 Definition: What is insurance?

 Insurance enables those who suffer a loss or accident to be

compensated for the effects of their misfortune. The payments come
from a fund of money contributed by all the holders of individual
insurance policies. In other words, individual risks are pooled and
shared, with each policyholder making a contribution to the common
fund.

 Well, it simply means protection against future contingent losses. The

concept of insurance is very simple; it involves paying someone to take
on a certain risk. An insurer is a company selling the insurance and the
one who is buying the insurance is called the insured or policy holder.
Read on to know all about insurance.

 Type of Insurance

 Life Insurance.
 General insurance.
 Health Insurance

 General Insurance

 General insurance is basically non-life insurance, which is meant for

short period of time, ideally twelve month or less. Now a day, some
companies make contracts for more than twelve months but not more
than 5 years. Vehicle insurance, fire insurance, marine insurance etc.
falls under general insurance category. In India, ICICI Lombard, National
Insurance, Oriental Insurance, Reliance, Cholamandalam MS, Tata AIG,
HDFC Ergo etc provide general insurance. A Marine Cargo policy covers
goods in transit including by sea, air and road. Further, insurance of
motor vehicles against damages and theft forms a major chunk of non-
life insurance business
 Life Insurance.

 Life insurance is the most discussed stuff in the industry. Most of the
people know about the insurance but they don’t know the difference of
the same. The good thing about insurance is that the awareness has
been increasing over a period of time. A decade back, people used to
buy insurance because somebody from their family or friends force
him/her to buy it. But now people buy insurance to mitigate the risk.
People have started understanding the need of an hour. Life insurance
can be classified as whole life plan, endowment, term plan, money
back plan and Unit Linked Insurance Plan (ULIP).

 Whole Life Insurance

 A whole life policy runs as long as the policyholder is alive. As risk is

covered for the entire life of the policyholder, therefore, such policies
are known as whole life policies. A simple whole life policy requires the
insurer to pay regular premiums throughout the life. In a whole life
policy, the insured amount and the bonus is payable only to the
nominee of the beneficiary upon the death of the policyholder. There is
no survival benefit as the policyholder is not entitled to any money
during his / her own lifetime. Whole life policies have a major drawback
in the sense that the policyholder is not entitled to any money during
his or her own lifetime. Hence such a policy is suitable only in a few,
very specific cases. Suppose a person buys a whole life policy for say
25 years at the age of thirty when his children are young and the
family needs protection. By the time he is 55 his children may be well
settled, no longer truly needing the protection the whole life policy
provides. On the other hand, he would probably require the money for
himself and his wife for the retired life but this would not be possible
since the sum assured is payable only when the policy holder dies.
 Endowment

 An endowment policy covers risk for a specified period, at the end of

which the sum assured is paid back to the policyholder, along with the
bonus accumulated during the term of the policy. An endowment life
insurance policy is designed primarily to provide a living benefit and
only secondarily to provide life insurance protection. Therefore, it is
more of an investment than a whole life policy. Endowment life
insurance pays the face value of the policy either at the insured's
death or at a certain age or after a number of years of premium
payment. Endowment policy is an instrument of accumulating capital
for a specific purpose and protecting this savings program against the
saver's premature death Apart from providing financial risk cover in
case the insurer's-who is usually a family's breadwinner-premature
death, the insurance amount is also repaid once this risk is over. The
endowment amount paid at the maturity of the policy can be used for
meeting major expenditures such as children's education and
marriage, etc

 Money back

 Money back policy provides for periodic payments of partial survival

benefits during the term of the policy, as long as the policyholder is
alive. They differ from endowment policy in the sense that in
endowment policy survival benefits are payable only at the end of the
endowment period. An important feature of money back 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. The bonus is also calculated on the full sum assured.
Money back life insurance policies are very popular among traditional
investors who seek financial instruments that provide insurance and
investment, with a low risk element and guaranteed returns. This type
of policy is perfect for individuals who are in their late 30s or early 40s
and are looking at significant payouts after 10-15 years to fund their
children's higher education, marriage and other expenses. ❑ Money
 back policies create a long-term savings opportunity with a reasonable
rate of return, especially since the payout is considered exempt from
tax except under specified situations. One negative aspect of money
back policies is that they have higher premium as compared to other
insurance polices.

