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How to buy various types of insurance policies?

For many average insurance policy buyers verifying conditions and clauses that covers all the possible risks in their policy is intimidating thoughts. They over rely on what an insurance agent told to them. There mayalso be a possibility of communication gap what he told and what the policy buyers understand. Even title of the policy may sometime mislead the buyers. For that reason, buying an insurance policy is not mere looking at the value of insurance cover, premium payable and period of insurance.  You need to carefully look at the special clauses and conditions in policy documents,before buying them.

You may find different types of insurance policies offered by different insurance companies in the market. Life insurance policy, Health insurance policy, Property Insurance policies including plant and machinery, boiler, shipping insurance, stock of goods and so on are the examples of insurance policies. The eventualities covered by them are different like death of the policy holders, hospitalization of insured, damages due to fire, theft, earth quake, flood etc. There are many eventualities in which insurance company is not liable to make good of the financial losses to the policy holder because of special conditions contained in policy documents. When your insurance policy fails to salvage in a situation of unforeseen tragedies, the very purpose of buying an insurance policy by you is defeated. Failing to get compensation, might also leave the policy holder in the lurch. Therefore buyer of the policy must ask insurance company to cover the risk which is missing in the policy document intended to be bought, even at the cost of higher premium. Let us look at purpose of each policy and how they matter to individual policy buyers.

Life insurance policies

The Life insurance is the favorite investment destination of millions of people in India. The Life insurance policy holder gets income tax rebate for premium paid , up to Rupees one lakh and fifty thousand, under section 80 C of IT Act, in a financial year. In case of unfortunate death of the policy holder, the nominee of the deceased (Policy Holder) receives full value of the insured amount. It is essential to buy a life insurance policy by every person for a substantial insurance amount, which would salvage the dependents in a situation of unforeseen tragedies. In endowment policies, the policy holder gets back the assured amount after the maturity of the policy with the accrued bonus on the policy. Life insurance policies are available for different maturity periods and according to the need of the policy buyers. Endowment Policies, Money Back Policies, Pension Plan, Children education Plan, Equity connected plan etc, are some of the popular products which the Life Insurance companies are selling.

Health insurance

Health insurance covers the expenditures associated to treatment and medical expenditures. The advantage of health insurance is cash free treatment at network hospitals. The insured would choose a hospital (except in emergency) of his choice and intimate the TPA (Third Party Administrator) of the insurance company, in advance about his intention of getting admitted to a hospital for the operation/treatment of particular ailment. The TPA would confirm that chosen hospital is still in the list of their network hospitals for cashless hospitalization. A number of hospitals insist health insurer to confirm whether patient’s claim is admissible or not (This is not possible in emergency cases). Even after confirmation from insurance company, fresh approval needs to be required if there is any change in the treatment. The net-work hospitals would receive policy holder’s hospitalization and medical bill expenses directly from the Insurance Company. Of course, the excess bill over settlement of claim if any to be borne by the patient. In the event of treatment was carried out in a non-network hospital the policy holder has to pay the hospital bill for getting discharged from the hospital and later on submit their medical insurance claim to the TPA of insurance company. In case of non-network hospitals, Health Insurance companies settle policy holder’s hospitalization and medical bill expenses for the treatments carried out only in such hospitals which adhere to stipulations like availability of minimum number of beds in the hospital and other terms and conditions mentioned in the insurance policy. One can buy health insurance policy for the entire family at a lower price compared to individual plan for each member. 

Personal Accident Insurance

Besides life insurance and health insurance, one should consider buying personal accidental insurance policy. Personal accidental policy covers death or disability due to an accident. The premium for personal accidental insurance policy is very low and the policy is unique because it offers three benefits. If the policy holder dies in the accident, it provides lump-sum payment of insured amount to the nominee. If the insured person is admitted to hospital on account of accident, the policy covers hospitalization expenses for injury. If the insured person becomes disabled due to accident the policy provides financial support. The agent rarely tries to sell this policy because they get a nominal commission of Rs.20-30. However some life insurance companies cover personal accident insurance as a rider along with life insurance policy. 

