Life Insurance as Social Security Tool Finance Essay

The business of insurance is to bring together the persons with common insurance interests sharing the same risks, collect the share or contribution (called premium) from all of them and pay out the compensations (called claims) to those who suffer from the risks. This sharing business benefits the society at large by spreading the losses of an individual over the group of individuals who are exposed to similar risks. People, who suffer loss, get relief because at least part of their loss is made good. People who do not suffer loss are relieved because they were spared from the loss. Some of the benefits of insurance to society are discussed as under :

Life Insurance as Social Security Tool

The General Assembly of the United Nations adopted and proclaimed the universal declaration of 'Human Rights' on December 10, 1948, which states that -

"Everyone has a right to a standard of living adequate for the health and wellbeing of himself and his family, including food, clothing, housing and medical care and necessary social services and the right to security in the event of unemployment, sickness, disability, widowhood or lack of livelihood in circumstances beyond his control".

When the bread winner dies, to that extent, the family's income takes a hit; the economic condition of the family is affected badly, unless other arrangements come into being to restore the situation. Life Insurance provides an alternate arrangement to overcome this situation. If this did not happen, another family would be pushed into the lower strata, which is actually a cost on society. Poor people cost the nation by way of subsidies, larger growth in population and poor education. In this sense, the life insurance business is complementary to the States' efforts in social management.

Under a socialistic system (based on the notion of equality for everyone, where everyone has a job and everyone has a place to live), the responsibility of full security would be placed upon the State to find resources for providing social security. In the capitalistic system (the means for producing and distributing goods like land, factories, technology, transport system etc. are owned by a small minority of people called the capitalist class), a provision of security is largely left to the individuals. The society provides different types of instruments like insurance, which can be used in securing this aim. Sometimes, also there is a tendency to provide some social security by the state under some schemes, where members are required to contribute. For example; the social security scheme in U.K.

In India, social security finds place in our constitution. Article 41 requires the State, within the limits of its economic capacity and development, to make a effective provision of securing the right to work, to education and to provide public assistance in case of unemployment, old age, sickness and disablement. Parts of the state's obligations to the poorer sections are met through the mechanism of life insurance.

As per Section 32 (B) of Insurance Regulatory and Development Authority (Obligations of Insurers to Rural Social Sectors) Regulations, 2000, insurance companies in India undertakes the following obligations to extend insurance benefits to economically weaker sections of the society in the unorganized sector, during the first five financial years, like : in rural sector, in respect of a life insurer; 5% in the first financial year; 7% in the second financial year; 10% in the third financial year; 12% in the fourth financial year and 15% in the fifth year; of total policies written direct in that year. In respect of a general insurer; 2% in the first financial year; 3% in the second financial year; 5% thereafter, of total gross premium income written direct in that year. In social sector, in respect of all insurers, 5000 lives in the first financial year; 7500 lives in the second financial year; 10000 lives in the third financial year; 15000 lives in the fourth financial year and 20000 lives in the fifth year. The obligations of existing insurers as on the date of commencement of IRDA Act shall be decided by the Authority after consultation with them and the quantum of insurance business to be done shall not be less than what has been recorded by them for the accounting year ended 31st March, 2000.

Economic Growth of the Country

Insurance has had a very encouraging impact on India's economic development. For development of any country, investments are necessary which are made out of savings. A life insurance company is a major instrument for mobilization of savings of people, particularly from the middle and lower income groups. These savings are channeled into investments for economic growth of the country. The Insurance Act 1938, has strict provisions to ensure that insurance funds are invested in safe avenues, like Government Bonds, profit making Companies etc. Huge funds of life insurance Companies are accumulated through payments of small amounts of premiums deposited by policyholders. These funds are invested in ways that contribute substantially for the economic development of the countries and not in any speculative ventures. Their investments, as in the case of the LIC, benefit the society at large. The private insurers in India are new and have accumulated funds equal to about one-eighth of LICs. But even their investments in the various sectors and contributing directly and indirectly to the country's economic development, would be of similar proportions.

