GENERAL NATURE OF INSURANCE COMPANIES
Insurance companies are financial intermediaries as they collect and invest large amounts of premiums. They offer protection to the investors, provide means for accumulating savings, and channelize funds to the government and other sectors. They are contractual saving agencies that receive, mostly without fail, a steady inflow of funds in the form of premiums or regular contributions to pension plans. They are also in a position to predict, relatively accurately, when and what amounts of insurance or pension benefits have to be paid. Further, their liabilities in most cases are long-term liabilities, for many life policies are held for 30 or 40 or 50 or even more years. As a result, liquidity is not a problem for them, and their major activity is in the field of long-term investments. Since they offer life-cover to the investors, the guaranteed rate of return specified in insurance policies is relatively low. Therefore, they do not need to seek high rates of return on their investments. As a combined result of all this, investments of insurance companies have been largely in government bonds, mortgages, state and local government claims, and corporate bonds.
companies are active in the following fields among others
life, health, and general, and they have begun to operate
the pension schemes and mutual funds also. Insurance business
consists of spreading risks over time and sharing them between
persons and organizations. The major part of insurance business
is life insurance, the operations of which depend on the laws
of mortality. The distinction between life and general insurance
business is that with regard to the life insurance, the claim
is fixed and certain, but in the case of general insurance
business, the claim is uncertain, i.e. the amount of claim
is variable and it is ascertainable only sometime after the
event. Pension business is a specialized form of life assurance.
LIFE INSURANCE CORPORATION
There has been life insurance business in India since 1818. Till 1956, the insurance business was mixed and decentralized. There were a large number of companies of different ages, sizes, and patterns of organization, which conducted only life insurance business, and some companies conducted general insurance business but which did life insurance also. In addition, there were a number of Provident Societies.
In 1956, the life insurance business of all companies was nationalized and a single monolithic organization, the Life Insurance Corporation of India (LIC), was set up. Today, life insurance is almost entirely in the hands of the LIC. The Post and Telegraph Department conducts some business in this area for its employees, but the volume of that business in relation to that of LIC, is negligible and declining.
The objectives of the LIC are:
spread life insurance and provide life insurance protection
to the masses at reasonable cost
mobilize peoples savings through insurance-linked savings
invest the funds to serve the best interests of both the policyholders
and the nation
conduct business with maximum economy, always remembering
that the money belongs to the policyholders
act as trustees of the policyholders and protect their individual
and collective interests
innovate and adapt to meet the changing life insurance needs
of the community
involve all the people working in the corporation to ensure
efficient and courteous service to the insured public
promote amongst all agents and employees of the Corporation
a sense of pride and job satisfaction through dedicated service
to achieve the corporate objective
The LIC has diversified its activities considerably in the recent past by establishing:
1.LIC Housing Finance Limited (LICHFL)
2.LIC Mutual Fund (LICMF)
3.Jeevan Bima Sahayog Assets Management Company (JBS AMC) Limited
4.LIC (International) E. C
TYPES AND STRUCTURE OF INSURANCE PLANS
large number of insurance policies have been introduced and
popularized by the LIC. Life insurance policies make a very
flexible financial instrument. There are only a few basic
types of such policies, viz. term insurance, whole life insurance,
endowment policies, annuity contracts, individual insurance,
group insurance, pension plans, childrens plans, and equity-linked
plans. These policies are mostly specific to different income
and age groups. Whole life policies charge a premium throughout
ones life while endowment policies are taken for a fixed period.
The latter provide life cover and carry an adequate return.
The former also cover life and are intended to be long-term
investments, which cover risk rather than provide return.
However, in order to serve different purposes, these basic
types can be combined in many ways to devise a large number
Life policies of any type can be either with profits or without profits. In the latter case, the sum paid out on maturity or at death is the sum insured in the policy when it was taken out. In the former case, bonuses out of extra earnings from various investments are added to the assured sum periodically during its currency or occasionally paid out in cash. The premiums on with profits policies are higher than those on without profits policies as an allowance for the bonuses paid.
As a financial instrument, life policy is a claim to a future payment of either a lump sum or a stream of income. The value of a policy is the present value of a lump sum or a future stream of income less the value of future premiums. It is possible to withdraw from the obligation to contribute further premiums and of realizing immediately the present value of the policy by (a) surrendering the policy for cash, (b) assigning it in the open market, (c) raising loan with the policy as security, and (d) converting it into a free or paid-up policy. The life insurance policies and pension funds are popular because they act as life cover or protection and medium of saving with the added benefits of profits sharing and many tax advantages. Life policies become vehicles in many cases for linking up such actions as house purchase, provision of school fees, purchase of unit trust units, and avoidance of tax. In many cases now, the provision of life cover becomes a subordinate motive, while the other motives are more important even when taking up a life insurance policy.
VALUATION OF LIFE POLICIES
funds collected through the sale of life plans are invested
in a variety of income-producing assets. The life fund is
built up out of the excess of premiums and investment income
over claims and expenses on revenue and capital accounts.
The life fund is valued from time to time, the valuation being
based on the method of discounting future income and expenditure
back to the present. The rate of discount used is usually
equal to the rate of interest, which the funds assets are
expected to earn on an average, and allowance may be made
for increase in interest rates, future bonuses while determining
the discount rate.
life fund is in surplus if valuation of fund is greater than
the present value of future liabilities. This surplus is available
partly for distribution to policyholders and partly for adding
to reserves. Only without profit policies participate in the
distribution of surplus. There are three basic methods of
distributing surplus to policyholders in the form of cash,
as a reduction in premium, and as an addition to the value
of policy. If the surplus is distributed in the form of addition
to the value of policy, it is known as reversionary bonus.
The bonus may be declared as a simple reversionary bonus calculated
on the original sum assured, or a compound reversionary bonus
calculated on the original sum assured plus any bonuses already
The surplus can be of two types: revenue surplus, i.e. an excess of future income over future outgoings, and capital surplus which arises when the value of the fund is balanced by the values of the various assets of the life fund as recorded in the balance sheet.