The M. S.

University of Baroda – Faculty of Commerce

T.Y.B.Com Semester VI
Personal Finance & Investment
Unit III - Insurance and Retirement Planning
Note: This material is issued for saving time in dictatation. For further reference students are requested to refer
the reference books. This reading material is issued for Academic purpose and classroom discussion.

INTRODUCTION :
Insurance in its purest form is a risk management tool providing a security blanket. It provides financial
protection against unexpected events. It is primarily used to transfer risks from one entity to another. As per
American Risk and Insurance Association, Insurance transfers the risk from an individual to a group of
individuals sharing same risk profile. Insurance is a contract between two parties - the insurer (the insurance
company) and the insured (the person or entity seeking the cover) - wherein the insurer agrees to pay the
insured for financial losses arising out of any unforeseen events in return for a regular payment of
“premium”. These unforeseen events are defined as “risk” and that is why insurance is called a risk cover.
Insurance is essentially the means to financially compensate for losses that life throws at people. Insurance
can be used as a tool to shield an individual against potential risks like travel accidents, death, unemployment,
theft, property destruction by natural calamities, fire mishaps etc.

Insurance contracts can be further classified into two broad categories depending upon its nature :
(i) Life Insurance and

(ii) Non Life Insurance (General Insurance)

LIFE INSURANCE :
Life Insurance Contracts cover the life of the insured with the objective of providing financial protection to the
dependents of the insured in an unfortunate event of death of the insured. Based on this objective the life
plans can be further classified under three broad categories: pure insurance products (term plans), pure
investment products (pension plans) and investment cum insurance products (endowment, money back,
whole life and unit linked insurance plans).

TERM PLANS :
Term Plans are the purest form of insurance. These are no frills policies that cover only the risk of insured’s
dying. In the event of insured’s death during the policy term the insured’s nominees receive the cover amount
– in insurance parlance, the “Sum Assured”. The insured gets no benefit if he/she survives the policy term.
Since the entire premium paid by the insured – which is the cost of buying insurance cover on term policies
goes towards covering the risk of insured’s life, insurers offer this cover at the least cost.

Insurance Policy : Term Plan

Particulars
Sum Assured `5 lac
Policy Term 20 years
Annual Premium ` 1,5001
Payback
If policyholder dies during the term (Sum Assured) `5 lac
If policyholder survives the term Nothing
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For a healthy 30 year old male

Illustratively, a healthy 30 year old male who wants a ` 5 lac cover for 20 years will pay an annual premium
of ` 1,500 on a term plan. However, he would have to pay several times more for an endowment plan
(explained in following two tables) which provides an identical life cover plus some returns.

Term plans are available for tenures between 5 and 40 years, with the maximum age of entry generally being
50 years. Premiums are payable every year. If the premium is not paid by the due date, (including grace
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period of one month) the policy lapses. The no frills structure of term plans makes it easy to compare the
plans offered by different insurers. Given two term plans that covers insured for a specific tenure and sum
assured, the one that charges the lower premium is better.

Group Insurance:

Increasingly, many organizations are buying group insurance for their employees and members. Typically
this is structured like term cover, which results in the payment of a lump-sum to an employee’s nominee in
the event of his/her death. The USP of group insurance is cost which feeds off the principle of ‘strength in
numbers’ because an organization buys cover for a number of employees through one policy. It pays a
significantly lower premium – 20 to 30 percent – than what an individual would pay if s/he were to buy the
same cover on his own. While assessing one’s life insurance needs, one should factor in any group insurance
cover taken by one’s employer on employee’s behalf.
Free add on Insurance:
Financial Service providers are also increasingly offering free life cover within limits and with conditions to
their customers as a loyalty reward or a marketing hook. So some credit card companies give free life
insurance to cardholders, banks to account holders, mutual funds to unit holders, automobile clubs to
members and so on. One should factor in such freebies while computing the life cover required.

ENDOWMENT PLANS:

While term plans just over the risk of death, endowment plans also offer some return on the premiums paid
by the insured. So, if the insured dies during the policy term, nominee gets the sum assured plus some
returns. If the insured survives the policy term, s/he receives the sum assured as well as the returns. These
plans are based on the philosophy “money if you die, money if you live” and is an enticing proposition which
comes at a price in the form of high premiums and drags down the returns on endowment plans to barely 4-
6 percent a year. In an endowment plan, the insured pays premium for a pre-defined tenure and sum assured.
The premium would depend on the age of the insured, the sum assured, the plan tenure and the nature of
returns. A portion of the premium paid is invested by the insurer on the insured’s behalf. Another portion goes
towards the insured’s cover and a third towards meeting the insurer’s administrative expenses which lowers
the effective yield on one’s investments in endowment plans. There are two types of endowment plans with
the differences arising from whether they offer the policyholder a share in the insurer’s profits or not and are
discussed as follows :

Insurance Policy : Without Profit Endowment Plan

Particulars
Sum Assured `5 lac
Annual Premium `15,0001
Premium payment period 20 years
Policy Tenure 20 years
Benefits (one time loyalty additions) 4 percent2
Payback
If policyholder dies during the term `5 lac
If policyholder survives the term (Sum Assured + loyalty additions) `5.2 lac (5 lac + 20,000)
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For a healthy 30 year old male 2 Assuming insurer declares loyalty additions @ 4%

Without Profit Plans:

These endowment plans don’t offer the insured a share in the insurer’s profits. Therefore compared to with
profit plans these plans are available for a lower premium. These are structured in such a way that if the
insured outlives the policy term, the insured gets back the sum assured and a nominal return on investment
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termed as ‘loyalty additions’ which is basically a token one time payout expressed as a percentage of the
sum assured made to the insured for staying in the plan through its term.

