Tuesday, August 12, 2008

Understanding Insurance: The Easy Way

"Insurance is a subject matter of solicitation" is the disclaimer written on every insurance brochure. In this sense, it is no better that the oldest profession of the world. However, the solicitation of Insurance companies leaves a lot to be desired. People today, still fear taking insurance because of the arcane words and phrases that is used in Insurance. I too was in the same league, till about a year back - when I decided to upgrade my knowledge about matters of Insurance.

In this blog I will deal with the basic types of Insurance that are available in the marketplace. You should note that Insurance companies customize their products and brand them with catchy name. However, the basic product remains one of the following or a combination of the following. So what are these basic types of Insurances?

1. Temporary Assurance: Temporary Assurance or Term Assurance or Pure Protection Plan is the most basic plan being offered by all Insurance Companies. In this type of Insurance, the sum assured or the benefit is payable only on your death within the period of insurance. Say for example, your age is 35 years and you take a Temporary Assurance for 10 years for the sum assured of Rs. 1,00,000. Then, in the case that you die before 45 years of age will your family (technically called the nominee) will get the sum assured. In case, you survive the 10 years period of Insurance, you are not eligible for any money.

2. Pure Endowment Assurance: This is the second most basic plan which is offered by the insurance companies. In this type of Insurance, the sum assured or benefit is only payable, if you survive the period of Insurance. For example, your age is 35 years and you take a Pure Endowment Assurance for 10 years for the sum assured of Rs. 1,00,000. Then, in the case that you survive to the age of 45 will you get the sum assured. In case you die before turning 45 you are not eligible to get any money. Thus this Insurance can be looked upon as a kind of forced savings for future.

These two are the two fundamental insurance products. Any other type of Insurance Product is a variation of these. We further discuss some more types of Insurance which are commonly available in the market.

3. Endowment Assurance: This type of Insurance is a combination of Temporary Assurance and Pure Endowment Assurance. In this type of Insurance, the sum assured is payable in case of your death or in case of your surviving the period of Insurance. For example, your age is now 35 years and you take Endowment Assurance of Rs. 1,00,000 for the next 10 years. So in case you die before turning 45, your nominees would get Rs. 1,00,000/- and in the case you survive till 45 years you will get Rs. 1,00,000.

4. Whole Life Assurance: This is a variation of the Temporary Assurance Plan. In Temporary Assurance the insurance is contracted for a certain period. In the above example, the insurance was for 10 year period. But in the case of Whole Life Assurance, the sum assured is payable at any point of time. Say for Example you take a Whole Life Assurance for Rs. 1,00,000 at age 35. Say you die at age 37, then your nominee is eligible to Receive Rs. 1,00,000. On the other hand say you die at age 95, even in this case your nominee is eligible to receive Rs. 1,00,000. Before you buy the Whole Life Policy, please ask the Insurance Agent about the definition of "Whole Life". This is because, different companies tend to define whole life differently. Some companies take the age 85 to be whole life while others take it to age 100. In case, you expect that you will live for a long time, it is always better to take a policy which has a longer whole life.

5. Fixed Term Endowment: This is a variation of the Pure Endowment Plan. In this case, the sum assured is payable only at the end of the period of insurance irrespective of whether the individual is alive or not. Say for example your age is 35 years in 2008 and you take Fixed Term Endowment of Rs. 1,00,000 for the next 10 years. The amount will be payable to you (in case you are alive) or to your nominee (in case you are dead) only in 2018. This type of insurance is best for fixed foreseen future expenses - for example marriage or children's education.

These are the basic flavors of Insurance Products. To give you an idea regarding what kind of premium will you end up paying for these products I have calculated the "Single (or One-Time) Premium" for these products under the assumptions that (i) there is a 6.00% return which is available to insurance companies when they invest the money (ii) You are a healthy male of age 35 years and (iii) You are subjected to mortality as per a certain Life Table schedule. The sum assured is Rs. 1,00,000 for all products and the period of insurance is 10 years.

Please note that the premiums are all Single Premiums payable only one time at the beginning of the insurance contract. Also the premiums do not take into account the expenses that is incurred by the insurance company in managing the insurance i.e. all these premiums are pure premiums

Type of PolicyOne Time Premium
Temporary Assurance Rs. 1,944.00
Pure Endowment Assurance Rs. 54,297.00
Endowment Assurance Rs. 56,241.00
Whole Life Assurance Rs. 14,802.00
Fixed Term Assurance Rs. 55,893.00


I hope that this has helped enlighten the people about insurance. In future I will also give the annual premiums and deal with other topics of Insurance.