Insurance plays a crucial role in financial planning by protecting individuals and businesses from potential financial losses. Broadly, insurance is classified into Life Insurance and General Insurance, each serving different purposes and covering different risks. In addition to understanding the types of insurance, it is essential to be familiar with key policy documents that form the legal foundation of an insurance contract.
Download UNIT 4 – Life and General Insurance with Policy Documents Notes
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Life Insurance
Life insurance is a contract between the policyholder and the insurer, where the insurer promises to pay a specified amount to the nominee in case of the insured’s death or upon maturity of the policy. The primary purpose is to provide financial security to the family and dependents.
1. Term Insurance
Pure risk cover that pays only in case of the policyholder’s death during the term.
It is the most affordable form of life insurance.
Example: A ₹50 lakh cover for 20 years at a low premium, but no maturity benefit if the insured survives.
2. Endowment Policy
Offers a combination of insurance and savings.
Pays the sum assured either on death or on survival at the end of the policy term.
Suitable for those wanting long-term savings with life cover.
3. Unit Linked Insurance Plans (ULIPs)
Combines investment and insurance.
Premiums are partly used for life cover and partly invested in market-linked funds (equity, debt, or hybrid).
Returns depend on market performance, making it a higher-risk, higher-reward option.
General Insurance
General insurance provides coverage for assets, liabilities, and health against specific risks, but it does not involve a savings or investment component. Policies are usually valid for one year and need periodic renewal.
1. Fire Insurance
Covers damage to property caused by fire, lightning, explosion, or similar perils.
Often used by businesses and homeowners to protect buildings, machinery, and stock.
2. Marine Insurance
Protects against loss or damage to goods in transit, ships, and cargo.
Includes marine cargo insurance (for goods) and marine hull insurance (for the ship itself).
3. Health Insurance
Covers medical expenses due to illness, surgery, or accidents.
May include hospitalization costs, pre- and post-hospitalization expenses, and even critical illness coverage.
4. Motor Insurance
Mandatory for all vehicle owners in India.
Third-party liability insurance covers damages caused to other people or property.
Comprehensive insurance covers both third-party liabilities and own-vehicle damages.
Key Policy Documents
When buying insurance, certain documents form the backbone of the contractual relationship between the insurer and the policyholder.
1. Proposal Form
The application form filled by the proposer with personal details, health information, and risk details.
Forms the basis for the insurer to decide whether to accept the risk and at what premium.
Any false declaration here can lead to claim rejection under the principle of utmost good faith.
2. Policy Bond
The official document issued by the insurer once the proposal is accepted.
Contains terms and conditions, policy number, sum assured, premium details, and coverage specifics.
It acts as proof of the insurance contract.
3. Endorsements
Written changes or additions made to the policy after it has been issued.
For example, adding a nominee, changing address, or including extra coverage through riders.
Importance of Understanding Policy Documents
They clearly define rights and obligations of both parties.
Help policyholders avoid misunderstandings about coverage, exclusions, and claim procedures.
Ensure transparency and compliance with legal requirements.