Procedure for buying a life insurance

The following is the procedure to be adopted in taking out a Life Assurance Policy as per the Rules and Regulations laid down by the Life Insurance Corporation of India.

Fill in a proposal

The first step in buying insurance is to fill up a printed proposal form given be the company. It contains information such as name and address, proposed insurance scheme, purpose and details of existing policies etc.

Personal statement

The proposer has to submit his complete history and health information about his family in another form called personal statement.

Medical examination

The assured has to go for a medical examination by the approved doctors at company’s cost after submission of the proposal to the insurance company.

Proof of age

The insured has to submit a prof of his age to the insurance company as age is an important factor in determining the premium amount.

Scrutiny of report

The insurance company will review your proposal and scrutinize the documents and reports submitted by you and the insurance agent for deciding on the acceptance of the proposal

Acceptance of the proposal

If the insurance company is satisfied with your proposal and accompanying documents, the company will confirm acceptance of your proposal

Payment of first peremium

On confirmation of acceptance, you will be asked to make the first year premium in cash or direct transfer. Once the first premium is paid the contract between the insurer and the insured comes into force

Issuing insurance policy

Insurance policy is the written document contains the terms of insurance. It is signed and stamped by the insurer. It includes the complete details of the policy include the date in force.

Evidence of title: Nomination and Assignment

Evidence of Title

There are different kinds of evidence of Title to Policy moneys. The simplest of these are Nomination and Assignment effected as per Sections 39 and 38 respectively of the Insurance Act, 1938.

Nomination

Nomination under Section 39 is naming of a person or persons to give a valid discharge to the insurance company and receive policy moneys in case of death of life assured during the period of the policy.

Nominee can only receive the moneys. In case of survival of the life assured till the date of maturity, nomination will be ineffective. Nomination can be done by making suitable entries in the proposal to the policy in which case it will be incorporated in the text of the policy.

Nomination can be done only by a Policyholder under a Policy on his own life and not otherwise.

Nomination can be done in favour of one or more persons. But those nominees who are alive on the date of death of the life assured only will receive the policy moneys. For this reason, while nominating more than one person, the life assured should not indicate shares of the policy moneys for individual nominees.

Nomination can be in favour of a minor, in which case, the life assured can appoint an appointee to receive policy moneys on behalf of the minor nominee in case of the death of the life assured during the minority of the nominee and before date of maturity.

Nomination once made can be changed by the life assured at his will (i.e. without any consent from the nominee) at any time but before the policy matures for payment.

Nomination once made is automatically cancelled by (1) cancellation/further change of nomination (2) assignment in favour of a third party—in case assignment is done in favour of the insurance company for a loan out of surrender value of the policy, then nomination will not get cancelled (3) a Will. .

Nomination should be normally in favour of someone near and dear. If a stranger is named as a nominee, there may be a suspicion of absence of insurable interest.

In a Joint Life Policy, normally there is no need for nomination because, in case of death of one life, policy moneys become payable to the surviving life. However there can be a joint nomination providing for a particular contingency, viz the simultaneous death of both lives in a common calamity.

Nomination is an instrument, the insurance law created, to secure an immediate payment of the policy moneys by the insurer, without prejudice to the decision on the question as to who are entitled to succeed the estate of the deceased life assured. Proceeds of the policy do not vest in the nominee though they are payable to the nominee in the event of the death of the holder of the policy. They do not, by virtue of nomination under Section 39 alone, become a part of nominee’s estate before or after the policy matures

Assignment

Assignment of a policy of life insurance, under Section 38 of Insurance Act, 1938, is a transfer of the property contained in the policy by the assignor to the assignee. Unlike a nominee under Section 39, Assignee under Section 38 has all rights under the policy not only to receive the policy moneys when they are due but also to deal with the policy in any way he desires without the consent of the assignor.

To assign a policy, the assignor should be the holder i.e. owner of the policy. It means that the policy need not be on his life. It also means that a person who is an assignee under a policy of life insurance can further assign it to any other person, for which act he need not obtain the consent or concurrence of the original assignor. However, the assignor should not be a minor. A child cannot, during his minority, therefore, assign a policy on his life to another.

Assignee can be anybody including a minor. In case of death of the assignee, the property will devolve upon his/her legal successors. There can be more than one assignee. In case of the death of any one or more assignees, the policy moneys will have to be paid to the legal heirs of the deceased assignee/assignees.

