Equity index annuity
Annuity is a periodical level payment made in exchange of the purchase money for the remainder of the life time of a person or for a specified period. The recipient is called annuitant since at the time of death the insurer does not suffer loss medical examination is not necessary. However age proof is essential at the time of the proposal. The payment of annuity generally continues up to the life. So the premium rate is determined according to longevity.
II. Kinds of annuities
1. Immediate annuities: The immediate annuity comes into effect immediately after the end of the first income period. The purchase money is collected in single installment. Evidence of age is always for at the time of entry.
2. Annuity due: Under this annuity the payment of installment starts from the time of the contract. The first payment is made as soon as the contract is finalized. The premium is generally paid in single installment but may be in installments also. The difference between the annuity due end immediate annuity is that the payment of each period is paid in its beginning under the annuity due contract while at the end of the period in immediate annuity contract.
3. Deferred annuity: Under this annuity the payment of annuities starts after a determent period or at the attainment by the annuitant of a specified age. The premium may be paid as a single premium or in installments. The payment of premium continues until the stated date for commencement of the installments or until prior death of the annuitant. At the death, the premiums may be returned without interest. The deferred annuity can be surrendered for cash at the end of or before the deferment period. No surrender value is payable after the deferment period. This type of annuity is useful to those who desire to provide a regular income for themselves and their dependants after the expiry of a specified period.
4. Life annuity: This annuity offers regular income to the annuitant throughout the life time. No payment is made after the death. So if the annuitant dies before receiving all the amounts of the purchase price at loss. But if a person survives for a longer period than expected the person is benefited by this annuity.
5. Annuity payment is guaranteed by the insurer up to specified period. If the annuity dies before the specified period annuity will continue up to the unexpired period. This annuity is of two types namely immediate annuity with guaranteed payment, deferred annuity with guaranteed payment and retirement annuity policy.
III. Insurance contract
Insurance may be defined as a contract between two parties, whereby one party called insurer undertakes, in consideration of a fixed amount called premium, to pay the other party called insured, a fixed sum of money on the happening of an event. Insurance contracts are based on certain fundamental principles. These principles are common to all types of life, fire, marine and miscellaneous insurance contracts, with the exception of the principle of indemnity, which is not applicable in case of life insurance contract, since it is a contingent contract.
IV. Principles of insurance contracts
1. (a) Agreement: An agreement includes offer and acceptance. Acceptance requires an offer. An offer may be preceded by an invitation to offer. Insurance, the canvassing of agents or even the publication of prospects is an invitation to offer. When the prospective policy holder proposes to enter into a contract, it is an offer. The offer may be given to the insurance company in the form of filling up a proposal form. When the insurance company accepts the offer, it becomes an agreement. Hence, the important fact is that the acceptance is essential. When the insurance company accepts the offer, it issues an insurance policy to the insured.
(b) Legal consideration: When the insurance promises to pay a fixed sum or the happening of an event. It must have some return for such a promise. The return is called legal consideration. The return may be in the form of money called premium. It need not be in the form of money called premium. It need not be in the form of money only, but may assume any other valuable form, such as, benefit, profit, right, interest. Hence, without a legal consideration, normally in the form of premium, the contract of insurance cannot be entered into.
(c) Competent to make contract: The partners to the contract must be competent. A person is competent to enter into a contract when he has attained the age of majority according to law, he is of sound mind is not disqualified from entering into contract by any law. Hence, a minor cannot enter into a contract, except when it is contract for necessities of life. Likewise, a person of sound mind alone can enter into a contract. Even a person of unsound mind can enter into a contract. If it can be proved that at the time of entering into contract, he possessed a sound mind in the same way a person must not have been disqualified by any law, when he enters into a contract.
(d) Free consent: When a person enters into a contract, he must enter on his own free will. He should not be compelled to enter into a contract. Such absence of free consent may b e due to coercion, undue influence, fraud or misrepresentation. Coercion refers to any act of threatening a person physically or psychologically. Undue influence refers to exercising the power over a person, which arises due to the special relationship existing between the parties, such as doctor and patient, teacher and student, guardian and ward. Fraud refers to cheating. Misrepresentation refers to representing a false fact or not representing a true fact. In case of fraud, the contract is void. In all other cases the contract is voidable at the option of the aggrieved party. Hence, free consent is essential for entering into a contract.
