- Subrogation- Subrogation means the insurance company steps into the shoes of the insured person after paying the claim and taking all actions that the insured person could have taken. An example could be a loss incurred by the insured person due to the accident caused by another car that was at fault. In such cases, the insurance company pays the claim to the insured person and then steps into the shoes of the insured person and pursues the claim with the “at fault” driver or her insurance company and recovers the loss from them.
Contribution- The principle of contribution is implemented when multiple insurance policies are covering the same property or loss, the total payment for actual loss is proportionally divided among all insurance companies.
Co-Pay- is the proportion of the claim amount which will be met by the Insured person. It is most popularly used in the context of car Insurance and health Insurance. For example, if the insured person has agreed on a co-pay of 15% and the ascertained claim amount is Rs. 2,00,000 then the insured person will pay Rs. 30,000 (15% of Rs. 2,00,000) and the Insurer will pay only the balance amount of Rs. 1,70,000/- .
Deductible- Deductible is the amount that a policyholder has to pay before the insurance company starts paying up. In other words, the insurance company is liable to pay the claim amount only when it exceeds the deductible. If the deductible of your policy is Rs 30,000 and the claim by the insured is Rs 40,000, then the insurance company is liable to pay only Rs 10,000. However, if the claim amount is less than the deductible, the insurer is not liable to pay any amount. For high deductible policies, the premium is lower while the low deductible policies have a higher premium.
Cashless claim payment– This is relevant for indemnity insurance and mostly used in the context of health insurance and car insurance. Under normal circumstances, the insured person first incurs the expenditure at the hospital/garage and then files a claim for reimbursement with the insurer. This blocks the cashflow of the insured person. In many cases, the insured person may not have that amount of cash available to first make payment to the hospital/garage.
Role of Insurance in Personal Finance-
Insurance is a very crucial part of everyone’s financial plan. Staying prepared for the unforeseen would ensure that you could still accomplish your goals even after encountering a financial crisis. An insurance policy would help to preserve your emergency fund in case of emergencies. Insurance could also protect your family if you’re part of an accident and have sustained injuries, become disabled, ill, or die. Some situations could be very expensive for the ones with no insurance coverage, so it is vital to have any policy you require depending on your financial situation.
The insurance decisions that you take must be dependent on your age, family, and financial situation. There are several forms of insurance that one can choose from. For instance, life insurance could be a necessity, particularly in case you’re married and have children.
Role of Insurance Adviser-
- Steps in Insurance Planning- Just like financial planning, insurance planning is also specific to the individual and their situation.
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- Identify insurance need– Insurance is primarily a tool for protection from financial loss. Identifying insurance needs, therefore, requires identifying all those situations that can result in a loss of income or an unexpected charge on income. Insurance needs can be broadly categorized as:
- Income replacement needs in the event of a risk to the earning ability of an asset, which includes the life of an individual as well as his earning ability as an asset generating income. Eg. such- Life Insurance, Critical Illness, and Accidental Disability insurance.
- Income protection needs to protect the available income from an unexpected charge. Eg. Health Insurance and Motor Insurance.
- Asset protection needs include the need to protect assets created from theft or destruction. Eg.-Household insurance.
2. Estimate the insurance coverage-
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- Estimate the amount of insurance required- The purpose of insurance is to compensate for the financial loss suffered from a specified event. It is not to profit or gain from it. The amount of insurance required must be calculated by giving due consideration to factors such as the future value of the costs being sought to be replaced, the period for which protection is required, and the ability to bear the cost of insurance.
- Estimate the tenure for which the insurance is required– Longer the coverage tenure higher is the yearly premium from the first year itself. Thus, taking a life insurance policy that has a higher premium because it covers death after retirement can also be considered wasteful.
- Identify the most suitable insurance product- Having decided on the insurance coverage, the next decision is the choice of product. Various types of insurance products are discussed in the next section.
- Optimize the insurance premium- Within the same insurance product and coverage, there are choices that help the insured reduce the insurance premium.
- Monitor the insurance coverage- Insurance is not a one-time activity. The exposure and coverage need to be monitored continuously. Where necessary, the policy coverage would need to be modified to mitigate additional risks.
Unit linked insurance products (ULIPs)-
(1) Lock-in period increased to five years: IRDA has increased the lock-in period for all Unit Linked Products from three years to five years, including top-up premiums, thereby making them long-term financial instruments which basically provide risk protection.
(2) Level Paying Premiums: Further, all regular premium /limited premium ULIPs shall have uniform/level paying premiums. Any additional payments shall be treated as a single premium for the purpose of insurance cover.
(3). Even Distribution of Charges: Charges on ULIPs are mandated to be evenly distributed during the lock-in period, to ensure that high front-ending of expenses is eliminated.
(4). Minimum Premium Paying Term Of Five Years: All limited premium unit-linked insurance products, other than single premium products shall have a premium paying term of at least five years.
(5). Increase In Risk Component: Further, all unit linked products, other than pension and annuity products shall provide a mortality cover or a health cover thereby increasing the risk cover component in such products.
(i) The minimum mortality cover should be as follows:
Minimum Sum assured for age at entry of below 45 years
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Minimum Sum assured for age at entry of 45 years and above
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Single Premium (SP) contracts: 125 percent of single premium.
Regular Premium (RP) including limited premium paying (LPP) contracts: 10 times the annualized premiums or (0.5 X T X annualized premium) whichever is higher. At no time the death benefit shall be less than 105 percent of the total premiums (including top-ups) paid.
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Single Premium (SP) contracts: 110 percent of single premium
Regular Premium (RP) including limited premium paying (LPP) contracts: 7 times the annualized premiums or (0.25 X T X annualized premium) whichever is higher. At no time the death benefit shall be less than 105 percent of the total premiums (including top-ups) paid.
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(In case of whole life contracts, term (T) shall be taken as 70 minus age at entry)
(ii)The minimum health cover per annum should be as follows:
Minimum annual health cover for age at entry of below 45 years
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Minimum annual health cover for age at entry of 45 years and above
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Regular Premium (RP) contracts: 5 times the annualized premiums or Rs. 100,000 per annum whichever is higher,
At no time the annual health cover shall be less than 105 percent of the total premiums paid.
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Regular Premium (RP) contracts: 5times the annualized premiums or Rs. 75,000 per annum whichever is higher.
At no time the annual health cover shall be less than 105 percent of the total premiums paid
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(6). MINIMUM GUARANTEED RETURN FOR PENSION PRODUCTS: As regards pension products, all ULIP pension/annuity products shall offer a minimum guaranteed return of 4.5% per annum or as specified by IRDA from time to time. This will protect the life time savings for the pensioners, from any adverse fluctuations at the time of maturity.
(7). RATIONALISATION OF CAP ON CHARGES: With a view to smoothening the cap on charges, the capping has been rationalized to ensure that the difference in yield is capped from the 5th year onwards. This will not only reduce the overall charges on these products but also smoothen the charge structure for the policyholder.