Advantages of Life Insurance

To why you should have Life Insurance let us take a close look at advantages of life insurance:

Life Insurance has no competition from any other business.Many people think that life insurance is an investment or a means of saving.This is not a correct view.When a person saves,the amount of funds available at any time is equal to the amount of funds available at any time is equal to the amount of money set aside in the past,plus interest.This is so in a fixed deposit in the bank,in national savings certificates,in mutual funds and all other savings instruments.If the money is invested in buying shares and stocks,there is the risk of the money being lost in the fluctuations of the stock market.Even if there is no loss,the available money at any time is the amount invested plus appreciation.In life insurance,however,the fund available is not the total of the savings already made(premiums paid),but the amount one wished to have at the end of the savings period(which is the next 20 to 30 years).The final fund is secured from the very beginning.One is paying for it over the years,out period,if so chosen.The assured fund is not affected.There is no other scheme which provides this kind of benefit.Therefore life insurance has no substitute.

There is no similar to a hire purchase scheme.In a hire purchase scheme,the intended purchase is effected immediately,but the price is paid in instalments later.However, in the event of death,the balance instalments are not exused.They have to paid by the surviving family.In the case of life insurance,the premiums cease on death.There are no outstanding instalments.There is no financial arrangement that can be equal the benefits of life insurance.

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ReInsurance

You came across this phrase ReInsurance but don't know what it is?Let us have a close look what is ReInsurance?

Insurance companies are taking risks.They have to pay claims as and when they occur.They cannot be sure when the claim will occur and how big the claim may be. This is so because of the very nature of perils.Insurers normally are financially sound enough to be able to pay claims.But there are limits.An event like the tsunami or a hurricane may generate claims amounting the crores of rupees,which may put a very heavy strain on the reserves of the insurer.Insurers protect themselves from such situations,which may be beyond their capacity,by reinsuring the risk with other insurers.If there is a claim,the burden is shared by the primary insurer and the reinsurers.

There are some companies which are exclusively in the business of reinsurance.In India the General Insurance Corporation of India is the national insurer.Reinsurance business is placed globally.When there is a major calamity,the claims affect several insurers all over the world,through the system of reinsurance.

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Who is a Trustee?

Let us see who is the trustee in this insurance sector:

The insurer is in the position of a trustee as it is managing the common fund,for and on behalf of the community of policyholders.It has to ensure that nobody is allowed to take undue advantage of the arrangemen.That means that the management of the insurance business requires care to prevent entry(into the group)of people whose risks are not of the same kind as well as paying claims on losses that are not accidental.The decision to allow entry is the process of underwriting of risk.Underwriting includes assessing the risk,which means,making an evaluation of how much is the exposure to risk.The premium to be charged depends on this assessment of the risk.The premium to be charged depends on this assessment of the risk.Both underwriting and claim settlements have to be done with great care.

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Premiums in the policy

Let us see on what basis premiums are calcualted:

Premiums are the amount of money paid yearly or monthly or quaterly based on the policy taken by us.

The premium for insurance is based on expectations of the losses. These expectations are based on studies of occurences in the past and the use of statistical principles.There is,in statistics,a "law of large numbers".When you toss a coin,the chance,or probability,of a head or tail coming up is half.If the coin is tossed 10 times,one cannot be sure that the head will come up 5 times. If the coin is tossed 1 million times,the number of heads variation will be less as a percentage.So also,the larger the numbers(of risks)included in the pool,the better the chnaces that the assumptions regarding the probability of the risk occuring,will be realized in practice.In order to be amenable to statistical predictions,insures have to insure large numbers of risks.The larger the spread of the business,the better the experience in relation to expectations.The probability of risk being the basis of premium calculation,large numbers are necessary to ensure that the premium charged is viable or adequate.

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Classification of Insurance

Let us a close look how the insurance sector is classified into different categories:

In India, insurance business is classified primarily as life and non-life or general. Life Insurance includes all risks related to the lives of human beings and general insurance covers the rest.General insurance has three classifications they are Fire(dealing with all fire related risks),Marine(dealing with all transport related risks and ships) and Miscellaneous(dealing with all others like liability,fidelity,motor,crop,engineering,construction,aviation,personal accident,ect.).Personal accident and sicknes insurance,which are related to human beings,is classified as "non-life" in India,but is classified as "life",in many other countries.

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The Business of Insurance

In this post you will come to know about the working principle of insurance:

Insurance companies are called insurers.The business of insurance is to

* bring together persons with common insurance interests(sharing the same risks)

* collect the share or contribution(called premium)from all of them, and

* pay out compensations(called claims)to those who suffer from the risks.