The sector is progressively increasing its contribution to the country's GDP. In addition, insurance is also driving the infrastructure sector by increasing investments each year. Further, insurance has also boosted the employment scenario in India by providing direct as well as indirect employment opportunities. Insurance and reinsurance companies are often heavily involved in projects as providers of insurance of risks against liability, project completion, errors and omissions, business interruption, and the like. For example; either it is the case of huge oil and gas projects or Delhi metro project. The financing for the structure can be provided by a bank or insurance company, a syndicate, or through a securitization of the hedged, credit enhanced future flow.

Due to the healthy performance of the Indian economy, the share of the life insurance premium in the Gross Domestic Saving (GDS) of the households sector has also increased (See exhibit 6). The increased contribution of the insurance industry from the households GDS has been ploughed back in to the economy, generating higher growth.

Exhibit 6 :A Share of Life Insurance Premium in GDS House Hold Sector - in percentage

Source : IRDA Annual Report 2010-11

Apart from investments, business and trade also gets benefitted through insurance in a way that they are able to face the impact of major perils like fire, earthquake, floods etc. Hence, capital and credit are expanded with the help of insurance. The agriculture will experience protection against losses to cattle, machines, tools and crops. Thus, the insurance meets all the requirements of the economic growth of a country.

Reduction in Inflation

The insurance reduces inflation in the country in two ways. Firstly, money in the form of premium is paid to insurance companies in order to purchase the insurance policies. Hence, the purchasing power of the individual for buying other products reduces which in turn reduces the liquidity in the market leading to controlled inflation. Secondly, by providing sufficient funds for production, this helps in narrowing down the inflationary gap. In India, the total penetration of insurance (premium as a percentage of GDP) has increased manifold from 1.90% in FY00 to 6.72% in FY10.

Tax Benefits of Life Insurance

The following tax benefits are applicable to policyholders.

Under Income Tax Act, 1961 - An individual or HUF can claim a deduction on the insurance premium paid for self, spouse and children (including dependent children), under section 80C of Income Tax Act, subject to income slabs. Premium paid for critical Illness Benefit qualify for rebate u/s 80 D.

Money received under a Life Insurance Policy - As per section 10 (10D) of the Income Tax Act, 1961, any sum received under a life insurance policy including bonus declared or paid do not form part of taxable income. To put it simply, it is exempt from tax. However, monies received under key man Insurance policy are not covered under section 10 (10D).

Under Wealth Tax Act - Insurance premium paid as well as surrender value of Insurance policy do not form part of chargeable wealth. For the same no wealth tax is attracted when the policy is in force. On maturity of policy the amount received, if it remains in cash on March 31 of the succeeding year, will form part of chargeable wealth.

Conventional Plans benefitting the Individual

As directed by Government of India, the Insurance Companies under the conventional plans have to invest 80 to 85% in Government Securities, Debentures, Bonds, Money Market Instruments, etc & and only 15 to 20% is invested in the Equities. These types of plans are very safe and secure for an individual but unfortunately, these were most preferred plans only till the private companies entered the Indian Market. Today also these plans are sold more than 50% by LIC as the capital is secured & the life assured gets reasonable returns on maturity without exposure to the risk of share markets. The customer will always get a lower amount in case of surrender of policy anytime before maturity but instead of surrendering the policy he can opt for a loan against the policy which is around 90% of surrender value & the interest rate is also very low, in LIC it is only 9% p.a.

CASE APPLICATION - [email protected]/* */

Client : A young married couple with a new baby. The wife owns a rapidly growing business.

Issues: The wife's start-up business was doing very well so the couple continued to invest in the company to help it grow. The husband was recently laid off so he decided to stay home and raise their child while his wife poured in countless hours to propel the business forward. The couple did not have enough money left over from her earnings to put into a savings account or retirement plan since they were investing everything back into the business to ensure its growth. The couple's biggest concern was how the husband and child would survive financially if the wife were to die or if she was disabled and in either event, she would be no longer able to sustain the business. The challenge was to find a way to provide the young family with a solution since their assets were tied up in the business.

