Life Insurance – Practices – Insurance Law and Practice Important Questions
Question 1.
Distinguish between the following:
(i) Term plan’ and ‘endowment plan’.
Answer:
‘Term plan’ and ‘endowment plan’:
Under Term plan’ the protection is available throughout the policy period and sum insured is payable only at the death of the insured during the policy period. Nothing is payable on survival. In endowment plan, the sum insured is payable either on death or at the time of maturity of the policy.
Question 2.
In aggressive sale of business, insurance companies are experiencing a severe problem of “Lapsation” (non-continuation of premium payment), which is hindering the growth of life insurance business. Identify some (any five external or internal) causes of the Lapsation of Life Insurance Policies.
Answer:
Ganesan committee identified that the early lapsation of the life insurance policies is the combined effect of both the external and internal factors with some element of interaction between the two.
The committee identified the following factors:
External Factors
1. Economic decision making of the policy.
2. Economic Social Background.
3. Availability of alternative investment options.
4. Client specific features like:
- Wealth and Savings
- Education
- Age
- Gender
- Location : Rural/ Urban
- Financial difficulties
- Resource Availability
5. Macroeconomic factors like
- Disposable income
- Inflation
- Government policies with regard to taxation
- Fiscal incentives
- Development of industrialized areas
- All the above factors are beyond the control of an Insurance Company.
- The internal factors contributing to the lapsation of life insurance policies are:
1. Product design and choices:
- Types of plans
- Mode of premium payments
- Policy Term.
2. Marketing and Personal Strategies:
- Planning of business activities (budgets, time frames)
- Sales personnel agents development officers, branch marketing supervisors
- Customer education
- Market research
- HRD linked to marketing (recruitment training appraisal, incentives and discounts)
- Policy mismatch (lack of need-based selling)
- Absence of insurance awareness/consciousness
- Domination of Tax concern rather than risk management concern,
- Lack of agency professionalism while selling insurance policies
- Remuneration/commission structure for the field force (High commission for the first year premiums and low commission for renewal premiums)
- Knowledge gap among the field personnel and no quality consciousness in training programs for the field force business target structure (focuses mostly in the month of March)
- High agent turnover/poaching/churning the policies due to increased competition in the market
- Lack of after-sales service.
Question 3.
Do you agree to the proposition that life insurance in addition to being a provision for the benefit of an individual and his family also acts as a social and economic welfare product? Elucidate.
Answer:
The immediate effect of a life policy taken by an individual accrues to the beneficiary on the death of the insured. The beneficiary could be the spouse, the members of the family or even partners or company in case of key man policies.
These claims available to the beneficiaries on the death of the insured help to meet the priority needs of such people like marriage expenses, education expenses of the children or even day to day needs of the family so that the society as a whole gets indirectly benefits of such payments.
Besides the above, the life insurance companies have a big role to play. The Life insurance companies which collect the savings of a person and convert into wealth.
The functions of life insurance company helping social and economic welfare Of the nation may be discussed as under:
(a) Saving Institution: Life Insurance companies both promote and mobilize savings in the country. The exemption provided to the taxpayers under the income tax laws provide further incentive to higher income persons to save through life insurance policies. The total volume of insurance business has been growing with the awareness of the insurance benefits and this has been resulting in more savings in the nation and consequent creation of wealth.
(b) Term Lending Institution: Life Insurance companies also function as a large-term financing institutions in the country. The annual net accrual of investible funds from life insurance business (after making all kinds of payments and liabilities to the policyholders) and net income from investments are quite large. These are used in term lending to the corporate borrowers of the industry and these help in growth of the industry in the country.
(c) Investment Institutions: Life Insurance companies including LIC of India are big investor of funds in the government sector. Under the law the life insurance companies including LIC of India are required to invest certain percentage of their accruals in government and other approved securities. These life insurance companies also make funds available to the private sector through investment in shares, debentures and loan. LIC of India also plays a significant role in developing the business of underwriting of new issues.
The International Association of Insurance Supervisors (IAIS) noted that by investing in bonds and other securities issued by financial institutions, insurance companies provide “an important contribution to the financial soundness of banks and more broadly to financial stability. In a similar fashion insurers are also allocating capital to the real economy by purchasing debt securities of industrial companies or through real estate investments.”
