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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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posted:9/21/2011
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