The Insurance Company suggested : Since all of the couple's money was in the business, we advised the wife to buy life insurance and disability insurance policies using the earnings of her business to pay for the premiums. The couple was able to still invest in the company and the company earnings provided the premium payment for a high yielding life insurance policy.

Outcome: Most of her earnings still stayed invested in her fast growing company, but because of the policies that were recommended and implemented, her family was reassured that they would be protected financially in the event that the wife were no longer able to run the business due to death or injury.

CASE APPLICATION - [email protected]/* */

Case Study- Insurance benefitted in reducing Operational Costs

https://www.inca-it.com/Images/casestudies/csid2_userid6.gif State Bank of India, London, United Kingdom

The Client

STATE BANK OF INDIA (SBI) is the largest bank in India with over 180 years of banking experience. Today, State Bank of India ranks among the top 25 commercial banks in Asia with assets exceeding US$60 billion. SBI operates worldwide through an extensive network of over 9000 offices including 50 overseas offices in 48 countries. The Bank has won the Technology Award 2005, from the 'Banker', London. Until recently, SBI UK operation has been using the Misys-Equation banking application for its operations. This application runs on the IBM AS400 platform. Since 2001, IIL Risk Management has provided various IT related services to the Bank.

The Problem

SBI, UK's Treasury operations use the Reuters 3000 dealing system. Dealers negotiate and confirm various deals every day involving money market and forex trades. These deals were posted manually into the banking application. Manual posting carried with it the risk of error prone entries, missed out deals, lack of suitable and timely checks & verification and inability to ascertain accurately counter party dealing limits.A  The Bank required 'straight through processing' from Reuters dealing server to the Misys-Equation platform to minimize operational risk. With an eye on future proofing the investment in the system it also desired that the solution be platform independent and therefore be based on 'java' programming and be integrated with the Meridian middleware provided by Misys. In addition, they required counter party limits and exposures to be displayed back to the dealer on a separate screen by intelligently using the information from dealer initiated Reuter conversations with the counter party. Investigation of available products in the market place found that they contained many functionalities already catered for by the Reuter system and were not cost effective and used obsolete technologies.A 

The Solution

IIL Risk Management (IIL) developed for the bank a unique and cost effective solution to automate the entire process from capturing deals from Reuter dealing 3000 server to posting into the core banking application.

A 

The solution integrates various technologies such as Microsoft Windows 2000 server, Access database, IBM MQ series, Misys Meridian middleware and IBM AS/400.

The process can be categorized as follows:

Electronic capture of deals via Reuter Ticket Output Feed (TOF).

Deal data processing with data validation and writing to database.

Deal data mapping, formatting and posting to Misys Equation using Meridian Middleware/IBM MQ Series.

Secure and user-friendly interface to monitor flow of deal data, correct any exceptions and review status of posting into Misys Equation.

Intelligent use of Reuters Current Interest Feed (CIF) to retrieve counter- party dealing limits and actual exposures from the Equation banking system and displaying the same back to the dealers.

A All the above modules work closely with each other in terms of connectivity, request and response along with reliable audit trails.

The Benefits

The implemented solution reduced SBI, UK Treasury Department's workload considerably virtually eliminating the need for human intervention. Operational efficiency was greatly improved. Timely display of counter party dealing limits at both Group and Individual level and actual exposures enabled the dealers to know the exact 'position' at any given time. This was an important technology based support for the Bank's efforts to minimize operational risk from manual interventions.

COSTS OF INSURANCE TO SOCIETY

Although the insurance industry provides many social and economic benefits to society, it is necessary to recognize the social cost of insurance. Cost of insurance to society are as follows :

Cost of Doing Business

Insurance industries consume means and economic resource like land, labor, capital and business enterprise in providing insurance to society. In financial terms expense loading must be added to the pure premium in their daily operations. An expense loading is the amount needed to pay all expenses, including commissions, general administrative expenses, state premium taxes, acquisition expenses and an allowance for contingencies and profit. As a result total cost in society will be increased.

However, these additional costs can be justified for several reasons:

From the insured's view-point, uncertainty concerning the payment of covered loss is reduced because of insurance.

