Life Insurance is an arrangement where a large number of persons agree to share the loss which some of them are likely to incur in future. As a large group of individuals come under this umbrella, contribution remains steady from year to year and when this arrangement is managed by an Institution, the law of average works out to the benefit of all members.

A family is generally dependent for its food, clothing and shelter on the income brought in at regular intervals by the breadwinner of the family. So long as he lives and the income is received steadily, that family is secure; but should death suddenly intervene the family may be left in very difficult situation and sometimes, in stark poverty. Death is certain, its time is uncertain. This uncertainty of death is inherent in human life, it is this uncertainty, that is risk, which gives rise to the necessity for some form of protection against the financial loss arising from death. Insurance substitutes this uncertainty by certainty.

The utility of this arrangement extends to the following aspects:-

Family Protection
▪ Aid to thrift
▪ Easier terms
▪ Estate creation and Preservation
▪ Protecting Human Life Value
▪ As an Investment
▪ Incomparable property.
▪ Device for Business finance, etc.

The earliest available reference to some form of Insurance is found in the Codes of Hammurabi and Manu (Manav. Dharma Shastra). The term ‘Yogakshemam’ is used in Rig Veda suggesting that some form of community insurance was practiced by the Aryans in India over 3000 years ago. Possibly our motto ‘Yogakshemam Vahamyaham’ (Your welfare is my responsibility) as inscribed in our logo is inspired by the same. The first organized effort to establish a life assurance office in India was made in 1870. After a few years, a company ‘Bharat’ was established in 1896 followed by several others and by 1956 the number of such companies was 245. Five of these companies had operations in Mauritius as well (such as New India, Asian and Oriental). As the Life Assurance business was nationalized in India and the Life Insurance Corporation Act (Act XXXI of 1956) was passed by the Indian Parliament in June 1956,the Life Insurance Corporation of India came into existence on the 1st September 1956 in India as well as in a few other countries including Mauritius.

(a) Definition:
Life Insurance is a business of effecting contract of insurance upon human life whereby payment of an agreed sum is assured by the insurer on survival for a
certain period and/or happening of an event contingent on human life in consideration of payment of a certain premium by the insured for a specified
period of his survival at such frequencies as agreed upon.

(b) Life Insurance – a contract of ‘utmost good faith’
Life Insurance is a contract of ‘Utmost Good Faith’ or technically called ‘Uberima Fides’. The doctrine of disclosing all material facts is embodied in this
important principle which applies to all forms of insurance. The proposer, who is one of the parties to the contract is bound to tell the other party (the insurer) everything affecting underwriting risk. The proposer will thus make full disclosure of all material facts and not merely those which he thinks material.
Misrepresentation, non-disclosure or fraud in any document leading to acceptance of risk automatically discharges the Corporation from all liability under the contract.

       It is therefore, obligatory on the part of the Agent to see that the proposer does not take advantage in making any such false statement.

(c) Essential Requisites of a Contract:
The contracting parties should be:
(i) Major (completed 18 years)
(ii) Of sound mind; and
(iii) Not legally disqualified from contracting.

(d) Insurable Interest and Life Insurance Contract
Apart from the essential requisites of a valid contract mentioned at (c) above, Insurable Interest is necessary for a valid contract of Life Insurance.

(e) What is Insurable Interest:
If the person, who is to benefit from the proceeds of life insurance, is in such a relationship to the insured as to have a real interest in the continued life of the insured, such person is said to have insurable interest in the life assured. This real interest is partly compensated for by the proceeds of the
insurance when the life assured dies.

(f) Cases of Insurable Interest:
(1) A person has insurable interest in his own life to an indefinite extent.However in practice, the insurer in order to avoid over insurance and consequent moral hazard, usually limits the amount of insurance to such a sum which may not be unreasonably large in relation to his/her needs for insurance, financial status and earning capacity.
2) A spouse has insurable interest in the life of the other.
3) A parent has no insurable interest in the life of minor child.
4) An employer has an insurable interest in the life of his employee and vice versa.
5) A creditor has an insurable interest in the life of his debtor up to the amount of his debt.
6) A partner has an insurable interest in respect of the capital contracted to be brought in by his co-partner.
7) A surety has an insurable interest in the life of his co-surety to the extent of his proportion of his debt and also in the life of his principal debtor.

Note: Where the proposal is on the life of another, the proposer must have an insurable interest in the life to be assured.

