2.Introduction to Insurance_1436524049

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L E A R N I N G M A T E R I A L

T R A I N I N G - C S C

INTRODUCTION TO INSURANCE

otes

WHAT IS INSURANCE

Insurance may be defined as the transfer of risk from the insured to theinsurer.

The insured is the person (or firm or company) confronted by risk, whotransfers the risk to the insurance company, which specializes in theassumption of risk and accepts the risk.

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In early history man lived in joint family, groups and communities to besecure.

At the earlier days, whenever an earning member would die due to diseaseor death, the other members of the social group (or family or clan) wouldcontribute to bail the survivors in the family out of financial difficulties.This contribution was in the shape of food- clothing and shelter.

Later, as commercial considerations grew stronger and stronger; nucleusfamily growth became a common practice, and these contributions andsharing started becoming individualistic.

The ‘assurances’, which were earlier, a common practice became rare.

This is the concept of growth of Insurance.

Insurance is

PROTECTION


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2. HOW INSURANCE WORKS

Theory of probability:

Let us assume that a particular city has a population of 1 lakh.

In the city, on an average in a year

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This data as per statistic is certain.

Then what is uncertain?

Uncertainty is as to who will die or get disabled during day-to-day high-risk prone fast life.

Though the number of deaths, accidents etc. is known,

What is not known is the name, age, time, place and of the ‘PERSONS’.

If it is known that 200 persons are prone to accidental death in a year, it is not known which200 individuals?

Due to this certainty, that 10000 people will die in an accident, or get injured and disabled or dienatural death or die of disease; all 1 lakh people will fear

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3. PURPOSE OF INSURANCE

Every human being has fear in his mind.

Ø The fear whether he will be able to meet the basic needs of the life i.e. Food, Clothing

and Housing (Roti, Kapda and Makkan).

Ø He has fear not only for himself but also for his dependents.

Ø The source of income to meet his basic needs may be through service or business.

Ø If he is able to meet his basic needs then he acquires the assets i.e. vehicles, property or jewellery etc.

Ø Then he gets additional fear of saving the assets from destruction. (The assets may bedestroyed through accident, fire or earthquake etc. and the income may be cut off due to

certainty i.e. old age and death or uncertainty i.e. accident, illness or disability.)

Ø As you know, the old age and death is certain for every human being while the accident,illness, disability and destruction of assets may be by random.

Ø The number of accidents will take place but with whom is uncertain.

Therefore, to overcome this problem, the Insurance plays a very important role.

The principal source of income of an individual comes from the compensation for workperformed by him. If this source of income gets cut off then: -

Family will make social and economic adjustments like:

# Wife may take employment at the cost of home making responsibilities

# Children may have to go for work at the cost of education.

# Family members might have to accept charity from relatives, friends etc. at the cost oftheir independence and self-respect.

# Family standard of living might have to be reduced to a level below the essentials forhealth and happiness.

“Love is the only kind of fire which is never covered by insurance.”


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4. The basic threats which all of us may encounter to varied extent and which result in cut off ofincome or sudden increase in - uncalled for expenses (beyond our means or higher than ourearnings) i.e. dislocates the human life, are: -

Õ ILLNESS (malnutrition, environment, chronic) – uncertain

Õ ACCIDENT – (uncertain)

Õ Disability – Permanent or Temporary (uncertain)

Õ OLD AGE – (certain)

Õ DEATH – (certain)

LIFE INSURANCE is an arrangement through which a person can plan for the continuation of

income when uncertainties and certainties (i.e.) illness or Accident and death or old age disrupt ordestroy his ability to earn his livelihood. Therefore the Insurance is

† The business of insurance is related to protection of human life, human created assets,human disability and business liabilities possessed by human beings which have a definitevalue, and

† Assets and human life generate benefit and income for the owner and his/her familymembers, and

† Loss of assets / human life for any reason stops the benefits and income to the owner andfamily members respectively, and

† Results in falling of living standards in the family, quality of life and future growth of theassociated family members, and

† Insurance is a mechanism that helps to reduce such adverse consequences through pooling,spreading and sharing of risk.

