Notes on Classification of Insurance: 2 Types

This article throws light upon the two types of insurance. The types are: 1. Life Insurance 2. General Insurance.

Type # 1. Life Insurance:

There is a life insurance council that decides entire norms relating to life insurance in India; In fact life insurance plays different type of roles. As conceived by the Life Insurance council the Life Insurance is the key to good financial planning. On one hand, it safeguards money and on the other, ensures its growth, thus providing with complete financial well being.

Life Insurance can be termed as an agreement between the policy owner and the insurer, where the insurer for a consideration agrees to pay a sum of money upon the occurrence of the insured individual’s death or other event, such as terminal illness, critical illness or maturity of the policy.

Life Insurance plans, unlike mutual funds, are beneficial when this is looked upon as a long term avenue of investment which also offers protection through life cover. Life insurance policies are broadly categorized into two types one a Traditional Plan and second Unit linked insurance plan (popularly known as ULIPs).

Traditional Polices:

The traditional policies offer in-built guarantees and define maturity benefits through variety of products such as guaranteed maturity value. The investment risk in traditional life insurance policies is borne by the life insurance companies.

Additionally, the investment decisions are regulated to a large extent by IRDA rules and regulations, ensuring stable returns with minimal risk. Investment income is distributed amongst the policy holders through annual bonus. These policies are ideal for policy holders who are not market savvy and do not wish to take investments risks.

ULIPS:

ULIPs, on the other hand provide a combination of risk cover and investment. More importantly they offer a flexibility to decide about risk taking profile.

Type of Insurance Plans:

Insurance companies provide different type of investment plans like:

1. Term Plan by insurance council:

Term Insurance helps the customers in safeguarding their families from financial worries that arise due to unfortunate circumstances. Term plans are pure risk cover plans with or without maturity benefits.

These pure risk plans cover life at a nominal cost Term plans also let avail the benefit to cover outstanding debts like mortgage, home loan etc. In case of something happens the financial burden is borne by the insurance company and not the loved ones.

The benefits of Term Plan:

1. High insurance cover at lower costs,

2. Financial security against loans and mortgages,

3. Single premium payment option available, and 

4. Available with host of additional rider benefits.

2. Health Insurance:

The purpose of health insurance is to help overcome unforeseen emergencies without compromising on any other financial goal. Health insurance helps pay for all medical expenses. A health insurance policy also gives the benefit of covering loved ones under one plan to avoid any financial constraints arising on account of a medical emergency.

Benefits:

1. Cashless hospitalization in all major hospitals pan India.

2. Coverage of pre and post hospitalization expense.

3. Coverage of all major day care treatments.

3. Endowment Plans:

Endowment Plans are an ideal choice for the risk -averse customers. Endowments are long- term, regular saving plans with a built-in life cover.

Subject to condition that all the premiums stand paid, at the end of the term the policy holder receives the sum assured plus accrued/guaranteed bonuses that have been declared over the years, as a lump sum. In case of the unfortunate death during the term of the plan, the sum assured, will be paid out as a lump sum with the bonuses that the policy is entitled to.

The benefits of Endowment Plans are:

1. It is available as money-back plans also.

2. Option to avail a host of additional rider benefits.

3. Covers life for a longer period of time.

4. Whole Life Insurance Plans:

When it is said as whole life plan it means the whole life insurance plans that provide cover throughout the life time. The premium could be paid for as long as a lifetime or for a limited period. These type of plans do not have any maturity period or maturity value. The sum assured under such plans are not paid during the life time of an insured person.

Such assured sum is paid in case of unfortunate death of the insured person, to the family of the policyholder. A whole Life Insurance plan assumes that the family of the insured person remains protected against financial losses that could occur on his death.

5. Group Insurance:

The Group Insurance covers a group of people, usually members of societies, employees of a common employer, or professionals. All employees or members are included under one “Master Policy” owned by the employer/nodal agency. Group insurance covers both life and savings products along with options like Superannuation and health.

6. Retirement Plans:

Retirement plans are meant to provide social security to those who are likely to retire from the jobs that provided employment to them. After retirement most of the people are not able to re-join any other employment because of the old age or for any other reason. The life expectancy is increasing day by day.

Gone are the days when people were not able to get timely medical aid and the death rate was very high. Keeping in view the life expectancy it has become more important and that is why retirement policies are becoming more and more popular. It serves twin purposes saving as well as support in the case of need in old age.

Retirement plans are of two types:

1) Immediate Annuity Plans:

Such type of plans contain provisions for converting a sum of money into a guaranteed series of payments for definite period or for life.

2) Deferred:

This type of plan allows to save regular amounts of money for a peaceful retirement. This type of annuity has two main phases, the accumulation phase which permits to invest and save money through the account and on the other hand there is pay out plan which is converted into regular annuity installments and payments are received.

Benefits of Retirement Plans:

1. It provides an alternative to normal retirement known as superannuation.

2. Compulsory Saving and Saving of Tax.

3. Choice of open market option i.e., an option to purchase an immediate annuity from the existing insurance company or any other life insurance company that is recognized by IRDA.

7. Children Plan:

Insurance today offers a very simple assurance in terms of monetary and a child and family in case of death or disability of parent and helps ensure that the shortage of funds never hamper dreams or aspirations of children. Children’s Plan ensure a secured financial future for children.

