Notes on Life Insurance- Important Questions PDF

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UNIT- 3 (LIFE INSURANCE) 1. Life insurance contract and kinds of life insurance. Life Insurance is one of the most popular forms of insurance and has acquired a top position all over the world. Life Insurance protects against financial losses resulting from premature death of the insured or guarantees payment of a certain sum of money on his attaining a certain age. When the insured person dies, the proceeds of the policy are paid to his representatives of beneficiary designated in the policy. Essential Features of Life Insurance: (i) It is a contract relating to human life. (ii) There need not be an express provision that the payment is due on the death of the person. (iii) The contract provides for payment of lump sum money. (iv) The amount is paid at the expiration of a certain period or on death of the person. A contract in which the insurer, in consideration of a certain premium, either in a lump sum or in any other periodical payments, in return agrees to pay to the assured, or to the person for whose benefit the policy is taken, a stated sum of money on the happening of a particular event contingent on the duration of human life. The person who guarantees the payment is called the insurer, the amount guaranteed is called the policy amount, and the person on whose life payment is guaranteed is called the insured or assured. The particular event on which payment is to be made is either death or maturity. The consideration to be paid is called the premium and the document containing the contract is called the policy. Kinds of Life Insurance (1) Whole Life Insurance- This is the original and normal form of insurance. Under this policy, the assured agrees to pay fixed premiums periodically throughout his life. The policy amount is payable on the death of the assured to his legal representatives, assignees or nominees. This is intended for the benefit of the members of the family of the assured after his death. (2) Endowment Insurance- Under this policy, the assured agrees to pay fixed premiums periodically, not throughout his life but for a term of years or until he attains a particular age say 50 or 55 years. The policy amount is payable to the assured at the end of the stipulated time; but if he dies before that time the amount is payable to his legal representatives or assignees or nominees. This is intended for the benefit of the assured himself in his old age. This head also includes a child’s endowment or deferred life insurance. (3) Annuity Insurance- Under the policy, the insurer undertakes to pay a certain fixed sum as annuity by monthly payment either for the expiration of the specified period or earlier if death should occur to the assured. (4) Terms Insurance- Under this policy, the insurer agrees to pay the amount only in the event of the assured dropping before a certain time or age. This type is frequently adopted as collateral security for loan. Such a policy provides for a low premium at the outset with a

gradual increase and as such is known as the ascending scale policy. These policies are usually for a short period. (5) Joint-life Insurance- It is an insurance on the joint life of husband and wife and the money under the policy becomes payable on the death of either of them. A more complex form on this insurance is last survival insurance. In this type of policy money becomes payable on the death of all but one. These policies carry surrender values and proportionate paid-up policies are allowed. (6) Advance Insurance- This is another modern form of insurance in which the policy provides for the payment of a lump sum amount to the assured in consideration of his agreeing to pay the premium for a specified period or for the life of the assured if his life should terminate before the end of that period. Apart from the above types of insurances, in the field of industry, group insurance is also recognized. This is an insurance on lives of a group of persons, usually the employees under the same employer, under one policy. In these insurances, the assured will be the employer. (7) Unit Linked Insurance Plan- Unit linked insurance plan (ULIP) is life insurance solution that provides for the benefits of risk protection and flexibility in investment. The investment is denoted as units and is represented by the value that it has attained called as Net Asset Value (NAV). The policy value at any time varies according to the value of the underlying assets at the time. In a ULIP, the invested amount of the premiums after deducting for all the charges and premium for risk cover under all policies in a particular fund as chosen by the policy holders are pooled together to form a Unit fund. A Unit is the component of the Fund in a Unit Linked Insurance Policy. The returns in a ULIP depend upon the performance of the fund in the capital market. ULIP investors have the option of investing across various schemes, i.e., diversified equity funds, balanced funds, debt funds etc. (8) Key man Insurance- Key man insurance is essentially a life insurance policy taken by a company on the life of a key person who is pivotal to the viability of its business; the beneficiary is the employer. The idea of key man insurance is to indemnify the organization for the losses that may accrue due to the sudden exit or death of the key person so as to enable the continuation of the business. The IRDA had directed that only term insurance plans should be offered for key man insurance. Key man insurance policies has been resorted to not only for covering more than one key person in an organization but also for covering all those persons who are critical for the organization though they may not necessarily be ranked as the key persons in the corporate hierarchy.