(d) Stabiliser in the share market: LIC acts as a downward stabilizer in the share market. The continuous inflow of new funds enables LIC to buy in the share market when the market is weak. However, LIC does not sell in the market when the market is high as it needs to always keep investing in the high inflow of funds.
(e) Biggest employers in the economy: Life Insurance companies are one of the biggest employers. They employ large number of staff for their day to day operations. In addition to the staff they also provide employment to intermediaries like agents, brokers, sub-brokers and other outsourcing companies who take care of some of their operations outside their offices.
(f) Expanding business: Whether businesses are launching a new product, signing a new sales contract or purchasing a new company, the business needs assurances that the other party is conducting business in good faith, insurance provides the necessary protection, in case business doesn’t proceed as planned.
Likewise, businesses would be reluctant to hire new employees if not for workers’ compensation insurance, which protects the employer while providing the employee with income when an accident temporarily puts the employee out of work.
Question 4.
Life insurance penetration is still dismally low in India. Why? Do you believe that “Keyman Insurance” can help in improving the situation? If yes, then how?
Answer:
We agree with the statement that Key Insurance Penetration is still dismally low. Key Insurance penetration in India continues to be one of the lowest at 3.69%, according to the annual report by IRDAI. “Insurance penetration in India was at less than 1% when the industry opened up for private companies in F.Y. 2000-01. The life insurance penetration was at 4.6% in 2009 but visibly showed a downward trend after that. Volatility in the stock market in 2008-2009 and regulatory changes in 2010 adversely impacted the sale of ULIP (unit-linked insurance plan) products and premiums. “Penetration in India reflected a flat trend of 2.7% from F.Y. 2014-15 to 2016-17.
Reasons for Low Insurance Penetration
A Pre-launch Survey Report published by NCAER (National Council of Applied Economic Research) and IRDAI (Insurance Regulatory Authority of India), gave few insights into the reasons why insurance penetration is low in this country.
- Majority of insured households know that insurance is a better tool for emergency than any other savings instrument.
- About equal number of households whether insured or uninsured see life insurance as a long-term savings and risk coverage tool.
- About 50% of both rural and urban household have heard about health insurance policies.
- Majority of both insured and uninsured household felt that insurance is relevant for all classes.
However, there are a few missing links and clues that point to the leakages: - Agents are the primary source of information about insurance for all households. A whopping 75% households have bought insurance because of agents’ advice.
- Majority of households in both segments perceive ‘accidents’ and ‘untimely death’ as the two events relevant to insurance.
- About 13% of uninsured population feels that insurance is only relevant for the rich while another 25% have no idea about it.
- About 50% of uninsured population feels that insurance is neither a savings tool nor a protection tool.
- This population also does not know about the kind of losses insurance can compensate for or to what extent.
Key Person Insurance is also known as Keyman Insurance. This is an insurance taken by a company (or partnership firm) on the life of a Key Person who can an employee or a director of the company or partner of the firm. For example, let us assume that A is the founder and Promoter of ABC Limited and has invested in the equity shares of the company. He is also the Chairman of the Board of the Company. It is only because of him that the company has turned profitable and his presence adds significant value to the company. Under the above scenario, on death of A, the company ABC Limited could be impacted financially.
His absence could result in loss of potential income as some clients who are with the company because of him could move to other companies or there could be a drop in morale of the management and this company’s performance and therefore revenue and profitability.
Thus, the company ABC Limited has an insurable interest in the life of Mr. A so the company can purchase a Keyman Insurance Policy from a life insurance company, where the Policyholder will be ABC Limited and the life insured would be that of Keyman i.e. Mr. A in this case. The company has an insurable interest in the life of Mr. A as in case of his death the company is likely to suffer losses. Only term insurance policy where sum assured is payable only on the death of the life assured.
Sum assured in such cases is calculated based on the contribution of the Keyman to the Company and potential loss to the company in case of sudden death of the Keyman. From underwriting point of view, it is important to establish the need for insurance of the Keyman i.e. whether the Life assured is indeed an indispensable person to the organization. This could be subjective based on certain statements made by the organizations but mostly it should translate into some visible benefit due to continuance.