Sub-section (1) of Section 38 of Insurance Act, 1938 mentions that an assignment can be made ‘whether with or without consideration’. But all assignments without consideration are not valid. Assignment for natural love and affection between parties standing in the near relation to each other is valid. But in any other case absence of consideration may render the assignment invalid.

Both absolute and conditional assignments are recognized under the Act. An absolute assignment transfers to the assignee all right, title and interest of the assignor in the policy to the assignee. The policy vests in the assignee absolutely and forms part of his/her death. A conditional assignment also creates an immediate vested interest in the assignee but such interest is liable to be divested on the happening of the contingencies set out in the assignment

Principles of life insurance

As we discussed before, insurance is actually a form of contract. Hence there are certain principles that are important to ensure the validity of the contract. Both parties must abide by these principles.

1. Principle of Uberrimae fidei (Utmost Good Faith),
2. Principle of Insurable Interest,
3. Principle of Indemnity,
4. Principle of Loss Minimization, and

The Principle of Utmost Good Faith

• Both parties involved in an insurance contract—the insured (policy holder) and the insurer (the company)—should act in good faith towards each other.
• The insurer and the insured must provide clear and concise information regarding the terms and conditions of the contract
• The rule of caveat emptor [let the buyer beware] does not generally apply.
• This doctrine is incorporated in insurance law and both the parties are expected to adhere to a high degree of honesty.
• Non-compliance by either party or any non-disclosure of the relevant facts renders the contract null and void.

The Principle of Insurable Interest

All risks are not insurable. In order to be insurable, the risk must be quantitatively measurable in terms of money and there should be insurable interest in the asset that is to be insured. Insurable interest provides the right to insure.

In a life insurance context, insurable interest is deemed to exist in the case of certain relationships based on sentiment. (E.g. husband & wife, parent & child).

The principle of insurable interest states that the person getting insured must have insurable interest in the object of insurance. A person has an insurable interest when the physical existence of the insured object gives him some gain but its non-existence will give him a loss. In simple words, the insured person must suffer some financial loss by the damage of the insured object.

In the following cases of life insurance contracts insurable interest need not be proved: Own life (up to the limit acceptable to insurers) Spouse’s life, Life of children

Instances of life insurance contracts where the extent of insurable interest has to be proved – Employer and employee, Creditor and debtor, Partners, Guarantors

The Principle of Indemnity

• According to the principle of indemnity, an insurance contract is signed only for getting protection against unpredicted financial losses arising due to future uncertainties. Insurance contract is not made for making profit else its sole purpose is to give compensation in case of any damage or loss.
• In an insurance contract, the amount of compensations paid is in proportion to the incurred losses. The amount of compensations is limited to the amount assured or the actual losses, whichever is less.
• 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.

The 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.

Laws relating to life insurance

The regulatory framework of life insurance business in India consists of the following acts

1. The Insurance Contract Act 1938 – It was the first comprehensive legislation governing both life and non-life companies providing strict control over insurance business.The salient features of this Act were as follows:
   • Constituting a Department of Insurance to supervise and control insurance business.
   • Compulsory registration of insurance companies & submission of annual financial returns.
   • Provision for initial deposits to allow only serious players in the field.
   • Compulsory investment of life fund to the extent of 55% in Government approved securities.
   • Prohibiting rebating, restriction on payment of commission and licensing of agents were other important provisions to bring in a sort of professionalism in to this business.
   • Periodical Valuation was made compulsory to assess financial viability of the insurance companies.
   • Provision was made for policyholder’s director in the Board.
   • Policy formats were standardised and premium tables were to be certified by an Actuary.
2. The Life Insurance Corporation Act 1956 – The Life insurance Corporation of India was founded on September 1, 1956, when the Parliament of India passed the Life Insurance of India Act which came into effect on 1^st Jul 1956 that nationalized the insurance industry in India. Over 245 insurance companies and provident societies were merged to create the state-owned Life Insurance Corporation of India. The acts contains provisions relating to the constitution of LIC, capital structure and functioning of the corporation, authorities of LIC and accounting and auditing guidelines for the Life insurance corporation.It is basically an investment institution, in as much as the funds of policy holders are invested and dispersed over different classes of securities, industries and regions, to safeguard their maximum interest on long term basis. LIC is required to invest not less than 75% of its funds in Central and State Government securities, the government guaranteed marketable securities and in the socially-oriented sectors.