The costs of doing business are not necessarily wasteful, because insurers engage in a wide variety of loss prevention activities.

The insurance industry provides jobs to millions of workers in the United States. However, because economic resources are used up in providing insurance to society, a real economic cost is incurred.

Fraudulent Claims

Cost of insurance also comes from the submission of fraudulent claims. Examples of fraudulent claims include the following :

Auto accidents are faked or staged to collect benefits.

Dishonest claimants use slip and fall as accident.

PhonyA burglaries, thefts or act of vandalism are reported to insurers.

False health insurance claims are submitted to collect benefits.

Dishonest policy owners take out of life insurance policies on insured's who are later reported as having died.

The payment of such fraudulent claims results in higher premiums to all the insured.

Inflated Claims

The final cost of insurance refers to inflated claims. Although the loss is not intentionally caused by the insured, the amount of the claim may exceed the actual financial loss. Some examples of inflated claims are as follows:

Attorneys for plaintiffs sue for high-liability judgments that exceed the true economic loss of the victim.

Insured's inflate the amount of damage in auto-mobile collision claims so that the insurance payments will cover the collision deductible.

Disabled persons may pretend to be sick for disability income benefit for a longer duration.

Insured's exaggerate the amount and value of property stolen from home or business.

Inflated claims should be regarded as important social cost of insurance. Premium must be increased in providing additional losses.

CASE APPLICATION - [email protected]/* */ - (Permission Granted)

[New India Assurance Co Ltd v/s Hardip Singh & Others - II (2003) CPJ 103 (NC)]

Can an insurance company independently challenge the award under a professional indemnity policy?

During a gall bladder surgery, Mohinder Kaur developed ventricular tachycardia, followed by ventricular fibrillation. She suffered cardiac dysrhythmia and went into coma due to medical negligence, becoming bedridden at the age of 45. A case was filed against the surgeon, the anaesthetist and the hospital. The insurance company was a party to the proceedings. The District Forum awarded a compensation of Rs 2 lakh, payable by the insurance company on behalf of the doctors under the professional indemnity policy. This was challenged in appeal before the State Commission, which upheld the Forum's order. The doctors did not continue further litigation, but the insurance company filed a revision petition before the National Commission.

Observing that it was incumbent on the insurance company to indemnify doctors under the professional indemnity policy by paying the amount awarded by the consumer forum, the commission stated the challenging of the order by the insurance company without rhyme or reason is neither proper nor desirable. The commission expressed deep anguish that such petitions were being filed. It observed that such cases are not meant to be fodder for the legal department and the insurance company cannot go on a spree in filing such petitions. The commission stated it was restraining itself this time, but warned that if such petitions are filed in future, heavy cost would be imposed. The agony of a consumer must end at some stage. It is the duty of the insurance company to see that frivolous cases were not filed so as to clog the wheels of justice, which result in wastage of time. While dismissing the revision petition, the commission directed the order be sent to the chairman-cum-managing directors of all insurance companies.

CASE APPLICATION [email protected]/* */

Dinesh Mishra was the owner of an apparel showroom situated in a commercial area of Navi Mumbai. The showroom stocked clothes for wealthy, trendy young people. It carried a variety of designs and premier collections designed by famous designers, including Ritu Beri.

On weekdays Mishra would stay in the apparel showroom upto 1:00 am as people in the city preferred to do late evening shopping. Thus, he could not spend sufficient time with his family during weekdays.A 

Every weekend Mishra spent time with his family. One evening, he was enjoying his weekend with his family in a restaurant situated outside the town on a small hillock. While Mishra and his family were enjoying a mid-night buffet at the restaurant, his cell phone started ringing. Ratan, the security guard of the apparel showroom, was on the line. In a panic-stricken voice, Ratan informed Mishra that there was a major fire in the showroom and that the showroom was completely destroyed in the fire.

On hearing the news, Mishra was shell-shocked and couldn't speak a word. After regaining his composure, he rushed to the spot and tried to get first hand information about the fire accident. He asked the security guard how the accident had taken place. He then informed UB Insurance Corporation of the incident. UB insurance was the primary insurer for the property.