Term Plan .

 ❑ Term plan: –

 In case of term insurance, insures pay premium to cover the death risk.
Insured does not get anything from the insurance company, if he
survives till the end of policy term. The premium paid for term cover
goes to the company. The good part of this plan is, insured gets
maximum death cover with minimum premium. Now a days,
companies have come up with insurance with return of premium, if
nothing happens to insured during the term of the policy, the company
pays part of the premium back to the insured. ❑ A policy with a set
duration limit on the coverage period. Once the policy is expired, it is
up to the policy owner to decide whether to renew the term life
insurance policy or to let the coverage end. This type of insurance
policy contrasts with permanent life insurance, in which duration
extends until the policy owner reaches 100 years of age ([Link]).

 ❑ ULIP –

 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. It is important to remember that in a ULIP, the
investment risk is generally borne by the investor
 In a ULIP, investors have the choice of investing in a lump sum (single
premium) or making premium payments on an annual, half-yearly,
quarterly or monthly basis. Investors also have the flexibility to alter
the premium amounts during the policy's tenure. For example, if an
individual has surplus funds, he can enhance the contribution in ULIP.
Conversely an individual faced with a liquidity crunch has the option of
paying a lower amount (the difference being adjusted in the
accumulated value of his ULIP). ULIP investors can shift their
investments across various plans/asset classes (diversified equity
funds ,balanced funds, debt funds) either at a nominal or no cost.

 Health Insurance

 Health insurance provides health cover or medical expenses to insured

in case of hospitalization for more than 24 hours. The hospitalization
coverage typically includes surgical operations, nursing care, doctor’s
fees, pathology, diagnostic tests hospital accommodation, pre and post
hospitalization expenses. Health insurance also pays for regular
checkups and consulting doctors. The insured in return pays specified
amount called premium every year or two. Health insurance not only
covers individual but also complete family. Individual health insurance
will provide Sum Assured to single person. Family health insurance also
called floater policy will provide single Sum Assured to cover all
members ❑ e.g.

 Mr. A buys individual policy with Sum Assured equal to 2 lacs. The
insurer will pay hospital expenses to a maximum amount of 2 lacs. Mr.
A buys family floater policy with Sum Assured equal to 8 lacs. If any of
his family member’s is hospitalized, insurer will bear all medical
expenses up to limit of 8lacs. Suppose Mr. A son and wife are
hospitalized requiring treatments that cost 1 lac for son and 3 lacs for
wife, whole amount will be covered since Mr. A took cover of 8 lacs.
There would be still Rs 4 lacs health insurance cover left for further
treatments.

 Common Terminologies used in Insurance

Life Insured: can be a individual adult, minor, or two or more people , jointly
under one policy.

