Auto insurance (India)
Auto insurance or car insurance is the insurance policy purchased for cars, trucks, buses, motorcycles and other road vehicles. Its principal objective is to provide protection against physical damage to the vehicle as well as bodily injury to individual(s) that could result from traffic accidents and against liability that could emerge from such incidents.
The ambit of auto insurance in India
In India, auto insurance covers the loss or damage to vehicles or their parts as a result of natural and man-made calamities. Accident cover is provided for individual owners of vehicles while driving as well as for passengers and third-party legal liability. Auto insurance is mandatory for all commercial and personal use vehicles. Insurance companies and automobile manufacturers form partnerships to offer customers auto premiums which are based on a number of factors. The premium amount increases with the increase in vehicle price. A customer can claim auto insurance for accidents, thefts or third party claims.
Some documents a customer must produce for the claim are duly signed claim form, registration book (blue book) of the vehicle, a copy of his driving license, police information (FIR) copy, vehicle’s original estimate and policy copy.
However, auto insurance in India does not cover depreciation, mechanical failure, drunken driving, nuclear perils or accidents that occur when a vehicle is used outside the geographical area.
The primary variants of auto insurance policy
Of the different types of auto insurance in India, Private Car Insurance is the fastest growing sector as it is mandatory for all new cars. Premium rates depend on the model and value of the car, the region or State of car registration and the year of manufacture. Meanwhile,
Two Wheeler Insurance covers accidental insurance for the vehicle driver. Premiums depend on the existing showroom price which is multiplied by the depreciation rate determined by the Tariff Advisory Committee at the time of purchasing the policy.
Commercial Vehicle Insurance provides cover for all commercial vehicles such as trucks, buses and taxis. Premiums depend on the vehicle’s showroom price at the start of the insurance period, the vehicle model and the place of its registration.
This is insurance against the risk of incurring medical expenses. It is a policy or contract between an insurance company and an individual or his sponsor, who can be the employer. An insurance company first estimates the overall risk of healthcare expenses and comes up with a finance structure in the form of a monthly premium to ensure that funds are available to pay for the healthcare benefits specified in the insurance policy. The contract can be renewed on a monthly or yearly basis.
Why avail a health policy
Health cover is very important for the rich and the poor alike, especially in today’s environment – we are vulnerable not only to diseases such as heart failure, renal failure, stroke and diabetes, but also to the madding rush of the ubiquitous traffic around us. A health insurance policy can cover expenses that may arise from such situations. In India, there are mainly three types of health insurance covers.
The primary variants of health insurance in India
The Individual Mediclaim policy
The Individual Mediclaim policy is the simplest form of health insurance as it covers an individual’s hospitalization expenses for up to the sum assured. The premium is also dependent on the value of the sum assured value. For instance, if a household has three family members, it can receive an insurance cover of Rs 2 lakh each under Mediclaim. If all three members require hospitalization, then each member can get insurance cover for up to Rs 2 lakh and all the three policies will be independent.
Family floater policy
The Family Floater policy is an extended version of the Mediclaim policy and under it, the value of the sum assured floats among family members, covering the expenses for the entire family up to the sum assured limit. Premiums are also typically less compared to separate insurance covers for each family member. For instance, if a household comprising three family members purchase a Family Floater policy for Rs 6 lakh, any member can claim up to that amount in expenses. However, the cover provided will reduce by that amount for the given year. Hence, if a member is hospitalized, the expenses for which total to Rs 4.5 lakh, the insurance cover for that year will be reduced to Rs 1.5 lakh. The amount of cover is restored to Rs 6 lakh the following year.
Home Insurance (India)
Why avails a home insurance policy
A major portion of investment in a person's life is targeted at home. Availing the best home insurance policy therefore ensures that this investment is secured against natural calamities like tornado earthquake or any other unfortunate event like theft, fire etc. Equipping oneself with a right home insurance policy the homeowners or policyholders can remain prepared to face any consequences that may come in their way in the event of a natural calamity.
Insurance companies provide various home insurance policies to protect homes from both natural and manmade calamities, which may come in the form of burglaries, theft, fire or earthquake. Insurance companies provide customers with instant quotes, the premiums for which are calculated keeping a number of factors in mind. They generally consider the area of the house by measuring it per square feet, the location of the property and an estimate of the rate of construction or the expense incurred per square feet.
In India, a property that is over 50 years old is not insured. Companies further insure only the concrete structures (RCC) and brick houses and not the thatched houses. Upon a house passing such criteria, its owner is required to pay the insurance premium on a monthly, quarterly or half-yearly basis according to the sum insured.