In a life insurance contract, the moneys are payable by the insurer on the happening of an event dependent on human life. Naturally, mortality is the most
important factor entering into the calculation of premium. The life insurance contract being a long-term contract, the probability of mortality in respect of a particular life assured increases from year to year.

As the rate of mortality increases with the age, the insurer has to charge increasing premium every year. However, the insurer charges level premium through out the term of the policy. As the premium charged in earlier years is more than sufficient to meet the claim, it is possible for the insurer to invest the balance amount giving benefit from interest yield on these investment. The premium charged is intended to cover the benefits payable under the policy, as well as expenses to run the business. Therefore, the following factors are to be taken into account for calculation of premiums:-

(a) Rate of Mortality:
The rate of mortality is the rate of people dying within a year. The proportion of people in a certain age group dying within a particular year is the rate of Mortality of that age group for the particular year. The rate of mortality depends mainly on the following factors:-

1. Age – Mortality increases with the age after puberty.
2. Sex – Female sex needs some restriction since they are constitutionally more complex, more delicate and having child bearing period.
3. Race – Mortality experience, customs, build etc, vary from race to race
4. Occupation – Certain occupations are (i) hazardous such as Blaster, Aviator;(ii) affecting health e.g. glass blowing, X-Ray Machine operators, (iii) affecting mode of living – Liquor Trade, Boxers, Wrestlers, Drivers, Sewers and Sewaged sewage-disposers, Gymnasts, Stunt performer, Mountain guides etc.
5. Residence and Travel: Except in isolated special cases it does not attract any extra hazard.
6. Environment: Living in polluted /unhygienic area etc.
7. Habits – Certain habits/hobbies such as mountain climbing, competitive racing, aviation etc. have underwriting significance is as much as they involve accident and
8. Condition of health as evidenced by –

i) Family history

a) Longevity, b) Heredity (history of Asthma, T.B., Diabetics).

ii) Personal history           

a) Chronic diseases which do not completely leave the system & have permanent or long after effects. b) Acute diseases which make the system weak for a short period.
iii) Standard impairments (deafness, blindness, loss of teeth, deformity as a result of injury or polio).
iv) Build – stout, thin or average
v) Any other matter which may be disclosed by Medical Examiner on examination.

The above first seven factors are well within the knowledge of the proposer and do not require any further examination by an external agency. The last however is more clearly brought out by the medical examination. The field personnel can also obtain much data based on these information as also on points 6 & 7 being men on the spot and hence they are called ‘primary underwriters.’ A medical examination can also help in bringing out certain facts to light which the proposer may try to hide or himself may be unaware of.

(b) Rate of Interest: This is the rate of interest of which the insurer is expected to invest the funds. In the process, the risk premium calculated is reduced
by applying this rate of interest and the net premium is arrived at.

(c) Expenses on loading: Expenses on loading covers the expected management expenses. Office premium is the premium arrived at based on the factors mentioned above, which the insured has to pay. In any scheme of insurance, the insurer has a certain mortality table as the basis for calculating the risk premium, an assured rate of interest and expected expenses loading. When actual experience of the Insurer conforms to the above assumptions, the fund is sufficient to cover the liabilities. The lives to be insured are ‘selected’ to offer insurance at ordinary rates and if the lives to be insured are ‘substandard’ then it is expected that the mortality is more than the assumed rate and an extra premium or restrictive clauses restricting the benefit of insurance is imposed on.

(d) Influence of Moral Hazard: Adequate premium can be charged for physical hazard, but no amount of premium can be adequate to meet the
moral hazard. Some common situations which may give rise to moral hazard are the following:
i) Insurance not supported by adequate insurable interest.
ii) Large amount of insurance not commensurate with the income of the proponent.
iii) Seeking large amount of insurance for the first time at a very advanced age.
iv) Suppression of previous insurance history regarding declination or extra charged.
v) Seeking insurance at a place other than the normal residence of the proponent.

Sources of information:

The information necessary for selection and classification is obtained from mainly these sources:
i) The proposal form completed by the proponent and witnessed usually by the agent. The personal statement regarding health and habits contain
certain important information.
ii) Medical Examiner’s Report.
iii) Agents Confidential Report

From the above sources the insurer can, to a great extent, assess the nature of risk whether it can be underwritten based on the Extra Mortality Rates of the life proposed and if so at ordinary (standard) rate or at an extra premium and/or with other restrictions.