Factors to be kept in mind while purchasing children policy:

1. The child must remain covered throughout even if something happens to parents.

2. The payout should be at an age when the child requires it the most, i.e., when he/she wants to enter his/her dream college or needs to start his/her career.

3. The plan should provide a regular source of income so that child does not have to compromise on his/her dreams and aspirations.

4. Ensure that the child himself/herself is not forced to pay the premiums of the policy.

8. Wealth Plans:

Under these type of plans the premium paid by subscribers are invested in to the equity, debt, and cash markets by allocating units, which like any other mutual funds have a NAV.

This type of plan allows to switch between one fund to another depending on the risk factor one is ready to bear. Such plans offer better returns than traditional endowment plans and offer a great deal of flexibility along with great returns making them finest product offerings.

Benefits:

1. There is option of paying single premium or regular premiums.

2. Wealth plans are always looked as investment plans. Such plans include investment funds ranging from index funds to mid-cap funds and debt market linked funds.

3. These type of plans also offer additional rider benefits. And also tax benefits as per existing laws.

The simplest life insurance business cycle looks like this:

Anyone willing to take a life insurance policy does not know how to avail the facility. He tries round about and comes across an agent who is authorised by the insurance company and has also qualified a test arranged under the law of IRDA to functions as an agent.

This agent prepares a proposal which contain the details of the proposed policy holder like his income, medical history, products (the products are explained by the agent to the proposed policy holders in detail so as to make him able to select a policy of his choice). It is necessary because the features of every policy vary from product to product.

Next comes the matter of sum for which a policy is required. The amount of sum selected by the customer is the highest amount of the policy cover. Next comes the number of years for which policy cover is required in other word what shall be term of the policy in question.

Depending upon the term of policy the amount of premium (The money required to be paid to the insurance company by the insured person an terms of frequency like monthly, quarterly, or yearly. This agent who procures the proposal remains abase/service agent for the proposal.

Proposal made or obtained by any authorized agent is subject to approval by the insurance company. Every insurance company has its own way of evaluating risk methods which are usually done by the central processing centre of the company. Once a proposal is approved by the company it enters into a legal agreement (popularly known as Insurance Policy) between the insurer company and the client.

Such an agreement or Policy the insurer companies agrees to cover the client for the sum assured. It depends on the nature of the policy of insurance if some additional covers are also included in the agreement of policy. The base agent gets commission for the policy.

During the term of the policy, the client can submit claims. The insurer makes payment against the claim after verification. Depending on the type of claim the policy is either terminated or is kept in force.

At the end of the term of the policy, the client gets the sum assured as part of the maturity benefit under life insurance policies. In addition to this the client will get the maturity bonus and any other benefits depending on the product feature.

Type # 2. General Insurance:

When we talk about general insurance it is meant insurance other than life insurance. In popular terms a dialect it is famous as non-life insurance. But when life insurance is not the subject matter of such type of insurance it should not be called non-life insurance. The word General Insurance appears to be a right term to understand the concept of such type of insurance activities.

Non-Life insurance products include property or casualty, health insurance or house, fire, marine insurance etc. This insurance class deals with all the non-life aspects of an insured like his/her house, health, land, office, cargo, etc., which might bring financial loss.

This sector covers almost everything related to property, vehicle, cash, household goods, health and also one’s liability towards others.

The major segments covered under general Insurance Policy India are:

a. Home Insurance:

(it is like property insurance which may include with other things).

This type of insurance can be further classified into specialized forms as follows:

a. Fire insurances.

b. Earthquake insurances.

c. Flood insurance.

d. Home insurance.

e. Boiler insurance.

Most of the General Insurance Companies provide a wide range of insurance products and services.

Some of these can be classified as follows:

a. Car Insurance.

b. Home Insurance.

c. Travel Insurance.

d. Private Medical Insurance.

e. Illness Insurance.

f. Long-term care Insurance.

g. Accident Insurance.

All above different type of names given to particular type of general insurance. These names may differ from company to company but the basics of all types of insurances remains the same to cover the losses, damages occurred due to natural calamity, accident, human error or otherwise. However in case of general Insurance it should be understood that it is not only confined to cars only but all type of general insurances.

Such Insurance can be of two types:

1. Comprehensive Insurance.

2. Third party Insurance.

1. Comprehensive insurance:

This type of insurance covers all the risks in case of motor insurance as contained in the Motor Vehicle Act, plus loss or damage caused to the vehicle due to any reason as explained in the policy. The term of policy depend upon the type of vehicles like Private Car, Taxi, Two wheeler, Commercial vehicle.

2. Third Party Insurance:

Third Party Insurance includes:

What is third party? The person who is driving the insured vehicle with valid driving license without the influence of intoxication is known as first party. While driving a vehicle by such a person if due some accident any other person either a pedestrians or occupant of other vehicles, and outsiders other than passengers of the vehicle in question are injured or died, these are known as third persons. The third party insurance covers such type of risks for unlimited amounts.

In such cases the passengers of the vehicle and pillion riders are also deemed covered. In case the vehicle is not self-driven and is being driven by an employee say driver or other persons the injury to these persons including death is also covered.

General Insurance is looked after by General Insurance Council of India (popularly known as GIC).

Both life insurance (including Health insurance) and general insurance are main types of insurance but different companies come out with different insurance products and provide different type of nomenclature to such products to show that there are various types of insurances. It should be kept in mind that all these different types of polices constitute the basic functions of insurance only whether life insurance or be it general insurance.