With Profit Plans:

Such endowment plans offer relatively higher returns than without profit plans by sharing with the insured the
profits earned by the insurer from year to year. Depending on whether the return carries assurances, there
are two kinds of with profit variants as discussed below:

Insurance Policy: With Profit Plan

Particulars
Sum Assured `5 lac
Annual Premium `22,6171

Premium payment period 20 years

Policy Tenure 20 years
Benefits (guaranteed additions/ bonus declared every year) 4 percent p.a.
Payback

If policyholder dies during the term (Sum Assured + Benefits accrued till date of death) `5 lac + benefits as applicable

If policyholder survives the term (Sum Assured + Benefits) `9.4 lac (5 lac + 4.4 lac)2
1
For a healthy 30 year old male. 2 Assuming insurer declares guaranteed additions/ bonus @ 4% a year which earns interest through the remainder of the term.

There’s an assured returns variant, wherein how much the insured will earn is known at the outset. The
returns accrue to the insured in the form of what is called ‘guaranteed additions’, which is declared either as
a certain amount per `1,000 sum assured or a percentage of the sum assured for example, `40 per 1,000
sum assured or 4% a year. This guaranteed addition component keeps accumulating through the policy term,
and is paid to the insured on maturity along with the sum assured. If the insured dies during the policy term,
the nominee of the insured will get the sum assured along with the guaranteed additions accumulated till the
date of death.

The non assured returns variants which have now become the standard endowment plan option instead of
guaranteed additions, the returns are paid out as bonuses which are based on insurer’s profits. Bonuses like
guaranteed additions are declared per ` 1,000 sum assured or a percentage figure of the sum assured.
Bonuses are to policies what dividends are to shares which are declared from the profits that the insurer
makes each year and may vary from year to year, even be skipped in a bad year.

The bonus keeps accumulating and is usually distributed to the insured on maturity (some insurers let insured
encash it periodically too), along with the sum assured and loyalty additions (at the discretion of the insurer).
If the insured dies during the plan tenure, the nominee will get the sum assured along with the bonus
accumulated till the date of death. Because the payout is not assured, the premium on bonus based plans is

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lower than those based on guaranteed additions. However, in both kinds of plans the returns are in low single
digits.

MONEY BACK PLANS :

Money Back Plans are variants of endowment plans with one basic difference which is that unlike endowment
plans, where the survival benefits are disbursed at the end of a policy term, the payback in money back plans
is staggered through the policy term.
Insurance Policy : Money Back Plan
Particulars
Sum Assured `5 lac
Annual Premium `34,1231
Premium payment period 20 years
Policy Tenure 20 years
Form of Benefits (bonus paid every year) 4 percent p.a.
Periodic Payback (% of sum assured) `1 lac each in years 5, 10 & 15 of term

Payback
If policyholder dies during the term (Sum Assured + Bonus accrued till date of death) `5 lac + Bonus as applicable
If policyholder survives the term (Balance Sum Assured + Bonus) ` 8 lac ( 2 lac + 4.4 lac )2
1 2
For a healthy 30 year old male. Assuming insurer declares guaranteed additions/ bonus @ 4% a year which earns interest through the remainder of the term.

Typically a part of the sum assured is returned to the insured at periodic intervals through the policy tenure.
For example in the illustration given in above table, `3 lac is paid back in three installments at 5 year intervals
(in 5, 10 and 15 years). The balance sum assured along with guaranteed additions or bonus (as the case
might be) is returned at the end of the tenure. However, this early return compared to conventional
endowment plans doesn’t reduce the sum assured of money back plans. In case of death claim, the full sum
assured will be paid, without deducting any survival benefits that may have already been paid as money back
components. Because of this staggered payback, the premium on money back plans is higher than on
endowment plans.

