Meaning of life insurance
Life insurance is a contract where the insurer agrees to pay a certain sum of money to the insured on the maturity of the contract or to his nominee on his death before maturity whichever occurs earlier. Inconsideration of payment of premium is a measure by which the insured can get compensation in the event of uncertain death.
According to professor Magee,” Life insurance contract is an agreement in which broadly stated the insurer undertakes to pay a fixed sum upon the death of insured or at some designated time to a designated beneficiary.”
According to M.N Mishra,” Life Insurance Company may be defined as a contract whereby the insurer in consideration of a premium undertakes to pay a certain sum of money either on the death of the insured or on the expiry of a fixed period.”
Life insurance is not a contract of indemnity as human life cannot be measured in monetary value. It is both protection as well as investment. It is protection because in case of the early death of the insured amount is paid to his nominee through which his dependents can meet their expenses and carry out their living. Similarly, it is an investment because the insured himself receives the whole insured amount along with agreed interest if he survives till maturity. Since it provides a good return to the insured it is a profitable investment.
Process or procedures of life insurance:
When any person is willing to take-up life insurance he or she has to fulfill certain formalities. They need to follow certain steps through which one can ensure his or her life. However, the steps to be followed for taking life insurance may differ from company to company. The following is the general procedures to be followed for taking life insurance:
A) Submission of proposal:
When any person wants to take life insurance he has to submit a proposal to the insurance company. The agent provides the proposal form. The proposal form is in printed form which is a list of a questionnaire that has to be filled up properly by the proposal. The proposal form includes the following:
- Name and address of the proposer
- Income and occupation of the proposal
- Date of birth
- Lifestyle and habit
- Other necessary information’s
B) Certificate of age:
Along with the proposal form a document that specifies the actual age of the proposer must be submitted. For this purpose birth registration certificate or citizenship, the certificate can be submitted. The certificate of age is very important in life insurance because the insurance company evaluates the risk on the basis of the age of the person.
C) Medical examination:
Another important obligation to be fulfilled by the proposer is an examination of his health condition. The proposer must examine his health from a medical officer or a doctor certified by the insurance company. The medical examination is compulsory because this also helps to determine the level of risk along with the age of the person.
D) Submission of agents report:
The agent is the person through whom the insurance is done. The agent describes all the technical terms associated with insurance to the proposer. Similarly, the proposer also provides all necessary information’s about himself to the agent and the agent prepares a confidential report and submits it to the insurance company. The agent report also plays an important role in the acceptance or rejection of the proposal.
E) Acceptance of the proposal:
Based on the medical report and the agents report when satisfied the insurance company accepts the proposal and issues acceptance letter to the proposer. The acceptance letter notifies that his/her proposal has been accepted and makes the demand for a certain premium along with its due.
F) Payment of the first premium:
Having come to receive the acceptance letter the proposer has to pay the stated amount of premium within the stated time after payment of the first premium the policy becomes active and thus the risk is insured against the payment of premium the insurance companies issue a receipt in a name of the insured which is the proof of insurance until the company issues the life insurance policy.
Types of life insurance policy
Insurance companies provide a wide range of options to their clients who are willing to take-up life insurance policy. Depending upon the type of policy selected its terms and condition, amount of premium conditions for the payment of compensation……etc differs the following are the major types of insurance policy:
1) Whole life policy
Under this policy, the insured has to pay premium throughout his life for a certain period only but the insured amount is only recovered after his death to his nominee. The whole life policy matures only after the death of the insured thus whole life policy doesn’t provide any benefit to the insured so it is simply protection for the family and the dependents of the insured the whole life policy can be of the following types:
A) Ordinary whole life policy
A Kind of whole life policy where the insured has to pay premium throughout his life till he survives but the insured amount is only paid after his death is ordinary whole life policy. Here, if the insured survives for a long period then the premium paid by him may even exceed the insured amount.
B) Limited premium whole life policy
Under this policy, the insured has to pay a premium only up to a specified time but the insured amount is paid only after his death is limited premium whole life policy. This type of insurance is suitable for an employee who has to pay a premium up to their age of retirement only.
C) Single premium whole life policy
Generally, the premium in life insurance is paid in installments on an annual basis but the whole life policy where the insured has to pay the premium only once on a basis is a single premium whole life policy. Here also the insured amount is recovered only after the death of the insured.
D) Convertible premium whole life policy
A kind of whole life policy that can be converted into other types of life insurance policies is convertible whole life policy. After the conversion of the policy all the terms and conditions of insurance and the number of premium changes.
2) Endowment policy
The endowment policy is done for a fixed period like 10 years, 15 years,20 years……etc. here the insured has to pay premium regularly up to the maturity of the policy. Under the endowment policy, the insured amount is recovered under both conditions i.e. early death of the insured before maturity or after maturity if the insured survives thus, endowment policy helps to protect the interest of the insured as well as his dependents. The endowment policy also can be of various types like:
A) Ordinary endowment policy
In ordinary endowment policy, the insured amount is recovered in both conditions i.e. early death of the insured before maturity or after the maturity of the policy whichever occurs earlier thus ordinary endowment policy helps to safeguard both insured and his nominee.
B) Pure endowment policy
The pure endowment policy is taken for a specific time and under it, the insured amount is only payable if the insured survives till the maturity period. In the case of the early death of the insured, the insurance company is not liable to pay any compensation.
C) Double endowment policy
Under endowment policy, if the insured is able to survive till the maturity of the policy then he or she receives double of the insured amount but in case of the early death before maturity, only the insured amount is paid to his or her nominee.
D) Deferred endowment policy
Under deferred endowment policy, the insured amount to be paid is delayed by the insurance company. Here, time is specified and if the insured dies before the specified time then his nominee has to wait till the expiry of that time however the premium payment stops after the death of the insured.
E) Anticipated endowment policy
Under the policy, the policyholder is paid a certain amount in installments from the insured amount and balance after the maturity if the insured survives until the maturity of the policy. In case of early death, the nominee receives a full insured amount which means the earlier installment taken by the insured will not be deducted.
3) Term policy
The term policy like endowment policy is also done for a specific time. Generally, the term policy is taken for a period of three months to seven years. Under term policy, the insured amount is only payable in one condition i.e. the death of the insured within the policy period. If the insured survives until the maturity of the policy the insurance company is not at all liable to pay any compensation. Thus, the term policy is neither protection nor investment this type of policy is taken by the creditors over the life of the debtors in order to recover their amount receivable from the insurance company in case of their death. The term policy can be of the following:
A) Ordinary term policy
The ordinary term policy is taken for a specific period ranging from 3 months to 7 years. Here, the insured amount is only recovered after the death of the insured during the policy period. Generally, the premium is paid once on a lump sum basis. This type of policy is suitable for people moving abroad for a job and for security personnel’s going on the war for peacekeeping missions.
B) Renewable term policy
In renewable term policy, the insured can renew his policy without a fresh medical examination. On the basis of the medical examination done earlier the time of the insurance is extended. However, after renewal, they have to pay a high rate of premium.
C) Convertible term policy
That kind of term policy which can be later converted into other types of life insurance policy is a convertible term policy. After the conversion of the policy terms and conditions of insurance changes.