Insurance products are usually referred to as ‘plans’ of insurance. These plans have two basic elements. One is the ‘Death cover providing for the benefit being paid on the death, of the insured person within a specified period. The other is the ‘Survival Benefit’ providing for the benefit being paid on survival of a specified period.
Plans of insurance that provide only death cover are called ‘Term Assurance’ plans. Those that provide only survival benefits are called ‘Pure Endowment’ plans. If the insured does not die within the specified period, no payment is made under a term assurance plan. Similarly, if the insured dies within the specified period, no payment is made under a Pure-endowment plan. Both these are like Fire Insurance policies. If the specified contingency does not happen, the policyholder does not get anything from the insurer.
All insurance plans are combinations of these two basic plans. A term Assurance plan with an unspecified period is called a ‘Whole Life policy’ under which the Sum Assured (SA) is paid on death, whenever it may occur. A Term Assurance plan along with a Pure Endowment plan when offered as a single product is called an Endowment Assurance plan, under which the SA is paid on survival of the specified period or on earlier death. A Term Assurance plan with a Pure Endowment plan of double the value is called a Double endowment Assurance plan under which the amount payable on survival is double the amount payable on death. What is called a Money Back or Anticipated Endowment policy, under which, say 20% of SA is paid on survival every five years and 40% on survival for 20 years and full SA on death at any time within the 20 years, is effectively a combination of Term Assurance plan for 20 years for full SA and 4 different Pure Endowment plans (20% SA for 5 years, 20% SA for 10 years, 20% SA for 15 years and 40% SA for 20 years.
It is not possible to give details of all the plans offered by all the insurers, mainly because insurer make changes in their offers or practices from time to time. Even if a reference is made to a plan of any particular insurer, the accuracy of the information is not to be taken for granted. Under SA is payable on the death of the insured during the specified period. If death does not occur, there is no payment from the insurer. The SA may be kept constant throughout the period, or be made to increase or decrease during the period.
The SA becomes payable only on death whenever it may occur. But unlike a term assurance plan, some payment will be made at some time. Although, in the case of Whole Life policies, the SA is payable only on death, some insurers pay the SA, when the life assured completes say, 100 years. In an Endowment plan, the SA is payable on survival to the end of the term or on earlier death.
In both Whole Life and Endowment plans, the premium would normally be payable till the SA becomes payable, that is, till a claims arises. Premium can also be made payable for a shorter period. Such policies would be called Limited Payment policies. If the limited period is only one year, a ‘single’ premium would be payable at the beginning of the policy. Single premium policies for Whole Life and Endowment plans are rare, but are offered. Persons, who expect that their professional earning may not continue for a long time like regular office worker, may prefer limited payment policies. Performing artistes and even professionals working abroad, run this risk. Sometimes, officers serving in the Armed Forces may have to retire before they reach the normal retirement age of 55 or more.
Both Whole Life and Endowment policies can be made participating in profit at the valuation, will be available under the policy. The methods of bonus additions are dealt with in an earlier chapter.
The amounts payable on death and on survival need not be the same in Endowment policies. A number of variations are possible. Survival benefits can be more than death benefits or vice versa. Survival benefits may be paid at intervals during the term, without affecting the SA payable on death. These are the Anticipated Endowment plans, also called Money Back or Money Saver plans. There are some Endowment plans under which, death benefit is available after the last survival benefit is paid at the end of the term of the policy.
Coverage that can be converted into permanent insurance regardless of an insured’s physical condition and without a medical examination. The individual cannot be denied coverage or charged an additional premium for any health problems.
‘Convertible’ plans of assurance are plans, which provide, in its terms and condition, that it can be changed to another plan after, or within, a certain period after commencement. The advantage of such convertible plane is that, when the right of conversion is exercised, there would be no further underwriting decision to be made. There would be no medical examination at that time.
WITH PROFIT AND WITHOUT PROFIT POLICIES
The insurer distributes its profits among its policyholders in the form of a bonus/profit share. An insurance policy can be “with” or without profit. In the former, any bonus declared is allotted to the policy and is paid at the time of maturity or death (with the contracted amount). In a without profit plan, the contracted amount is paid without any profit share. The premium rate charged for a with profit policy is therefore higher than for a “without” profit policy.
Joint life policies are similar to endowment policies in that they too offer maturity benefits to the policyholders, apart form covering risks like all life insurance policies. But joint life policies are categorized separately as they cover two lives simultaneously, thus offering a unique advantage in some cases, notably, for a married couple or for partners in a business firm.