As different customers have different needs, insurance companies also offer different home insurance policies to meet the requirements. Some policies have a standard or fixed coverage, while others are flexible packages, which could be a basket of covers. The premium for the latter is higher compared to the standard cover because the risk of the company that provides such covers is more.
Claiming a home insurance policy
An individual can forward a claim to the insuring company in the event of burglary, theft or fire. Leading insurers have also launched 24-hour help lines and call centers to speed up the claim process and provide better service to customers. When an individual makes a claim request, he will have to provide all his personal details, details of the property as well as the details of the policy purchased. The insurance company then assigns a surveyor who submits the loss report following an inspection of the property. A claim is usually processed by the company within seven to 15 days. Once the claim receives the company’s approval, the insured is intimated in writing about the approval after which the company issues the stipulated payment via check.
Insurance: an introduction
Insurance, in common parlance implies a form of financial security. In the domain of law and economics, it implies a mode of risk management primarily aimed at mitigating or lessening the impact of an uncertain or contingent loss. It is typically done in exchange for a certain sum that seeks to transfer the risk of a loss from one entity to another. The process generally entails the involvement of insurance firms which bring various insurance policies to the general public, thereby acting as an insurer to an insured. An insured is also called a policyholder.
The insured entity can be an individual or any other entity who agrees to pay a certain sum of money called an insurance premium that the insurer determines to be adequate for covering a certain policy that the insured chooses. In this way, the insured gets the insurer’s promise of compensation in the event of a financial loss and receives a contract or insurance policy, which entails the criteria and circumstances under which the policyholder is to receive financial compensation.
Risks, in the financial domain, can arise from many quarters: volatile financial markets, project failures, legal liabilities, credit risk, accidents, natural calamities or “acts of God” and physical harm from an adversary. Risk management or the practice of assessing and controlling uncertain risks is undertaken by insurance companies as a key and detailed exercise. This involves not only identifying, evaluating and prioritizing risks, but also requires that resources be coordinated and applied economically to mitigate and control the possibility and impact of undesired events as also to enhance the realization of opportunities.
Principles governing insurance
Under a given insurance policy, funds are pooled from several insured entities or exposures to compensate the losses that some may incur. In this manner, insurance firms charge a fee from the exposures while guaranteeing them protection from risk. The fee depends on how frequent or severe the risk will be. Furthermore, the risk insured against must meet certain criteria to be eligible as an insurable risk. Although insurance is a commercial enterprise and an important aspect of the financial services industry, individuals can also seek self-insurance by saving funds for potential losses they may incur in future.
Life insurance is a contract between the policy holder and the insurer, where the insurer agrees to pay a beneficiary a stipulated sum of money upon the occurrence of the death of an insured individual or other unforeseen event, such as terminal or critical illness. In return, the policy owner agrees to pay a stipulated amount (at regular intervals or in lump sums), technically known as premium.
Life insurance policies broadly fall under the two categories
The main objective of this variant is to facilitate the growth of capital via regular or single premiums.
The protection policies usually entail a lump sum payment designed to provide a benefit in the event of specified event, typically
A common form of this variant is term insurance.
Types of life insurance
Term Life Insurance
Term life insurance is coverage for a specific period or term and can comprise one year and five years to 15 and 20 years. As the time period is limited, this policy is also sometimes called ‘temporary’ insurance. If such a policy purchaser dies during the policy term, cash benefits are paid to the beneficiary who is called the nominee. However, if the policy is not renewed once the term is over, the coverage ceases and in the event of a policy holder’s death after the coverage period ends, cash benefits are not paid out.
Term life insurance is the most easiest to understand. The policy has no financial investment value and most of the premium pays for coverage, while only a small amount goes into paying the costs incurred by an insurance company. It also provides the maximum amount of coverage against the amount invested.
The main advantage such a policy has is that it pays the nominee who has been specified by the policy purchaser upon the latter’s death. It also covers final expenses and hands out a lump sum for the purchaser’s dependents. A term policy covers the purchaser for the full amount of life insurance chosen and is convertible as well as renewable. This however, depends on the type of policy purchased. As the insured’s age advances, the annual premium amount also gradually increases.
Among the disadvantages, the first is that a cash value account is not provided for the future such as during retirement. Further, it does not provide permanent life insurance protection.
Whole Life Insurance
Whole life insurance covers the policyholder’s entire life. Unlike term life insurance, there is no date specified for the policy’s cessation. Upon the death of the policyholder, the policy’s face value (death benefit) is paid to the nominee or nominees specified in the life insurance policy.