The following factors are considered while considering the need for Key Person Insurance:
(i) Age: Generally the assured is not too young or not too old. If too young the person might not have contributed significantly to the company’s success. If too old the person might not have enough residual service to justify a minimum term of the policy.
(ii) Level of expertise: High level of technical expertise or management skills makes a person indispensable. Qualification and experience in different fields is of great significance importance.
(iii) Earning of Profit making track record of the company: Usually, the key person’s contribution translates into higher revenue or profitability over a period of time, especially when the person is in sales or marketing jobs or Managing Director or CEOs whose key performance indicator is driving profitability.
However, there could be other functional heads like Chief Human Resources Officer who may not contribute directly to Profitability but builds a good culture which motivates employees to stick on to the company and contribute to the success. However, this needs to be demonstrated by the company taking the Key Person Policy.
There is no limit to the number of Key persons (s) in a company. This depends on the needs of the company. Usually, the sum assured under a Key Person policy is linked to the profitability of the company and the amount of insurance cover granted could be, minimum of the following 3 parameters:
- 3 times the average gross profits of the Company for the last 3 years.
- 5 times the average net profit of the company for the last 3 years.
- 10 times the total annual compensation package for the key man which includes salary, bonus and all other perquisites.
If there are more than 1 key person in the Company, the overall limit will be governed by the same principle and the sum assured granted to the various key persons will not exceed the overall limit arrived at by the above method. So we can say that Keyman Insurance helps in increasing the penetration level in Insurance as it is been done in bulk for the employees of an organization.
Question 4.
There are 1,000 persons who are all aged 50 years and are healthy. It is expected that of these, 10 persons may die during the year. if the economic value of the loss suffered by the family of each dying person is taken to be ‘ ₹ 20,000, explain how these 1,000 persons may share the risks in cases of 10 persons through pooling of funds.
(b) On what basis the insurable interest arise under the following circumstances:
- Owner of a building and bank as a mortgagee.
- Warehouse and keeper of goods.
- Renting the building by landlord to a tenant.
- Employer to pay compensation to employees for accidents.
Answer:
(a) Insurance reduces risk through pooling of funds. People lacing common risks come together and make their small contributions to a common fund. The contribution to be made by each person is determined on the assumption that while it may not be possible to tell beforehand, which person will suffer, it is possible to toll, on the basis of past experiences, how many persons, on an average, may suffer losses.
- In the given problem, the total loss would work out to be ₹ 2,00,000/- (i.e. 10 x 20,000). If each person of the group contributes ₹ 200/- a year, the common fund would be ₹ 2,00,000/- This would be enough to pay ₹ 20,000/- to the family of each of the ten persons who die. Thus, 100 persons share the risks in case of 10 persons.
(b) Insurable interest arises under the following circumstances:
- by ownership
- by law (as a bailor and bailee)
- by contract
- by legal liability.
Question 5.
Kumar, holder of a life insurance policy for a sum assured of 110 lakh, died in an accident. The accident was widely reported in the press. Mrs. Sheela Kumar, his wife, was the nominee under the policy.
Nayar, the agent who had canvasseTt’the insurance, met Tandon, the Regional Vice-President of the insurance company and requested for a ” prompt settlement of he claim assuring that he will get the documentation,
completed by Mrs. Kumar. Nayar was a leading agent of the company.
Tandon took an intimation letter from Nayar and instructed the accounts department to hand over the receipted voucher and claim cheque to Nayar. Tandon, however, forgot to inform his action to Sharma the claims officer of the insurance company.
Nayar handed over the cheque, voucher and claim form to Mrs. Kumar stating that he will collect the documents next day. Since he did not turn up the next day, she mailed the claim form, discharged voucher and the policy bond to the insurance company. Sharma, who received the documents, not knowing the earlier action of Tandon, approved the claim and arranged for a cheque for ₹ 10 lakh to be mailed to Mrs. Kumar.
The insurance company wrote to Nayar intimating that the amount of ₹ 10 lakh will be recovered in installments from his agency commission. Nayar replied that such an action will be in violation of the agency law and agreement.
Answer the following questions stating reasons:
(a) Can the company legally recover the money from Nayar?
(b) Can the company legally recover the money from Mrs. Kumar?
(c) Can the company legally recover the money from children of Mrs. Kumar?