In the case of joint life insurance’s: • A joint life declaration is necessary to create a joint interest in the policy. • In case of partnership insurance, the partnership deed will be examined to ascertain the nature of financial interest of each partner. • Each life will be underwritten separately. • Bonuses accrue on the single basic SA only.
Children’s insurance policies include those through which parents or legal guardians can provide for life insurance for their child from birth. The risk cover commences from the date child attaining the age of 12/17/18/21 (known as the Date of Risk), and will vest itself on the child upon his or her attaining majority on completion of age 21, if the case demands so.
Until the child attains majority, the parents are the owners of the policy and have to pay the premium periodically. It is important that these policies are considered only after the insurance portfolios of the parents have been completed. The family’s insurance budget should primarily buy as much life insurance possible on the lives of the breadwinner and should not be frittered away on the children’s lives as their insurance is useless in the event of any premature death of the breadwinner. In fact, those lives should be insured that have maximum economic benefits. Quite often, policies lapse if and when the premium paying breadwinner of the family dies before the vesting age. After all, the child may not be in a position to continue paying the premiums.
The Unit Trust of India has Unit Linked Insurance Plan (1971). This plan is designed for any resident in India between the ages of 12 and 55 planning to save between Rs. 6000 and Rs. 75000, to be contributed in half-yearly or annual installments over a period of 10 or 15 years. Persons over 55 years can go in for a 10 year plan. No medical examination is necessary. A small part of the contribution is utilized for providing life cover and the balance is invested in units. In case the person dies before the end of the plan period, the legal heirs will be entitled to the units to his credit and the amount of the insurance cover.
Unit-Linked policies in India by the L.I.C. under the brand name Bima Plus, is a plan of this nature. It offered a choice of three funds (Secured, Balanced and Risk) with different risk profiles, depending on the different patterns of investment in equities, debts and liquid assets. The policyholder was allocated units, which were valued every week.
Industrial insurance plans are designed for workers with low incomes. The policies are issued for small SAs, with weekly premiums. The arrangement is that the agents will visit the house or place of work of the policyholder every week to collect the premium. The administrative costs are high. Agents have to be remunerated differently because they are expected to visit every policyholder every week, to collect the premium. Both mortality and lapse rates tend to be high.
SALARY SAVING SCHEMES (SSS) POLICIES
Salary Savings Scheme provides for payment of premium through monthly deductions by the employer from the salary of employees. For this scheme, the additional charge of 5% of the premium usually added for the monthly mode of payments will be waived.
Endorsement to an insurance policy that modifies clauses and provisions of the policy, including or excluding coverage. Endorsements to life insurance policies that provide additional benefits or limit insurance company’s liability for payment of benefits under certain conditions. These include: 1. Waiver of Premium for Disability. An insured with total disability that lasts for a specified period no longer has to pay premiums for the duration of the disability. In effect, the company pays the premiums. 2. Accidental Death Benefit. 3. GUARANTEED INSURABILITY. 4. COST-OF-LIVING ADJUSTMENT (COLA) 5. Other- Insured. Term life insurance is added on a person other than the primary insured, with the rate based on the other person’s age, sex, underwriting classification, and amount of coverage. 6. Children’s Insurance. Term insurance on each child is added, usually to the age of majority. Generally, a child cannot become insured before the age of 15 days or after his or her eighteenth birthday. 7. Additional Insurance. Term insurance can be added to ordinary life policies as an additional layer of coverage for some specified time interval. 8. Transfer of Insurance In business situation, generally used to insure key persons with the cash value and the insurance coverage transferable from the initial insured person to another person.
9. Dreaded Diseases or critical illness cover.An annuity is an investment that you make, either in a single lump sum or through installment paid over a certain number of years, in return for which you receive a specific sum every year, every half-year or every month, either for life or for a fixed number of years.
After the death of the annuitant, or after the fixed annuity period expires for annuity payments, the invested annuity fund is refunded, perhaps along with a small addition, calculated at that time. Annuities differ from all the other forms of life insurance discussed so far in one fundamental way-an annuity does not provide any life insurance cover but, instead, offers a guaranteed income either for life or a certain period. Typically, annuities are bought to generate income during one’s retired life, which is why they are also called pension plans. Annuity premiums and payments are fixed with reference to the duration of human life. Annuities are an investment, which can offer an income you cannot outlive and provide a solution to one of the biggest financial insecurities of old age; namely, of outliving one’s income.