In India, the IRDA(Insurance Regulatory Development Authority) has, in 2005,issued Regulations enabling micro-insurance(braodly meaning insurance for small Sums Assured, like 5 to 50 thousands)to be done by both life and general insurers on the basis of mutual tie-ups.A policy may be issued by a life insurer covering both life and non-life risks,but premium on account of the non-life business will be passed on to a general insurer and the claim amount collected from the latter.

The business of insurance is one of sharing.It spreads losses of an individual over the group of individuals who are exposed to similar risks.People who suffer loss get relief because at least part of their loss is made good.People who do not suffer loss are relieved because they were spared the loss.

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Purpose of Life Insurance

Let us see why we should have Life Insurance?

A human being is an income generating asset.One's income generating ability depends on one's skills,(manual,professional,problem solving,entrepreneurial, etc). These are the assets.The value of the assets.The value of the asset can be measured by considering the income that is generated by the person concerned.The concept of Human Life Values,provides scientific ways to determine the asset value of the human life and therefore, the amount of life insurance required.These techniques,like other techniques related to selling,will have to be learnt on the job.

These assets also can be lost through unexpectedly early death or through sickness and disabilities caused by accidents.Accidents may or may not happen.Death will happen,but the timing is uncertain.If it happens around the time of one's retirement,when it could be expected that the income will normally cease,the person concerned could have made some other arrangements to meet the continuing needs.But if it happens much earlier when the alternate arrangements are not in place,there can be losses to the person and dependents.Those dependent on the income are helped to overcome the difficulties,by insurance.

A person who may have made arrangements for his needs after his retirement,also would need insurance.This is because the arrangements would have been made on the basis of some expectations like,likely to live for another 15 years,or that children will be able to look after the aged parents.If any of these expectations do not become true,the original arrangement would become inadequate and there could be difficulties.Living too longs can be as much a problem as dying too young.Both are risks,which need to be safeguard against.Insurance takes care.

Thus, the risks in case of a human being are related to:

*Early death
*Living too long
*Disabilities
*Sickness
*Unemployment

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Working of Insurance

Don't how insurance works let us see the working of insurance practically with examples:

Consider the first situation:

In a village there are 400 houses, each valued at Rs.20,000. Every year on an average, 4 houses get burnt, resulting into a total loss of Rs. 80,000. If all the 400 owners come together and contribute Rs.200 each, the common fund would be Rs.80,000. This would be enough to pay Rs.20,000 to each of 4 owners who houses got burnt. Thus the loss of Rs.20,000 each of 4 owners is shared by 400 house-owners of the village bearing Rs.200 each. This works out to 1% of the value of the house, which is the same as the probability of risk(4 out of 400 houses).

Consider the second situation:

There are 1000 persons who are all aged 50 and are healthy. It is expected that, on an average, 1% of persons aed 50, or 10 persons, may die within one year. If the economic value of the loss suffered by the family of each dying person is teken to be Rs.20,000.If eac person in the group contributed Rs.200, the common fund would be Rs.2,00,000.This would be enough to pay Rs.20,000 to the family of each of the ten persons who die. Thus, the risks are shared by 1000 persons, although 990 of them did not suffer any loss.

In the first example, assume that are 400 houses but of different values. In that case, the contribution of each house owner would be 1% of the value of the house. If the assumption was that 8(2%) out of 400 houses are likely to get damaged, the contribution would be 2%(probability of risk) of the value for each house. The probability of risk does not depend on the value of the house. The probability of risk would depend on factors like the nature of construction of the house(concrete or thatch work) or the location in which it is(residential,commercial or industrial area).The risk is measured in terms of percentages and the contribution would be that same percentage.Similarly in the case of human beings, the probability of risk(death or disablity)will vary according to age,profession,life styles and habits,health conditions,heredity etc.

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Insurance is your soldier

Yes, Insurance is your soldier to protect you from unseen consequences. Let us see the reasons.

There are certain principles, which make it possible for insurance to remain a preferred fair arrangement. The first is that it is difficult for any one individual to bear the consequences of the risks that he is exposed to.It will become bearrable when the community shares the burden.The second is that the peril should occur in an accidental manner.Nobody should be in a position to make the risk happen. In other words, none in the group should set fire to his assests and ask others to share the loss. This would be taking unfair advantage of an arrangement put into place to protect people from the accidental risks they are exposed to. The occurence has to be random, and not the deliberate creation of the insured person.

