Insurance

 

It's time for me to also share some lessons in insurance. I hope we're all ready. In this presentation we will try and understand;

• insurance and ris

• Some insurance principles

• Types of insuranc

• Insurance contract

• General insurance policies an

• Life assurance policies

 

I'm pretty sure we're all familiar with insurance in connection with your personal life- for example life assurance, motor insurance, travel, property or health insurance.

 

Insurance works on the principle of pooling resources to build up a fund from which a portion is paid out in the event of loss to a member of the pool.

The insurer collects an amount of money called the PREMIUM from a group of people in similar circumstances or who carry a similar RISK. This group of people are called the INSURED PERSONS. This forms the insurance pool. If any member or insured person suffers a loss, the insurer will pay out the agreed sum of money (SUM ASSURED) from the insurance pool to compensate for the loss.

 

What is RISK?

Risk is a combination of the probability of an event occurring and the consequences of that event. Risk is present whenever human beings cannot control events which affect them, or cannot foresee the future. Risk can be described in different ways but we will not bother ourselves with that now. We will rather engage ourselves with how people respond to or deal with risk.

 

Risk can be treated in a number of ways:

1. People can treat risk by ELIMINATING or abandoning a whole operation or replace it with a safer one.

 

2. Alternatively, one can respond to a risk by reducing any activity or operation which is likely to result in a risk.

 

3. Lastly we can also TRANSFER or contract out any activity which will give rise to a risk to an organization who will be responsible to pay any losses when they occur.

 

The most common form of risk transfer is by insurance.  By purchasing full insurance, the insured has transferred the financial impact of the risk to the insurer. Now let's take note of the ff insurance principles.

 

1. Principle of Uberrimae fidei (Utmost Good Faith)

According to this principle, the insurance contract must be signed by both parties (ie. Insurer and insured) in an absolute good faith or believe or trust.

The person getting insured or covered must willingly disclose and surrender to the insurer his complete true information regarding the subject matter of insurance. The insurer's liability gets void (ie. Legally revoked or cancelled) if any facts about the subject matter of insurance are either omitted, falsified, hidden or presented in a wrong manner by the insured. The insurer must provide the insured complete, correct and clear information regarding the terms and conditions of the contract.

NB: this principle applies to all types of INSURANCE CONTRACTS.

 

2. The principle of insurable interest

It states that a person has insurable interest when the person has a relationship with the subject matter of the insurance policy such that the person would suffer financial loss if the insured event occurs. In life insurance it refers to the life assured and other covered lives. In fire insurance and general insurance it must be present at the time of taking the policy and also at the time of the occurrence of loss.

NB: its applicable to all insurance contracts

 

3. Principle of indemnity

It essentially means that following a loss, the insured should be restored to the same FINANCIAL POSITION as he enjoyed immediately before the insured event happened.

Bottom-line, no one is supposed to PROFIT from any insurance policy. You get as much as the value of your loss.

 

4. The principle of contribution

This principle takes its roots from the principle of indemnity. According to this principle, the insured can claim the compensation only to the extent of the actual loss either from all insurers or from any one of them.-That's when the same property has been insured with more than one insurer under the same peril.- In such a case one of the insurers can pay the full value of the loss or all the insurers can contribute and pay for the loss.

 

5. The principle of Causa Proxima (proximate or nearest cause)

This principle states that when a loss is caused by more than one causes, the nearest and not the remote should be taken into consideration to decide the liability of the insurer.

Let's consider the following scenario to explain:-

A cargo ship's base was punctured due to rust and so sea water entered and the cargo was damaged. Here there are 2 causes for the damage.

     i. The cargo ship getting punctured because of rust and

     ii. The sea water entering the ship thru puncture

The risk of sea water is insured but the first is cause is not. The nearest cause of damage is sea water which is insured; therefore the insurer is liable and should pay the compensation.

 

However, in the case of life insurance the principle of proximate cause of death does not apply unless that cause of death is EXCLUSION.Most life insurance policies have exclusions like suicide, attempted suicide, excessive use of alcohol, wilful inhalation of gas, wilful taking of poison or drugs, horse riding, riots, terrorist activities, civil commotion, mountaineering, speed contest, hunting, etc

 

6. Principle of subrogation

We understood from the principle of indemnity that a person should recover the exact amount of their loss. However, in theory, it can be possible for a claimant to recover the cost of his loss or injury through the courts from the person who caused the loss, as well as receiving compensation on an insurance policy from his insurer. This will mean that he was being compensated twice for the same loss.