The premium remains unchanged for a whole life insurance policy as it is spread out over many years. This facilitates people earning fixed incomes in not being obliged to pay higher premiums in the future. One major difference between term life insurance and whole life insurance is that in the latter, cash value builds up over time. If a policyholder cancels the policy after a certain period has passed, the insurance company pays the cash value to him. The cash value is structured to be at par with the face value when the policyholder reaches 100 years of age. An insurance company will pay the face value to the policyholder in a lump sum when he reaches that age.
Universal Life Insurance
Universal life insurance comes along with many features of whole life insurance, but provides greater flexibility following the term’s commencement. Universal life insurance is also a permanent policy, protecting the policyholder until death. Cash value also builds up over time. However, unlike whole life insurance, universal life insurance separates the death benefit and build-up of cash value for facilitating the policy holder to make changes in the policy. Therefore, if the policyholder wants to enhance the death benefit, he can put additional premium money into the insurance account and less into the cash value account and vice-versa. The policyholder can pay only for the insurance portion if he wants to reduce premiums.
Travel insurance provides coverage for medical expenses, loss of money or personal belongings such as baggage incurred while traveling, either within a person’s own country, or overseas. When a trip to a destination is booked, temporary travel insurance can be arranged to cover the duration of that trip. A more wide-ranging and continuous insurance can also be purchased from travel insurance companies, travel agents and travel suppliers such as tour operators. However, insurance purchased from the latter are not as wide-ranging as those offered by professional insurance companies.
Overseas travel insurance also covers possible losses while traveling overseas, which could include loss of passport, baggage delay and loss, medical expenses and accidental death while traveling, either in the course of the journey or the stay. Travel insurance can come under various categories and they include student travel, business travel, leisure travel, adventure travel, cruise travel, and international travel.
Student medical insurance: a key variant of travel insurance
A student travel medical insurance can offer a comprehensive cover for up to two years to Indian students wishing to travel overseas for studies. It is a wide-ranging coverage that costs a lot lesser than similar ones available abroad. Some plans even cover treatments for mental and nervous disorders that include alcoholism and drug dependency, pregnancy-related expenses and sport-injury related expenses.
Business travel insurance
Business travel insurance or corporate insurance is meant to cover not only the personal safety of the individual (employee) when traveling abroad, but also other important aspects such as equipment and money. An employer may offer some form of standard insurance which may not cover loss of personal property or injury that is not related to work.
Business travel insurance is available in different forms. Some insurance companies offer an altogether different type of policy along with a specialized policy to cover aspects such as sports or weddings and raise the premium accordingly. Business insurance can be different in each company, with some offering several additional cover options, while others just offering a very basic policy providing coverage for only business equipment. As the levels of cover may also significantly vary, they must be looked into in detail when moving expensive company equipment, as some insurance providers may not provide the adequate coverage.
Get Going with Insurance
The Indian Contract Act 1872 defines a contract as an agreement between two or more parties to do or to abstain from doing an act and which is intended to create a legally binding relationship. Insurance is also a legally binding contract as it assumes all essentials of a valid contract:
- Intention of the parties to the insurance contract is legally approved
- There is an willful agreement to do an act - while the proposer offers insurance, the insurer accepts insurance
- Proposal form is the basis of Contract and the consideration is the premium to be paid
- The Insured is a major with sound mind and bears adequate capacity to enter into contract
Insurance is an equitable transfer of the risk of a loss, from one party to another, in exchange for payment. Under the transaction, the insured pays a premium to the insurer in exchange for the insurer's promise to indemnify the insured in the case of a financial loss. This is done under a contract, called the insurance policy, which forms the basis of any transaction between the two parties.
An Insurance Contract is based on Fair Play that rests on two pillars:
Utmost good faith - is a positive duty to voluntarily disclose, accurately and fully, all facts material to risk being proposed, whether requested or not. It’s required throughout the contract. A breach of utmost good faith happens due to misrepresentation and non-disclosure of material facts. A material fact is any fact or circumstance which influences the mind of a prudent underwriter in fixing the premium in determining whether to take the risk.
Material facts that need not be disclosed include facts of common knowledge, facts of law, facts that can be discovered with reasonable diligence and facts which minimise risk. Section 45 of the Insurance Act, 1938 states that if Material Facts are discovered within two years from the commencement of policy, the insurer can declare the policy null and void. The policy cannot be called in question after 2 years, on the grounds of inaccurate or false statement unless it is proved to be material and fraudulent.
