HISTORY OF INSURANCE – INTRODUCTION

The story of insurance is probably as old as the story of mankind. The same instinct that prompts modern businessmen today to secure themselves against loss and disaster existed in primitive men also. They too sought to avert the evil consequences of fire and flood and loss of life and were willing to make some sort of sacrifice in order to achieve security. Though the concept of insurance is largely a development of the recent past, particularly after the industrial era – past few centuries – yet its beginning dates back almost 6000 years.

      Insurance in various forms has been mentioned in the writings of Manu (Manusmriti), Yagnavalkya (Dharmashastra) and Kautilya (Arthashastra). The fundamental basis of the historical reference to insurance in these ancient Indian Texts is the same i.e. pooling or resources that could be redistributed in times of calamities such as fire, floods, epidemics and famine. The early references to Insurance in these texts have reference to marine trade loans and carriers’ contracts.  

       World Insurance was born after almost a decade of studying the risk management needs of independent freight forwarders all over the world. Early insurance goes back to the Egyptian times. Around 3000 BC, Chinese merchants dispersed their shipments among several vessels to avoid the possibility of damage or loss. Insurance understood as a technique providing protection against the fortuitous events for a consideration had its origin in the bottomry bonds which were issued by the Mediterranean merchants as early as the fourth century BC. This loan was an advance of money on a ship during the period of voyage and the loan destination. During the voyage if ship was lost, the obligation to repay the loan was extinguished. The interest payable constituted a sort of premium for the risk of total loss.

An early form of life insurance dates to Ancient Rome; “burial clubs” covered the cost of members’ funeral expenses and assisted survivors financially. The first company to offer life insurance in modern times was the Amicable Society for a Perpetual Assurance Office, founded in London in 1706 by William Talbot and Sir Thomas Allen. Each member made an annual payment per share on one to three shares with consideration to age of the members being twelve to fifty-five. At the end of the year a portion of the “amicable contribution” was divided among the wives and children of deceased members, in proportion to the number of shares the heirs owned. The Amicable Society started with 2000 members.

Insurance as we know it today has its existence to 17th century in England. In fact, it began taking shape in 1688 at a rather interesting place called Lloyd’s Coffee House in London, where various professionals met to discuss and transact business. By the end of the 18th century, Lloyd’s had developed enough business to become one of the first modern insurance companies.¹ The first stock companies to get into the business of insurance were began in England in 1720. The year 1735 witnessed the dawn of the first insurance company in the American colonies in Charleston, SC.

The first life table was written by Edmund Halley in 1693, but it was only in the 1750s that the necessary mathematical and statistical tools were in place for the development of modern life insurance. James Dodson, a mathematician, and actuary, tried to establish a new company aimed at correctly offsetting the risks of long term life assurance policies, after being refused admission to the Amicable Life Assurance Society because of his advanced age. He was unsuccessful in his attempts at procuring a charter from the government.

His disciple, Edward Rowe Mores, was able to establish the Society for Equitable Assurances on Lives and Survivorship in 1762. It was the world’s first mutual insurer and it pioneered age based premiums based on mortality rate laying “the framework for scientific insurance practice and development” and “the basis of modern life assurance upon which all life assurance schemes were subsequently based”.

The Greeks and Romans introduced the origins of health and life insurance 600 BCE when they created guilds called “benevolent societies” which cared for the families of deceased members, as well as paying funeral expenses of members.² Guilds in the Middle Ages served a similar purpose. The Talmud deals with several aspects of insuring goods. Before insurance was established in the late 17th century, “friendly societies” existed in England, in which people donated amounts of money to a general sum that could be used for emergencies.

INDIAN INSURANCE SECTOR – INTRODUCTION

       The concept of insurance has been prevalent in India since ancient times amongst Hindus and has a deep rooted history. Overseas traders practiced a system of marine insurance. The joint hindu family, peculiar to India, was a method of social security for every member of the family in his life. Insurance is listed in the Constitution of India in the Seventh Schedule as a Union List subject, meaning it can only be legislated by the Central government. Insurance in India refers to the market for insurance in India which covers both the public and private sector organisations. The insurance sector has gone through a number of phases by allowing private companies to solicit insurance and also allowing foreign direct investment. India allowed private companies in insurance sector in the year 2000, setting a limit on FDI to 26%, which was increased to 49% in 2015. However, the largest life insurance company in India, Life Insurance of India is still owned by the Government and carries a sovereign guarantee for all insurance policies issued by it.

            The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector. Before that, the industry consisted of only two state insurers: Life Insurers (Life Insurance Corporation of India, LIC) and General Insurers (General Insurance Corporation of India, GIC). GIC had four subsidiary companies. With effect from December 2000, these subsidiaries have been de-linked from the parent company and were set up as independent insurance companies: Oriental Insurance Company Limited, New India Assurance Company Limited, National Insurance Company Limited and United India Insurance Company. The insurance sector went through a full circle of phases from being unregulated to completely regulated, and then currently being partly deregulated. It is governed by a number of acts.

From its creation, the Life Insurance Corporation of India, which commanded a monopoly of soliciting and selling life insurance in India, created huge surpluses and by 2006 was contributing around 7% of India’s GDP.

The corporation, which started its business with around 300 offices, 5.7 million policies and a corpus of INR 45.9 crores (US$92 million as per the 1959 exchange rate of roughly Rs.5 for US$1),  had grown to 25,000 servicing around 350 million policies and a corpus of over Rs.800,000 crore (US$120 billion) by the end of the 20th century.

      Until 1999, there were no private insurance companies in India. The government then introduced the Insurance Regulatory and Development Authority Act in 1999, thereby de-regulating the insurance sector and allowing private companies. Furthermore, foreign investment was also allowed and capped at 26% holding in the Indian insurance companies.

INSURANCE CONCEPTS AND GROWTH

INSURANCE – CONCEPT

      Insurance is the man’s constant search for security and finding out ways and means of ameliorating the hardships arising out of calamities. The aim of all insurance is to compensate the owner against loss arising from a variety of risks, which he anticipates to his life, property and business. Insurance is a technique involving collection of small amounts of premium from many individuals and companies out of which losses suffered by a few are reimbursed. In this method the individual insured who is exposed to uncertain and accidental loss is able to get protection through payment of a small but definite cost namely premiums.

      Insurance is defined as “cooperative device to spread the loss caused by a particular risk over a number of persons who are exposed to it and who agree to ensure themselves against that risk”³. Insurance is a contract between two parties ie. Insurer and insured, whereby in consideration of payment of premium by the insured, the insurer agrees to reimburse the financial loss which the insured may incur due to an insured peril. The contract is again subject to the Indian Contract Act coupled with special principles evolved by common law. Depending on the contract, other events such as terminal illness or critical illness may also trigger payment. In this method the individual insured who is exposed to uncertain and accidental loss is able to get protection through payment of a small but definite cost, namely premium. The same instinct that prompts modern business today to secure themselves against loss and disaster existed in primitive men also. They too sought to avert the evil consequences of fire and flood and loss of life and were willing to make some sort of sacrifice in order to achieve security.

.     A thriving insurance sector is of vital importance to every modern economy.

Ø First because it encourages the habit of savings.

Ø Second because it provides a safety net to rural and urban enterprises and productive individuals. And perhaps most importantly it generates long- term invisible funds for infrastructure building. The nature of the insurance business is such that the cash inflow of insurance companies is constant while the payout is deferred and contingency related.   