UB insurance sent a claims adjuster, Venu, to meet Mishra and analyze the damage caused to the property. Venu had considerable experience as a claims adjuster. He had been associated with UB Insurance Corporation for nearly five years. Prior to this, he had worked for Delhi Insurance Corporation for nearly four years. Venu rushed to the site of the accident as soon as he received orders from his superior to conduct a spot analysis of the property in question.

At the site, Venu met Mishra and assessed the situation. He asked Mishra about the daily turnover of business in his showroom. Mishra informed Venu that the business was moving quite smoothly. Later, Venu asked Mishra for the books of accounts related to the business. Fortunately, the books of accounts were not damaged in the fire. The books revealed that in recent times, there was a reduction in sales. When Venu asked Mishra the reason for the decrease in sales, Mishra replied that it was because of low demand during the off-season period. Venu later made enquiries with other apparel shops in the area and was told that competition was quite intense in the region, and that demand had been low for the past two months.

After obtaining all the necessary information pertaining to the business, Venu again came back to Mishra and asked the probable reasons for a fire occurring on a Sunday and not a weekday, and that too, at such a late hour.

Since the showroom was closed at the time of the accident and all lights and other electricity related equipment had been switched off, Venu felt that there should have been less chance of a fire accident occurring during the weekend.

Mishra asked Venu to consult the fire fighters who would perhaps be able to throw some light on the possible reasons for the cause of the accident. When Venu asked the fire fighters involved in putting out the fire, they informed him that the fire might have been caused by a short circuit.

ADVANTAGES AND DISADVANTAGES OF INSURANCE IN HANDLING RISKS

Life insurance refers to the protective cover on the life of the individual insured and provision of financial benefits in case of loss of life of that individual within a certain period. It must be understood that life is pretty unpredictable and one needs to be prepared to meet all unforeseen events. Some of these unforeseen events may cover adverse situations, also termed risks. While some are preventable or can at least be minimized, some are completely avoidable. Nevertheless some risks are totally unforeseen.

Sometimes it is impossible to avoid losses. For example; people may become ill. They may die as a result of a grave illness or grievous injuries sustained in accidents or their homes or other property may undergo damage or theft. In all such cases, they may have to face substantial losses in incomes and savings. Insurance is a matter of financially ensuring that if such an incident does come about, the loss does not affect the present wellbeing of the person.

When considering taking up insurance it is important to also consider factors such as the type of risk, the effect of that risk, the cost of the risk and what one can do to mitigate this risk.

Insurance is appropriate only when one wants to guard against a 'significant' monetary loss. The word 'significant' is important here because if the potential loss is small, it doesn't make sense to pay a premium to protect against the loss. Let us take the case of life insurance; if a person is the sole breadwinner in a household, the loss of income that his family would experience as a result of his premature death would be considered a 'significant' loss. It would be very difficult for his family to replace his income. This is where taking an insurance policy helps. The monthly premiums ensure that if one dies, his income is replaced by the insured amount. The same principle applies to many other forms of insurance.

Insurance allows not only the individuals, but also business houses and other entities to protect themselves against significant potential losses and financial hardship at a reasonably affordable rate. One may consider taking up insurance to protect oneself or any other person from financial hardships. Insurance may cover any of the following:

Protecting one's family from loss of income after one's death.

Ensuring debt repayment after death.

Covering contingent liabilities.

Protecting against the death of a key employee or person in one's business.

Protecting one's business from business interruption and loss of income.

Protecting oneself against unforeseeable health expenses.

Protecting one's home against theft, fire, flood and other hazards.

Protecting oneself against lawsuits.

Protecting oneself in the event of disability.

Protecting one's car against theft or losses incurred because of accidents.

Major Advantages of Life Insurance in Handling Risks

Life Insurance plays a major role to hedge the risks of the future, which may or may not take place. It is also used to hedge against the risk of an uncertain loss.

Risk Cover - Life today is full of uncertainties; in this scenario Life Insurance ensures that your loved ones continue to enjoy a good quality of life against any unforeseen event and to cover the risk of loss.