Insurable interest - is the relationship with subject Matter that is recognized by Law and one that gives legal right to a person. It’s pertinent to note that Insurable Interest is not defined by the Insurance Act 1938 but Section 30 of the Indian Contract Act 1872 states that without Insurable interest, a contract is deemed to be a Wagering Contract which is void. Hence, Insurable Interest is a legal pre Requisite.
Now the question arises as to who can have insurable interest in whom. The list is exhaustive:
- Any person in himself
- Either spouse in Marriage
- Creditor on Debtor (To the Extent of Outstanding Mortgage with Interest)
- Surety on Principal (To the extent of Debt)
- Partners in business
- Employer in employees
- Parents in the Lives of their Minor Children
Indemnity is a fundamental principle of insurance applied to losses that are quantifiable. It’s the monetary compensation that restores the insured’s financial position prior to the loss occurred. In Life Insurance, the insurable interest on own life is unlimited, hence the Principle of indemnity does not apply but it does apply to General Insurance.
It’s pertinent to note that Insurance is meant only for compensating losses and managing risks. It’s not a mechanism to make profits. Precisely why the amount of claim cannot exceed the amount of loss incurred. Talking of Risk management brings us to the question: How does one manage risks in life? There are essentially three ways:
Avoidance - like for instance, you can avoid accidents by practicing safe driving
Retention - You employ own conserved resources to take care of your needs
Transfer - This is where you buy insurance; thereby transferring your risk on the insurer. The purpose may include:
- Protection of Family interests in case of untimely death
- Planning for Future Expenses like higher education of children
- Assured Income Flow in case of Retirement or Disability
Life Insurance is a contract between you and a life insurance company, which provides your beneficiary with a pre-determined amount in case of your death during the contract term.
Buying insurance is extremely useful if you are the principal earning member in the family. In case of your unfortunate premature demise, your family can remain financially secure because of the life insurance policy that you have purchased.
The primary purpose of life insurance is therefore protection of the family in the event of death. Today, insurance is also seen as a tool to plan effectively for your future years, your retirement, and for your children's future needs. Today, the market offers insurance plans that not just cover your life and but at the same time grow your wealth too.
If you have dependants and financial responsibilities towards them, then you certainly need insurance. Having a family means dependants; this in turn means financial commitments. Financial commitments come in the form of loans, children's education, medical expenses etc.
Imagine what would happen if you were to lose your life suddenly or become disabled and cannot earn. Being insured in a situation like this is a necessity. When you insure your life, in effect what you are doing is insuring your earning capacity. This guarantees that your dependants will be able to continue living without financial hardships even in case of your demise.
Most insurance plans available today come with a savings element built into it. These policies help you plan not only for protection against death but also for a financially independent future, which would enable you to have a comfortable retirement.
There are several benefits of buying insurance. Other than the risk cover, the most important benefit you receive is Income Tax Relief under Section 80C of the Income Tax Act, which means premiums paid by you reduces your tax liability. Besides it helps you build up compulsory savings. Also through a valid assignment the beneficiaries of the policy are protected from claims of creditors. One could also surrender his policy in case of emergencies. For a policy taken under the MWP Act 1874, (Married Women's Property Act), a trust is created for wife and children as beneficiaries.
In order to buy a life insurance policy, you must pay certain amount as premiums to the life insurance company. The amount of premiums payable depends upon the type of policy, term of policy contract, sum assured and your age. You could pay these premiums monthly/half-yearly/annually or as a single premium.
One of the simplest rules is to assume that insurance is a replacement for your lost earning capacity. Calculate your total income for the years that you expect to work. Assuming that the prevailing interest rate is 8%, you need to insure your life for at least 12 times your current annual income. Assuming that a family needs Rs. 100 annually for household expenditure and the rate of interest would be at 8%, then the breadwinner needs to have a life insurance policy of approximately Rs. 1200. If the insurance amount were to be put in the bank by the family, the family would get a comfortable Rs. 96 p.a., which would at least let the family maintain the current life style.
However to calculate your insurance need more precisely, use the following steps:
Calculate Monthly Livable Income required (Post tax). This is the monthly amount that the survivors of the policyholder will need in the event of his death. This is taken at 70% of the current total family expenses. Denote this as "M".
Calculate Monthly Income required (Pre-tax) as M/(100-t)%. Denote this as "M1". Here t = Tax rate.
Calculate Annual Income (A) = M1*12.
Assume Estimated-earning rate on capital as 8%. Denote this as "r".
Calculate Capital livable income required (C) as (A/r)%.