BASIC PRINCIPLES OF INSURANCE

A contract is an agreement which includes a set of promises that are imposed by law and for breach of promises law provides a remedy. Hence insurance is under the purview of contract act. Nonlife insurance policies are contracts of indemnity and involve insurable interest of the insured. Basic principles of insurance are as follows:

a) Principle of Uberrimae fidei (Utmost Good Faith): Insurance contract is done on utmost faith ie: in a contract of insurance there is an implied condition that each party must disclose every material fact known to him. A representation or a statement made by an applicant for insurance before the contract is affected. A misrepresentation of material fact makes the contract voidable at the option of insurer. Concealment has also the same effect. Applicant should not conceal the facts, even though the disclosure of the same may result into rejection of application. The insurer’s liability gets void (i.e. legally revoked or cancelled) if any facts, about the subject matter of insurance are either omitted, hidden, falsified or presented in a wrong manner by the insured. The principle of Uberrimae fidei applies to all types of insurance contracts.

b) Principle of Insurable Interest: Insurable interest means – A relation between the insured and the event insured against, such that the occurrence of the event will cause substantial loss or injury of some kind to the insured. Insurable interest exists only if the insured would suffer economic loss in the event of the damage or destruction of insured object. It is also necessary that insurable interest must exist at the time of loss. Secured creditors have insurable interest in the property for which they have given loan.

c) Principle of Indemnity: Indemnity means security, protection and compensation given against damage, loss or injury. According to the principle of indemnity, an insurance contract is signed only for getting protection against unpredicted financial losses arising due to future uncertainties. This principle argues that an individual should not be permitted to make profit from the contract but should be re-established to the same financial conditions that existed prior to the occurrences of loss. In an insurance contract, the amount of compensations paid is in proportion to the incurred losses. There are two fundamental purposes involved, first to prevent the insured from making profits from occurrence of loss and second to reduce moral hazard. However, in case of life insurance, the principle of indemnity does not apply because the value of human life cannot be measured in terms of money.

d) Subrogation: Subrogation means substitution of the insurer in place of insured for the purpose of claiming indemnity from third party for a loss covered by the insured. It is another provision under the insurance contract which is preventing the insured from making profits. It also applies to all contracts of indemnity. It is generally applicable to contract of fire insurance and marine insurance. According to the principle of subrogation, when the insured is compensated for the losses due to damage to his insured property, then the ownership right of such property shifts to the insurer. This principle is applicable only when the damaged property has any value after the event causing the damage. The insurer can benefit out of subrogation rights only to the extent of the amount he has paid to the insured as compensation. The principle of subrogation prevents an insured who holds a policy of indemnity from recovering from the insurer the sum greater than the economic loss he has sustained.

e) Contribution: Principle of Contribution is a corollary of the principle of indemnity. It is the right of insurer who had paid a loss under a policy to recover a proportionate amount from other insurers who have covered the liability for the same loss.

f) Deductibles: Deductibles is a provision by which a specified amount is subtracted from the loss payment otherwise payable to the insured. It is used to eliminate small claims and the administrative expense of adjusting these claims. It is the return substantial premium savings are possible. Insurance company will be liable only when the amount of loss exceeds the deductibles.

g) Principle of Loss Minimization:  According to the Principle of Loss Minimization, insured must always try his level best to minimize the loss of his insured property, in case of uncertain events like a fire outbreak or blast, etc. The insured must take all possible measures and necessary steps to control and reduce the losses in such a scenario. The insured must not neglect and behave irresponsibly during such events just because the property is insured. Hence it is a responsibility of the insured to protect his insured property and avoid further losses.

h) Principle of Causa Proxima (Nearest Cause): Principle of Causa Proxima means when a loss is caused by more than one causes, the proximate or the nearest or the closest cause should be taken into consideration to decide the liability of the insurer. The principle states that to find out whether the insurer is liable for the loss or not, the proximate (closest) and not the remote (farthest) must be looked into.

FUNCTIONS & FUNCTIONAL AREAS OF INSURANCE⁴

A) Primary Functions

• Providing Protection – The elementary purpose of insurance is to allow security against future risk, accidents and uncertainty. Insurance cannot arrest the risk from taking place, but can for sure allow for the losses arising with the risk. Insurance is in reality a protective cover against economic loss, by apportioning the risk with others.
• Collective Risk Bearing – Insurance is an instrument to share the financial loss. It is a medium through which few losses are divided among larger number of people. All the insured add the premiums towards a fund and out of which the persons facing a specific risk is paid.
• Evaluating Risk – Insurance fixes the likely volume of risk by assessing diverse factors that give rise to risk. Risk is the basis for ascertaining the premium rate as well.
• Provide Certainty – Insurance is a device, which assists in changing uncertainty to certainty.

B) Secondary Functions

• Preventing Losses – Insurance warns individuals and businessmen to embrace appropriate device to prevent unfortunate aftermaths of risk by observing safety instructions; installation of automatic sparkler or alarm systems, etc.
• Covering larger risks with Small Capital – Insurance assuages the businessmen from security investments. This is done by paying small amount of premium against larger risks and dubiety.
• Helps in the Development of Larger Industries – Insurance provides an opportunity to develop to those larger industries which have more risks in their setting up.

C) Other Functions

• Is a savings and investment tool – Insurance is the best savings and investment option, restricting unnecessary expenses by the insured. Also to take the benefit of income tax exemptions, people take up insurance as a good investment option.
• Medium of earning foreign exchange – Being an international business, any country can earn foreign exchange by way of issue of marine insurance policies and a different other ways.
• Risk Free trade – Insurance boosts exports insurance, making foreign trade risk free with the help of different types of policies under marine insurance cover.
• Insurance provides indemnity, or reimbursement, in the event of an unanticipated loss or disaster. There are different types of insurance policies under the sun cover almost anything that one might think of. There are loads of companies who are providing such customized insurance policies. 

Factors Affecting Insurance Industry (PESTEL Analysis):

A) Political Factors

• Bureaucracy and Red Tapism in Public Sector
• Change in Rules
• Service Tax
• Increased FDI limits
• End of Government Monopoly

B) Economic Factors

• Increase in Gross Domestic Savings
• Contribution to Country’s GDP
• Role in Government Securities Market
• Biggest Player in Domestic Equity Market

C) Socio Cultural Factors

• Population
• Religions faiths and Uncertainty about life
• Increase in Life Span and Increase in Elderly Diseases
• Family History
• Age and Gender
• Occupation, Earning Capacity and Family Maintenance
• Changing Perception, Changes in Life Style and Health
• Educational background
• Low Insurance Coverage

D) Technological Factors

• Automation and Internet Information Era
• Database Management
• E-Insurance in India
• Online Insurance Premium Payment
• Business Tie-ups with Banks

E) Legal

• IRDA Rules
• Consumers Forum

SWOT ANALYSIS OF INSURANCE INDUSTRY

Strengths:
            • Premium rates are increasing and so are commissions.
            • The variety of products is increasing.
            • Prospects expect more services from their brokers.

Weaknesses
            • Insurance companies are often slow to respond to changing needs.
            • There is an increasing trend of financial weakness among the companies.
            • There are more competitors for agencies to compete with banks and Internet players.

