequate and there could be difficulties. Living too long can be as much as problem as dying too young. Both are risks, which need to be safeguarded against. Insurance take care.

Thus, the risks in the case of a human being are related to

• Early Death
• Living too long
• Disabilities
• Sickness
• Unemployment

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How Insurance Works

How Insurance Works:The mechanism of insurance is very simple. People who are exposed to the same risks come together and agree that, if any one of them suffers a loss, the other will share the loss and make good to the person who lost. All people who send goods by ships are exposed to the same risks, which are related to water damage, sinking of the vessel, piracy, etc. Those owning factories are not exposed to these risks, but they are exposed different kinds of risks like, fire hailstorms, earthquakes, lightning, burglary, etc. Like this, different kinds of risks can be identified and separated groups made, including those exposed to such risks. By this method, the heavy loss that any one of them in the group may suffer (all of them may not suffer such losses at the same time) is divided into bearable small losses by all the others in the group. In other words, the risk is spread among the community and the likely big impact on one is reduced to smaller manageable impacts on all. Insurance helps to spread the costs or risks.Read continue to Know more about How Insurance Works.

If a Jumbo Jet with more than 350 Passengers crashes, the loss would run into several crores of Rupees. No airline would be able to bear such a loss. It is unlikely that many Jumbo Jets will crash at the same time. If 100 airline companies flying Jumbo Jet, come together into an insurance pool, whenever one of the Jumbo Jets in the pool crashes, the loss to be borne by each airline would come down to a few lakhs of Rupees. Thus, insurance is a business of "Sharing". It makes an unbearable loss, Bearable. More details are given below about How Insurance Works.

There are certain principles, which make it possible for insurance to remain a preferred and fair management. The first is that it is difficult for any one individual to bear the consequences of the risks that he is exposed to. It will become bearable when the community shares the burden. The Second is that the peril should occur in an accidental manner. Nobody should be in a position to make the risk happen. In other words, none in the group should set fire to his assets and ask others to share the loss. This would be taking unfair advantage of an arrangement put into place to protect people from the accidental risks they are exposed to. The occurrence has to be random, accidental, and not the deliberate creation of the insured person.

The manner in which the loss is to be shared can be determined before-hand. It can be equal among all. It can also be proportional to the risk that each person is exposed to. The trader who has sent Rs 100 Lakhs worth of goods on a ship will bear double the loss to be borne by another trader who has got Rs. 50 Lakhs worth of goods one the same ship. Current practice is to make the sharing proportional to the exposure to risk. The Share likely shares may be collected in advance, at the time of admission to the group. Insurance companies collect in advance and create a fund from which the losses are paid.

The collection to be made from each person in advance, is determined on the basis of assumptions. While it may not be possible to tell beforehand, which person will suffer, it may be possible to tell, on the basis of past experiences, how many persons, on an average, may suffer losses.

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Classification of Risk

Classification of Risk:Risks are classified in various ways. One Classification is based on the extent of the damage likely to be caused. Critical or Catastrophic risks are those which may lead to the bankruptcy of the owner. It Would happen if the loss is total, like in a tsunami, wiping out everything. It can also happen if the deceased persons was heavily in debt. important risks may not spell doom, but may upset family or business finances badly, requiring a lot of time to recover. The adverse effects of an economic recession is one such. Less damaging are Unimportant risks, like temporary illness or accidents.

Another Classification of Risk is between Financial and Non-Financial risks, referred to in an earlier paragraph. Insurance is concerned with only financial risks.

A third Classification of Risk is between Dynamic and Static risks. Dynamic risks are caused by perils which have national consequence, like inflation, calamities, technology, political upheavals, etc. Static risks are caused by perils which have no consequence on the national economy, like a fire or theft or misappropriation. Dynamic risks are less likely to occur than static risks, but are also less likely to occur than static risks, but are also less predictable. Static risks are more suited to management through insurance.

Fundamental risks are those that affect large populations while Particular risks affect only specific persons. A train crash is a fundamental risk while a theft is a particular risk. Life Insurance business deals with particular risks, but fundamental risks affect the life insurance company's experience, as many persons will be affected at the same time, when there is an. Earthquake, flood or riot.

Another Classification of Risk is between Pure risks and  Speculative risks. The latter are in the nature of betting or gambling where the risk is, to some extent, under the control of the person concerned, while a pure risk is not. It is more in the nature of an Act of God. Insurance deals with only pure risks and not speculative risks.

Need of Insurance

Need of Insurance:Assets are insured, because they are likely to be destroyed or made non-functional before the expected life time, through accidental occurrences. Such Possible occurrences are called Perils. Fire, floods, breakdowns, lightning, earthquakes, etc, are perils. If such perils can cause damage to the asset, we say that the asset is exposed to that risk. Perils are the events. Risks are the consequential losses or damages. The risk to a owner of building, because of the peril of an earthquake, may be a few lakhs or a few crores of rupees, depending on the cost of the building, the contents in it and the extent of damage.