Subtract Existing Insurance Cover amount (if any) from "C".
The final amount you arrive at is the amount for which you should buy insurance.
Yes. The premium that you pay on your insurance policy is mainly dependant upon two things—your age and the tenure of the policy. The younger you are the lower is your insurance premium amount. At younger age, you would be physically sound and may not be suffering from illnesses. This would entitle you to a lower premium on the policy. Therefore it is advisable to buy insurance at an early age to reduce the cost of insurance.
Yes! We have the Unit Linked Pension Plan, which helps you to regularly invest your savings during your earning life in order to build up a retirement corpus to take care of your post retirement needs. Further you may be eligible for a tax deduction on the premiums paid up to Rs. 10,000 (as per current tax provisions) per financial year under section 80CCC of the Income tax Act.
Other savings plans like Bank Fixed Deposits, NSC, PPF have short maturity tenures, compared to life insurance policies. (Eg.: NSC for 6 years, PPF for 15 years & life insurance can be up to 100 years). Hence, other saving plans have limited impact on financial planning prospects.Whereas, a Life Insurance Policy pays the Sum Assured even if the Policyholder expires before the end of the payment term. Hence, this provides greater security to the person and his/her family. As such, insurance policy is definitely a better savings plan.
ULIP is a market-linked life insurance plan, which invests the premium money in various proportions in the equity and debt markets. In effect, this ensures that the returns on such plans are linked to the performances of the markets while also offering the individual an insurance cover at the same time.
Term Insurance, also known as pure life cover, is the cheapest and the simplest form of insurance. Under this insurance policy, against payment of regular premium, the insurer agrees to pay your beneficiaries the sum assured in event of your premature death. However, if you survive till the end of the policy term, nothing is payable to you. This policy has no savings component and the premiums you pay are purely a cost to buy you life cover. This is suitable for you if
You are looking for a low cost life cover without any savings benefits attached.
You are at that stage in life where insurance cover is vital but you cannot afford high premium payment due to low income.
The main difference is in the flexibility in the choice of investments. In the case of unit-linked life insurance, the insurance company would usually offer a choice of different funds (say, with a differential mix of bond and equity investments) in which the policyholder can opt to invest his/her contributions. The policyholder can decide which funds his/her contributions need to be invested in and in what proportion. Therefore, the returns under the policy are dependent on the investment choice made by the policyholder. The policyholder can also opt to invest top-up contributions over and above the regular contributions at any time and to switch his/her investment pattern at any time during the term of the policy.
In the case of traditional life insurance, the policyholder is usually offered a guaranteed sum assured. In addition, non-guaranteed bonuses in the form of a share in the profits of the fund may also be offered depending on whether the policy is a participating policy or not. The premium amounts are usually fixed at the outset and the same quantum of premium needs to be paid throughout the term of the policy.
Term plans are the purest and cheapest form of insurance where benefits are payable only on the death of the policy holder within the term. Whole life plans are a special type of term assurance wherein the term of the policy is whole of the life. So it follows that benefits under the policy are payable only on death of the policy holder
A physical disability like polio or loss of any limb should not in any way exemplify you from getting life coverage. However depending on the severity of the disability there might be an increase in the premium charged.
Once a life insurance policy is issued, it cannot be cancelled by the insurance company during the policy period for any reason including changes in health, provided the required premium payments are made and the information on the application was not misleading or inaccurate.
Life insurance companies underwrite risk on the basis of the health status of the person. The amount of evidence of health required by the insurer depends upon the amount of risk involved i.e. the sum insured under the contract. In the case of a low sum insured of the life to be insured or younger age, the company might ask only for the statement of health in the form of a health questionnaire from the customer and not a medical examination. In other cases a full medical examination may be required.
Yes, But for an insurance contract to be valid, the insured must have an insurable interest in the subject matter of insurance. The insurable interest is the pecuniary interest, whereby the policy-holder is benefited by the existence of the subject matter and is prejudiced by the death or damage of the subject matter. The subject matter is life in the case of life insurance. It can be further explained by way of following example:
Husband and wife have unlimited insurable interest in each others life.
Parents can buy a life insurance policy for their children to protect their future just in case if something happens to the parents.
A creditor has insurable interest in the life of a debtor to the extent of the amount involved plus a reasonable amount of interest.
Partners in a business have insurable interest in the lives of their co-partners.
A company has insurable interest in the lives of the key employees of the company.
The insurance company usually provides investment information at periodic intervals through news bulletins and other means.
The process of evaluating risks for insurance and determining in what amounts and on what terms the insurance company will accept the risk.