Things to know before buying life and non-life insurance policies

(This post explains various types of insurance policies available in the market like Life Insurance policies, Health insurance policies, Property Insurance policies including plant and machinery, boiler, shipping insurance, stock of goods, etc., and conditions and clauses to be verified by the buyers before buying them).

For many average insurance policy buyers verifying conditions and clauses that cover all the possible risks in their policy is intimidating thoughts. They over-rely on what an insurance agent told them. There may also be a possibility of a communication gap between what he told and what the policy buyers understand. Even the title of the policy may sometimes mislead the buyers. For that reason, buying an insurance policy is not merely 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, and Property Insurance policies including plant and machinery, boiler, shipping insurance, stock of goods, and so on are examples of insurance policies. The eventualities covered by them are different like the death of the policyholders, hospitalization of the insured, damages due to fire, theft, earthquake, flood, etc. There are many eventualities in which an insurance company is not liable to make good of the financial losses to the policyholder 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 policyholder in the lurch. Therefore buyer of the policy must ask the insurance company to cover the risk that is missing in the policy document intended to be bought, even at the cost of a higher premium. Let us look at the purpose of each policy and how they matter to individual policy buyers.

Life insurance policies

Life insurance is the favorite investment destination of millions of people in India. The Life insurance policy holder gets an income tax rebate for premiums paid, up to Rupees one lakh and fifty thousand, under section 80 C of the IT Act, in a financial year. In case of the unfortunate death of the policyholder, the nominee of the deceased (policyholder) receives the full value of the insured amount. It is essential to buy a life insurance policy for every person for a substantial insurance amount, which would salvage the dependents in a situation of unforeseen tragedies. In endowment policies, the policyholder 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 needs of the policy buyers. Endowment Policies, money-back policies, Pension Plans, Children’s education Plans, equity-connected plans, etc, are some of the popular products that Life Insurance companies sell.

To know details of various types of life insurance policies click ‘Different types of policies‘

Health insurance

Health insurance covers the expenditures associated with 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 inform 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 a particular ailment. The TPA would confirm that the chosen hospital is still on the list of their network hospitals for cashless hospitalization. Several hospitals insist health insurers confirm whether a patient’s claim is admissible or not (This is not possible in emergency cases). Even after confirmation from the insurance company, fresh approval needs to be required if there is any change in the treatment. The network 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 being carried out in a non-network hospital, the policyholder has to pay the hospital bill for getting discharged from the hospital and later on, submit their medical insurance claim to the TPA of the insurance company. In the case of non-network hospitals, Health Insurance companies settle the policyholder’s hospitalization and medical bill expenses for the treatments carried out only in such hospitals that adhere to stipulations like availability of a minimum number of beds in the hospital and other terms and conditions mentioned in the insurance policy. One can buy a health insurance policy for the entire family at a lower price compared to an individual plan for each member. 

Personal Accident Insurance

Besides life insurance and health insurance, one should consider buying a personal accidental insurance policy. Personal accidental policy covers death or disability due to an accident. The premium for a personal accidental insurance policy is very low and the policy is unique because it offers three benefits. If the policyholder dies in the accident, it provides a lump-sum payment of an insured amount to the nominee. If the insured person is admitted to the hospital on account of an accident, the policy covers hospitalization expenses for injury. If the insured person becomes disabled due to an 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 a 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.  Besides standard policy which normally covers fire and earthquakes, one can go for a comprehensive plan that covers a wide range of risks like fire, earth quack, lightning, storm, flood, landslide, 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 is to be paid.  It is the responsibility of the insured to keep the policy alive by payment of the premium on the due date or before the due date.  For house buildings, flats, and apartments insurance companies are generally ready to cover insurance for a longer period say for 15 years and the premium payable for a longer period of insurance is cheaper compared to policies where the 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, earthquake, etc.

Why do banks insist on 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 the value of the plant and machinery, the full claim will not be settled by the insurance company. This is because the insurance company settles insurance claims proportionately to the damage of the assets for ‘underinsured’ assets.

For example, a factory unit insures its inventory worth Rs.10 lacs against a CC limit of Rs.10 lakh sanctioned by the bank. If at the time of the 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 2/3^rd of the inventory held in the godown. In this case, insurance available is only 2/3^rd of Rs.10 lakh or actual damage whichever is less as the stock is underinsured. Take another example partial damage of inventory to the extent of only Rs.6 lacs in the above-mentioned 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 the claim only up to Rs.4 lacs because only 2/3^rd of the stock was insured (the owner has insured inventories only for Rs.10 lakh, which is two-thirds of 15 lacs inventories held in the godown). The insurance company therefore settles the claim proportionate to damage of insured stock. Sometimes, a unit is holding inventory more than the credit limit which complicates the settlement of a claim. To avoid such complications banks insist on insurance coverage of 120% of inventory created out of bank finance.  Banks hypothecation clauses will be incorporated in the insurance policies wherever 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 legally 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 to remain intact and therefore insist on comprehensive insurance.

Hypothecation clauses

The properties, inventories, plant and machinery, and motor vehicles that are bought by the borrower out of bank finance should be offered to the 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 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 is a document containing the terms and conditions of the insurance contract/ agreement between the insurer (Insurance Company) and the insured (policyholder) which may be an individual, a company, or any other entity. The risks covered under insurance policies mean 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 policyholder. The special clauses mean the list of eventualities in which the Insurance company is not liable to make good on the financial loss to the policyholder. An insurance policy document exhibits the name of the assured, the sum insured, premium paid or /payable and periodicity of the premium payable, the validity period of the policy, details of risk covered, clauses for claiming the settlement, and any other special clauses which prohibits policyholder from claiming the financial losses. It is the responsibility of the insured to keep the policy alive by payment of the premium on the due date or before the due date. The insurer undertakes to make good on financial loss to the extent of the sum insured at the time of calamities. The insurance business in India is governed under the Insurance Act, of 1938 and the Insurance Regulatory & Development Authority Act. IRDA is the regulatory authority for the insurance business in India.

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. The article should not be construed as solicitation material. It is based on industry experience and several secondary sources on the internet; and is subject to changes. Please read the related product brochures for exclusions, terms and conditions, warranties, etc. carefully before concluding a purchase