WHOLE LIFE PLANS :

The three categories of insurance plans mentioned above provides life cover to insured only for a defined
period which is up to a certain age (generally, 70 years). Whole life plans, on the other hand, provides the
insured cover throughout his/ her lifetime. Typically whole life plans are structured such that the policyholder
has the option to pay premiums up to a certain age (referred to as the maturity age, which is generally 80 -
100 years) or for a specified period. On reaching maturity age, the insurer gives the insured an option to
either continue with the cover throughout lifetime (for which no further premiums will have to be paid) or
encash the maturity benefits (sum assured plus bonuses). Some insurers do give the option to encash the
bonus during the term itself which can serve as a useful income stream during the later years, if the insured
so desires. Further, one should be very selective while taking a decision to purchase a whole life cover
considering the benefits and the need and its relevance in the retirement years of one’s life.
Insurance Policy : Whole Life Plan
Particulars
Sum Assured `5 lac
Annual Premium `11,8551
35 years or till age of 80
Premium payment period whichever comes later
Maturity age2 80 years
Form of Benefits (bonus, if applicable) 2.5 percent
Payback
If policyholder dies (Sum Assured + Bonus accrued till date of death) `5 lac + Bonus as applicable
If policyholder is alive at the maturity age and decides to en-cash maturity benefits (Sum Assured + Bonus)3 `8 lac ( 5 lac + 3 lac )2

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 1
For a healthy 30 year old male.
2
Policyholder has option to extend cover for lifetime or en-cash maturity benefits.
3
Policyholder earns bonus for a minimum 35 yrs. @ 2.5% a year which earns interest through the remainder of the term

UNIT LINKED INSURANCE PLANS (ULIPs) :

These plans are insurance cum investment plans. The insurers however are governed by certain investment
restriction which can invest just 10 percent of the premium paid by the insured into equities and the greater
chunk which is 90 percent has to be invested in debt paper. While such restrictions are indented to ensure
safety on the insured’s investment, they also lead to rigidity in investment and result to low single digit returns.
Unit linked insurance plans get around such restrictions by giving insured the greater control over where
his/her premium should be invested.

These plans double up as mutual funds. The annual premium paid by the insured on unit linked plans is
linked to the sum assured and the policy tenure. As explained in table below, for a given sum assured of `1
lac on a 20 year plan, the premium payable is ` 6,000 a year. In the first year, typically around 20 percent of
the premium is deducted by the insurer towards insured’s risk cover and to meet its own administrative
expenses which gradually drops through the plan term, tapering off at around 5 percent.

Insurance Policy : Unit Linked Insurance Plans (ULIPs)

Particulars
Sum Assured `1 lac
Policy Tenure 20 years
Annual Premium `6,0001
Premium Payment terms 20 years
Form of Benefits NAV linked appreciation2
Payback
If policyholder dies during the term `1 lac (Sum Assured) + value of units
on date of deaths
If policyholder survives the term `1 lac (Sum Assured) + value of units
on date of maturity
1
For a healthy 30 year old male 2 NAV, net asset value of the unit.

The balance 80 percent in the first year and more in the subsequent years is invested in an investment plan
of the insured’s choice and insured is allocated units based on the prevailing net asset value (NAV) of the
plan which is opted for. The investment plans on offer cover the risk reward spectrum. One can choose from
income plans (higher on debt, low on equity), growth plans (high on equity, low on debt) and balanced plans
(roughly equal distribution between debt and equity).

Insurers based on the historical performance of their plans and their return expectations tend to project a
range of returns for each plan and one should take that these are just guesstimates and what one ends up
with could be higher or lower depending on the selected plans’ performance.

The insured can switch from one plan to another free of cost once a year. Thus, unlike endowment plans,
one can control the investment in ULIPS. It also enables the insured to periodically monitor the performance
of one’s investment. Insurers declare the NAV of the various plans periodically – generally once in three
months. Exiting these plans is also easier and it doesn’t invite punitive penalties. After lock in period (generally
1 year), the insured can withdraw units anytime in part or in full at the then prevailing NAVs. However, the
insured’s life cover will be reduced accordingly. One can also make incremental investments any time and
add a corresponding amount to one’s life cover.

By their very nature, ULIPs are meant for individuals who understand investing and the stock market but
prefer to leave it to the experts to do active money management. The case to prefer ULIPs over conventional
endowment plans is compelling. Insurance plans are long term plans with tenures stretching to 10, 15, 20
years duration which gives a good chance to reap the true returns potential of equities. In endowment plans,
though the insured’s money stays locked for similar lengths of periods, at least 90 percent is invested in low
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yielding debt instruments as a result of which returns from them are paltry. In other words, endowment plans
don’t maximize returns, especially for a knowledgeable investors and ULIPs offer this possibility.

PENSION PLANS:

These plans are reverse of life insurance plans. These plans are pitched by insurance companies as
retirement planning schemes. Pension plans are investment options that lets an investors set up an income
stream in the post retirement years by routing current savings through an insurer who invests the same on
the behalf of investor for a fees. The precise returns that an investor can earn depends on several factors
like age of investor at which he/she begins investing, the amount of contributions, the investments
preferences based on risk profi1e, the age at which the investor wants the money to start coming back to
him/her, and the number of years for which the investor wants the returns.

Thus, in a pension plan one has to fix the retirement age also called the vesting age – the age when one
wishes to have a regular income in the form of pension and has to make regular contributions during the
earning years which enables him/her to receive regular pension during retirement period.

The payback from pension plans generally takes the form of an annuity. There are two types of annuities,
Immediate and Deferred, depending on when the insurer begins the annuity paybacks. With an Immediate
annuity, the payments start the year the investor buys the contract. The investor hands over a lumpsum to
the insurer and chooses the periodicity of payments and the number of years for which the pension is required
based on the assessment of life expectancy of the investor and the needs of investor’s financial dependants.
Typically, this option would appeal to those who have retired or about to retire and are looking to set up an
immediate, regular income stream and feel ill equipped to handle their investments on their own.