 Proposer: is a person who is liable to pay premium for the policy on life
insured. A proposer can also be life insured for the same policy.
 Nominee: A nominee is the person who will receive the proceeds of the
policy if the insured person dies during the term of the policy. A
nominee has no right in the proceeds of the policy, except as a trustee
holding the proceeds on behalf of the legal heirs of the insured.
 A nominee exists only for convenience purposes so that the proceeds
can be transferred to the legitimate beneficiaries.
 If a nominee is also one of the legal heirs, then the nominee can take
their own proportionate share as entitled to them under the prevailing
law, and pass on the balance to the other legal heirs.
 Note: It is recommended that you appoint someone as a nominee at
the time of buying the policy, though you can do the same later on as
well.
 Appointee: An appointee is a person who will only act as a guardian to
the he/she nominee till they become matured ,but the percentage of
the share of the policy will be 100% with the nominee. Your child’s date
of birth, the name of his/her natural guardian and the nature of the
relationship with the guardian will have to be specified.
 Sum Assured: Sum Assured is predefined benefit that insurance
company pays to the policyholder in the insured event. In case of life
insurance policy, the insurance company pays SA which is pre-defined
amount which will be paid either in case of death or in case of maturity.
If the policy holder dies during the term of the policy, the insurance
company will pay the nominee the SA and the policy terminates.
 Premium- Age dependent: Premium is the amount paid by the insured
person for purchasing the insurance product. Premium is to be paid by
the insured person at the commencement of contract and thereafter
throughout the term at periodical intervals. Premium vary as per age,
term and benefits offered under the type of product. E.g. say for a
people belonging to a given age bracket say 21-30 years, the higher
the age the higher will be premium. Therefore correct Age proof has to
be provided as it avoids delays in paying claims at the time of maturity.
 Policy Term: can be defined as the minimum term by which the policy
holder can take the policy as specified in the insurance product or as
specified by him/her. Once policy term is over contract gets
terminated.
 Premium Paying Term: can be defined as the minimum/maximum term
by which the policy holder can pay the premium. It can be classified
into two categories
a) Regular PPT b) Limited PPT
 Regular PPT: can be defined as PT=PPT, where PT= policy term and
PPT= premium paying term, here risk cessation date and premium
cessation date will remain same. e.g. PT=15 and PPT=15.
 Limited PPT: can be defined as PT not equal to PPT, where PT= policy
term and PPT=premium paying term, here risk cessation term will not
be equal to premium cessation term. PT=15 and PPT=05.
 Modes of payment.
❑ Annual mode ❑ Half yearly mode ❑ Quarterly mode ❑ Monthly
mode.

 Annual mode: in this mode premium has to be paid only once in the
whole year.
 Half yearly mode: in this mode premium has to be paid twice in the
whole year.
 Quarterly mode: in this mode premium has to be paid on every quarter.
 Monthly mode: in this mode premium has to be paid on monthly basis.

 Maturity & Accumulation fund

 Policy Maturity: Policy gets matured when all premiums are paid for the
said term. Once policy gets matured and benefits are paid, policy gets
terminated. For term plans even if policy gets matured by paying
premium for said term, no benefits are paid on maturity since for term
plan benefits are paid only on death
 Accumulation Fund: Accumulated value in insurance refers to
accumulated value in cash value life insurance. Cash value life
insurance builds up cash value over time. The insured pays a monthly
depends on the mode opted premium to the insurance company each
month. From this premium, the insurance company has to deduct the
cost of insurance, like policy admin charge as stated in insurance
contract. What is left over each month is placed in savings or
investment account internal to policy. The amount plus the interest
earned represents the accumulated value or cash value.

 Terminologies in UL PLANS:
  NAV: The investments in ULIPS are termed as units and Net Asset Value
(NAV) refers to the value of each unit of the fund on a certain day.

 Allocation units: can be defined as allocated amount invested in a

particular fund to buy units of that fund after deducting allocation
charges from the premium.

 Fund Value: can be defined as Total units of the fund opted multiply by
NAV of that fund for that day. Fund value changes with variation in NAV
for the opted fund. say for a particular fund KBDF NAV is 1 and price for
that fund is 94000 units so

 fund value=total units * NAV=94000*1=94000

Mortality charge: Whenever you buy a life insurance policy, the company
offering it will levy a charge for the insurance protection upon death and to
cover certain other expenses. In a nutshell this is the actual cost of
insurance. Technically called mortality charge, this is deducted usually every
month from your policy's account value. While the insurance company can
tweak these charges from time to time it cannot exceed the maximum limit
as specified in the policy. Mortality charge is collected every month. These
are charges for the cost of insurance coverage and depend on number of
factors such as age, amount of coverage, state of health etc

Premium Allocation Charge: This is a percentage of premium appropriated

towards charges from the premium received. The balance known as
allocation rates constitutes that part of premium which is utilized to purchase
(investment) units for the policyholder. The percentage varies by the policy
year, premium size and frequency. This charge is levied at the time of
premium collection. A percentage of the premium is appropriated towards
charges initial and renewal expenses apart from commission expenses
before allocating the units under the policy

E.g. Allocation Charge: Premium:100000

❑ Allocation Charge: 6%=100000*6%=6000

❑ Allocation charge is collected on every premium collection.