Thus life insurance business is complimentary to the Government efforts in social management.


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5. NEED OF INSURANCE

To provide Security and Safety

† Life Insurance provides security against premature death and payment in old age to lead

the comfortable life.

† In general Insurance, the property can be insured against any contingency i.e. fire,earthquake etc.

† The uncertainty due to fire, accident, death, illness, disability in the human life, iscompensated financially by general insurance.

† Insurance is the only way to assist and provide adequate cover at the time of sufferings.

† Life Insurance provides protection and investment while general Insurance provides only

protection to the human life and property respectively.

1 Reasons Why We Need Life Insurance

Life insurance is one of those things every person is expected to have.

1. To provide for the risk of dying too early or living too long.

2. To replace lost income for the family- to provide money to replace the income of thebread winner in the case of the unfortunate death so that the family can maintain its

standard of living.

3. To pay medical expenses associated with death- Unfortunately, many deaths areprolonged and a mountain of medical bills can accumulate.

4. To pay off a mortgage or other debts- A life insurance death benefit can allow the

surviving family to eliminate monthly house payments, car payments, , or other debtobligations.

5. To provide money for settling the estate- If there is an estate to be settled, death benefitsare paid immediately upon death, so money will be available to pay costs related to theestate (e.g., taxes) while it’s being settled.

6. To leave an inheritance- A life insurance policy is a great way to leave money behind forthe family or for a charitable cause. Unlike capital gains, death benefits are not taxable.

7. To provide for future needs of children- A life insurance policy can supply money for

children to go to college. Or, in the case of special needs children, it can provide forongoing care and living expenses.

8. To provide a source for emergency cash- Many insurance policies allow for cashaccumulation, from which a person can borrow. Although this borrowing will reduceyour death benefit, the person may want to have the option if a personal financial crisis

arises.

9. To maximize pension- on retirement a person.

10. To allow for business continuity- If a person owns or co-owns a business, then life

insurance is a way to protect the company’s future in case of death of the person.


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GOVERNMENT SCHEMES:

INSURANCE AS A SOCIAL SECURITY TOOL

(a) Workman Compensation Act 1923: This act fixes the liability of employer and he is now

required by law to pay compensation to victims of accidents while on duty.

(b) Employee State Insurance Act 1948: The purpose behind this legislation was to provide

medical aid to workers and their families working in industries located in certain notified areas.

(c) Motor Vehicle Act 1988: Third Party Liability Insurance is compulsory and no uninsured

vehicle is allowed to ply the roads or in any public place in India. The Act now provides thatirrespective of the fact that the fault was of the driver/ owner or not (No- fault) the victim of anaccident will be entitled to a compensation payment in case of death of grievous bodily injury.

(D)Public Liability Act 1991:

The public liability act makes it compulsory for all individuals, companies, industries (Bhopal Gastragedy of 1984) involved in handling of hazardous substances to insure against any untowardhappening so that immediate succor is made available to the victims from the Insurancecompanies.

(E) Personal Accident Social Security Scheme: The scheme provided for a payment of

Rs.3,000/- in the event of death due to an accident of any person in the age group of 18 to 60 whois the earning member of the poor family. The premium is borne by the Central Government andthe expenses for implementation of the scheme by the state Government.

(F) National Agricultural Insurance Scheme or the (RKBY) Rashtriya Krishi Bima Yojnaintroduced in 1999 with the objective of providing Insurance coverage and financial support tofarmers in the event of failure of crops as a result of calamities, pests and diseases.

(G) Hut Insurance Scheme: The scheme provides that in case of destruction of Hut due to fire,

compensation of Rs.1,000/ - for hut & Rs.500/- for belongings shall be paid.

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2.Introduction to Insurance_1436524049