The manner in which the loss is to be shared can be determined before hand. It can be equal among all. It can also be proportional to the risk that each person is exposed to. The trader who has sent Rs.100 lakhs worth of goods on a ship will bear double the loss to be borne by another trader who has got Rs.50 lakhs worth of goods on the same ship. Current practice is to make the sharing proportional to the exposure to risk. The share could be collected from the members after the loss has occured or the likely shares may be collected in advance, at that time of admission to the group.Insurance companies collect in advance and create a fund from which he losses are paid.

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How Insurance Works?

Let us have a close look at the working principle of Insurance:

The mechanism of insurance is very simple. People who are exposed to the same risks come together and agree that, if any one of them suffers a loss, the others will share the loss and make good to the person who lost. All people who send goods by ships are exposed to the same risks, which are related to water damage, sinking of the vessel, piracy,etc. Those owning factories are not exposed to these risks, but they are exposed to these risks like fire,hailstorms,earthquakes,lightning,burglary, etc.Like this, different kinds of risks can be identified and seperate groups made,including those exposed to such risks. By this method, the heavy loss that any one of them in the group may suffer( all of them may not suffer losses at the same time) is divided into bereable small losses by all the others in the group. In other words, the risk is spread among the community and the likely big impact on one is reduced to smaller manageable impacts on all.Insurance helps to spread the costs or risks.

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Pure Risks and Speculative Risks

Let us have a close look at Pure and Speculative risks:

The latter are in the nature of betting or gambling where the risk is, to some extent, under the control of the person concerned, while a picture is not so. It is more in the nature of an Act of God. Insurance deals with only pure risks and not speculative risks.

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Fundamental and Particular risks

Let us a close look at Fundamental and Particular risks:

Fundamental risks are those that affect large populations while particular risks affect only specific persons. A train crash is fundamental risk while a theft is a particular risk.Life Insurance business deals with particular risks, but fundamental risks affect the life insurance company's experience, as many persons will be affected at the same time, when there is an earthquake, flood or riot.

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Dynamic and Static Risks

Let us have a close look at Dynamic and Static risks:

Dynamic risks are caused by perils which have national consequence, like inflation, calamities, technology, political upheavals, etc. Static risks are caused by perils which have no consequence on the national economy, like a fire or theft or misappropriation. Dynamic risks are less likely to occur than static risks, but are also less predictable. Static risks are more suited to management throught insurance.

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Critical or Catastrophic risks, Financial and Non-Financial Risks

Let us have a close view about Critical or Catastrophic risks, Financial and Non-Financial Risks:

Critical or Catastrophic risks are those which may lead to the bankruptcy of the owner. It would happen if this total, like in tsunami, wiping out everything. It can also happen if the deceased person was heavily in debt. Important risks may bot spell doom, but may upset family or business finances bdaly, requiring a lot time to recover. The adverse effects of an economic recession is one such. Less damaging are Unimportant risks, life temporary illness or accidents.

Finalcial and Non-Financial Risks:

Insurance is concerned only with financial risks

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Classification of Risks in our Daily Life

Risks are classified into various types based on the damage to be caused. If we understand this then we can know when to take the insurance for our assests and for our lives:

Risks are classified in various ways:-

Critical or Catastrophic risks

Financial or Non-Financial risks

Dynamic and Static risks

Fundamental risks

Pure and Speculative risks

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Purpose and Need to get Insured

Why should we get insured? What is the need for getting Insured?
These questions are answered in this post.

Assests are insured , because they are likely to be destroyed or made non-functional before the expected life time, through accidental occurences. Such possible occurences are called Perils. Fire, Floods, breakdowns,lightining, earthquakes,etc., are perils. If such perils can cause damage to the assest, we say that the assest is exposed to that risk. Perils are the events. Risks are the consequential losses are damages. The risk to a owner of a building, because the peril of an earthquake, may be a few lakhs or a few crores of rupees, depending on the crores of rupees, depending on the cost of the building, the contents in it and extent the damage.

The risk only means that there is a possibility of loss or damage. The damage may or may not happen. The earthquake may occur, but the bulding may not have been affected at all. Insurance is done against the possibilty that the damage may happen. There has to be an uncertainity about the risk. The word "possibility" implies uncertainity. Insurance is relevant only if there are uncertainities. If there is no uncertainity about the occurence of an event,it cannot be insured againts. In case of a human being, death is certain, but the time of death is uncertain. The person is insured, because of the uncertainity about the time of his death. In the case of a person who is terminally ill, the time to death is not uncertain, though not exactly known. It would be "soon".He cannot be insured.