The other type of annuity is a deferred annuity, wherein the annuity payments are deferred for later years
(at a predefined age of vesting, as it is called). During the accumulation phase, your investments earn a return
and grow without being taxed until you receive your annuity payments. Consequently, investments in well
managed annuity plans have the potential to grow substantially over a long period. However, the investors
are liable to tax (at appropriate slab rates) on the annuity withdrawals, which are treated as income. Therefore,
deferred annuities make financial sense if the investor is likely to move to a lower tax bracket after his/her retirement.

Deferred annuity schemes enforce a savings discipline unlike with self managed investments. Additionally
since these are conceived of as long term investment vehicles, premature withdrawals invite prohibitive
penalties. Increasingly, insurers are packing in a few options that provide greater flexibility to one’s pension plan.

Participative Pension Plan

Particulars
SCENARIO 1: FIXED TERM
Annual Contribution: ` 10,000 : Annual benefit period: 5 years
Age/ Vesting age 50 55 60
30 59,000 1,00,000 1,20,000
35 35,000 61,000 1,06,000
40 18,000 36,000 65,000
SCENARIO 2: INDEFINITE TERM
Annual Contribution: ` 10,000 : Annual benefit period: Till death of annuitant
Age/ Vesting age
30 42,000 73,000 1,22,000
35 23,000 44,000 77,000
40 12,000 25,000 47,000
Based on the surety of returns pension plans can be classified as participative or unit linked. In a participative
plan, at the time of investing, the insurer indicates the annuity amount (not an assurance) an investor is likely
to receive during the benefit period.

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The illustration given in the above shows the yearly annual payable for various age term combinations for an
annual contribution of `10,000 for a fixed period and for an indefinite period. Obviously, longer the benefit
period, the lower is the annuity.

However, no such indicative assurances are given under the unit linked pension plans (ULPPS).

Insurance Policy : Unit Linked Pension Plan

Particulars
Age at entry 30 years
Vesting age 50 years
Annual Contribution `10,000
Payback
Form of Benefits NAV linked appreciation2
Projected accumulation at vesting age
@ 7 percent a year `4.38 lac
@ 9 percent a year `5.58 lac
@ 12 percent a year `8.10 lac

The illustration as given in above table shows how ‘10,000 invested every year for 20 years will appreciate
under various possible return scenarios. Depending on the performance of the selected scheme, the value
of the investment would also appreciate. The contribution made by an investor is directed to an investment
plan of his/her choice. For each investment one makes, some units would be given to the investor based on
scheme’s then prevailing NAV. As in ULIPS, so also in ULPPs wherein one can choose from a variety of
schemes (income, growth and balanced) and also can make free switch once in a year (a nominal charge is
levied for additional switches). Each contribution made by the investor leads to entitlement of additional units.

Pension plans facilitate discipline, long term investing – which is one of the pillars of wealth creation. Each
year, investor sets aside a certain, pre specified sum towards retirement kitty. This money stays invested for
long period of time reaping the benefits of compounding. On reaching the vesting age, on can withdraw money.

However, it is always advisable to buy a pure term insurance plan for protection and to buy a pure pension
plan for the purpose of getting regular pension and maximize returns after the retirement. One should choose
a plan that offers the maximum projected maturity value since that will be the basis of the regular pension.
However, the final value depends on the costs, fund management and market performance over the years.
While the last two are not in one’s control one should always try to scout for the plan with highest projected
maturity value and lowest costs.

RIDERS :

Consider a situation which requires hospitalization and surgery for a critical illness. Your life insurance policy
cannot be invoked to recover these medical expenses. A separate medical insurance policy would enable
you to claim the expenses which would come at extra cost which means two policies would be required, one
to cover your life and another to cover your medical expenses. However after mid 2001, riders came in
picture. Riders are options that allow the insured to enhance life cover qualitatively and quantitatively are
similar to the toppings that one adds to pizza in order to improve its taste as one likes. And as with toppings,
riders are optional and available in a variety of flavors to be picked and chosen, mixed and matched based
on one’s preferences. And each of these comes for a small additional cost.

For example, one has the option to cover the risk of medical emergencies by adding “Major Surgical
Assistance Benefit Rider” to the life cover. This rider gets activated only if the insured is hospitalized for
surgery and will cover hospitalization and surgical expenses. However, one has to pay an additional premium
for the rider but typically would come out to be less than the premium one pays on two separate policies.
Thus, riders provide low cost pure risk cover. Riders have to be bought along with the base policy and they
generally come with separate terms and conditions with additional exclusion clauses.

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Riders, if selected properly based on one’s insurance needs can add great value to one’s life cover. The
riders available in the market can be classified into four broad categories: Critical Illness Insurance, Medical
Expense cover, Disability Insurance cover and Miscellaneous.

