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Financial Underwriting Insurable Interest The positive interest in the continued survival of a person or asset in proper form is called Insurable Interest. Neither the insurer nor the insured wants the insured event to happen Moral Hazard Prof.George A Akerloff developed the concepts on Moral Hazard through his theories on Lemon for which he was awarded Nobel Prize. Moral hazard cuts through the fabric of insurable interest by suppression of health and family conditions, suppression of information on income and occupation thereby luring the insurer to offer a higher cover and the insured or his beneficiary becomes a gainer by this. Death should not make one richer Moral hazard can arise by way of: Inflating income [for gaining cover] Deflating income [for gaining free pension] Distorting income [for gaining cover on behalf of others with financial interests] etc. How to avoid MH as regards income? Insurer puts directed questions to elicit information from proposers on their income, source of income and even wealth to ward off the hazard arising out of lack of information on income and sources of income. Life cover is given strictly in proportion to income for which specific guidelines have been issued. Financial underwriting Is the process of linking income and cover offered by the insurer This is done by: Linking income & overall cover limit Linking income & age Linking income and sex of the proposer Financial Underwriting Insurance cover linked to age and income: 18-30 22 times 31-40 17 times 41-50 12 times 51 + 10 times +20% cover can be offered on favourable MHR What do you mean by Total Cover? Insurance cover means the Total rated up Sum Assured under all previous policies + the current proposal’s S.A. + the Term Assurance S.A. if opted for ( Term rider ) + the insurance taken from other Private companies + Group cover (CI rider cover should not be included) Proof of Income Proof of income depends on the TRSA TRSA upto 15 lacs :Proposals to be considered on the basis of Income shown in the proposal form and MHR. TRSA exceeding 15 lacs but upto 25 lacs : C.A.’s certificate showing income for last 3 years giving PAN, duly certified by proponent or PFQ TRSA exceeds 25 lacs : Copies of IT returns/Orders with computation of Income statement for last 3 years duly attested by L.A. and witnessed by DO/ Agent/ ABM(S). Other proof if TRSA exceeds 25 lacs • If income exempted from IT is not mentioned in the ITRs then separate proof to be called for . • To arrive at the maximum permissible insurance, standard dedcution, interest on housing loan, house tax paid etc. can be added to the net income. • Agricultural income : Land revenue records in form of 7/12 extracts / certificate from Revenue authorities (V.A.O) regarding income generated from agriculture. Other proofs if TRSA exceeds 25 lacs Export income : Income certificate in the form of report under section 80HHC & F.No.10CCAC duly completed and attested to be obtained. NRI income : Salary certificate or employment contract to be insisted upon. Bank statement is only a supporting evidence. TRSA for calling Income proof TRSA for calling for proof of income is as under: TRSA on the life of proposer + TRSA on the life of all children aged up to 25 years ( if financed by parents) + TRSA on the life of wife ( if financed by husband)/ TRSA on the life of husband (if proposed and financed by wife) + Total rated up credit given to sons and unmarried daughters aged more than 25 years. Funding from Wife’s income Wife can fund Insurance on the life of her husband subject to the following restrictions: Wife belongs to category 1 or 2 and copies of ITRs for last three years of wife’s income are submitted. Wife should be the proposer on the proposal being considered on the life of her husband and proposal form 340 to be completed. Husband should be insured fully based on his own income. Additional cover to be funded by wife’s income will be upto the amount of insurance on her life. Funding from husband’s Income Funding from husband’s income to women falling under female category I & II is allowed subject to the following conditions: • The maximum cover allowable to women on the basis of their own income to be calculated. • If the TRC is less than Rs. 40 lacs, and the maximum allowable cover is also less than Rs.40 lacs, the shortfall can be funded from husband’s income. • The amount of cover to be funded from husband’s income will not exceed the insurance on his own life. • And the husband’s income should support the insurance on his life as well as funding. Funding from parents income Age of the L.A. Credit from parents income Upto 25 years minor lives – max. Rs.50 lacs major children up to Rs.25 years max. Rs.1 crore. 