Opportunities
            • The ability to cross sell financial services is barely being tapped.
            • Technology is improving to the point that paperless transactions are available.
            • The client’s increasing need for an “insurance consultant” can open new ways to service the client and generate income.

Threats
            • The increasing cost and need for insurance might hit a point where a backlash will occur.
            • Government regulations on issues like health care, mold and terrorism can quickly change the direction of insurance. Increasing expenses and lower profit margins will hit hard on the smaller           agencies and insurance companies.

            • Increasing expenses and lower profit margins will hit hard on the smaller agencies and insurance companies.

Table 1.2:                               SWOT Analysis of Indian Insurance Sector

CLASSIFICATION OF INSURANCE

      Insurance may be classified according to the type of coverage. The conventional classification of insurance is Life Insurance and Non-Life Insurance/general insurance.

Chart No.1.1

Insurance

                        Life Insurance                                                           Non-Life Insurance

                                     Commercial Lines        Personal Lines

• Cottage industry and small sector          *    Property insurance
• Traders and shopkeepers                        *    Health Insurance
• Traders Organisations                            *   Accident Insurance

                                                               *    Liability Insurance                                

Chart No.1.2                          Insurance Industry of India

                                                                        Insurance

              Life                                                                                       Non-life/General

                                                    Marine             Motor               Fire                     Health

Table 1.3:   Registered Insurers in India     (As on 31th March, 2018)

Source: IRDA Annual Reports

Chart 1.3

Ministry of Finance (Government of India)

                                                                          IRDA

Life Insurance             General Insurance                Health                    RE-Insurance   

Public Private            Public  Private                Public      Private                      Public  Private

   1            23           6                 18                      0                     5                              1              0

LIFE INSURANCE

      “What is the most wonderful thing in the world? – Yaksha asked Yudhishtira in the Epic ‘Mahabharata’. Yudhistira replies, “The most wonderful thing in the world is that men seeing every day the dead being carried to the burial ground, still imagine that they are eternal”. Death is a sublime theme of reflection and is a natural phenomenon. Therefore, one should not be distressed for what is inevitable and unavoidable, observed Shri Krishna in the Bhagvad Geeta.

History

      Life insurance in India made its debut well over 100 years ago. In our country, which is one of the most populated in the world, the prominence of insurance is not as widely understood, as it ought to be.

      Insurance in India can be traced back to the Vedas. For instance, ‘yogakshema’, the name of Life Insurance Corporation of India’s corporate headquarters, is taken from the Rig Veda. The term suggests that a form of “community insurance” was popular around 1000 BC and practiced by the Aryans. Burial societies of the kind found in ancient Rome were formed in the Buddhist period to help families build houses, secure widows and children.

      Pandit Ishwar Chandra Vidya Sagar⁵, a noted social reformer and educationist founded “the Hindu Family Annuity Fund” in 1872 in Calcutta. This Company was started to give financial help to Hindu widows and orphans through annuities.   

      Life Insurance in its modern form came to India from England in the year 1818. Oriental Life Insurance Company started by Europeans in Calcutta was the first life insurance company on Indian Soil.  The company failed in 1834. In 1829, Madras Equitable began conducting life-insurance business in the Madras Presidency. The British Insurance Act was enacted in 1870, and Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were founded in the Bombay Presidency. The era was dominated by British companies. All the insurance companies established during that period were brought up with the purpose of looking after the needs of European community and Indian natives were not being insured by these companies. However, later with the efforts of eminent people like Babu Muttylal Seal, the foreign life insurance companies started insuring Indian lives. But Indian lives were being treated as sub-standard lives and heavy extra premiums were being charged on them. Bombay Mutual Life Assurance Society heralded the birth of first Indian life insurance company in the year 1870, and covered Indian lives at normal rates. Starting as Indian enterprise with highly patriotic motives, insurance companies came into existence to carry the message of insurance and social security through insurance to various sectors of society. Bharat Insurance Company (1896) was also one of such companies inspired by nationalism. The Swadeshi movement of 1905-1907 gave rise to more insurance companies. The United India in Madras, National Indian and National Insurance in Calcutta and the Co-operative Assurance at Lahore were established in 1906. In 1907, Hindustan Co-operative Insurance Company took its birth in one of the rooms of the Jorasanko, house of the great poet Rabindranath Tagore, in Calcutta. The Indian Mercantile, General Assurance and Swadeshi Life (later Bombay Life) were some of the companies established during the same period. Prior to 1912 India had no legislation to regulate insurance business. The starting 150 years were noticed by disordered economic situations. The World War I and II have affected the Indian economy badly. As a result of these wars, Indian economy was facing turbulent economic conditions. Economic crises have affected the lives of Indians. The first war of Independence has increased the economic crises. The economic conditions were getting adverse due to the freedom fight. The results of these adverse economic conditions were bankruptcies and liquidation of life insurance companies and other financial institutions in India.  In the year 1912, the Life Insurance Companies Act, and the Provident Fund Act were passed. The Life Insurance Companies Act, 1912 made it necessary that the premium rate tables and periodical valuations of companies should be certified by an actuary. But the Act discriminated between foreign and Indian companies on many accounts, putting the Indian companies at a disadvantage.

      During the period of ten years from (1919 to 1928) Indian Life offices made sound growth. There was a remarkable consistent development both in the volume of new life business as well as total life business in-force. The former increased from Rs. 4.49 crores in 1919 to Rs. 15.41 crores in 1928 and the latter from Rs. 28.23 crores to Rs. 71.1crores between the same years. The number of new policies issued enhanced from 28,046 in 1920 to 92,724 in 1928. Further, the average amount of new business for each life office increased from Rs. 1.07 crores in 1919 to Rs. 2.28 crores in 1927. The first two decades of the twentieth century saw lot of growth in insurance business. From 44 companies with total business-in-force as Rs.22.44 crore, it rose to 176 companies with total business-in-force as Rs.298 crore in 1938. During the mushrooming of insurance companies many financially unsound concerns were also floated which failed miserably. The Insurance Act 1938 was the first legislation governing not only life insurance but also non-life insurance to provide strict state control over insurance business. The demand for nationalization of life insurance industry was made repeatedly in the past but it gathered momentum in 1944 when a bill to amend the Life Insurance Act 1938 was introduced in the Legislative Assembly.

      The growth of postal life insurance was remarkable during this period. The average policy amount of new business in the year 1922 and 1923 exceeded Rs. 2000 mark. In 1928 the total number of postal insurance policies in-force was 58586 having a total insurance amount of Rs. 11.67crores and with an average policy amount of total business of Rs. 1,992. Another interesting phenomenon of postal life insurance was that its surplus valuation very steadily increased from Rs. 20.6 lacs in 1922 to Rs. 44.4 lacs in 1927. Due to this steady increase of surplus the post offices were able to announce a reversionary bonus at the rate of 1.2% per annum on whole life policies and 0.8 percent per annum on endowment policies in 1922 and at 1.44 percent per annum and 0.96 percent per annum respectively in 1927.

      The following outstanding features of life insurance business during the pre-independence period upto 1900 have been observed: Firstly, the insurance companies established in this period were not properly organised and the growth of life insurance business was very slow. Secondly, only life insurance business was transacted by the major companies at this stage. Merely one or two non-life insurance companies were established during this period. Thirdly, many new insurance companies were set up during this period on mutual basis. Further the joint stock form of insurance business first appeared at this stage and policy-holders began to enjoy the controlling interest and rights to appoint their own trustees, auditors and consulting actuaries. Lastly,principle of charging same rate of premium both on the lives of Indians and Europeans were started during this stipulated period.