   At present, it is the largest institutional investor. It provides long term finance to industries. Besides, it extends resource support to other term lending institutions by way of subscription to their shares and bonds and also by way of term loans.

    

   Objectives of LICThe LIC was established with the following objectives:

   • Spread life insurance widely and in particular to the rural areas, to the socially and economically backward areas.
   • Maximisation of mobilisation of people’s savings for nation building activities.
   • Provide complete security and promote efficient service to the policy-holders at economic premium rates.
   • Conduct business with utmost economy and with the full realisation that the money belong to the policy holders.
   • Act as trustees of the insured public in their individual and collective capacities.
3. The Insurance Regulatory and Development Authority Act 199 –The Insurance Regulatory and Development Authority (IRDA) is a national agency of the Government of India, based in Hyderabad. It was formed by an act of Indian Parliament known as IRDA Act 1999, which was amended in 2002 to incorporate some emerging requirements. Mission of IRDA as stated in the act is “to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto.”

   IRDA Act 1999 paved the way for the entry of private players into the insurance market which was hitherto the exclusive privilege of public sector insurance companies/ corporations.

   Functions of IRDAI 

   Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA.

   • Issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration
   • protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance
   • Specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents
   • Specifying the code of conduct for surveyors and loss assessors
   • Promoting efficiency in the conduct of insurance business
   • Promoting and regulating professional organisations connected with the insurance and re-insurance business
   • Levying fees and other charges for carrying out the purposes of this Act
   • calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers.
   • Specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries
   • Regulating investment of funds by insurance companies
   • Adjudication of disputes between insurers and intermediaries.

 

IFRS in India (IND AS)

India is a recent participant in the IFRS adoption chain when the Ministry of Corporate Affairs (MCA) announced its roadmap for adoption of the Indian Accounting Standards (Ind-AS) from the financial year 2016-2017. Resource dependency and continuous interaction with the outside world are reasons for IFRS adoption in India.

It has been decided that there will be two separate sets of Accounting Standards viz. (i) Indian Accounting Standards converged with the IFRS i.e.  Ind AS and (ii) Existing Notified Accounting Standards. Ind AS are issued by the Central Government of India under the supervision and control of Accounting Standards Board (ASB) of ICAI and in consultation with National Advisory Committee on Accounting Standards (NACAS).

While formulating Ind AS, efforts have been made to keep these standards in line with the corresponding IFRS and departures have been made where considered absolutely essential. They have been named and numbered in the same way as the corresponding IFRS.

As per the Notification, Indian Accounting Standards (Ind AS) converged with International Financial Reporting Standards (IFRS) shall be implemented on voluntary basis from 1st April, 2015 and mandatorily from 1st April, 2016.

The Develpment of IFRS

Introduction to IFRS

Different accounting standards are followed worldwide to tap varied national economic and social forces. Much of the diversity have resulted from deeply entrenched differences in legal systems, income tax systems, historical, political and economic ties, size and complexity of business enterprises, development of financial market, sources of investment and financing, the level of community education, predominant culture and language and the overall economic development. 

Ongoing globalization of the world economy has brought to the forefront the problems engendered by differences in these accounting reports. Uniformity, rationalisation, comparability, transparency and adaptability in financial statements are very much required for true cross-border economic and financial integration. As a result, the quest for international harmonization through adoption of International Financial Reporting Standard (IFRS) has been widely accepted as useful and rational.

History of IFRS

The debate on international harmonization of accounting standards started in the 1960s. It formally commenced in 1973 with the establishment of the International Accounting Standards Committee (IASC) assigned with the task of drafting international accounting standards to gain investors’ confidence and provide a strong investment climate. Between 1973 and 2000, the IASC developed a comprehensive list of accounting standards and interpretations, a conceptual framework and other guidance. In 2001, the IASC formally restructured into International Accounting Standards Board, IASB. All 41 standards issued by the IASC were adopted and were amended and updated according to industry and accounting needs to be renamed as IFRS, International Financial Reporting Standards.

