How insurance policies are bought and written

How insurance policies are bought and written

We have already established in earlier chapters why an individual should have insurance, what insurance is and the principles behind it. So, how does an individual go about buying an insurance policy? Well, first of all they will need to have heard that insurance is available.

Source of preliminary information

Insurance companies spread awareness of, and generate interest in, their products through mass media advertisements. As we will see later (section G5C), the IRDA has issued specific guidelines on what prospectuses and advertisements issued by insurance companies should say. An individual may conclude from this information that they need insurance and approach the company or one of its agents. We will look at prospectuses in more detail in section G5C.

Alternatively, an individual may be approached by a life insurance agent who will introduce them to the products of the life company they represent.

Purpose of buying insurance

Insurance should be bought by a person based on their needs. There are many insurance products available in the market, and which to buy should be decided after careful consideration. Based on their requirements, an individual may choose to purchase a whole life insurance policy, an endowment policy, a money-back policy, a child plan or a retirement plan etc. We shall look at these products in detail in later chapters.

How life insurance is written

Most policies are written on what is known as a single life basis, with only one life insured. Usually, but not always, the person taking out the policy and the life insured are one and the same person. This is known as an own life policy. Policies can also be taken out jointly by two insureds – for example a husband and wife can take out one policy, with both being the policyholder and the life insured. This is known as a joint life policy.

Proposal form

Advertisements and the prospectus are the means by which insurance companies invite proposals. The person seeking insurance is called the proposer – they are proposing themselves for life (or indeed any kind of) insurance. The proposer will complete the proposal form and submit it to the insurance company. The information in the proposal form is evaluated by underwriters who will then choose to accept or reject the proposal, or to accept it on modified terms. We will look at what the proposal form looks like and its importance in section G1.

Quotations

A quotation is simply that – a quotation as to how much the policy will cost and on what terms. It will often be held open for a set period, during which the proposer can choose to take the policy or decide that it is not for them. If the proposer accepts the quotation, then the insurance company is bound to the terms and price that were offered in it. However, if a material fact relating to the proposer changes during the period of the quotation, then the insurance company is not bound to it.

Insurance contract

An insurance contract commences from the date on which the insurance company issues the first premium receipt (see section G3A). The policy document can be sent later (see section G4). If a person dies before the issue of the policy document, but after the issue of first premium receipt, the insurance company is liable to pay the death claim.

Renewals

Life insurance policies are long-term policies, running for a set period of often many years. Health insurance policies on the other hand, issued by non-life companies, are short-term policies that run for only one year. At the end of the year the policyholder is advised to renew the policy so that they do not lose the benefit of the protection that the insurance provides, and also because the insurance company will not want to lose the customer. The insurance company will therefore invite the policyholder to renew their policy. We will look at renewal in a little more detail later in the chapter.

Summary

Now that we have set the scene by giving an overview of how insurance is bought, we can build on this knowledge by looking at the documents that are necessary in insurance and at some of the technical terms used in them. To put all this into a practical context we will follow the case study of Nitish Sharma and his life insurance agent, Mr Kumar.

Anand Khemka
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