Main Features of Indian Insurance Business during Pre – Nationalisation Period:

1. The foreign insurance companies outnumbered the Indian insurance companies operated in India till 1870; the number of foreign insurance companies was 12 as against 8 Indian insurance companies. At this time rates of premium charged by the foreign companies on Indian lives were greater than those charged on foreign nationals.

2. In the initial stage, the growth of insurance was very slow. But during the period 1901 to 1928, it had a rapid and steady growth and actually it experienced a boom during 1929 -1938. In the first forty years of the twentieth century, insurance business in India enjoyed high rate of progression and this was possible mainly because of strong Swadeshi feeling and people’s better appreciation for the merit of life insurance business.

3. In the pre-nationalisation period, the average amount of new business per Indian life office was very low, though it increased very steadily over the period.

4. Before nationalisation the spatial distribution of insurance business in India was very uneven. Initially insurance companies having limited coverage were concentrated in South India (especially in the Presidency of Madras). Later on the centre of insurance business was shifted to Presidency of Bengal and then it spread over Bombay, Delhi and Punjab. But Bombay maintained its lead position in this sphere till the period of nationalisation. However, during pre-nationalisation period the insurance companies did their business mainly in metropolitan cities and in urban areas, neglecting the vast area of rural India.

5. At the time of inception of insurance business in India, life insurance companies dominated the scene. But steadily over time non-life business was progressed.

6. During pre-nationalisation period, life insurance products were not diversified. The products were mainly endowment policy, whole life policy, limited payment whole life policy, children’s endowment fund and few others. Among all these, endowment policies outnumbered others. It is to be noted that during this period, joint family system prevailed in India and so risk of one member was compensated by the other members of the family; therefore at that time the whole life policy did not develop much.

7. Another feature of Indian insurance business in the pre-nationalisation period was that a number of Indian and foreign companies operating in the country ceased to work and some of them tried to survive in amalgamation with other companies. This was happened due to disappearance of capital or life fund of most of the insurance companies resulting from the deployment of investible funds in risky and speculative areas and faulty actuarial valuations and loss assessment for doing insurance business properly.

LIFE INSURANCE IN INDIA – PRE NATIONALISATION

        Table 1.4:           Indian and Foreign Life Insurance Companies Operating in India

Source: Dr. A N Agarwala, 1961, Life Insurance in India: A Historical and Analytical Study

Table 1.5:   Life Insurance Business Transacted in India by Indian and Non-Indian                                                               Life Insurance Offices in 1945 and 1955

Source: Dr. A N Agarwala, 1961, Life Insurance in India: A Historical and Analytical Study

Table 1.6:                   Growth of Life Insurance Business in India: 1914-1950

Particulars                         1914           1930          1940          1945          1948           1950
1 No.of insurers                    44               68             195            215            209             208

Total No. of Policies                                                                                                                                       In force                     —–        513925     1371963    2376000   2791000     3010780

Total business                                                                                                                                     in force in crores                22.44    84.89        225.51        459.43      566.36        612.45

Total life funds                                                                                                                           in  crores                             6.366        20.53        62.41           107.4        150.39       172.3

Source: Tryst with Trust, The LIC Story, Page 15 extracted from H. Narayanan, “Indian Insurance-A Profile”

Table 1.7:           Growth of Life insurance in India-Pre-Nationalisation period⁶

Notes: 1. No of policies are in ‘000                            2. SA and Life Fund are in Rs in Cr.

Source: IIYB various issues, Agarwala (1961:21-23), Bhave (1970:340-351)

Table 1.8:                              Business Transacted by Indian Insurers

Source: A. N. Agarwal (1960): Insurance in India .

  Table 1.9:      Average Amount of New Policies issued by Indian Insurers in India

Source: Dr. A N Agarwala, 1961, Life Insurance in India: A Historical and Analytical Study

Table 1.10      Percentage of National Income Applied for Life Insurance 1948 -1954

Source: O.S. Gupta (1966): Life Insurance, p. 471, Table -12.

NATIONALISATION AND POST-NATIONALIZATION OF LIFE INSURANCE IN INDIA

      Though we are not directly concerned with the cause for nationalization, it would be in the fitness of things, to mention some of the important causes which have led to the nationalization of life insurance in India in 1956 to enable a better understanding of the problem. It has been said that the Swadeshi Movement of 1905, the Non-co-operation Movement of 1919 and the Civil Disobedience Movement of 1929 were milestones in the history of Indian insurance as these movements were primarily responsible for generating the Spirit of Indianness.

      The shortcomings noticed in the insurance business were due to the unscrupulous business practices of some insurance business magnates. The funds of the insurance companies were jeopardized by doubtful dealings such as-

 i) Buying them at higher prices and selling them at lower prices,

ii) Buying and selling to oblige others,          

iii) Granting of loans on inadequate security,            

iv) Buying and selling of investments needlessly,     

v) Cutthroat competition among life insurers,           

vi) Many insurers made appointments on what were termed ‘pro-rate bases’ resulting in higher rates of remuneration than were permitted by the insurance Act, and as such were illegal appointments,

vii) Inadequate agency force and high expense ratio,           

viii) A good number of companies were going into liquidation and the business of some transferred to other companies,     

ix) Fraudulent investment practices at the cost of policyholders.

x) High lapse ratio of insurance policies, and

xi) High cost ratios.

      Many of these were given a clear expression by Mr. H.D. Malaviya in his book “Insurance Business in India”. As many as 25 Companies had gone into liquidation and another 25 Companies had frittered away their resources at the cost of policyholders by 1956. The fraudulent practices of the past, the vast potential for life insurance business, and the growing needs of planned development finance culminated in the historic decision of the Government to nationalize life insurance in India in 1956.

      Mr. C.D. Deshmukh stressed the importance of life insurance as distinct from general insurance. He further said that the nationalization of life insurance will be another milestone on the road, the country has chosen in order to reach its goal of a socialistic pattern of society. Moving the life insurance (emergency provisions) Bill 1956 in the Lok Sabha on 29th February 1956, the then Finance Minister, C D Deshmukh, stated as follows: Insurance is an essential social service which a welfare state must make available to its people and the State must assume responsibility for rendering this service once it cannot be provided in any other manner. So while it is the failure of the general run of insurance companies to live up to the high traditions demanded of them that have led the Government to take this step. I would like to emphasise that nationalisation in this field is in itself justifiable. With the profit motive eliminated, and the efficiency of service made the sole criterion under nationalisation, it will be possible to spread message of insurance as far wide as possible, reaching out beyond the more advanced urban areas and into hitherto neglected, namely, rural areas. Shri Chintaman Deshmukh echoed these words. “The misuse of power, position a n d privilege that we have reason to believe occurs under exist-faff conditions” he said in his broadcast talk on the day the Ordinance was promulgated, “is one of the most compelling reasons that have influenced us in deciding to nationalise life insurance”.⁷

      It was hoped that the nationalized life insurance would reach millions and millions of industrial workers and people in rural areas who by and large remained, outside the orbit of life insurance till now. The nationalized life insurance was viewed in this context as an important instrument of plan finance, as one that builds up in the policy holder, a sense of confidence and participation in nation building and finally as a measure conceived in a genuine spirit of service to the people. These historical facts and promising hopes have led to nationalization of life insurance in 1956. Though the nationalization of life insurance was received very warmly and with high expectations by the entire nation, but it was then criticized by few of the following heads. The insurance trade and business community termed the ordinance on nationalization as “Undemocratic” and there was no reason for doing so. Shri. B.D. Garware, president of the Maharashtra Chamber of Commerce reiterated it as “an eloquent illustration of an utterly unnecessary extension of the public sector” and “This is bound to shake the confidence of private enterprise and arrest economic and industrial development”.⁸ Thus, the nationalization of life insurance corporation is a most severe blow on the private enterprise, as the interest concerned’ were not consulted and it is obviously a political decision in that it is contrary to all facts and experience of the countries in the west. Since the nationalization of the corporation the cost of insurance was bound to go up, besides in absence of competition the rates of premium would tend to go up, it would be an obstacle to the development of the economy.