26 to 35 years 50% of L.A.’s own eligibility 36 to 45 years 30% of L.A.’s own eligibility More than 45 years No credit from parents income Funding from parents income 1. Additional cover as above will depend on the adequacy of income of father and mother. 2. Total insurance that can be funded by them will be 10 times of their 3 years average annual income duly reduced by the total rated up insurance on their own lives and insurance if any on the lives of other family members which is already being financed out of their income. Funding from parents income 3. Copies of ITRs acknowledgement slips in respect of parents income for preceding 3 years must be attached with the proposal. 4. A separate addendum in the form of a letter to be signed by the proponent which will form the basis of insurance contract furnishing the details of insurance on the life of all members of the family and amount of premium financed by parents in respect of each individual should be submitted. MHR Rules SUC MHR limit Upto 1 lac MHR required for NMG cases Upto 10 lacs BM’s/Distinguished club agent Upto 20 lacs* DM’s club member agent Upto 30 lacs** ZM’s club member agent/FSE Up to 50 lacs** * CM’s Club Member/MDRT Upto 1 crore Development Officer In case of CLIAs the limits for these club members will be: *Rs.50 lacs, ** Rs.75 lacs and ***Rs 1 crore respectively MHR Rules SUC MHR limit Upto 2 crores ABM(s)/ BM(s)/ ABM i/c Upto 5 crores BM/ SBM in charge Upto 10 crores Manager ( sales) Above 10 crores Marketing Manager Retired Cl.I & II Officers of LIC who are LIC Agents can give MHR up to a limit of Rs 20 lacs in the ordinary course and if they are CLIAs they can give MHR for proposals up to 50 lacs. Key Man Insurance • Any profit making company can take out insurance on the life of its key employees. A Keyman is defined as an employee with special technical knowledge, whose service contributes substantially to the success of the business and whose death/ resignation would result in a great financial loss to the company. • Only Term assurance Plan is allowed. Nomination and Assignment are not allowed. Only absolute assignment in favour of keyman in case of his leaving the job of the company is allowed. Requirements for Keyman • Form no 340 and keyman questionnaire should be submitted, signed by the person authorized by the company • MHR by Manager(S)/MM • A certified true copy of the board resolution stating therein the name of the Keyman, quantum of Insurance and the name of the officer authorised to sign the proposal form and allied papers. • Audited accounts, Balance sheet, P&L a/c of the company for the last 3 years and form 16 in respect of the keyman. • Articles of Association and Memorandum of Association of the company. Quantum of Insurance • Key man drawing salary but without any shareholding in the firm The insurance will be restricted to 10 times of the salary for the latest financial year as reflected in the form 16 and should be lower of 3 times of avg. gross profit or 5 times of average net profit. Key man with shareholding in the firm and with or w/o drawing salary. Maximum allowable should be lower of 3 times of avg. gross profit or 5 times of average net profit. Partnership Insurance In a partnership deed it is generally provided that in the event of death of any partner, the surviving partners will have the option to purchase the deceased partner’s share in the firm. However, for this purpose, the Partnership firm should have sufficient cash available and such ready cash will be available if the firm insures the lives of all its partners. Requirements • Proposal form 340 • Copy of deed of partnership duly attested by the partner authorised to sign the insurance proposal • Copies of audited balance sheet and P&L A/c for the last 3 years showing the capital amount of the partners. • Copies of ITRs of the firm for preceding 3 years • Letter of authority in favour of partner signing the proposal Quantum • Only Term Insurance plan is allowed. • Maximum insurance to be allowed will be equal to the closing capital balance of partner as at the end of the previous financial year + proportionate amount of goodwill, depending on the share in profits of the individual partner. • Goodwill to be taken will be the last 3 years net profits. • Partnership Insurance to all the partners should be insisted. Employer-Employee Scheme • Policy on the life of an individual employee where the premium is paid by the employer. • The S.A. will depend on individual’s eligibility only. • The types of plan offered can be other than Term assurance. • The employee should not have beneficial ownership in the employer-company in excess of 5 %.
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