Answer:
(a) Mr. Nayar, is the agent of the insurance company in which Mr. Kumar was the holder of a life insurance policy. The relationship of Mr. Nayar (being an agent) and the Insurance Company (Being an employer) are governed by the Indian Contract Act, 1872 and Sections 182 to 238 of the Indian Contract Act, 1872 governs the relationship between a Principal and an Agent.
An Agent is a person employed to do any act for another or to represent another in dealings with third persons. The function of an agent is to bring his principal into contractual relations with third persons. A Principal is a person for whom the above act is done or who is so represented. An agent, who acts within the scope of authority conferred by his or her principal, binds the principal in the obligations he or she creates against third parties.
In the present case, The company may not be entitled to recover the money from the agent Mr. Nayar as the negligence occurred on the part of Insurance Company official Mr. Sharma and Mr. Nayar, the agent is not responsible for the double disbursement of claim to the insured i.e. Mrs. Kumar.
(b) Yes, the excess money paid could be legally recovered from Mrs. Kumar. There are generally several causes in the policy agreement that forbid double indemnification. The Insurance Company generally reserves the right to recover the amount from the Policyholder or the member of policy holder’s family or any other person, if it is found that the benefits are erroneously paid due to the fault of the Policyholder. Further, in case the insurer is not in a position to recover such amounts from the member or any other person, the Policyholder will be liable to pay the said amount to the insurer within the prescribed time limit from the date of its demand.
The Policyholder however, will not be liable or responsible for any wrong payments made by the company without any fault on the part of the Policyholder but nothing stops the company in recovering the excess amount paid to Mrs. Kumar.
(c) The Insurance Company generally reserves the right to recover the amount from the Policyholder or the member of policy holder’s family or any other person, if it is found that the benefits are erroneously paid due to the fault of the Policyholder. However, the Policyholder will not be liable or responsible for any wrong payments made by the Company without any fault on the part of the Policyholder. In this case since the cheque has been issued in the name of Mrs. Kumar, it is doubtful that the company can legally recover money from the children of Mrs. Kumar.
Question 5.
Ashwini, aged 30 years, was employed as a supervisor in a bank. On 4th June, 2012, he took two life endowment insurance policies on his life for ? 50,000 each from Prudent Life Insurance Co. Ltd. Each policy had a different maturity term and period. Both the policies had accident claim benefit of an equivalent amount, viz. in the case of death of the insured due to an accident, the amount payable by the insurer would be twice the amount of the sum assured. Ashwini made his wife Smt. Asha as his nominee under the policies and also the legal assignee, since the couple had no issues then.
On 31st May, 2014, Ashwini while going to his office on his two-wheeler was involved in a head-on collision with a motor car coming from the opposite direction and was severely injured. He was admitted to a hospital, but succumbed to the injuries and died in the hospital on the morning of 2nd June, 2014.
Smt. Asha filed a claim under the policies with the insurer for payment of the sum assured together with the accident benefits. The company, after processing the claim, informed her on 15th July, 2014 that they were rejecting the claim on the ground that Ashwini, while taking the policies, had suppressed material facts.
The insurer indicated that Ashwini did not mention in the proposal form, the fact of an earlier ailment of having suffered from para-typhoid in June – July 2010 and having been away from his employer on medical leave between 6th June 2010 and 5th July 2010.
The nominee filed a complaint on 18th August 2014 with the District Consumer Forum stating that the repudiation of the claim was not justified. The insurer reiterated its argument that the non-mention of the previous ailment to it was a suppression of material facts and affected the fundamental nature of the contract. The District Consumer Forum on consideration of the arguments before it held in favour of the insurer agreeing with it that the deceased had suppressed material facts at the time of the proposal.
Smt. Asha, not accepting the decision of the District Consumer Forum, filed an appeal with the State Forum. Her counsel contended before the Forum that even if the deceased had suffered from para-typhoid less than two years prior to obtaining the policies and did not give the necessary information in the proposal form, it did not amount to a material suppression of facts. His main argument was that the cause of death was the accident with the motor vehicle and the cause had no nexus whatsoever with the alleged ailment. Thus, there was no suppression of facts.