      The objectives of nationalization were, in 1956, to conduct the business with utmost economy in a spirit of trusteeship, to charge premium and invest the funds for obtaining maximum yield consistent with the safety of the capital, and render prompt and efficient service to the policy- holders. The mission was to spread insurance to every nook and comer of the country and to mobilize savings to invest the funds to the best advantage of the investors as well as the community as a whole. Keeping in view the national priorities and the attractive returns, the mission given to the LIC at the time of nationalization can be summarized as follows;        

A. Providing protection of insurance to people in every nook and comer of the country.    

B. Mobilizing savings for the development of the country.

C. Responding to customer sensitivity.

      However, it was much later on the 19th of January, 1956, that life insurance in India was nationalized by the promulgation of the Life Insurance (Emergency Provisions) Ordinance, 1956. About 154 Indian insurance companies, 16 non-Indian companies and 75 provident were operating in India at the time of nationalization. Nationalization was accomplished in two stages; initially the management of the companies was taken over by means of an Ordinance, and later, the ownership too by means of a comprehensive bill. The Parliament of India passed the Life Insurance Corporation Act on the 19th of June 1956, and the Life Insurance Corporation of India was created on 1st September, 1956, with the objective of spreading life insurance much more widely and in particular to the rural areas with a view to reach all insurable persons in the country, providing them adequate financial cover at a reasonable cost.

        The nationalisation of life insurance is an important step in our march towards a socialist society. Its objective will be to serve the individual as well as the state. We require life insurance to spread rapidly all over the country and to bring a measure of security to our people. (Jawaharlal Nehru).⁹

        When parliament set up LIC as a monopolistic public undertaking, it was argued and believed that elimination of competition and the malpractice that competition has given rise to, would lead to:

      a) Better and more economical management of the Business of life insurance.

      b) Reduction in administrative expenses.

      c) Improvement in the quality of service.

      d) Increase in volume of business.

      e) Maximisation of social advantages that insurance can provide through higher returns on  investments of life fund, consistent with safety and liquidity of the invested funds.

            From about 200 crore of new business in 1957 the corporation crossed 1000 crore only in the year 1969-70, and it took another 10 years for LIC to cross 2000 crore mark of new business. But with reorganization happening in the early eighties, by 1985-86 LIC had already crossed 7000 crore sum assured on new policies.

Some of the important milestones in the life insurance business in India are:

1818: Oriental Life Insurance Company, the first life insurance company on Indian soil started functioning.

1870: Bombay Mutual Life Assurance Society, the first Indian life insurance company started its business.

1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business.

1928: The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance businesses.

1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public.

1956: 245 Indian and foreign insurers and provident societies are taken over by the central government and nationalised. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India.

GROWTH OF LIC IN THE PRE REFORMS PERIOD

            LIC is the only public sector company which existed in both the pre and post reform periods. The table below shows the growth of LIC since its inception in 1956 till the end of the pre reform period i.e.1999.

Table 1.11:                 Growth of LIC between 1957 and 1999 (Pre-Reform Period)¹⁰

    Source: Secondary Data – Annual Reports of LIC (Rajendran and Natarajan, 2009)        

            Table 1.12:                 LIC – Some Basic Statistics (1957-2000)

Source:  First Statutory Report of LIC (presented to Parliament on 13.03.59 for the first sixteen months from 01.09.56 to 31.12.57), Annual Report of LIC for the year 1999-2000

Table 1.13:                 Decadal performance of LIC under the monolithic era

Source: LIC Various Annual Reports.

Table 1.14:                 New Business of LIC                Amount in Rs. Crores

       Source: Secondary Data – Annual Reports of LIC. (Rajendran and Natarajan, 2009)        

    Table 1.15: Lapse Ratios of the LIC, 1957 through 1974-75¹¹

            @ Annual rate

            Source: Report on the Activities of the Life Insurance Corporation of India, 1961 to                                                                                                   

                          1974-75, Life Insurance Corporation of India, Bombay.

Table 1.16:    Overall and Renewal Expense Ratios of the LIC, 1957 through 1974-75          

                                                                                                                               (Percentages)

      * 16 months ** 15 months

Source: Report on the Activities of the Life Insurance Corporation of India, 1965-66, 1972-73 to 1974-75, Life Insurance Corporation of India, Bombay.

Table 1.17:         Yield on Life Fund of the LIC, 1957 through 1974-75¹²      (Percentages)

                Source: 1) Report on the Activities of the Life Insurance Corporation of India, 1966-

            67, 1972-73 to 1974-75, Life Insurance Corporation of India, Bombay.
            2) Valuation Reports, Life Insurance Corporation of India, Bombay.

LIBERALISATION POST 2000

            The world has become a global village. The Liberalisation, Privatization and Globalisation (LPG) wave has sweeped across the global economies. The two pillars of India’s economic policy before 1991 have been protection and public sector. Thus the New Economic Policy 1991 was a departure from the regulated planned economic tradition to that of LPG movement. After nearly a decade of intense debate a consensus developed in India for ending the public sector monopoly in insurance and opens the industry to private sector participants subject to suitable prudential regulation. ¹³

            In August 2000, the Indian Government embarked on a program to liberalise the insurance sector and opened it up for the private sector. LIC emerged as a beneficiary from this process with robust performance, albeit on a base substantially higher than the private sector. In 2006, the Actuaries Act was passed by parliament to give the profession statutory status on par with Chartered Accountants, Notaries, Cost & Works Accountants, Advocates, Architects and Company Secretaries. A minimum capital of US$80 million (Rs. 4 billion) is required by legislation to set up an insurance business. In 2013 the first year premium compound annual growth rate (CAGR) was 24.53% while total life premium CAGR was 19.28% matching the growth of the life insurance industry and outperforming general economic growth.

The main objectives of liberalization are:

• To meet the obligation of WTO by opening up the finance sector to the international players and competition as a part of liberalization of trade and services.
• To induce competition among providers, to give customer a sense of greater choice of products and services.
• To promote FDI flow to help build better infrastructure.
• To reorganize insurance market through a regulatory authority for giving a better deal to customers.
• To promote professionalism in insurance and insurance related trade and occupations.
• To make Indian insurance market globally competitive.

Source: Rao.G.V, “Insurance- A challenging career”, Insurance Chronicle, September 2004, Vol-4, Issue -9, p-52.