(e) Certainty: An agreement must not be vague, loose and uncertain. The terms and conditions must be clearly understood by both the parties to the contract. If the proposer turns out to be illiterate, the insurer must analyze or make the terms and conditions clear to him. Otherwise, there will be no mental accord. The insurance company issues a printed policy document which contains all the terms and conditions of insurance contract.
(f) Possibility of performance: The agreement must be capable of being performed. A promise to do an impossible thing cannot be enforced. The insurer must b e able to pay the money. On the happening of the event and the insured is also executed to make regular payment of the premium. Otherwise, it would define the meaning of the insurance plan.
(g) Writing and registration: The law requires formalities of writing and registration, in some special cases. An oral contract is also a valid contract, but for insurance, the agreement must be in writing. They must be properly signed, stamped and registered. In insurance, the formalities are fulfilled as the proposer makes his proposal through a printed from duly signed by him and also the insurer issues the original policy document, property signed and stamped to the insurer.
(h) Lawful object: In order to make a valid contract, the object of the agreement must be lawful. An object that is not forbidden by law, not immoral, not opposed to public policy and which does not defeat the provisions of any law is lawful. Hence, when a contract of insurance is entered into, all these factors must be thoroughly considered.
Apart from all these principles which are to be adhered to while entering into a contract, the following principles are essential for a contract of insurance.
2. Insurable interest: The insured must have an actual interest, called the insurable interest in the subject matter of the insurance. It means that the insured stands in such relation to the subject matter of insurance that suffers loss by its destruction of damage and is benefited by its safety or existence. Insurable interest to be valid, must satisfy the following three conditions:
a. There must be a physical object, life, limb or property, which is subjects to risk and the risk can operate on the subject and cause damage or destruction.
b. There must be a potential liability and thus must be caused by the happening of an event which is insured.
c. The insured must be in a legally recognized relationship with the subject matter of the insurance, whereby, he benefits from continued safety and suffers from damage or destruction to it.
In property insurance, anyone who owns a house, furniture goods or an automobile has an insurable interest in it. Agents who act on behalf of their principals, administrators, executors and trustee?s mortgagees also have insurable interest in the properties entrusted to them in such capacities.
In life insurance, insurable interest exists between the parties given below, on the basis of special relationship existing between them.
a. Husband and wife: Stemming form the ancient concept that marriage is a contract which in force till death do us apart; man and wife are one person. Hence, a husband and wife have a mutual, unlimited insurable interest in each other.
b. Relatives: For others, the right to insure does not arise automatically from family relationship. A father of his or her son, unless some direct financial loss is likely to arise from his death. In the same way, if the relationship between brother and sister, grand parents and grand children meet the pecuniary test of insurable interest, their lives can be insured.
c. Creditors and debtors: A creditor has a right to insure the life of his debtor to the extent of debts; because he stands to loose if the debtor dies without paying the debt.
d. Partners: The partners of a partnership firm have an insurable interest in the lives of their copartners, as the death could cause financial loss to the remaining partners.
3. Indemnity: The principle of indemnity is the regulating principle of insurance and is applicable in all contracts of insurance, except life, personnel accident and sickness insurance. Under the insurance contract, the insurer undertakes to indemnity the insured against loss suffered by the latter. If the insured suffers a loss, the insured shall be indemnified only to the extent of loss, in terms of money, but not for anything more than that. This in conformity with the basic concept of insurance, whereby an insurer is required to compensate the unfortunate few for the loss they sustain but does not allow earn profit from the misfortune.
4. Mitigation of loss: This principle places a duty on the insured to make every effort and to take all steps, to mitigate or minimize the loss, in the event of some mishap to the insured property. This principle is included in order to check the insured not to become careless or inactive.
5. Attachment of risk: The contract of insurance can be enforced only if the risk is attached. If for any reason, the risk does not run or could not fun, the consideration for which the premium was given fails and the insurer must return the premium.
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