The State Forum after hearing the arguments of both the parties allowed Smt. Asha’s appeal and held that the cause of death was accident and not illness. The non-mention of the fact of illness and hospitalisation did not amount to any non-disclosure of material facts. The Forum granted the relief asked for and directed the insurance company to pay Smt. Asha ₹ 2,00,000 under the policies. The decision taken on 6th January 2015 also entitled the nominee with interest at 9% per annum from the date of filing the claim, viz. 18th August. 2014.
From the information given above, answer the following questions – (a) Was the State Forum justified in its conclusion in terms of the conditions of life policies issued by Indian insurance companies? Give reasons for your answer. Cite relevant case law, if any.
(b) If Ashwini had died on account of an illness, and not in an accident, will the decision of the State Forum be different? Give reasons.
(c) What are the provisions of the Insurance Act, 1938 regarding the time limit beyond which the terms of a life insurance policy cannot be questioned?
(d) What do you mean by ‘guaranteed surrender value’ in a life policy?
(e) Can a discontinued life insurance policy be revived by the insured and if so under what circumstances and on what terms?
(f) Can a disputed claim under a small value life policy (e.g. ? 2,000) be settled in a quick manner?
(g) If death of the insured under a life policy takes place within two years of its commencement, by way of suicide, will the beneficiary get a claim?
Answer:
(a) The decision of the State Forum is justified on the following grounds:
- That the Death of Late Shri Ashwini Kumar was as a result of an accident and not any illness.
- That Section 45 of the Insurance Act,1938 provides that a policy of life insurance cannot be called in question by an insurer after the expiry of three years from the date on which it was effected on the ground that a statement made in the proposal for insurance or any other document leading to the issue of the policy was inaccurate or false.
- That the Death of Shri Ashwini Kumar was within two years of taking a Life Insurance Policy from “Prudent Life Insurance Company”. The policy was taken on the 4th of June 2012 and the death of the assured occurred on 2nd of June 2014.
- That the accident of Motor Cycle with car resulting in death of the assured had nothing to do with any illness and hence cannot come under the purview of Section 45 of the Insurance Act.
In the light of the foregoing, the decision taken by the state forum was correct and in Relevant Case: Life Insurance Corporation of India Vs. Shakuntala Bai on 17 July, 1973 (AIR 1975 AP 68).
(b) Had the Death of Late Shri Ashwini Kumar occurred on account of illness and not accident on 2nd of June 2014, the same would have come under the purview of Section 45 of Insurance Act, 1938 of three years limitation and hence the illness of the deceased on account of Para¬Typhoid would have been a material fact and its non-disclosure in the proposal form would have prejudiced admission of liability under the claim.
The Decision of the District Forum in repudiating the claim would than have been justified.
(c) The Section 45 of the Insurance Law (Amendment) Act, 2015 clearly stipulates that no policy of life insurance shall be called in question on any ground whatsoever (other than fraud) after the expiry of three years from the date of the policy, i.e., from the date of issuance of the policy or the date of commencement of risk or the date of revival of the policy or the date of the rider to the policy, whichever is later.
(d) The Guaranteed Surrender Value is the amount guaranteed to the Policyholder in case of voluntary termination of a policy before maturity. The minimum surrender value allowed is equivalent to an assured percentage of the total amount of premium paid by the Policyholder. Surrender value is the amount that a Policyholder receives from the insurer in case he plans to terminate the policy before its maturity. If a Policyholder decides to end the policy before it matures, he is liable to receive a certain sum that has accrued as his saving. From this amount the insurer deducts the surrender charge and the remaining is transferred to the Policyholder.
A regular premium policy acquires guaranteed surrender value after the policyholder has paid the premiums continuously for three years if the premium paying term is 10 years or more. For policies where premium paying term is less than 10 years, policy acquires guaranteed surrender value after 2 years premiums have been paid. When an individual decides to terminate his policy, all the benefits attached with it cease to exist, including the life cover. Therefore, the Policyholder should only terminate the policy if he feels that it no longer fulfils the requirement or if he realizes that the policy was sold with false promises.
(e) Yes, a discontinued life insurance policy can be revived by the insured. If the life policy has lapsed, it may be revived during the lifetime of the assured, but within a period of 3 years from the date of first unpaid premium and before the date on which the Annuity Vests, on payment of arrears of premium together with interest as may be decided by the insurer. Revival is a fresh contract wherein the insurer can impose fresh terms and conditions. It varies from policy to policy, insurer to insurer; Generally, a declaration of the insured state of health at the time of reinstatement is taken by the insured.