2. Persons entitled to payment of life insurance money. The contract of insurance stands discharged on maturity of the policy, or by death or on the happening of the event insured against, and the following persons are entitled to receive the amount payable under the policy: (1) Payee

The person who has been authorized by the assured and whose name appears in the benefit schedule of the policy is entitled to receive the amount on maturity of the policy. He is a person who by his own name on the face of the policy is entitled to the proceeds of the policy and he is called the payee. His position for the money received under the policy will be same as nominee. (2) Assured In case of life insurance on one’s own life, the insured himself can get the payment of he survives the date of maturity provided that: (a) The insured is living at the time of maturity (b) The policy is alive i.e. has not been lapsed for non-payment. (c) The policy has not been transferred or assigned. The assured himself is entitled to payment excluding his heirs, successors and nominee except in case of assignment. In case of life insurance on the life of third parties also the assured will be entitled to get the amount. Example: If the creditor takes a policy on the life of the debtor, the creditor will be entitled to get the payment. Where the assured is a lunatic- When the policy monies are payable to the life assured and he is reported by an authentic source that he is not of sound mind, a certificate from the court of law under the Indian Lunacy Act appointing a person as the guardian to manage the properties of the lunatic should be called for. If the assured has recovered from mental disorder, he should be asked to obtain a certificate from the Mental Hospital where he was treated or from a civil surgeon that he has completely recovered from his mental disorder and that he is capable of managing his affairs. When insured is adjudged insolvent- In case where insured is adjudged insolvent the receiver is entitled to receive the sum assured. Where the insolvent is an insured person, this includes his insurance policies, which the receiver or Official Assignee as the case may be, may allow the insolvent to keep in force or surrender it to the insurer for the benefit of the creditors. (3) Executors and Administrators The status of executors and administrators is that of the legal representatives of the assured and they are competent to make claim in respect of insurance policy after the death of the assured. The only difference between a nominee and legal representative is that a nominee is only authorized to receive an amount and in law that amount does not belong to him, but legal representatives has the legal right to claim the amount according to the law of succession applicable to him. Under Section 211(1) of the Indian Succession Act, 1925 the executors or administrators ofa deceased person are his legal representatives for all purposes and all the property of the deceased person vest in them, whereas if the deceased person is a Hindu, Mohammedan,

Buddhist, Sikh or Jain, the property will pass by survivorship to some other person, the property of the deceased will not vest in an executor or administrator. (4) Joint family members The general rule in such cases is that, in the absence of anything to the contrary, the insurance amount is treated as a separate property of the assured, because it is a personal contract and the primary object of life insurance is to benefit the wife and children of the assured. IN THE CASE OF MATHUPALLI VENKATA SUBBARAO V. LAKSHMINARASAMMA, it was held that having regarded to modern social conditions the general presumption is that the policy amount is separate property and does not become joint family property unless there is a clear contrary intention. (5) Voluntary assignees Assignment is an act of insured whereby he transfers the policy to another called the assignee. Where the policy has been assigned by the policy holder i.e. insured, the assignee/ assignees will be entitled for payment. The heirs and successors of the insured will be excluded because assignment constitutes an act of transfer of the policy in favor of assignee. If a policy-holder assigns a policy on a condition that if he survives until the date of maturity or condition that the assignee predeceasing him, the condition is valid and the assignor gets his rights in the policy.

(6) Nominees Nomination can be made under Section 39 of the Insurance Act, 1938. The nomination indicates the person authorized to receive the amount, on the payment of which the insurer gets a valid discharge of its liability under the policy. The object of the section appears to be to empower the nominee merely with the power to collect the money due under the policy and to make it clear that the nomination itself does not confer any title on the nominee in the money received. It only empowers the nominee to give a valid discharge to the insurer and clothes him with the right to sue and to the extent only the law seems to have been changed. The nominee does not become the owner of the money due under the policy and he is liable to make it over to the legal representatives of the assured. Thus, nominee acts only as a receiver. 3. Amount recoverable under the Life policy. Under a life insurance policy the following amounts are recoverable namely: (i) The amount insured on the happening of the event insured or after the completion of the period. (ii) Bonus if declared by the company: This is also recoverable with the insurance amount. (iii) The share of the profits: In the case of a participation policy, a share in the profits may be recovered in addition to the sum assured. This will not make the assured a member or a contributory of the company, but he has a right only after the profits have been declared by the Board of Directors of the company.

(iv)

Surrender value: In case where the policy lapses due to non-payment of premium or where the assured surrenders the policy the insurance company may pay a percentage of premium paid according to the rules of the company.