BENEFITS OF PRIVATISATION

1. Creation of jobs: New insurance companies are expected to help in expanding the employment resulting in more employment opportunities. Greater the market expands, higher the opportunity for new employment.

2. New and Innovative business: Privatization leads to the development of new and innovative products in the field of Life & General insurance. Entry of foreign players with their professional approach and innovative temperament will accelerate the trend of introducing tailor-made, need-based business.

3. Greater management skill: Entry of global insurance giants with much more risk management skills and greater risk absorbing capacity will ensure introduction of products having deeper and wider insurance converge. New entrants will like to focus on their new area and thus opting to offer products with new coverage.

4. Greater operation of freedom: Investment managers in private sector enjoy greater operational freedom than their counterparts in the public sector and consequently the private companies can expect to obtain a better yield on investments than Life insurance & General Insurance Corporations.

5. Customer needs and service: This impetus of liberalization will see the industry transforming approach towards its customer. Unfortunately in recent past there has been much lip talks on this than any actual improvement coming up from public sector insurers. Relieved from bureaucratic shackles, industry could become more sensitive towards customer-needs and service.

6. Expansion of Insurance Market: Greater the expansion of insurance market, higher the opportunity for so many other sector of the economy to grow. This can provide a sustained market for a variety of businesses like, market for hardware and software products, training institutes and professional services such as legal, consultancy, financial, intermediary and large pool of long term resources for financing infrastructure development.

7. Social Security: The new era of liberalized insurance sector will ensure overall economic growth of the country and bring more and more people under the coverage of insurance. This will ensure extending the benefits of social security to large sections of our population. The left trade unions have expressed some reservation and apprehensions in allowing private entry on the following grounds.

1. The private companies would concentrate mainly on the urban segment.

 2. Without adequate regulation the funds may not reached the public for their benefit.

      Although there may be some grain of truth in the fear and apprehensions aired by left trade unions and the employees of Life Insurance & General Insurance Corporations, the benefits to the nation would certainly outweigh them. Thus it is clear that the action of our present Government in passing the Privatization Bill is on the whole a step in the right direction and also in the best interest of the country. The Government which has considered the opposition to this in-depth has also given solemn assurances to safeguard the interest of the employees of Life Insurance & General Insurance Corporations which, of course is one of the public sector institutions.

LIFE INSURNCE COUNCIL OF INDIA

            Life Insurance Council is a forum that connects the various stakeholders of the sector. It develops and coordinates all discussions between the Government, Regulatory Board and the Public. In short, it is the face of the Life Insurance industry. Constituted under Sec.64C of Insurance Act 1938, the Life Insurance Council functions through several sub-committees and includes all life insurance companies in India. In total, there are 24 life insurers who offer a variety of traditional and new innovative products. As per the amendment, the Executive Committee may make bye-laws for the transaction of business. The Executive Committee shall comprise of four elected members, an eminent person not connected with Insurance business, three persons to be nominated by the Authority to represent Insurance Agents, Intermediaries and Policy holders, one representative each from self-help groups and Insurance Cooperative Societies. Life Council accordingly framed bye-laws after holding a series of meetings of CEOs and other key representatives of member companies and also hold elections in a free and transparent manner.

Objective
            To play a significant and complementary role in transforming India’s life insurance industry into a vibrant, trustworthy and profitable service, helping people in their journey to prosperity.

Mission

• To function as an active forum to aid, advise and assist insurers in maintaining high standards of conduct and service to policyholders.
• Interact with the Government and other bodies on policy matters.
• Actively participate in spreading insurance awareness in India.
• Take steps to develop education and research in insurance.
• Help India enjoy the benefits of global practices.

Functions

• Creating a positive image of the industry and enhancing consumer confidence.
• Maintaining high standards of ethics and governance.
• Promoting awareness of the role and benefits of life insurance.
• Organizing structured and proactive discussions with Government, lawmakers and regulators.
• Conducting research in life insurance, publish monographs and contribute to development of the sector.
• Acting as forum of interaction with other organizations of the financial services sector.
• Playing a leading role in insurance education, research, training and conferences.
• Providing help and guidance to members when necessary.
• Be an active link between the Indian life insurance industry and the global markets.

THE LIFE INSURANCE INDUSTRY IN INDIA (as on 30 June, 2018)

            The sector of life insurance has witnessed immense growth in the past few years. Today, it is second only to banks for mobilized savings and forms a formidable part of the capital market.

The life insurance sector controls:

* More than Rs. 36,625 crore of deployed capital

* Over Rs. 34,07,106 crore of managed assets

* Investments in infrastructure exceeding Rs 3,70,715 crore

Another indication of the sector’s growth is its infrastructural strength.

Today the life insurance sector comprises of:

* Over 11,148 branches
* More than 20.72 lakh agents
* 2.67 lakh direct employees and growing significantly
* 32.50 crore In-force policies.

 (The above figures are provisional as of 30 June, 2018 Source: Life Insurance Council)

LIFE INSURANCE

Concept

      Life insurance is a contract that pledges payment of an amount to the person assured (or his nominee) on the happening of the event insured against. The contract is valid for payment of the insured amount during: a) The date of maturity, or b) Specified dates at periodic intervals, or c) Unfortunate death, if it occurs earlier. Among other things, the contract also provides for the payment of premium periodically to the Corporation by the policyholder. Life insurance is universally acknowledged to be an institution, which eliminates ‘risk’, substituting certainty for uncertainty and comes to the timely aid of the family in the unfortunate event of death of the breadwinner.  

      By and large, life insurance is civilisation’s partial solution to the problems caused by death. Life insurance, in short, is concerned with two hazards that stand across the life-path of every person:

1. That of dying prematurely leaving a dependent family to fend for it.

2. That of living till old age without visible means of support. 

Nature: Life Insurance is designed to be an effective and efficient means of planning for adverse financial consequences in the event of untimely death of income earner for the average family. During the life span of and individual his needs may vary. At different stages of life cycle his needs are different. Also changes in the economic and social environment greatly influence the needs, choices and expectations of customer. Life insurance is a contract that pledges payment of an amount to the person assured (or his nominee) on the happening of the event insured against. The risks associated with human life in general can be covered up to the limit specified called sum assured. A person can insure his or her life and his health against the contingencies like death, disability, surviving too long. In event of his death, his dependents will be reimbursed to the full amount that he was insured for. Or if the insured person meets with an accident or suffers from an illness that cripples him forever, he will be compensated with the complete sum assured anyway since he may not be able to recover after medical treatment and rehabilitation.