To avoid this, the principle of subrogation is applied. The principle allows the insurer to take over all the of the legal rights of recovery against the 3rd parties which the insured may have once the insurer has paid the claim. This principle is included in all property insurance contracts and all indemnity policies.

 

Types of Insurance

Insurance comes in 2 broad forms,

1. life and

2. ]non life (or general) insurance.

In simple terms general insurance are policies which cover items one can put a value on.

They come in different forms and classes.

• Property

• Motor

• Fire

• Goods in transit

• Marine and aviation, etc

 

The foundation of life insurance is the recognition of the value of a human life and the possibility of indemnification for the loss of that value

 

 

Insurance contracts

 

Under English contract law, a contract is defined as an agreement between two or more parties which is legally binding.  For the contract to be valid there must be an offer and acceptance, and consideration. In insurance, The contract is the agreement between the insurer and the insured. The policy provides written evidence of the contract. Consideration is provided by the insured paying a premium and the insurer agreeing to make future payments to the insured in defined circumstances.

 

A contract may be written or verbal but in practice however, virtually all insurance contracts are in writing, and in the case of life insurance, insurers are obliged to issue a policy within one month of receiving the first premium. The main objective of every insurance contract is to give financial security and protection to the insured or beneficiaries as in the case of life insurance from any future uncertainties. The insured must never try to misuse this safe financial cover by seeking profit opportunities by reporting false occurrences. This violates the terms and conditions and breaks trust which can lead to breaching the contract and may even invite legal penalties.

 

 

The contract forming process

1     -the proposer provides information to the insurer abt the risk(s) to be insured.  In a case of a simple motor policy,  the individual wld complete a proposal form. For large commercial insurances, the insurers wld require detailed information before agreeing to take on the risk and wld be likely to carry out their own surveys.

2     -the insurer then decides that this particular risk is one we wld like to accept

3     -the insurer then makes an offer to the proposer of tge premium he wld require to accept the risk

4     -the proposer accepts by paying the premium and the contract is now in existence

5     -the contract now confers the ff rights and obligations:

           (a) the insurer is entitled to the premium in exchange for the obligation to make future payments to the insured in the event of certain specific events

           (b) the onus of premium payment rest with the insured in order to enjoy the cover the policy offers. That is, no premium no cover.

 

General insurance can be broken down to two areas.

1.  personal insurances where the policyholder is a private individual and

2. commercial insurances where the policyholder is a firm or some other kind of organisation.

 

 Within general insurance there are a number of different categories.

 

• Property

Property insurance includes a range of covers, which may be needed by businesses or an individual to protect their physical property, such as buildings, machinery and stock.

 

• Pecuniary

Pecuniary means relating to money and pecuniary insurance covers businesses against purely financial losses (e.g. from fraud, legal expenses or business interruption) rather than physical damage to property.

 

• Motor insurance

Available for private cars, motorcycles, commercial vehicles and fleet insurance. Motor is one of the compulsory insurance classes and anyone using a motor vehicle on the public highway must have it.

 

• Liability insurance

We all have a legal duty to behave reasonably to others. If we injure someone or damage their property through negligence, we are legally obliged to pay compensation. Liability insurance is there to insure individuals and businesses against this risk.

 

• Marine and aviation insurance

Marine policies cover the property or 'interest' insured against perils of the sea such as bad weather, stranding, collision, fire and seizure, while aviation insurance covers damage on the ground or in the air, and liabilities for cargo and passengers.

 

• Health and protection insurance

Personal accident and sickness cover pays out in the event of death, permanent disablement or loss of eyes or limbs due to accident or if the insured is unable to work due to accident (or sickness). Private Medical insurance (PMI) pays for inpatient and outpatient. Creditor insurance covers credit repayments (e.g. on mortgage and credit card loans) in the event of unemployment, accident or sickness.

Four major types of  life insurance coverage are:

1. Term Life,

2. Whole Life,

3. Guarantee Universal Life,

4. Index Universal Life.

Each of these provides a death benefit, but they can differ significantly in length of coverage, premium flexibility, accumulation and distribution of cash values, and other factors. While specific policies vary by company, these general descriptions can help you understand the basic differences.