Insurance does not protect the assest.It does not prevent its loss due to the peril. The peril cannot be avoided through insurance. The risk can sometimes be avoided, through better safety and damage control measures. Insurance only tries to reduce the impact of the risk on the owner of the assest and those who depend on that assest. They are the ones who benefil from the assest and therefore, would lose, when the assest is damaged. Insurance only compensates for the losses and that too, not fully.

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History of Insurance in India

Let us have a close view about the first insurance company in India:

In India, insurance began in 1818 with life insurance beign transacted by an English company, the Oriental Life Insurance Co.Ltd..The first Indian Insurance company was the Bombay Mutual Assurance Society Ltd, formed in 1870 Mumbai.This was followed by the Bharat Insurance Co.in 1896 in Delhi, the Empire of India in 1897 in Mumbai, the United India in Chennai, the National, the National Indian and the Hindustan Cooperative in Kolkata.

Later were established the Cooperative Assembly in Lahore, the Bombay Life (originally called the Swadeshi Life), the Indian Mercantile , the New India and the Jupiter in Mumbai and the Lakshmi in New Delhi. These were all Indian companies started as a result of the swadeshi movement in the early 1900's. By the year 1956, when the Life Insurance business was nationalised and the Life Insurance Cooporation of India(LIC) was formed on 1st September 1956, there were 170 companies and 75 provident fund societies transacting life insurance business in India. After the ammendments to the relevant laws in 1999, the L.I.C did not have the exclusive privilege of doing life insurance business in India. By 31.8.2007, sixteen new life insurers had been registered and were transacting life insurance business in India.

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History of Insurance

Don't you know how the insurance concept started continue to read about that:

Insurance has been to exist in some form or other since 3000 BC. The Chinese traders, travelling treacherous river rapids would distribute their goods among several vessels, so that the loss from any one vessel being lost, would be partial and shared, and not total. The Babylonian traders would agree to pay additional sums to lenders, as the price for wiriting off the loans, in case of the shipment being stolen. The inhabitation of Rhodes adopted the principle of "general average", whereby, if goods are shipped together, the owners would bear the lossses in promotion, if loss occurs, due to jettisoning during distress.(Captains of ships caught in storms, would throw away some of the cargo to reduce the weight and restore balance. Such throwing away is called jettisoning) The Greeks has started benvolent societies in the late 7 th century AD, to take care of the funeral and families of members who died. The friendly societies of England were similarly constituted. The Great Fire of London in 1666, in which more that 13000 houses were lost, gave a boost to insurance and the first fire insurance company, called the Fire Office, was started in 1680.

The origins of Insurance business as in vogue at present, is traced to the Lloyd's Coffee house in London. Traders, who used to gather in the Lloyd's coffee house in Londo, agreed to share the losses to their goods while being carried by ships. The losses used to occur because of pirates who robbed on the high seas or because of bad weather spoiling the goods or sinking the ship.

This is the history of Insurance, if you have any queries or doubts kindly leave the comments.

What is Insurance?

Hello friends don't you know how insurance protects our lives, property and possessions.Read here to get a clear idea about insurance.

The business of insurance is related to the protection of the economic values of assests. Every assest has a value. The assest would have been created through the efforts of the owner. The assest is valuable to the owner, because he expects to get some benefits from it. It is a benefit because it meets some of his needs. The benefit may be an income or in some other form. In the case of a factory or a cow, the product generated by it sold and convenience in transportation. There is no direct income. Both are assests and provide benefits.

Every assest is expected to last for a certain period of time during which it will provide the benefits. After that, the benefit may not be available. There is a life time for a machine in a factory or a cow or a motar car. None of them will last for ever. The owner is aware of this and he can so manage his affairs that by the end of that period or life-time , a substitute is made available. Thus, he makes sure that the benefit is not lost. However, the assest may get lost earlier. An accident or some other unfortunate event may destroy it or make it incapable of giving the benefits. An epidemic may kill the cow suddenly. In that case, the owner and those enjoying the benefits therefrom, would be deprived of the benefits. The planned substitute would not been ready. There is an adverse or unpleasant situation. Insurance is a mechanism that helps or reduce the effects of such adverse situations. It promises to pay to the owner or beneficiary of the assest, a certain sum if the loss occurs.

This is the clear explanation of insurance still if you any queries or doubts kindly leave your comments.

Obama Health Plan

US President Honourable Barack Obama describing reformed health insurance plan in USA.
Lets us have a view of it.