1. Contract of Life Insurance: A contract of life insurance is a contract of utmost good faith technically known as uberima fidae. The doctrine of disclosing all material facts is embodied in this important principle, which applies to all forms of insurance. At the time of taking a policy, policy holder should ensure that all questions in the proposal form are correctly answered. Any misrepresentation, non-disclosure or fraud in any document leading to the acceptance of the risk would render the insurance contract null and void.
2. Tax Relief:  Life insurance is the best way to enjoy tax deductions on income tax and wealth tax. This is available for amounts paid by way of premium for life insurance not only on one’s life but also on the life of the spouse and children, subject to income tax rates in force. Assesses can also avail of provisions in the law for tax relief. In such cases the assured in effect pays a lower premium for insurance than otherwise.
3. Protection: Savings through life insurance guarantee full protection against risk of death of the saver. Also, in case of demise, life insurance company assures payment of the entire amount assured where as in other savings, only the amount saved with interest is payable.
4. Money when needed:  A policy that has a suitable insurance plan or a combination of different plans can be effectively used to meet certain monetary needs that may arise from time-to-time. Children’s education, start-in-life or marriage provision or even periodical needs for cash over a stretch of time can be less stressful with the help of these policies. Alternatively, policy money can be made available at the time of one’s retirement from service and used for any specific purpose, such as purchase of house or for other investments.
5. Family and personal uses of life insurance: The primary purpose of life insurance is the protection of the family. Every family is dependent for subsistence upon a income which necessarily varies in amount with the particular circumstances surrounding its case.
6. Principles of life insurance: Capitalising of the value of a human life and indemnification of the value, recognizing the value of a human life from both the family and the business standpoint, it should be noted that life insurance constitutes the only safe method of indemnification against the loss of value through death. By furnishing this capitalized value in the event of death, life insurance may be said to perpetuate the earning capacity of the life for the benefit of those dependent upon it.

Why Buy Life Insurance ¹⁴

Life Insurance is a financial cover for a contingency linked with human life, like death, disability, accident, retirement etc. Human life is subject to risks of death and disability due to natural and accidental causes. When human life is lost or a person is disabled permanently or temporarily, there is loss of income to the household.

Though human life cannot be valued, a monetary sum could be determined based on the loss of income in future years. Hence, in life insurance, the Sum Assured (or the amount guaranteed to be paid in the event of a loss) is by way of a ‘benefit’.  Life Insurance products provide a definite amount of money in case the life insured dies during the term of the policy or becomes disabled on account of an accident.

Advantages of Life Insurance (life insurance council – http://www.lifeincouncil.org)

            Life Insurance provides the dual benefits of savings and security. The following benefits explain why this investment tool should be an integral part of your financial plans.

• Risk Cover– Life today is full of uncertainties; in this scenario Life Insurance ensures that your loved ones continue to enjoy a good quality of life against any unforeseen event.
• Planning for life stage needs– Life Insurance not only provides for financial support in the event of untimely death but also acts as a long term investment. You can meet your goals, be it your children’s education, their marriage, building your dream home or planning a relaxed retired life, according to your life stage and risk appetite. Traditional life insurance policies i.e. traditional endowment plans, offer in-built guarantees and defined maturity benefits through variety of product options such as Money Back, Guaranteed Cash Values, Guaranteed Maturity Values.
• Protection against rising health expenses– Life Insurers through riders or stand alone health insurance plans offer the benefits of protection against critical diseases and hospitalization expenses. This benefit has assumed critical importance given the increasing incidence of lifestyle diseases and escalating medical costs.
• Builds the habit of thrift– Life Insurance is a long-term contract where as policyholder, you have to pay a fixed amount at a defined periodicity. This builds the habit of long-term savings. Regular savings over a long period ensures that a decent corpus is built to meet financial needs at various life stages.
• Safe and profitable long-term investment– Life Insurance is a highly regulated sector. IRDAI, the regulatory body, through various rules and regulations ensures that the safety of the policyholder’s money is the primary responsibility of all stakeholders. Life Insurance being a long-term savings instrument, also ensures that the life insurers focus on returns over a long-term and do not take risky investment decisions for short term gains.
• Assured income through annuities – Life Insurance is one of the best instruments for retirement planning. The money saved during the earning life span is utilized to provide a steady source of income during the retired phase of life.
• Protection plus savings over a long term– Since traditional policies are viewed both by the distributors as well as the customers as a long term commitment; these policies help the policyholders meet the dual need of protection and long term wealth creation efficiently.
• Growth through dividends– Traditional policies offer an opportunity to participate in the economic growth without taking the investment risk. The investment income is distributed among the policyholders through annual announcement of dividends/bonus.
• Facility of loans without affecting the policy benefits– Policyholders have the option of taking loan against the policy. This helps you meet your unplanned life stage needs without adversely affecting the benefits of the policy they have bought.
• Tax Benefits-Insurance plans provide attractive tax-benefits for both at the time of entry and exit under most of the plans.
• Mortgage Redemption– Insurance acts as an effective tool to cover mortgages and loans taken by the policyholders so that, in case of any unforeseen event, the burden of repayment does not fall on the bereaved family.

Life Insurance is needed:

• To ensure that  immediate family has some financial support in the event of demise of the bread earner
• To finance children’s education and other needs
• To have a savings plan for the future so that one has have a constant source of income after retirement
• To ensure that one has extra income when one’s earnings are reduced due to serious illness or accident
• To provide for other financial contingencies and life style requirements

Who needs Life Insurance

Primarily, anyone who has a family to support and is an income earner needs Life Insurance. In view of the economic value of their contribution to the family, housewives too need life insurance cover. Even children can be considered for life insurance in view of their future income potential being at risk.

Benefits

·                     As per section 60 (kb) of The Code of Civil Procedure, all money payable under a policy of insurance on the life of the judgment debtor, are not attachable.

• Section 6 of the MWP Act states that the benefits under a Life Insurance Policy taken by a married man, under MWP Act for the benefit of the married man’s wife, or children or any of them, shall be payable only to the wife or children according to the ratio decided by the Life Assured. Further it states that the said Policy does not form part of the estate (property) of the deceased Husband. Hence the husband does not have any control over the Policy and is not his asset. Therefore the said Policy cannot be attached by the Creditors of other Legal Heirs of the deceased husband.
• It is to be noted that unlike in the case of other Life Insurance Policies which can be claimed by other Legal Heirs also (even though may not be attachable), MWP Act Policies can neither be claimed by the other Legal Heirs nor by the Husband’s Creditors. Even the husband cannot claim any benefit. Therefore, an absolute estate is created in favour of the wife or children. This is a special privilege given by Law only to a Life Insurance Policy taken by a married man. This benefit is not available for any other asset. This benefit is not available for any other asset.

KINDS OF LIFE INSURANCE POLICIES

• Money Back Policy: Under this plan, some part of the sum assured in returned back to the policyholder in case of survival of the insured person. The nominee receives death benefit in case of policyholder’s death during the policy term and this death benefit is equal to the sum assured plus accumulated cash benefits. 
• Term Insurance Policy: It gives financial security for the whole family of the policyholder in case of his or her sudden death. This plan provides high sum assured at low cost and cover is available for a period of time and after the maturity times policy holder is not eligible for any profits or allowances.. Generally, it will be available for 5, 10, 15, 20 or 30 years. Term Insurance Plans are the simplest and cheapest Insurance policies as the premium rates are very low. However during the coverage time if an insurance holder dies, a specific lump sum amount will be paid for the family or guarantor. 
• Whole Life Insurance Policy: The policy gives protection against risks for throughout life of the insured person and the policy continues as long as the insured is alive. It gives death benefit to the nominee in case of insured’s death. This insurance does not include any survival benefits.
• Endowment Insurance Policy: It is a savings linked insurance which offer cover for a certain time period and the insured person get sum assured with bonus at the time of maturity in case of his survival. Usually this plan will have maturity for 10, 15 and 20 years or up to certain age limit.
• Unit-Linked Insurance Policy: This plan is a combination of both investment and life insurance. Some portion or percent of the premiums goes into savings and some part goes into investment.
• Pension Plans: To lead a happy and respectful retirement life a good pension plan is must. Pension plans are nothing but an insurance policy which will help to provide better pension days by saving amount during your earning years. Here the policy holder can pay lump sum amount or premiums for certain years to get annuity in later years.