OTHER PLANS
Special plans of insurance are available which serve to provide Insurance cover to citizens who cannot be commonly classified or segregated. These special plans are designed to satisfy needs ranging from debt-clearance in the event of the death of the insured to financial aid in the event of a medical mishap. Special plans also provide financial assistance for handicapped dependants as well as emergency surgery required if and when a medical emergency arises.
Special plans are insurance policy plans available from the National Insurance providers to serve the needs of citizens who cannot be commonly classified or segregated. These special plans are designed to satisfy needs ranging from debt-clearance in the event of the death of the insured to financial aid in the event of a medical mishap. Special plans also provide financial assistance for handicapped dependants as well as emergency surgery required if and when a medical condition arises.
Physically handicapped persons are insured. Extras are charged in some cases like, loss of both arms, deaf in both ears, blind in both eyes, etc. partially handicapped persons are mostly accepted without extra premium, except in certain plans.
A policy that provides coverage to employees of an organization and sometimes their dependents. Because the cost is shared by a large number of people, group life and health plans frequently offer broader coverage at lower costs than individual policies.
Group Insurance is designed
with businesses in mind. While individual insurance plans can deny
coverage to a specific individual due to poor medical conditions or
high risk situation, or charges increased rates, a group insurance
plan cannot. Insurance companies must not accept the entire group or
none at all, nor can they increase rates to one individual. With group
insurance plans, there is strength in numbers. Otherwise known as a
Benefits Plans, group insurance is a means by which an employer
sponsors a program of life and financial security for his employees.
In other words, a group insurance plan enables insured employees
to maintain and retain their income.
A group insurance plan is
often viewed as being nothing more than individual insurance sold
broadly to a large number of people, who happen to work for the same
employer. If fact, group insurance differs from individual in a number
of important ways:
A. It includes coverage which can’t be
purchased on an individual basis.
B. It makes many coverage
available non-medically, based only on the requirement that the
employee is working full time.
C. Group Insurance usually offers
much broader coverage (i.e. fewer restrictions).
D. Group
Insurance is much cheaper because of the reduced insurer mark-up for
risk charges and administrative expenses.
E. Group Insurance is
more tax effective. Premiums paid by the employer are treated as a
business expenses and is not taxable, they are not treated as taxable
income of the employees, and most of the claims are also tax free.
For an employer who is contemplating buying a group insurance
plan, there is obviously much more detail to be considered.
WHAT IS GROUP INSURANCE?
An insurance policy that provides coverage for a number of people under one contract, called a master contract. In a Group insurance policy, the policy holder is usually the employer who contributes premium which is a certain percentage of the salary of the employees in the organization. However, the employees are the beneficiaries in such Group Insurance policies. In general, in a Group Insurance policy the insurance company ordinarily cannot turn down any applicant who is a member of the defined group.
ESSENTIAL FEATURES OF GROUP INSURANCE SCHEMES
The most important condition is that the group must not have been formed for the purpose of taking advantage of this scheme. The group must have some other bonding. Entry into or exit from the group must be for reasons other than the availability of cover under the scheme. Also, there must a minimum number of members in the group. Twenty five would be considered adequate. In many cases, the members would be in hundreds. The individual beneficiaries are not permitted to choose the amount of insurance cover. The amount will be determined on criterion, which are applied uniformly to all the members of the group. For example, the cover may depend on age or years of membership or income (in the case of employees) or rank. If the criterion is age or rank, then all individuals of the same age or rank will get the same cover. If the criterion is of income, the cover can be a fixed multiple of income. The income, depending on output, may be a suitable criterion.
GROUP INSURANCE SCHEMES
One Year Renewable Group Term
Insurance Scheme Under this scheme, the members are covered for
specific amount, payable on their death. This is the simplest and the
cheapest of the schemes. This is particularly helpful to relatives of
employees, who die young and find that the amount payable under
gratuity and Provident Fund schemes are not adequate. This is also
helpful to cover the liabilities of borrowers under mortgage or
hire-purchase agreements. The amount of cover can be related to the
outstanding loans.
Group Gratuity
Schemes
It is offered to employers and is related to the gratuity to employees. Gratuity is paid to employees who retire or die after long years of service. Since 1972. Payment of Gratuity has been made compulsory by the Payment of Gratuity Act. The amount of Gratuity is linked to the number of years of service and the salary drawn during the last few years.
It provides two advantages.
Firstly, it can guarantee a certain amount of Gratuity, which would be
more than what the rules provide, particularly for those who die young
and with relatively lesser number of years of service. The second
advantage is that it makes it easier to fund the gratuity liability of
the employer. Actuarial advice is available from the Insurer about the
adequacy of the funds earmarked for payment of Gratuity .