1. Critical Illnesses:

The Critical Illness Insurance Rider provides additional cover in the event of a critical illness. Typically
extra cover provided is equal to the sum assured on the base policy and is paid on the diagnosis of a
critical illness. The illnesses covered and the amount of premium varies across the insurers. Most insurers
cover cancer, coronary artery bypass, heart attack, kidney failure, major organ transplant and paralytic
stroke. One should check the list of illnesses covered and otherwise as some insurers exclude the critical
illnesses that may have been caused due to existing ailments.

This rider gets terminated if the critical illness diagnosed is of terminal in nature. In such cases, the
policyholder is paid 50 percent of the total sum assured (for the base policy plus rider) and the balance in
installments over the next six months. A critical illness rider can be bought for ` 250 – 450 (the band is on
account of varying cost and coverage) per ` 1,00,000 sum assured. The premium paid qualifies for tax
deduction up to ` 10, 000 under Section 80D (for senior citizens-`5000).

2. Medical Expenses:

Riders under this category cover risk towards ailments other than critical illnesses that may require medical
treatment and hospitalization.

Hospital Cash Benefit Rider:

This rider is invoked on hospitalization subject to conditions and exclusions. The insurer will compensate
for the duration of one’s stay in the hospital. This rider has two components: sum assured and daily
compensation. For example you have taken a sum assured of ` 50,000 and a per day hospital cash benefit
of ` 5,000. So if you are hospitalized for three days, your insurer will pay you ` 15,000 as compensation
with maximum amount of ` 50,000 (as the claim amount is capped at the sum assured), which means that
you are covered for hospitalization of 10 days.

Unlike the critical illness rider, the hospital cash benefit rider is neither terminated when a claim is made
nor is there any drawdown in the claim limit. The premium payable depends on two factors: the sum
assured and the age of policyholder (unlike most other riders which are not influenced by the age). Insurers
charge around ` 200 per ` 1,00,000 sum assured for this rider. These riders however, do not cover hospital
admittance for routine checkups, specify a minimum hospitalization of 48 hours and stipulate a ceiling on
the daily compensation amount.

Major Surgical Assistance Rider:

This rider provides a policyholder financial support in the event of surgery. When this rider is invoked, the
policyholder is paid a part of the sum assured (only for the rider) depending on the nature of surgery, which
varies between 20 percent and 50 percent of the sum assured. In other words, for each surgery you are
entitled to a maximum of 50 percent of the sum assured. Each claim reduces the sum assured for the
remainder of the year by the corresponding amount. It is the insurer’s prerogative to renew the rider cover
the year following a claim year. The premium payable for this rider varies between ` 290 and ` 600 per `
1,00,000 sum assured and qualifies for a tax deduction under Section 80CD.

3. Disability Benefits:
The riders under this category address contingencies that arise in the event of a disability and are discussed as follows:

Disability / Dismemberment Benefit Rider :

This rider provides for an additional cover equal to the sum assured in the base policy in case of a disability
due to an accident. Generally, the claim amount is staggered so as to give the policyholder a stream of
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 income to fall back on. Some insurers even waive future premiums payable on the base life policy. This
rider is available for `80–120 for a sum assured of `1,00,000 and qualifies for tax rebate under Section 88.

Waiver of Premium Rider gets activated in the event of a policyholder becoming completely disabled or
becoming unemployed die to injury or sickness. The premiums due on the base policy and riders are
waived till the person is able bodied and employed again. In other words, this rider provides disability
insurance against your life insurance policy.

The merit of opting for this rider is evident particularly in cases where the premium on the base policy is
high. The premium payable to buy this rider depends on among other factors, the premium you are paying
on your base policy, your age and other riders you might have taken. The higher the premium on the base
policy, the older you are and the more the riders you add, the higher will be the premium you pay on this
rider.

4. Miscellaneous Riders: Here are few other riders on offer and an indication of what to look out for when
you buy them:

Accident Death Benefit Rider :

This rider is activated in case a policyholder dies due to an accident during the term of the policy. If the
death occurs while travelling with a ticket in an authorized public mass transport system, namely bus or
train. Insurers give the policyholder twice the accident cover stated under this rider. The premium payable
is ` 80 – 200 per ` 1,00,000 lakh sum assured and qualifies for a tax rebate under Section 88.

Level Term Cover Rider :

This rider gives you the option to increase your risk cover in non term plans up to a maximum of the sum
assured in your base policy. The riser offers death benefit alone and addresses a need for extra protection
for a specified time period such as a time when you are carrying large debt and which to insulate your
dependents from financial liability in the event of your death. The level term rider costs around ` 250 – 300
for a sum assured of ` 1,00,000 and premium payment qualifies for a tax rebate under Section 88.

Guaranteed Insurability Option Rider :

This rider insures your insurability in the future,. It gives you the right to purchase additional insurance (of
the nature of your base policy) at different stages in your life without having to undergo any further medical
examination at the original premium rate. This rider is particularly useful if you know that in time you will
need to buy additional insurance to keep pace with changing life circumstances for instance, when you
get married or have children. Further, even though your health may deteriorate with age, you do not have
to give any medical evidence of your insurability. The rider is available for an annual premium of around
`100 per `1,00,000 lakh sum assured but does not qualify for any tax rebate or deduction.