The adoption of International Financial Reporting Standards and plans for convergence or harmonisation differ widely by jurisdiction. As per IFRS Foundation report, as of September 2018, 87% of profiled jurisdictions require IFRS Standards for most domestically accountable companies, 15 of 20 G20 economies require the use of IFRS Standards. The remaining major capital markets without an IFRS mandate are (i) the US, with no current plans to change; (ii) Japan, where voluntary adoption is permitted but not required; and (iii) China, which intends to fully converge at some undefined future date.

Benefits of Convergence with IFRS

The term International Financial Reporting Standards (IFRS) comprises IFRS issued by International Accounting Standards Board (IASB): International Accounting Standards (IAS) issued by International Accounting Standards Committee (IASC); Interpretations issued by the Standard Interpretations Committee (SIC) and the IFRS Interpretations Committee of the IASB. IFRS are considered a “principles based” set of standards.

There are many beneficiaries of convergence wih IFRS such as the economy, investors, industry, professionals etc.

The economy: It encourages international investing and thereby leads to more capital flows to country’s economy.

Investors: Investors confidence especially of those who wish to invest outside the country becomes strong when accounting standards used are globally accepted.

Industry: The industry is able to raise capital from foreign markets at lower cost if it can create confidence in the minds of foreign investors that the financial statements comply with globally accepted accounting standards.

Professionals: More opportunities and greater mobility of Indian accounting and auditing professionals to work in different parts of the world.

Objectives of Accounting Standards

Accounting standards are written policy documents issued by the expert accounting body or other regulatory body covering the aspects of recognition, measurement, presentation and disclosure of accounting transactions and events in the financial statements.

Objectives of Accounting Standards

1. To harmonize accounting policies and practices followed by different business entities.
2.  To standardize diverse accounting practices adapted for various aspects.
3.  To eliminate the non-comparability of financial statements.
4. To improve the reliability of the financial statements
5. To provide standard accounting policies, valuation norms and disclosure requirements.

Types of Fire insurance policies

Fire insurance contract may be defined as an agreement whereby one party, for a consideration, undertakes to indemnify the other party up to an agreed amount against financial loss of goods or property which the later may suffer because of fire.

Type of Fire policies

1.  Valued policy – A policy in which the value of the property is ascertained and/or agreed upon which the insurer undertakes to pay in the event of destruction of goods/property by fire is known as valued policy.
2. Specific policy – It is a policy which insures a risk for a specific amount. In case of any loss under this policy, the insurer pays whole loss provided it is not more than the sum specified in the policy.
3. Average policy – If the property is under-insured, the insurer will bear only that proportion of the actual loss which the sum assured bears to the actual value of the property at the time of loss.
4. Floating policy – It is the policy which covers on several types of goods lying at different locations under one amount and for one premium.
5.  Excess policy – Where the stocks of the insured fluctuate he may take out a policy for minimum level of stock and another policy to cover the maximum amount of stock which may reached at times. The former is known as the first loss policy and the latter as excess policy.
6. Blanket policy – It covers fixed as well as current assets under one policy
7. Comprehensive policy – A which covers risks such as fire, flood, riots, strikes, burglary etc. upto a certain specified amount is known as the comprehensive policy.

Classification of Life and General Insurance

Types of Insurance

Insurance is basically of two types – Life insurance and General insurance.

Life insurance: Life insurance policy covers the life risk of the insured up to the policy amount. Life insurance becomes payable on the death of the insured or on the maturity of the insurance policy.

General insurance: General insurance means insurance other than life insurance. Section 2(6B) of Insurance Act 1938 defines general insurance business as “fire, marine or miscellaneous insurance business whether carried on singly or in combination with one or more of them”

Classification of Life Insurance

Life insurance policies can be broadly categorised into the following.

Whole life policy – where the insured amount is payable on death

Endowment policy – where the insured amount is payable either on the lapse of specified period or death

Annuity contract – where a specified amount is paid annually to the insured from the date on which he attains a specified age till death

Classification of General Insurance

General insurance can be broadly classified into the following.

Fire insurance: It covers the risk of loss of property accidental or non-intentional fire.

Marine insurance: under this, the insurance company agrees to indemnify the owner of a ship or cargo against risks which are incidental to marine adventure such as sinking or burning of the ship, collision of the ship etc.

Miscellaneous insurance: These are insurance policies which cover various other types of risks. Miscellaneous insurance in India include motor vehicle insurance, burglary insurance, credit insurance and so on.

 

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