Financial Security - The policy of life insurance provides economical security to the family of the policy holder in case of death of the breadwinner. On occurrence of this unfortunate event, the family is forced with a cash crunch. But by availing a life insurance policy, this problem of cash crunch is solved by a lump sum amount paid by the insurer.

Planning for Life Stage Needs - Life Insurance not only provides for monetary support in the event of untimely death but also acts as a long term investment. The policyholder can meet his aims in life such as children's education, their marriage, building dream home or planning a relaxed retired life (all according to life stage needs and risk appetite). Some prevalent policies like traditional endowment plans, offer in-built guarantees and defined maturity benefits through variety of product options covering all major risks such as Money Back, Guaranteed Cash Values and Guaranteed Maturity Values (see chapter 9 and 10 for more details).

Protection against Rising Health Expenses - The cost of health is increasing day by day and the instrument like insurance helps in meeting these heavy unbearable expenses. Insurance Companies, either through riders or stand alone health insurance plans offer the benefits of protection against the risks of critical diseases and hospitalization expenses. (see chapter 13 for more details).

Builds the Habit of Prudence - Life Insurance is a long-term contract, where, as policyholder, you have to pay a fixed amount in the form of premium at definite intervals. This builds a prudent habit of long-term savings and these regular savings over a period of time ensures that a decent corpus is built to meet financial needs at various life stages and cover all those risks faced in the future.

Safe and Profitable Long-Term Investment - Life Insurance is a highly regulated sector whereby, IRDA (Insurance Regulatory and Development Authority), the regulatory body, by various rules and regulations ensures that the safety of the policyholder's money being the primary responsibility of the Insurance Company. Life Insurance also being a long-term savings instrument, ensures that the insurers focus on returns over a long-term and avoid risky investment decisions for short term gains.

Assured income through Annuities - Life Insurance is one of the best instruments for retirement planning. The money saved during the earning life span is utilized to provide a steady source of income during the retired phase of life (refer chapter 12 for details).

Protection plus Savings over a Long Term - Since traditional policies are viewed both by the distributors as well as the customers as a long term commitment; these policies help the policyholders meet the dual needs of protection as well as long term wealth creation efficiently.

Growth through Dividends - Participating (with profit) policies offer an opportunity to participate in the economic growth without taking the investment risk. The investment income is distributed among the policyholders through annual announcement of dividends/ bonus.

Facility of Loans without affecting the Policy Benefits - Policyholders can avail loans on all traditional policies, except money-back plans, if he has paid premiums for at least three years. The interest rates vary from company to company. This helps them to meet unplanned life stage needs without adversely affecting the benefits of the policy they have bought.

Note : The way the loan amount is calculated is different for ULIPs and traditional policies but recently as reported by the newspaper Business Standard on 22nd Jan 2012, IRDA is planning to ban loans by life insurance companies against ULIPs and is not approving any unit-linked plans with a clause of loans against policy. IRDA Chairman, Mr. J Hari Narayan confirmed the fact that, "Fundamentally, ULIPs are risky products, given that they are linked with the stock market. In case the fund value drops dramatically due to negative price movement, the risk would come to the insurers. Hence, loans against such products are not advisable."

Mortgage Redemption - There are circumstances in life when the individual needs funds but is unable to get from various sources. Insurance acts as an effective instrument to cover mortgages and loans taken by the policyholders so that, in case of any mishap, the burden of repayment does not fall on the bereaved family as the loan amount is deducted from the police value on maturity.

Major Disadvantages of Life Insurance in Handling Risks

There are certain disadvantages to buying life insurance like you have to die to win i.e. you pay your premiums every year because you want to protect your family. This is inexpensive insurance so you had no problems with these payments. 20 years go by and you didn't die. You have nothing to get back from the life insurance company. It would have been a fair deal as you were only paying for death benefit.