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EXCLUSIONS :

In the event of policyholder’s death, life insurance companies promise to compensate his/her nominees as
per the terms of the policy. However, insurers can refuse to give life cover to certain category of individuals
and under certain specified circumstances which leads to death of the policyholders which are listed as follows:

1. High Risk Professions:

Insurers don’t give cover to individuals in professions that by their nature carry an apparent risk of death.
So, those in defense forces, paramilitary and police cannot buy cover directly from the insurers. However,
their employers can insure their lives.

2. High Risk Pursuits:

Deaths while taking part in high adventure sports like mountaineering and motor racing, or dangerous
activities like hunting is also not covered. Insurers differentiate between ‘adventure’ and ‘high adventure
sports’ on the basis of their threat to death. So according to their classification, trekking is an adventure
sport and covered for but mountaineering strays into high adventure territory and is therefore excluded.

3. Suicide:

Most insurers don’t cover death by suicide in the first year of the policy. If a policyholder commits suicide
during this period, the insurer is not liable to pay any dearth benefits to his/her nominees. However, the
insurer will refund all the premiums paid by the policyholder till the time of the death, along with interest at
the prevailing market rate. The suicide clause is meant to protect the insurers from fraud.

4. War:

Individuals residing in areas affected by strife and insurgency face a greater risk of death. So insurers
make allowances in their policies to protect their interest. Most insurers thus don’t cover residents of such
areas for this risk of death. However, they do refund the premiums paid along with interest at the prevailing
market rate for the duration of the policy. Alternatively, instead of the war clause, insurers demand a stiff
mark up in premium to give cover or refuse to give cover.

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 NON-LIFE INSURANCE:

As the name denotes the non life insurance deals with all the insurance contracts other than life insurance
and is also termed as “General Insurance”. Insurance is a risk cover and is not something to be profited from
either knowingly or unknowingly. Insurers are willing to cover all kinds of risks for the insured or the
policyholder provided the three basic principles of insurance are fulfilled and satisfied by the insured and are
discussed as follows:

At present the non life insurance can be divided into two categories, Non tariff and Tariff with the basis of
difference being the freedom insurers have in deciding the premium rates. Insurers have complete pricing
freedom in the non tariff categories – for example, health, accident and liability insurance, to name a few. In
the tariff categories, through the Tariff Advisory Committee (TAC) of the IRDA (Insurance Regulatory
Development Authority) sets the minimum premium rates which insurers cannot undercut. It’s another matter
that in such categories, most insurers charge the IRDA rate (as in the vehicle insurance and fire cover in the
house insurance).

Various Non Life Insurance policies are discussed as follows:

VEHICLE INSURANCE:

On the road, it’s impossible to tell with surety what awaits you round the bend, but with vehicle insurance
by your side, you can cushion yourself against the adverse financial repercussions of the mishaps that
could befall you and your vehicle. Vehicle Insurance offers you cover against every conceivable risk related
to your vehicle: theft or damage to it or death of the driver and passengers in an accident and damage
caused by your vehicle to another person or property.

WHAT IS IT?

All vehicle insurance policies can be broken down under three heads:

Third Party Liability: You the insured are the first party, the insurer is the second party and every other
person the third party. The law makes it mandatory for every vehicle owner to have at least third party motor
insurance which covers your liability to compensate any person up to a pre specified amount subject to a
court ruling for bodily injuries and property damage caused by your vehicle. However, third party cover
alone is not adequate with the ever present possibility of accidents and exorbitant repair costs which make
sense to go beyond compulsory third party cover and buy a comprehensive motor insurance cover, the
nuts and bolts of which are explained in the subsequent tow heads.

Theft and own damage: This entitles you to claim compensation in case your vehicle is stolen or damaged.
On the standard policy, the annual premium is a function of the type of vehicle (two wheeler of four wheeler,
commercial or private), its size (cubic capacity is the benchmark used), its age and the region in which it is
registered. The premium is calculated in the basis of Insured Declared Value of the vehicle, which is
basically the depreciated value of the vehicle agreed upon by the insurer and the policyholder. The IDV of
a vehicle reduces with age. Insurers give a depreciation schedule for up to five years, which is the starting
point for deciding the IDV of a vehicle, this IDV figure is scaled up or down depending on the condition of
the vehicle.

Cover for occupants of vehicle: This section provides cover against death of injury to the vehicle, driver
and passenger the maximum cover that can be taken under this section is `1 lac for a driver and `2 lac for
each passenger.

Package Policy:

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A comprehensive package policy, covering loss or damage to Two Wheelers, liability to Third Party
and Personal Accident Cover, Long Term Two Wheeler Package Policy has been specifically
designed to be issued for a period of two years or three years.

Eligibility:
Vehicle Type: Motor Cycle/Scooter/Moped
Age:
Two year policy: Age of the vehicle should be less than 9 years
Three year policy: Age of the vehicle should be less than 8 years

Note:
i. Beyond 10 years of age of the vehicle, “Two Wheeler Package Policy” may be issued.
ii. Age to be considered from the date of purchase of the vehicle.