4. Health Insurance Policy “Health is wealth”. Nowadays treatment of diseases and health care costs has become more and more expensive. Keeping in view the affordability of medical treatment, the mediclaim or health claim has become part and parcel of life. Protecting health of citizens against infectious diseases, promoting better standards of health care and ensuring that there are adequate safeguards against financial risks connected with sever ailments, would constitute key objectives of public health policy in a welfare state. Health insurance is a personal insurance that provides coverage for the cost of hospital and medical expenses arising from illness and injury. It includes individually hospital cash, critical illness and disability benefits. Features of health insurance policies: The policy covers all the hospitalization and domiciliary hospitalization expenses for illness and diseases suffered or accidental injury sustained during the policy. All the expenses including room rent, nursing expenses, surgeon and operation theatre expenses and other expenses concerning to the diseased unless expressly excluded. The policy does not cover the expenses for the diseases which are pre-existing when the policy is purchased. The expenses allowed which are incurred during the period up to 30 days prior to and period 60 days after hospitalization are eligible for reimbursement. The claim may also contain health checkup. The insured is eligible to claim the health check-up expenses once in every 4 years of the existing policy. The maximum insurance coverage available under this policy is Rupees 5, 00,000. It covers all the healthy persons of 5 years to 80 years of age. Mediclaim is offered to individuals as well as groups (in this case the group discount is available) and the employer is compensated for the amounts that are reimbursed by the employer to employees. Inclusion of maternity expenses is an option available to the insured. Categories of Health Insurance Coverage (1) Medical expenses Cover: It covers payment of expenses related to hospitalization and the services rendered by the doctor and the nursing home. The main benefit is that under these insurance schemes, a predetermined number of days stay in the hospital and hospital costs are covered in the scheme. Apart from these costs, all other costs for services provided by the hospital are covered while the insured remains hospitalized. (2) Major Medical expenses cover/Long-term care insurance: This category covers expenses related to major surgery or operations due to serious illness or disease. Major medical coverage continues protection after basic medical expense insurance benefits have exhausted.

(3) Disability Income Cover: It is aimed at providing for the lost income during the disability period or during the treatment period. The benefit is usually paid as a percentage of the capital sum insured and is paid weekly. Types of Health Insurance: 1. Individual Medical Expense Insurance: Every individual requires health insurance coverage. Individual policies are meant for such people and the following people are:  Self- employed  Students not covered by their parents insurance  Early retirees  Employees who are not offered any medical expense coverage  Part-time, temporary or contract workers who are not eligible for coverage through their employees  Unemployed persons who are not eligible for government sponsored health plans for the poor and  Spouse, children and other dependents those are not eligible for coverage.

2. Comprehensive Major Medical policy: All categories of medical care services and supplies are covered under this policy. The reimbursement of all covered expenses is made after providing for the deductible. For example; a reimbursement of 80 percent of the total covered expenses in a year after providing Rupees 500 for deductible up to a maximum amount of Rupees 1,00,000. 3. Special Individual Insurance Coverage: These policies include:  Hospital confinement indemnity policies: A fixed sum is paid for each day of hospital confinement.  Temporary Major medical policies: These policies cover for only one term if the coverage is on a three-month basis.  Specified Disease Policies: Also called as dreaded disease policies. These policies provide various types of benefits up to a substantial maximum wholly for the purpose of treatment of dreaded disease mentioned in policy. 4. Long term Care Insurance: Long term care are special policies that provide coverage for nursing home care and home health care for a period specified in the policy. They are divided into 2 major categories: (a) Nursing home care- Insurance policies have three levels of nursing home care:  Custodial care, which is the basic level of nursing care and takes form of assistance with the daily living activities.  Intermediate care, it is preventive and rehabilitative in nature.  Skilled nursing care, it is the highest levels of nursing care and needs good expertise.

Normally, LTC policies contain Activities of Daily Living (ADL) and if the insured fails to perform 2 or more than 2 ADL’s, the insured can get the benefit. The following ADL’s are:  Eating  Bathing  Dressing  Toileting  Transferring  Continuance  Taking medicine (b) Community care: These benefits are stated as a percentage of the nursing home benefits and are provided by a variety of programs and services as under:  Home health care- The aim is to maintain, improve or restore the individuals’ health. It includes skilled nursing, personal services etc.  Hospital care- The aim is for treatment of terminally ill patients and it is not to save the patients’ life but to make it more comfortable, thereby allowing the patient to die in dignity. Such care can take place at home or hospital.  Respite care: It provides temporary relief for family members providing care in the individuals’ home. 5. Disability Income Insurance: It is an insurance aimed at providing for the lost income during the disability period or during the treatment period. It tries to replace the income that cannot be earned due to the sickness of the assured....