Need of Insurance:The risk only means that there is a possibility of loss or damage. The damage may or may not happen. The earthquake may occur, but the building may not have been affected at all. Insurance is done against the possibility that the damage may happen. There has to be an uncertainty about the risk. The word 'possibility' implies uncertainty. Insurance is relevant only if there are uncertainties.This is the another Need of Insurance.

If there is no uncertainty about the occurrence of an event, it cannot be insured against. In the case of a human being, death is certain, but the time of death is uncertain. The person is insured, because of the uncertainty about the time of his death. In the case of a person who is terminally ill, the time of death is not uncertain though not exactly known. It would be 'soon'. He can not be insured.I think everyone Needs Insurance.

Only economic consequences can be insured. If the loss is not financial, insurance may not be possible. Examples of non-economic losses are love and affection of parents, leadership of managers, sentimental attachments to family heirlooms, innovative and creative abilities, etc.

Insurance only tries to reduce the impact of the risk on the owner of the asset and those who depend on the asset. They are the ones who benefit from the asset and therefore, would lose, when the asset is damaged. Insurance only compensates for the losses - and that too, not fully.These are the Needs of Insurance.

History of Insurance

History of Insurance: Insurance has been known to exist in some form or other since 3000BC. The Chinese traders, traveling treacherous river rapids would distribute their goods among several vessels, so that the loss from any one vessel being lost, would be partial and shared, and not total. The Babylonian traders would agree to pay additional sums to lender, as the price for writing off the loads, in case of the shipment being stolen. This is starting of History of Insurance.

The inhabitants of Rhodes adopted the principle of the 'general average', whereby, if goods are shipped together, the owner would bear the losses in proportion, if loss occurs, due to jettisoning during distress.(Captains of ships caught in storms, would throw away some of the cargo to reduce the weight and restore balance. Such throwing away is called jettisoning).

The Greeks had started benevolent societies in the late 7th century AD, to take care of the funeral and families of members who died. The Friendly societies of England were similarly constituted. The Great Fire of London in 1666, in which more than 13000 houses were lost, gave a boost to insurance and the first fire insurance company, called the Fire office, was started in 1680.

The origins of insurance business as in vogue at present, is traced to the Llyod's Coffee House in London. Traders, who used to gather in the Llyod's coffee house in London, agreed to share the losses to their goods while being carried by ships. The losses used to occur because of pirates who robbed on the high seas or because of bad weather spoiling the goods or sinking the ship. 

In India, insurance began in 1818 with Life insurance being transacted by an English company, the Oriental Life Insurance Co. Ltd.. The First Indian insurance company was the Bombay Mutual Assurance Society Ltd, formed in 1870 in Mumbai. This was followed by Bharat Insurance Co. in 1896 in Delhi, the Empire of India in 1897 in Mumbai, the United India in Chennai, the National, the National Indian and Hindusthan Cooperative in Kolkata.This is normal overview of History of Insurance.

Later, were established the Cooperative Assurance in Lahore, the Bombay Life(originally called the Swadeshi Life), the Indian Mercantile, the New India and the Jupiter in Mumbai and the Lakshmi in New Delhi. These were all Indian Companies started as a result of the Swadeshi movement in the early 1900s. By the year 1956, when the Life Insurance business was nationalized and the Life Insurance Corporation of INDIA(LIC) was formed on 1st September 1956, there were 170 companies and 75 provident fund societies transacting life insurance business in India.

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What is Insurance

What is Insurance:The business of insurance is related to the protection of the economic values of assets. Every Asset has a value. The asset would have been created through the efforts of the owner. The asset is valuable to the owner,because he expects to get some benefits from it. It is a benefit because it meets some of his needs. The benefit may be an income or in some other form. In the case of factory or a cow, the product generated by it is sold and income is generated. In the case of motor car, it provides comfort and convenience in transportation. There is no direct income. Both are assets and provide benefits.

Every Asset is expected to last for a certain period of time during which it will provide the benefits. After that, the benefit may not be available. There is a life time for a machine in a factory or cow or a motor car. None of them will last for ever. The owner is aware of this and he can so manage his affairs that by the end of that period or life-time, a substitute is made available. Thus, he makes sure that the benefit is not lost. However, the asset may get lost earlier.This is little description about what is insurance.

An accident or some other unfortunate event may destroy it or make it incapable of giving the benefits. An epidemic may kill the cow suddenly. In that case, the owner and those enjoying the benefits therefrom, would be deprived of the benefits. The Planned substitute would not have been ready. There is an adverse or unpleasant situation. Insurance is a mechanism that helps to reduce the effects of such adverse situations. It promises to pay to the owner or beneficiary of the asset, a certain sum if the loss occurs.If you are not satisfy with this description about what is insurance please gives valuable not comment in the bottom of page.I will like to consider them.

Insurance does not protect the asset. It does not prevent its loss due to the peril. The peril cannot be avoided through insurance. The risk can sometime be avoided through better safety and damage control measures. Insurance only tries to reduce the impact of the risk on the owner of the asset and those who depend on that asset. They are the ones who benefit from the asset and therefore, would lose, when the asset is damaged. Insurance only compensates for the losses - and that too, not fully.