General Benefits of Life Insurance Policies

            Almost all the above mentioned life insurance policies serve as a boon to face the uncertainties in life boldly. Some of the general benefits of these plans are as follows.

• Death Benefits: Most of the Life Insurance Policies provides protection to the family or the guarantor in case of unfortunate death of the nominee. 
• Maturity Benefits: During the time of maturity you will get the guaranteed money back plus other added benefits mentioned in the plan. In some of the plans there is also an option to withdraw certain money during regular interval.
• Tax Benefit: As per section 80C of Income Tax Act the amount you pay as a premium is benefited from your tax amount, however this is limited upto Rs. 1,00,000 per annum. Additionally in case of physical handicapped Rs. 50,000 more is non- taxable and in case of severe handicap problem this amount is increased upto Rs. 75,000.Further according section 10D any returns obtained as death benefits or maturity benefits is tax free. However in case of maturity benefits the premium per annum should not exceed 20% of assured sum.  
• Loan Facility: Some of the Insurance Policies allow you to take loan against your policy. In this case loan amount depends on the life insurance policy, premiums paid and the overall term.
• Riders: Riders are some added benefits along with the life insurance coverage. Some of the insurance policies allow you to invest part of your premium amount on market shares thereby helping to gain extra bonus.

SAVING ON TAX WITH LIFE INSURANCE (Income Tax Act, 1961)

1) Deduction allowable from Income for payment of Life Insurance Premium (Sec. 80C):

(a) Life Insurance premia paid in order to effect or to keep in force an insurance on the life of the assessee or on the life of the spouse or any child of assessee & in the case of HUF, premium paid on the life of any member thereof under an insurance policy, (other than a contract for a deferred annuity,) issued on or before the 31st day of March 2012 shall be eligible for deduction only to the extent of 20% of the actual capital sum assured or actual premium paid whichever is less.

 (b) Life Insurance premia paid in order to effect or to keep in force an insurance on the life of the assessee or on the life of the spouse or any child of assessee & in the case of HUF, premium paid on the life of any member thereof, under an insurance policy, (other than a contract for a deferred annuity,) issued on or after the 1st day of April 2012 shall be eligible for deduction only to the extent of 10% of the actual capital sum assured or actual premium paid whichever is less.

 Where the policy, issued on or after the 1st day of April, 2013, is for insurance on life of any person, who is—

 (i) a person with disability or a person with severe disability as referred to in Sec 80U, or

            (ii) suffering from disease or ailment as specified in the rules made under section 80DDB, deduction under this section is allowed only to the extent of 15% of the actual capital sum assured or actual premium paid whichever is less.

(c) Contribution to deferred annuity plans in order to effect or to keep in force a contract for deferred annuity, on his own life or the life of his spouse or any child of such individual, provided such contract does not contain a provision to exercise an option by the insured to receive a cash payment in lieu of the payment of annuity is eligible for deduction.

(d) Contribution to Annuity Plans–New Jeevan Dhara, New Jeevan Dhara-I & Jeevan Akshaya– VI.

2) New Jeevan Nidhi Plan & New Jeevan Suraksha – I Plan (U/s. 80CCC):

            A deduction to an individual for any amount paid or deposited by him from his taxable income in the above annuity plans for receiving pension (from the fund set up by the Corporation under the Pension Scheme) is allowed.

NOTE: The aggregate amount of deduction under u/s 80C, 80CCC & 80CCD(1) shall not in any case exceed one lakh fifty thousnad Rupees .

3) Deduction under section 80D:

a) Deduction allowable upto Rs.25,000/- if an amount is paid to keep in force an insurance on health of assessee or his family (i.e. Spouse & dependent children) or any contribution made to the central Government Health Scheme or such other scheme as may be notified by the Central Government in this behalf or on account of Preventive health check –up of the assessee or his family .

b) Additional deduction upto Rs.25,000/- if an amount is paid to keep in force an insurance on health of parents or on account of Preventive health check –up of the parent of the assessee, whether dependent or not .

c) In case of HUF, deduction allowable upto Rs.25,000/- if an amount is paid to keep in force an insurance on health of any member of that HUF.

d) If the sum specified in (a) or (b) or (c) is paid to effect or keep in force an insurance on the health of any person specified therein who is a senior citizen, then the deduction available will be up to Rs.30,000/-. Here senior citizen means the person who is of sixty year or more during the previous year.

e) In Case the amounts are paid in (a) or (b) or (c) on account of preventive health check up , the deduction for such amounts shall be allowed to the extent it does not exceed in aggregate Rs. 5,000 /-.

f) For the purpose of deduction, the payment shall be made by

 i. Any mode, including cash. In respect of any sum paid on account of preventive health check up.

 ii. Any mode other than cash in all other cases.

g) The insurance as mentioned above shall be in accordance with the scheme framed by

 i) the General Insurance Corporation of India as approved by the Central Government in this behalf or;

ii) Any other insurer and approved by the Insurance Regulatory and Development Authority.

4) Jeevan Aadhar Plan (Sec.80DD): Deduction from total income upto Rs.75000/- allowable on amount deposited with LIC under Jeevan Aadhar Plan, Jeevan Vishwas for maintenance of an handicapped dependent (Rs.1,25,000/- where handicapped dependent is suffering from severe disability)

5) Exemption in respect of commutation of pension under Jeevan Suraksha & Jeevan Nidhi Plans:

Under Section 10(10A) (iii) of the Income-tax Act, any payment received by way of commutations of pension out of the Jeevan Suraksha & Jeevan Nidhi Annuity plans is exempt from tax.

 6) Income tax exemption on Maturity/Death Claims proceeds under Section 10(10D):  As per Section 10(10D) of the Income Tax Act, 1961, any sum received under a Life Insurance Policy, including the sum allocated by way of bonus on such policy is exempt from tax where the sum is received as a death benefit However, to get exemption under above section for sum received other than death benefit 

• policy shall not be issued under Section 80DD(3), or
• policy shall not be issued as a Keyman Insurance Policy, or
• policy which has been issued on or after April 1, 2003 and the premium paid in any of the years during the term of the policy not exceeding 20% of the Actual Capital Sum Assured. 
• policy which has been issued on or after April 1, 2012 and the premium paid in any of the years during the term of the policy not exceeding 10% of the Actual Capital Sum Assured.

            Where the policy, issued on or after the 1st day of April, 2013, is for insurance on life of any person, who is— (i) a person with disability or a person with severe disability as referred to in section 80U, or (ii) suffering from disease or ailment as specified in the rules made under section 80DDB, exemption under this section shall be available only if the premium payable in any of the years is not more than 15% of the actual Capital Sum assured.

Table 1.18:     Life Insurance Companies Operating In India      (As On 31st March, 2016)

Source: Annual Report 2015-16 (IRDA)    Annexure 1  (P.155)

This is an example post, originally published as part of Blogging University. Enroll in one of our ten programs, and start your blog right.

You’re going to publish a post today. Don’t worry about how your blog looks. Don’t worry if you haven’t given it a name yet, or you’re feeling overwhelmed. Just click the “New Post” button, and tell us why you’re here.

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