❑ Mortality Charge gets deducted from funds every month. For mortality
charge calculation a mortality rate table is provided for each age of LA.
Mortality charge is calculated on SAR.

❑ E.g. SA: 5600000, f.v.= 94000.00

❑ mortality rate:0.003248 ❑ Mortality Charge: SAR=SA-fv=5506000 ❑

=5506000*0.003248*0.0833=1489.69

❑ Admin charge: Premium =100000, mode4=annualized premium:=400000

❑ charge=400000*0.1%=400. Admin Charge gets deducted from funds

every month.

❑ Alteration charge: is fixed charge whenever any alteration like SA change,

addition and deletion of rider is carried

❑ GMV charge: is deducted on monthly basis from fund value. ❑ GMV

charge =fund value *0.75%/12

Charges:

❑ Fund Management Charge: This is a charge levied as a percentage of the

value of assets and shall be appropriated by adjusting the NAV.

❑ Policy Admin. Charge: is levied at the beginning of each policy month from
the policy fund by cancelling units for equivalent amount. It can be
expressed as a fixed amount or a percentage of the premium or a
percentage of SA as mentioned in product specs. This is the charge for
administration of the plan and is levied by cancellation of units

❑ Surrender charge: is levied on the surrender value at the time of

surrender of the contract. It is usually as a percentage of fund. Deducted for
premature partial or full encashment of units

❑ Switching charge: this charge is levied at the time of switching of funds

from one fund to another. This is charge is levied after some free switches as
mentioned in policy document. Usually a limited number of fund switches are
allowed each year without charge, with subsequent switches, subject to a
charge

❑ Miscellaneous Charge: levied for any alterations within the contract such
as increase in SA, decrease in SA, premium redirection. It is expressed as a
fixed amount.
Riders:

❑ CIB(Critical Illness Benefit Rider): if insured falls sick and requires

hospitalization and undergoes major treatment due to critical illness. The
critical illness rider provides protection against major illnesses and diseases.
Insurance companies specify the list of illnesses covered and exclusions
under this rider. If the insured is diagnosed with any of these illnesses the
rider amount is paid either in lump sum or in installments

❑ ADB(Accidental Death Benefit rider): This rider helps if the insured meets
with accident and dies with accident. This rider covers risk of death due to
accident.

❑ Waiver of Premium Riders: This rider comes into picture when life insured
becomes permanently disabled and loses its income or earning capacity. In
such a case company waives off premiums and pays it for client till the policy
gets matured . Types of waiver riders are ADGB( Accidental Disability Rider)
and LGB (Life Guardian Rider).

❑ LGB: This rider comes into picture when life insured dies. This rider is
majority when life insured and proposer are different.

❑ Permanent Disability Riders: If the insured becomes disabled this rider

provides monthly or the mode as chosen income benefit to him. The benefit
amount can be linked to SA of PDB rider

Top Up

❑ If life insured wants to invest additional money along with the insurance
then here Top up comes into picture. Allowing top ups under the unit linked
policies is one of the beneficial features of these policies not only to the
policyholder but also to the insurers.

❑ It is a single investment made by the customer.