(f) Yes, in the event of any dispute relating to the settlement of a claim on a policy of life insurance assuring a sum not exceeding two thousand rupees (exclusive of any profit or bonus not being a guaranteed profit or bonus) issued by an insurer in respect of insurance business transacted in India, arising between a claimant under the policy and the insurer who issued the policy or has otherwise assumed liability in respect thereof, the dispute may at the option of the claimant be referred to the Authority (i.e. IRDA) for decision and the Authority may, after giving an opportunity to the parties to be heard and after making such further inquires as he may think fit, decide the matter.
The decision of the authority under above clause shall be final and shall not be called in question in any Court, and may be executed by the Court which would have been competent to decide the dispute if it had not been referred to the authority as if it wore a decree passed by that Court.
(g) If death occurs within certain period of time as mentioned in the policy document (generally 2 years) of taking a Life Insurance Policy, the beneficiary/nominee would receive the premium back but not the death benefit.
Question 6.
What are the characteristics of endowment insurance?
Answer:
Endowment Insurance:
An endowment insurance offers death cover if the life insured dies during the term of the policy and also offers a Survival benefit if.the life insured survives until the maturity of the policy.
It offers death cover if the life insured des during the term of the policy OR survival benefit the life insured survives until the maturity of the policy.
Some of the key features of an Endowment insurance plan are :
- If the life insured survives the entire term of the plan, then a specified amount is paid to him/her on maturity of the plan
- If the life insured dies before the maturity of the plan, then the death cover benefit is paid to the nominee/beneficiary.
- Savings element: After deducting the death cover charges & administration charges from the premium, the remaining amount is invested by the insurance company. The returns earned are later paid back to the life insured in the form of bonuses.
- Goal-based investment: Helps in accumulating money for specific plans like a child’s higher education or marriage, etc.
- Some insurance companies also allow partial withdrawal or loans against these policies
There are different variants under this plan –
- Higher death cover than the maturity benefit
- Maturity benefit is double the death cover, known as a double endowment insurance plan.
Question 7.
What are ULIPS? Explain its features and importance.
Answer:
Unit linked Insurance Plan :
A Unit Linked Insurance Plan or ‘ULIP’ as it is popularly known is basically a combination of insurance as well as investments, similar to a protection cum savings plan. While a part of the premium paid is utilized to provide insurance cover to the policyholder the remaining portion is invested in various equity and debt schemes.
A fund is created from a pool of premiums collected from policyholders and the fund is used to invest in various market instruments (debt and equity) in varying proportions similar to mutual funds. ULIP policyholders are allotted units and each unit has a Net Asset Value (NAV) that is declared on a daily basis. The NAV is the value based on which the net rate of returns on ULIPs are determined. The NAV varies from one ULIP to another based on market conditions and the fund’s performance.
Features :
ULIP policyholders can make use of features such as top-up facilities, switching between various funds during the tenure of the policy, reduce or increase the level of protection, options to surrender, additional riders to enhance coverage and returns as well as tax benefits.
Types :
There are a variety of ULIP plans to choose from based on the investment objectives of the investor, his risk appetite as well as the investment horizon. Some ULIPs allocate a larger portion of the invested capital in debt instruments while others purely invest in equity. Again, all this is totally based on the type of ULIP chosen for investment and the investor preference and risk appetite.
Charge:
Unlike traditional insurance policies, ULIP schemes have a list of applicable charges that are deducted from the payable premium. The notable ones include policy administration charges, premium allocation charges, fund switching charges, mortality charges, and a policy surrender or withdrawal charge. Some Insurer also charge “Guarantee Charge” as a percentage of Fund Value for built-in minimum guarantee under the policy.
Risks :
Since ULIP returns are directly linked to market performance and the investment risk in investment portfolio is borne entirely by the policyholders, one needs to thoroughly understand the risks involved and one’s risk absorption capacity before deciding to invest in ULIPs.
Question 7.
Write a short note on the Proposal form under IRDA (protection of Policyholders’ Interests) Regulations, 2002.