In the
absence of the arrangement for the Group Schemes with an Insurer, the
employer had to provide for Gratuity in one of the three ways.
(1)He could pay as and when the gratuity falls due out of his
current revenues. This is not prudent business practice, because the
amounts of gratuity payable can vary considerably from year to year
depending on the demographic profile of the employees, causing
fluctuations in profits and also possibilities of delays or even
defaults in gratuity payments.
(2) Create an internal reserve for
gratuity liabilities.
(3) Set up a Gratuity Fund and create a trust
to administer the funds.
Group Term Insurance
Scheme:
Group (Term) Insurance Scheme provides life insurance protection to groups of people. Administration of the scheme is on group basis and cost is very low. Under Group (Term) Insurance Scheme, life insurance cover is allowed to all the members of a group subject to some simple insurability conditions without insisting upon any medical evidence.
The restrictions under a
Group Term Insurance Scheme mainly relate to size of the group, amount
of cover available, minimum and maximum age limit for eligibility of
cover (18 to 60), participation of minimum percentage (75%) of
eligible members of the group at inception and compulsory
participation of all new members.
Group Superannuation
Schemes
Special Features:
(1)The members can be
covered for Group Superannuation scheme whereby pension is payable to
employees who retire from the service or die while in service .
(2)
create an internal reserve for pension payment.
(3) Set up a
pension Fund and create a Trust to administrator the funds.
On
Retirement of a member, the (contribution plus interest) is utilized
to provide the following:-
• Commuted Value (Equivalent to 1/3rd
of the corpus) which is tax free.
• The corpus that remains
2/3rd after providing for the commuted value is taken as the purchase
price to provide for pension.
On Death:
The Pension is payable on the
life of the beneficiary. Corpus is utilized towards the payment of
pension of the type the beneficiary may opt and the benefit so
received is tax free. A lump sum payable by way of death benefit
besides the pension, if the employer has taken Group Insurance Scheme
in conjunction with the Group Superannuation Scheme.
On
Withdrawal: (Resignation etc.)
He may opt for a pension from the normal retirement date as provided in the old employer’s scheme. He may opt for payment of commuted value and pension, immediately in which case the benefits would be taxable.
Employers who have to pay pensions purchase annuities from a life insurer as and when they have to release the pensions. After purchase, the annuities will be paid by the insurer directly to the pensioners. The benefits can be tailored to meet the requirements of the employer and the pensioners. The purchase price would be decided by the employer, according to its policies and terms of employment. For a given purchase price, there could be various options as to how the annuity could be dispersed. The variations, as in annuities, would be when to begin and when it should end. It could end on the pensioner’s death or continue as long as the spouse is alive or be for not less than a specified period. These could be left to the preference of the pensioner.
Voluntary Retirement Schemes are very common these days. Employees receive substantial amounts from the employers. Group insurance schemes can help to channelise such funds to steady and assured flows of income.
SPECIAL
SCHEMES
Group Insurance Scheme in lieu of
EDLI
Features:
All employers to whom the
Employee’s Provident Fund and Miscellaneous Provision Act, 1952
applies, have a Statutory liability to subscribe to Employee’s
Deposit Linked Insurance Scheme, 1976 to provide for the benefit of
Life insurance to all their employees.
Special Features:
Under the scheme as amended with effect from 24th June, 2000 the insurance benefit is equal to the average balance to the credit of the deceased employee in the Provident Fund during the last 12 months, provided that where such balance exceeds Rs, 35,000, insurance cover would be equal to Rs. 35,000 plus 25% of the amount in excess of Rs, 35,000 subject to a maximum of Rs. 60,000. Thus if the length of service is not adequate and/or the salary is low the average balance may be substantially less and as such the benefit to the employee’s family is either inadequate or non-existent.
It may be noted that an employer may be exempted from contributing to this scheme, if it has provided for better insurance benefit through alternative scheme. LIC’s Group Insurance Scheme in lieu of EDLI has been accepted as one such better alternative.
GROUP LEAVE ENCASHMENT SCHEME (GLES)
As per the amendments to the Companies Act, made in 1988, and the accounting standards, employers have to fund the liability in respect of the leave encashment facility. The L.I.C’s scheme enables such funding (including medical leave encashment). In addition, the scheme provides for a sum assured ranging from Rs, 5,000 to 25,000 payable to the families of employees who die while in service.