❑ The Top up fund can be withdrawn after the locking period as defined in
respective plan

❑ Reinsurance can be defined as an insurance of an insured risk. The

practice of insurers transferring portions of risk portfolios to other parties by
some form of agreement in order to reduce the likelihood of having to pay a
large obligation resulting from an insurance claim. The intent of reinsurance
is for an insurance company to reduce the risks associated with underwritten
policies by spreading risks across alternative institution.. Retention limit for
KLI is 25lacs. For Kotak Life Insurance, any policy with SA above 25lacs gets
reinsured ❑ Types of insurance

❑ Auto Treaty: A policy is reinsured under Automatic Treaty if SAR for the
policy is above 25 lacs but below 1crore.

❑ Facultative Treaty: If SAR for a particular policy is above 1 crore then

Policy is said to be in Facultative treaty .

❑ Retention Limit = 25lacs

❑ Corridor Limit = 50K

❑ Auto Treaty = 25lacs to 1cr

❑ Facultative = above 1cr

E.g. ❑ Traditional Plan ❑ SAR = BSA. For e.g. for K10 plan SA if SA=35lacs

❑ Reinsured Amount = SAR - Retention limit., 35-25=10lacs which is

reinsured under auto treaty

. ❑ Unit Linked Plan

❑ SAR = BSA – FV, for K42 plan, SA=50lacs and Fund value=5lacs

❑ SAR=SA-FV=50-5=45lacs

❑ Reinsured amount= SAR - Retention limit.

❑ 45-25=20lacs which is reinsured under auto treaty

❑ For K45 plan, SA=1.25cr,

❑ SAR=SA=1.25cr

❑ Reinsured amount= SAR - Retention limit.

❑ 1.25cr-25lacs=1cr which is reinsured under facultative treat

Switching:
 ❑ It allows the customer to switch some amount or all amount of his
investment from a fund taken at the inception into another fund available in
the plan for that complete year

❑ After some free switch available for that year some flat charge is charged
as mentioned in policy document.

❑ The charge amount is deducted from the fund opted at the inception.

❑ On premium collection units will get transferred to the source fund and
not to the switched fund

Premium Redirection

❑ It can be defined as the change of fund opted at the inception of policy to

a new fund, wherein from the next premium collection units will get directed
to new fund selected.

❑ It can be done at any time in a policy year but will be effective from policy
anniversary only.

❑ From next policy anniversary, premium will get collected to new fund. The
units in the old fund will not get changed, but will be paid on maturity
depending on the NAV for that fund.

Life Asia

❑ This application holds all the rules relating to the contract, such as product
definition, method of payments, change rules, Surrender values, and loan
interest rates and so on. The advantage of this system is that changes can
be accommodated easily and new products can be designed and set up in a
very short period of time, assuming no new programming features are
required.

❑ Things that can be executed in Life Asia are various PS (Policy Servicing)
like Alteration, Revival, Premium collection, surrender, survival benefit,
Maturity, termination of policy etc..

❑ NB (New Business) activities like policy login, data entry pertaining to vario

PS ACTIVITIES
❑ ALTERATION

❑ FREELOOK CANCELLATION/ALTERATION

❑ SURVIVAL BENEFIT

❑ SURRENDER

❑ MATURITY

❑ TERMINATION OF POLICY

ALTERATION

❑ Policy Alteration is the service provided to the client as per their request

❑ Alterations are broadly bifurcated into two types: ✔ Minor Alteration ✔

Major Alteration

 ❑ Minor Alteration
 ❑ Address Change
 ❑ Contact Details Updating
 ❑ Mode Change
 ❑ Name Change
 ❑ Nominee Change

 Major Alteration
 ❑ SA/Premium Alteration
 ❑ Rider Addition/Deletion
 ❑ Policy Loan
 ❑ Reduced Paid Up

 FREE LOOK CANCELLATION

 This is the period, which is given to the customer to relook at the policy
features and take the final decision, whether to continue the policy or
go for refund or get the policy features changed via fresh policy
 ❑ The Process of Policy Cancellation within this freelook period is called
CFI (Cancellation from Inception