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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