Sr. NoAlphabatesName of GlossaryMeaning of Glossary
1AAccidentAn event or occurrence causing damage/injury to an entity, and is unforeseen and unintended.
Accident BenefitProvides for payment of an additional benefit equal to the sum sum assured in instalments on permanent total disability and waiver of subsequent premiums payable under the policy.
Age LimitsStipulated minimum and maximum ages below and above which the company will not accept applications or may not renew policies.
AgentAn insurance company representative licensed by the state who solicits, negotiates or effects contracts of insurance, and provides service to the policyholder for the insurer.
Annuity PlansThese plans provide for a “pension” ( or a mix of a lumpsum amount and a pension ) to be paid to the policy holder or his spouse. In the event of death of both of them during the policy period, a lumpsum amount is provided for the next of kin.
Application FormSupplied by the insurance company, usually filled in by the agent and medical examiner (if applicable) on the basis of information received from the applicant. It is signed by the applicant and is part of the insurance policy if it is issued.
AssignmentAssignment means legal transference. A method by which the policy holder can person on his interest to another person. An assignment can be made by an endorsement on the policy document or as a seperate deed. Assignment can be of two types Conditional absolute
2BBeneficiaryThe person(s) or entity(ies) (e.g. corporation, trust, etc.) named in the policy as the recipient of insurance proceeds upon the death of the insured.
Business InsuranceA policy which primarily provides coverage of benefits to a business as contrasted to an individual. It is issued to indemnify a business for the loss of services of a key employee or a partner who becomes disabled.
3CConvertible Whole Life PolicyA mix of “whole life policy” and “endowment policy”, it provides for very low insurance premiums with maximum risk cover while the life assured is just beginning his working career, and the possibility of converting the policy to an “endowment” policy after five years of commencement.
4DDays Of GracePolicy holders are expected to pay premium on due dates. a period is 15-30 days (depending on the mode/frequency if premium payment) is allowed as grace to make payment of premium; such period is days of grace.
Deferment PeriodPeriod between the date of subscription to an insurance-cum-pension policy and the time at which the first instalment of pension is received. Such policies generally prescribe a minimum and maximum limit on the deferment period.
DepreciationA decrease in the value of property over a period of time due to wear and tear or obsolescence. Depreciation is used to determine the actual cash value of property at time of loss.
Double/Triple Cover PlansThese offer to the beneficiaries double/triple the sum assured on death of life assured during the term of the policy. On survival to the date of maturity, the basic sum assured is paid to the assured. These are low-premium plans, most useful for situations such as housing.
5EEmbezzlementFraudulent use or taking of another’s property or money which has been entrusted to one’s care.
Endowment PolicyThe assured has to pay an annual premium which is determined on the basis of the assured’s age at entry and the term of the policy. The insured amount is payable either at the end of specified number of years or upon the death of the insured person, whichever is earlier.
ExclusionsSpecific conditions or circumstances for which the policy will not provide benefits.
Excess And Surplus Insurance1) Insurance to cover losses above a certain amount, with losses below that amount usually covered by a regular policy. 2) Insurance to cover an unusual or one-time risk, e.g., damage to a musician’s hands or the multiple perils of a convention, for which coverage is unavailable in the normal market.
6FFacultative ReinsuranceA type of reinsurance in which the reinsurer can accept or reject any risk presented by an insurance company seeking reinsurance.
7GGuaranteed Surrender Value (GSV)After payment of premiums for at least three years, the Surrender Value allowed under the policy is equal to 30% of the total premiums paid excluding premiums for the 1st year and all extra premiums.
Guaranteed PoliciesThese are policies where the payment stays fixed.
8IIndemnityLegal principle that specifies an insured should not collect more than the actual cash value of a loss but should be restored to approximately the same financial position as existed before the loss.
Insurable InterestA condition in which the person applying for insurance and the person who is to receive the policy benefit will suffer an emotional or financial loss, if any untouched event occurs. Without insurable interest, an insurance contract is invalid.
InsurabilityAll conditions pertaining to individuals that affect their health, susceptibility to injury and life expectancy; an individual’s risk profile.
InsuranceSocial device for minimizing risk of uncertainty regarding loss by spreading the risk over a large enough number of similar exposures to predict the individual chance of loss.
InsuredThe person whose life is covered by a policy of insurance.