Answer:
Proposal Form:
The Insurance policy is a legal contract between the Insurer and the Policyholder. As is required for any contract there is a proposal and an acceptance. The application document that is used for making the proposal is commonly known as the ‘Proposal Form’. All the facts stated in the Proposal form becomes binding on both the parties arid failure to appreciate its contents can lead to adverse consequences in the event of claim settlement.
The Proposal form has been defined under IRDA (Protection of Policyholders’ Interests) Regulations, 2002 as “it means a form to be filled in by the proposer for insurance for furnishing all material information required by the insurer in respect of a risk, in order to enable the insurer to decide whether to accept or decline, to undertake the risk and in the event of acceptance of the risk, to determine the rates, terms and conditions of a cover to be granted.
While the IRDA had defined the Proposal form, the design and content was left open to the discretion of the Insurance company. However based on the feedback received from policyholders, intermediaries, Ombudsmen and Insurance companies, the IRDA felt it necessary to standardise the form and content of the Proposal Form. Thus the IRDA has issued the IRDA (Standard Proposal form for Life Insurance) Regulations, 2013. While the IRDA has prescribed the design and content, it has provided the flexibility to the Insurance companies for seeking additional information.
He Proposal form carries detailed instructions not only for the Proposer and the Proposed Life Insured but also to the Intermediary who solicits the policy and assists in filling up the form.
It also requires the Proposer and the Proposed Insured to declare the correctness and authenticity of the information provided in the form. In addition, the Intermediary is required to certify that he has explained the features of the policy, including terms and conditions, premium requirements, exclusions and applicable charges to the Proposer.
It is pertinent to mention here that the Proposal form gains utmost importance in any insurance contract, as the insurance company offers a cover on the basis of information provided in the Proposal form. Through the Proposal form, the Insurer seeks to elicit all material information of the Proposer and the Proposed Insured, which includes name, age, address, education, income and employment details of the Proposer, medical history of the Proposed Insured and his family members, income details, any existing life insurance cover on the Proposer as well as Proposed Insured. The information sought in the Proposal form is important for an insurance company to assess the risk that can be underwritten and also to comply with other regulatory requirements such as the ‘Know Your Customer norms.
The IRDA regulations divide the Proposal form into the following broad sections:
Section A – Contains details of the Proposer;
Section B – Contains speciaiised/additional information which may vary based on the product;
Section C – Contains suitability analysis which is highly recommended;
Section D – Contains details of the product proposed. Some of the Insurers also have online versions of the Proposal form, through which an Insurance policy can be proposed online by the Proposer on the website of the Insurance Company.
Question 8.
Write a brief note on Variable insurance plans.
Answer:
Variable Insurance Plan:
Variable life insurance is a permanent life insurance policy with an investment component. Variable universal life insurance can help meet the needs of those who want life insurance protection with the potential to build cash value. The policy has a cash-value account, which is invested in a number of sub-accounts available in the policy. A sub-account act similar to a mutual fund, except it’s only available within a variable life insurance policy.
A typical variable life policy will have several sub-accounts to choose from, with some offering upwards of 50 different options. The cash value account has the potential to grow as the underlying investments in the policy’s sub¬accounts grow – at the same time, as the underlying investments drop, so may the cash value. The appeal to variable life insurance lies in the investment element available in the policy and the favourable tax treatment of the policy’s cash value growth.
Annual growth of the cash value account is not taxable as ordinary income. Furthermore, these values can be accessed in later years and, when done properly through loans using the account as collateral, instead of direct withdrawals, they may be received free of any income taxation. Similar to mutual funds and other types of investments, a variable life insurance policy must be presented with a prospectus detailing all policy charges, fees and sub-account expenses.
Question 9.
What do you mean by Nomination? Explain the difference between Assignment and Nomination.
Answer:
Nomination:
Nomination is a facility that enables a Policyholder to nominate an individual, who can claim the proceeds of the policy, upon the demise of the Policyholder.
Nomination is dealt with under Section 39 of the Insurance Act, 1938. It lays down that the Policyholder who holds a policy of life insurance on his own life may nominate the person or persons to whom the money secured by the policy shall be paid in the event of his death.
Where any nominee is a minor, a major should be appointed to receive the money secured by the policy in the event of death of the policyholder during the minority of the nominee.