Make:
1.Indigenous models & Imported vehicles

Insured Declared Value:

IDV provision will be same as in GR.8. IDV for each year of the policy period which can be either for
2 years or 3 years will be calculated by applying the depreciation rates under GR 8 and the IDV for
each year is to be mentioned separately in the Policy Schedule.

Computation of IDV: An illustration

Age of the vehicle - 2 years and 5 months,
Policy period: 3 years;
MSP as on date of commencement of insurance: Rs.100/-
IDV for 1st year – Rs.70/- (at 30% depreciation);
IDV for 2nd year – RS.60/- (at 40% depreciation);
IDV for 3rd year – Rs. 50/- (at 50% depreciation)

IDV of obsolete models of Two Wheelers

IDV of obsolete models of the vehicle is to be determined on the basis given below:

Age of vehicle %age of depreciation for fixing

IDV
Up to 2 years 65

EXCLUSIONS:

1. The policy doesn’t cover for loss or damage if the driver of the vehicle was drunk at the time of the
accident which has to be established through a breath analyzer test or a stomach wash test or driving
without a valid license.

2. Damage to tyres (unless the vehicles is also damaged), wear and tear, routine maintenance and
mechanical breakdown is also not allowed as claim.

MEDICAL INSURANCE :

Given the high cost of quality healthcare these days, one can rest easy with medical insurance.

WHAT IS IT?

A standard medical insurance policy covers boarding, nursing, diagnostic and medicine expenses. Some
insurers also cover pre and post hospitalization expenses, subject to conditions and limits. The premium
and the extent of cover vary across insurers. Medical insurance plans have a settlement ceiling of ` 5 lac.

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In other words, that is the maximum medical cover one can buy. The policy term is one year with the
premium being paid annually which increases with age and size of cover. Insurers also consider an
individual’s medical history.

Healthcare expenses tend to increase with age and that’s typically when one feels the need for medical
cover, but it may be too late to buy that cover in old age. Most insurers don’t cover pre existing diseases
and premiums increase with age. So one should buy it when one is young when premiums will be lower
and one can be covered for medical conditions that may be diagnosed over the years – provided you renew
your policy year on year. Additionally, each so claim year increases your cover by 5 percent at no extra
cost. There are income tax benefits to be bad on medical covers as under Section 80D of the Income Tax
Act, premium payments up to ` 10,000 a year towards buying medical cover can be claimed as a deduction
and for senior citizens premium payments up to ` 20,000.

FINE PRINT

1. Coverage under medical insurance is subject to a minimum hospitalization of 24 hours except for
dialysis, chemotherapy, radiotherapy, eye surgery, dental therapy and tonsillectomy.

2. Expenses on hospitalization incurred in the first 30 days after taking a policy are not covered except in
case of an injury due to an accident.

3. In case domiciliary hospitalization (treatment at home, either due to the unavailability of a hospital or
because the patient is not in a condition to be moved to a hospital) the cover is capped at 20 percent
of the sum insured.

4. The insurer can question claims made on ailments detected during the first 30 days on of the first policy
period. The onus is on the insured to prove that it wasn’t a pre existing disease.

EXCLUSIONS :
The company shall not be liable to make any payment under the policy in respect of any expenses
incurred in connection with or in respect of:

1. Pre-existing diseases
All pre-existing diseases when the cover incepts for the first time until 48 months of continuous
coverage has elapsed. Any complication arising from pre-existing ailment/disease/injuries will be
considered as a part of the pre existing health condition or disease.

To illustrate if a person is suffering from either hypertension or diabetes or both at the time of taking
the policy, then policy shall be subject to following exclusions.

Diabetes Hypertension Diabetes and Hypertension

Diabetic Retinopathy Coronary Artery Disease Diabetic Retinopathy

Diabetic Nephropathy Cerebro Vascular Accident Diabetic Nephropathy
Diabetic Foot/wound Hypertensive Nephropathy Diabetic Foot/wound
Diabetic Angiopathy Internal Bleeding/ Diabetic Angiopathy
Haemorrhage
Diabetic Neuropathy Diabetic Neuropathy
Hyper/Hypoglycemic shock Hyper/Hypoglycemic shock
Coronary Artery Disease Coronary Artery Disease
Cerebro Vascular Accident
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 Hypertensive Nephropathy
Internal Bleeding/
Haemorrhage

2. First 30 days waiting period

Any disease contracted by the insured person during the first 30 days from the inception of the first
policy. This shall not apply in case the insured person is hospitalised for injuries, suffered in an accident
which occurred after inception of the first policy.