 

1. Term Life Insurance

Term life insurance is basic coverage that generally does not build life cash value. Consumers typically buy term life insurance to provide death benefit protection for a specific period of time. Premiums for term coverage are usually initially lower than other types of life insurance because the policy only provides a death benefit for a defined period. Later, some term insurance policies can be extended or converted into another type of coverage.However, if you renew or convert your coverage, your new premium will probably be higher than your previous coverage, and can continue to increase as you grow older.

 

2.   Whole Life Insurance

As its title indicates, whole life insurance provides a lifetime death benefit for a set premium amount and builds cash value you can use while you’re living.The strength of a whole life insurance policy is that it provides guaranteed cash values and benefits in return for fixed premiums. A trade-off to consider is that a whole life policy may build cash value at a lower rate than alternative coverage options.

 

3. Guarantee Universal Life Insurance

Guarantee Universal life (GUL) insurance policies provide a death benefit as well as the opportunity to build policy cash value. This coverage is different from term and whole life insurance because, within policy limits, you can vary the amount and timing of your premiums. Typically, you can also increase or decrease your death benefit (based on your insurability). As long as you maintain sufficient policy value to keep your policy in-force, your policy’s flexibility enables you to pay premiums as your circumstances allow.

Your cash value in a GUL policy is determined by the amount of premiums you pay, the declared interest crediting set by the insurance company, and policy charges. As a policy owner, you have more flexibility with GUL than with whole life, but you assume additional risk. GUL policies usually have fewer guarantees than whole life coverage, so you must carefully manage premium payments and any distributions taken to help ensure your policy will stay in-force. This type of life insurance policy usually offers a built-in no lapse guarantee that can last for the lifetime of the insured life or for a shorter period selected by the policy owner.

 

4. Index Universal Life Insurance

Index universal life (IUL) insurance includes the premium flexibility and adjustable death benefit that typical UL coverage provides. Plus, IUL can provide the potential for greater policy value growth than UL, with less risk to you than a Variable Universal Life policy. IUL policies link the growth of policy value to the percentage change of one or more widely-followed financial market indices. As a rule, IUL policies also include a fixed-rate interest crediting option.

Insurers offering IUL policies credit interest at rates that are linked to the percentage change of a selected index. These companies typically provide a "crediting rate zone" with a cap that represents the maximum crediting rate and a floor that represents the minimum crediting rate. Based on the percentage change in the index, interest will be credited between the cap and floor.

With IUL, your policy value can be credited with higher interest rates than whole life and UL policies typically provide. You may have greater downside protection than Variable Universal Life, but, compared to Variable Universal Life, the upside potential is more limited.

 

Index Universal Life Insurance coverage is typically purchased for one of two reasons:

 

• A death benefit index UL product solution is designed to provide affordable death benefit guarantees with the opportunity for cash value growth to provide financial flexibility.

• A cash accumulation index UL product solution provides a death benefit, and is also designed to accumulate policy value that can be used to supplement income, either as a withdrawal or policy loan, later in life.

 

 How life insurance can impact on our individual lives and that of our dependants

 

 Let's all spend a little time reading and reflecting on these few phrases:-

1.  Death creates an immediate need for immediate cash - life assurance creates immediate cash for the need

2. The only thing a man can buy on instalment plan for which his widow won't furnish the payment after he dies is life insurance.

3. Whatever reasons you may have for not starting a life insurance now would only sound ridiculous to your widow

4. Do you want your children to be embarrassed by anything you didn't do that you could have done today?

5. Life insurance doesn't take money away from your family, it assures them money for future delivery-at a time they will need it most

6. Life insurance is the only way a man can make his will b4 he makes his money

7. If you had to go on a long trip for several months, how much money would your wife need each month you are gone? Would she need less if you were gone forever?

8. Unless u have rich relatives, the only money you would have at retirement age is the money you do not spend now

9. No man plans to be poor in old age, but many just don't make plans not to be And lastly,

10. The heaviest burden an old man carries is an empty wallet

 

Brothers of this great fraternity there are 2 things in life.

If you leave long, there are life needs.

If u die early there are death needs

In which ever happens first there will be some obligations to take care of

Make the right choice. Get insured today!