Property protection insurance

Property protection insurance includes flats, houses, residential and commercial buildings. A house is a costliest asset but very few people insure it. The house insurance is required only for the reconstruction value of the structure and it need not cover the cost of the land.  Beside standard policy which normally covers fire and earth quack one can go for comprehensive plan that covers wide range of risks like fire, earth quack, lightning, storm, flood, land slide, vehicle impact, rioting, arson and bursting  of pipes and tanks. The policy can be expanded to cover the burglary and breakage for which additional premium insurance to be paid.  It is the responsibility of the insured to keep the policy alive by payment of premium on due date or before the due date.  For house buildings, flats and apartments insurance companies generally ready to cover insurance for longer period say for 15 years and premium payable for longer period insurance is cheaper compared to policies where annual premium is paid.

Insurance on Plant and machinery

Insurance companies provide insurance for plant and machinery, boiler, stocks of raw materials, semi-finished, finished goods and goods under transport etc. against risks associated with fire, theft, floods, earth quake, etc.

Why banks insist insurance for 120% value of inventories?

It is important to remember that whenever the value of the insurance cover is less than the actual stocks of inventory or value of the plant and machinery, full claim will not be settled by the insurance company. This is because the insurance company settles insurance claim proportionately to the damage of the assets for ‘under insured’ assets.

For examples a factory unit insures its inventory worth Rs.10 lacs against CC limit of Rs.10 lakh sanctioned by the bank. If at the time of fire accident the unit was holding inventories more than the insured amount say worth Rs.15 lakh in its godown. In the insurance company parlance, the unit is holding only for 2/3rd of inventory held in the godown. In this case insurance available is only 2/3rd of Rs.10 lakh or actual damage whichever is less as the stock is under insured. Take another example that a partial damage of inventory to the extent of only Rs.6 lacs in the above said fire accident. The factory owner naturally claims damage of Rs.6 lacs from the insurance company, as he holds insurance for Rs.10 lacs.  In this case the insurance company settles claim only up to Rs.4 lacs because only 2/3rd of  stock was insured (the owner has insured inventories only for Rs.10 lakh, which is actually two third of 15 lacs inventories held in the godown). The insurance company therefore settles the claim proportionate to damage of insured stock. Sometime, a unit is holding inventory more than credit limit which complicates settlement of claim. To avoid such complications banks insist for insurance coverage of 120% of inventory created out of bank finance.  Banks hypothecation clauses will be incorporated in the insurance policies where ever the stocks are hypothecated to the banks. Claims if any will be directly settled to the banks.

The advantage of comprehensive insurance

Vehicle/Automobile insurances cover damages and legal financial expenditures of the third party in case the due to an accident with the insured vehicle. This type of insurance is called ‘third party insurance’. Holding a ‘third party insurance’ is legal binding on the owner of a motor vehicle. The comprehensive insurance held by the vehicle owner provides insurance cover against theft of the vehicle, self-damage on the vehicle due to accident and personal accident insurance of the driver etc. in addition to third party insurance. Since third party insurance meets the losses of third parties and not the losses of the owner like theft or self-damage. Bankers want their security value remain intact and therefore insist for comprehensive insurance.

Hypothecation clauses

The properties, inventories, plant and machineries, motor vehicles which are bought by the borrower out of bank finance should be offered to bank as security for the loans and advances made by them. The insurance company records the name of the financing bank in its records as well as on the face of the policy. This ensures that in the eventualities of settlement of claims, the money should directly reach the bank (financer) and not to the bank borrower.

The definitions of insurance, policy, risk covered, special clauses etc.

Insurance means “a promise of a sum of money as compensation in the event of losses”. An insurance policy means a document containing the terms and conditions of insurance contract/ agreement between the insurer (Insurance Company) and the insured (policy holder) that may be an individual or a company or any other entity. The risks covered under insurance policies means the Insurance Company declares in the policy document, that the list of eventualities in which it is liable to make good of the financial loss to the policy holder. The special clauses mean that the list of eventualities in which Insurance company is not liable to make good of the financial loss to the policy holder. An insurance policy document exhibits the name of the assured, the sum insured, premium paid or /payable and periodicity of premium payable, validity period of the policy, details of risk covered, clauses for claiming the settlement and any other special clauses which prohibits policy holder from claiming the financial losses. It is the responsibility of the insured to keep the policy alive by payment of premium on due date or before the due date. The insurer undertakes to make good of financial loss to the extent of sum insured at the time of calamities. The insurance business in India is governed under Insurance Act, 1938 and Insurance Regulatory & Development Authority Act. IRDA is the regulatory authority for insurance business in India.

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