3. Specific waiting period

Following diseases/treatment are subject to a waiting period mentioned below.

i. One year waiting period

a. Benign ENT disorders
b. Tonsillectomy/Adenoidectomy/Mastoidectomy/Tympanoplasty

ii. Two years waiting period

a. Cataract k. Pilonidal sinus
b. Benign prostatic hypertrophy l. Gout and Rheumatism
c. Hernia m. Hypertension and related
complications
d. Hydrocele n. Diabetes and related complications
e. Congenital internal disease o. Calculus diseases
f. Fissure/Fistula in anus p. Surgery of gall bladder and bile duct
excluding malignancy
g. Piles (Haemorrhoids) q. Surgery of genito-urinary system
excluding malignancy
h. Sinusitis and related disorders r. Surgery for prolapsed intervertebral disc
unless arising from accident
i. Polycystic ovarian disease s. Surgery of varicose vein
j. Non-infective arthritis t. Hysterectomy

iii. Four years waiting period

a. Treatment for joint replacement due to degenerative conditions
b. Age related osteoarthritis and osteoporosis

4. HIV, AIDS, STD

Any condition directly or indirectly caused to or associated with Human Immunodeficiency Virus
(HIV), Acquired Immunodeficiency Syndrome (AIDS), complications of AIDS and other Sexually
Transmitted Diseases (STD).

5. General debility, congenital external anomaly

General debility, run down condition or rest cure, congenital external disease or defects or anomaly.

6. Sterility, infertility, assisted conception

Sterility, infertility/sub fertility, assisted conception procedures.

7. Pregnancy
Treatment arising from or traceable to pregnancy/childbirth including caesarean section, miscarriage,
surrogate or vicarious pregnancy, abortion or complications thereof including changes in chronic
conditions arising out of pregnancy other than ectopic pregnancy which may be established by medical
reports.
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8. Refractive error
Surgery for correction of eye sight due to refractive error.

9. Obesity
Treatment for obesity or condition arising there from (including morbid obesity) and any other weight
control and management program/services/supplies or treatment.

10. Psychiatric disorder, intentional self inflicted injury

Treatment for all psychiatric and psychosomatic disorders/diseases, intentional self-inflicted injury,
attempted suicide.

11. Genetic disorders, stem cell surgery

12. Circumcision unless necessary for treatment of a disease (if not excluded otherwise) or
necessitated due to an accident.

13. Vaccination or inoculation unless forming part of treatment and requires hospitalisation.

14. Cosmetic, plastic surgery, sex change, hormone replacement

Cosmetic or aesthetic treatment of any description, change of life or sex change operation, hormone
replacement therapy. Expenses for plastic surgery other than as may be necessitated due to illness/
disease/ injury.

15. Massages, spa, steam bath, naturopathy, experimental treatment

Massages, spa, steam bath, shirodhara, udhwarthanam, abhyangam, kayasekham and similar treatment.

Expenses for naturopathy, experimental medicine/treatment, unproven procedure/treatment,

alternative treatments (other than ayurveda and homeopathy), acupuncture, acupressure, magneto-
therapy and similar treatment.

16. Dental treatment

Dental treatment unless arising due to an accident.

17. Vitamins, tonics

Vitamins and tonics unless forming part of treatment for illness/disease/injury as certified by the
attending medical practitioner.

18. Out Patient Department treatment (OPD treatment)

19. Diagnostic and evaluation purpose where such diagnosis and evaluation can be carried out as
outpatient procedure and the condition of the patient does not require hospitalisation.

20. Treatment in convalescent home, nature clinic

Treatment in convalescent home/hospital, health hydro/nature care clinic and similar establishments.

21. Drug/alcohol abuse

Treatment arising out of illness/disease/injury due to misuse or abuse of drugs/alcohol or use of
intoxicating substances.

22. Stay in hospital which is not medically necessary.

23. Spectacles, contact lens, hearing aid, cochlear implants.

24. Equipments
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External/durable medical/non-medical equipments/instruments of any kind used for diagnosis/
treatment including CPAP, CAPD, infusion pump, ambulatory devices like walker, crutches, belts,
collars, caps, splints, slings, braces, stockings, diabetic foot-wear, glucometer, thermometer, similar
related items (as listed in Appendix II) and any medical equipment which could be used at home
subsequently.

25. Irrelevant investigations/treatment, drugs/treatment not supported by a prescription, private nursing

charges, referral fee to family physician, outstation doctor/surgeon/consultants’ fees and similar
expenses (as listed in Appendix II).

26. Items of personal comfort

Items of personal comfort and convenience (as listed in Appendix II) including telephone, television,
aya, barber, beauty services, diet charges, baby food, cosmetics, napkins, toiletries, guest services.

27. Service charge/ registration fee

Any kind of service charges including surcharges, admission fees, registration charges and similar
charges (as listed in Appendix II) levied by the hospital.

28. Home visit charges

Home visit charges during pre and post hospitalisation period of doctor, attendant and nurse.

29. Treatment not related to illness

Treatment which the insured person was on before hospitalisation for the illness/disease/injury,
different from the one for which hospitalisation claim has been made.

30. Risky avocations

Treatment for any illness/disease/injury arising from scuba diving, motor racing, parachuting, hang
gliding, rock or mountain climbing and similar activities.

31. War group perils

Injury or disease directly or indirectly caused by or arising from or attributable to war invasion act of
foreign enemy, warlike operations (whether war be declared or not) and injury or disease directly or
indirectly caused by or contributed to by nuclear weapons/materials.

RETIREMENT PLANNING

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