9JJoint Life Endowment Assurance PlansThe sum assured ( plus any accrued bonuses) under this type of policy is payable on the end of the endowment term or on the first death of the two lives assured, whichever is earlier. Typically (though not a necessity) taken out by a couple, a variation is available for couples only. In this case, the sum assured will be payable on first death and then again on the second death (along with all vested bonuses) if both deaths occur during the term of the policy. If one or both lives survive to the maturity date, the sum assured along with all vested bonuses will be payable on maturity date. Premiums during this plan cease on the first death or the expiry of the selected term, whichever is earlier. Another variation
10KKeyman Insurance PolicyA life insurance policy taken by a person on the life of another person who is or was his employee/connected to his business in any manner whatsoever.
11LLapsed PolicyA policy which has terminated and is no longer in force due to non-payment of the premium due within the grace period.
Limited Payment Life PolicyPremiums need to be paid only for a certain number of years or until death if it occurs within this period. Proceeds of the policy are granted to the beneficiaries whenever death of the policy holder occurs. Again, this policy can also be of the “with profits ” or “without profits” type.
Loyalty AdditionsThe loyalty addition is given upon the maturity of the policy, and not before. It’s a small percentage of the sum assured. Broadly speaking, loyalty addition is the difference between the performance, of the insurance company and the guaranteed additions. It is LICs effort to further share its surplus after valuation with the policy holders, as LIC is a non-profit organization.
12MMaturityThe date upon which the face amount of a life insurance policy , if not previously invoked due to the contingency covered (death), is paid to the policyholder.
Maturity ClaimThe Payment to the policy holder at the end of the stipulated term of the policy is called maturity claim.
MisrepresentationAct of making, issuing, circulating or causing to be issued or circulated an estimate, an illustration, a circular or a statement of any kind that does not represent the correct policy terms, dividends or share of surplus or the name or title for any policy or class of policies that does not in fact reflect its true nature.
Money Back PolicyUnlike endowment plans, in money back policies, the policy holder gets periodic “survivance payments” during the term of the policy and a lumpsum amount on surviving its term. In the event of death during the term of the policy, the beneficiary gets the full sum
assured, without any deductions for the amounts paid till date, and no further premiums are required to be paid. These type of policies are very popular, since they can be tailored to get large amounts at specific periods as per the needs of the policy holder.
Moral HazardRisk depends on the need for insurance, state of health, personal habits standard of living and income of insured person. Moral hazard is the risk factors that affects the decision of the insurance company to accept the risk.
13NNominationAn act by which the policy holders authorises another person to receive the policy moneys in case of any eventuality. The person so authorised is called Nominee.
14PPremiumThe payment, or one of the regular periodic payments, that a policy holder makes to an insurer in exchange for the insurer’s obligation to pay benefits upon the occurrence of the contractually-specified contingency (e.g., death).
Premium Back Term Insurance PlansThese provide for refund of all the premiums paid, in the event of th life assured surviving to the end of the policy term. The total sum assured is paid to the beneficiaries in the event death occurs during the policy term.
15RReinstatementThe restoration of a lapsed policy to in-force status. Reinstatement can only occur after the expiration of the grace period. The company may require evidence of insurability (and, if health status has changed, deny reinstatement), and will always require payment of the total amount of past due premium.
RiskThe obligation assumed by the insurer when it issues a policy. The spreading of risk across a broad base of the population, adjusted for statistical probability, and the protection against catastrophic loss, is the entire purpose of insurance. For risk assumption purposes, death is viewed as a contingency. That is, although death is certain, its timing is unknown. The process of evaluating and selecting risk is known as underwriting.
16SSalary Saving SchemeThis scheme provides for payment of premiums by money deduction from the salary of the employees by one employer.
Sub Standard RiskPerson who is considered an under-average or impaired insurance risk because of physical condition, family or personal history of disease, occupation, residence in unhealthy climate or dangerous habits.
Surrender ValueThe value payable to the policy holder in the event of his deciding to terminate the policy before the maturity of the policy anytime after payment of atleast three years premiums.
Survival BenefitThe payment of sum assured to the insured person which has become due by instalments under a money back policy.
17VVesting AgeThe age at which the receipt of pension starts in an insurance-cum-pension plan OR where a child (minor) attains an age of 18 years and becomes owner of the Children policy procured by the proposer
18WWhole Life PolicyPremiums are paid throughout the life time of life assured. This can be with profits or without profits ( A “with profit” policy is eligible for various bonuses declared by LIC every year, while a “without profits” policy does not have this privilege ).
With-Profit policyPolicies entitled to bonus, which is paid at the time of claim-death or maturity one with-profit policies.
Without-Profit policyThese policies are not entitled to participate in bonuses.