On the other hand, had you purchased a permanent policy you could keep it forever but if you chose to stop in 20 years for example you would likely get back a good portion of the premiums you paid. If you include your dividends you may actually get back all your premiums at that point. Dividends are not guaranteed so the life insurance company is not allowed to project that this will happen. Permanent policies cost more than term policies so your choice may depend on how much you are able, or are willing, to pay for your life insurance.

Life Insurance policies can also be disadvantageous may be due to agents, when you work with an agent you have to pay commission to him, this may lead extra cost. If you cut the middlemen then you can save money on premium.

Incompetent Personnel and Facilities in the Industry - Not all insurance companies are equipped enough to provide the consumers with life insurance policies they actually require. Many Insurance corporations have emerged after realizing the vast market potential and the untapped new segment. These companies are by and large interested in making huge profits rather than helping the general public with their insurance related queries. In the process, these insurance companies, hire unskilled people and provide poor infrastructural facilities. The insurance companies do not make use of modern methods to find the value of loss of goods insured .This alarming trend seen even in some developed countries is poised to stunt the growth of insurance industry. However with the advent of globalization multinational corporations have been constantly acquiring and merging with these companies. They are therefore able to provide the necessary impetus and remove this setback though not to the full extent.

Lack of Consumer Awareness - The ultimate consumer is still not aware of life insurance policies. The level of his understanding is not sufficient. This is partly because of the reason said above. Some of the domestic companies don't have the technical expertise to implement the latest practices. Moreover the services of insurance agents could sometimes do more bad than good. Some of them try to convince their clients to invest more or to choose certain policies which are not much beneficial to the clients. A person will find himself in trouble if he invests more than what is actually required. Since some agents indulge in unethical practices, this has led to wrong mindsets among general public about insurers.

Expensive - The life insurance can prove to be a costly affair, particularly when suffering from illness and regarded by insurers as high risk due to some reasons like old age etc.

Irrelevant in case of no family or dependents - The life insurance policy is irrelevant for an individual who is not having any family or dependents

Increasing Premiums - The premium payable increases with the increase in age. But the income gradually decreases which makes it difficult to strike a balance.

No benefit in case of Long Life - Some policies do not provide any cash benefit on the policy holder surviving the policy term. In that case, amount paid for premiums is wasted.

From the above discussion, it becomes clear that though life insurance is a mixed blessing, yet its advantages outweigh its disadvantages. But at the same time, it depends on the requirements of the individual. Life insurance is a savings option that helps the individuals, general public, business houses and the nation at large. It is therefore a wise move to choose a life insurance policy but, he has to gather enough information about life insurance companies and their products which suits your requirement.

SELECTED REFERENCES

Adapted from "Pooling of Risk", Mint, Markets and Finance (2012, 9th July) - Deepti Bhaskaran

Mishra,M.N., & Mishra, S. B. (2008), "Insurance - Principles and Practice", S.Chand.

George, E. Rejda, (2008). "Principles of Risk Management and Insurance", 9th ed., Pearson Education.

QUESTIONS FOR REVIEW AND DISCUSSION

'Insurance is able to curtail inflation, so it should be made compulsory'. Comment.

Do you support the view that 'Indian masses are under insured'?

Define insurance from viewpoint of the individual and of society.

How is diversification form of risk transfer ? In what way does it result in risk reduction ?

A common mistake made by people unfamiliar with risk management is to think of self-insurance as being synonymous with risk retention. Discuss the differences between these concepts and the relationship between them.

Explain whether the following risks and perils are insurable by private insurers :

A hailstorm that destroys your roof

The life of an eighty-year-old man

A flood

Mold

Biological warfare

Dirty bombs

List out at least three major differences between insurance and gambling ?

List out at least three major differences between insurance and hedging ?

List out the requirements which are necessary to be included in the category of 'insurable risks' by the insurer ?

What are the costs to society of insurance and what are the contributions that insurance makes to society that justify these costs.

Describe in detail the importance of Insurance. What are the uses to the business community and society as a whole ?

Because large-scale human-made and natural disasters are not controllable by insurers, should the government pay for damages?

Because insurance is the business of insurers, should they handle their problems without being subsidized by taxpayers? What would be the outcome in terms of safety and loss controls?

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