Car Insurance

Car Insurance also known as Motor Insurance
Car insurance concept a bit difficult to understand. Few people consider it as an investment but it is not exactly an investment because it does not yield returns like a financial instruments such as fixed deposit or a mutual fund. However, it is an important part of your financial plan as it prevents financial losses in cases like a car accident.Car insurance is based on the simple concept of risk mitigation. You pay a premium to an insurance company which pay for the car repairs as per the terms and conditions of the policy.

Policy Features and Clauses of Life Insurance

Policy features of Life insurance

• Effective Date of policy: Effective date of policy is the date that is given in the policy document with some of below details  

1. Complete protection that takes effect as of the policy effective date.
2. The Incontestability Clause’s contestable period begins.
3. The suicide clause begins.

• Backdating Policies

1. Backdating is the practice of allowing the policy effective date to be set in the past.
2. The maximum number of months for backdating a policy is six.
3. For most companies, backdating is good for sales. For instance, reducing the age of the proposed insured by a month can result in lower premiums. 
4. It can also allow applicants into the acceptable age range for policies that have age limits. 
5. Furthermore, by aligning with the policy owner’s income pattern or dates, it can make payments convenient. 

• Policy Provisions: Policy provisions act as contractual provisions defining the limits of a certain life insurance policy.

• Policy Clauses 

1. Ownership Clause: According to the ownership clause, the policy owner possesses all contractual
2. rights in the policy while the insured is still alive. Such rights include:
3. Selection of a settlement option  Naming and changing of the beneficiary designation  Assigning ownership of the policy to someone else  Selection of dividend options  Canceling the policy and selecting the non-forfeiture option
4. Taking out a policy loan

• Entire Contract Clause

1. According to the Entire Contract Clause, the Life Insurance document, the attached application, and riders constitute the complete contract between the insurer and policy owner.

Important Points: 

• To exercise these rights, the policy owner typically does not need the beneficiary's consent.
• No statement can be used by the insurer to void the policy unless the statement is a material misrepresentation and is part of the application. In addition, any officer of the company cannot change the terms of the policy unless the policy owner agrees to the change.

Incontestability Clause

Under the Incontestability Clause, the company is given a specific period of time, usually one to two years, to find out any cause for contesting the policy. After the contestable period has expired, the insurer cannot contest the policy. 

Suicide Clause

A typical Suicide Clause states that the face amount of the policy will not be paid if the insured commits suicide within a specific period of time, usually one to two years,after the policy is issued. The only payment is a refund of the premiums

Reinstatement Clause

If the premium is not paid during the grace period, a life insurance policy may lapse for nonpayment of premiums. The Reinstatement Clause allows the policy owner the right to reinstatement of a lapsed policy under certain conditions. The conditions are:

• The insured must provide evidence of insurability, a condition that insurers often waive for lapses of less than two months.

• All overdue premiums plus interest must be paid.

• A policy loan must be repaid or reinstated.

• The policy has not been surrendered for its cash value.

• The lapsed policy must be reinstated within a certain period, usually three to

seven years.

If the policy owner wishes to continue the same type of life insurance coverage, it usually is more economical to reinstate a policy than to buy a new one. This is because a new policy is likely to have a higher premium, since it will be issued

when the insured is older.

Misstatement Clause

The insured's age may be misstated in the application. Under the Misstatement Clause, the amount paid is the amount of life insurance that the premium would

have purchased at the insured's correct age.

EXAMPLE: 

• Assume that Mary's correct age is thirty but is incorrectly recorded in the application as age twenty-nine. Assume that the premium for an ordinary life application at age twenty-nine is $20.00 per $1,000.00 and $21.00 per $1,000.00 at age thirty.

• If Mary has $15,000.00 of Ordinary Life Insurance and dies, only 20/21 the of the proceeds will be paid, or $14,286.00.

Beneficiary Designations

The beneficiary is the person or party named in the policy to receive the policy proceeds. There are numerous Beneficiary Designations in life insurance. They include

the following:

The Primary Beneficiary – is the first party who is entitled to receive the proceeds at the insured's death.

The Contingent (Secondary) Beneficiary – is the beneficiary entitled to the policy proceeds if the primary beneficiary is not alive.

A Revocable Beneficiary – designation means that the policy owner has the right to change the Beneficiary Designation without the beneficiary's consent. An Irrevocable Beneficiary designation means that the policy owner cannot change the beneficiary without the irrevocable beneficiary's consent.

A Specific Beneficiary – designation means that the beneficiary is named and can be identified. For example, Martha Smith may be specifically named to

receive the policy proceeds if her husband should die.

A Class Beneficiary – designation means that a specific individual is not named but is a member of a group to whom the proceeds are paid.  One example of a

Class Beneficiary Designation would be "children of the insured”

Change of Plan Provision

The Change of Plan Provision allows the policy owner to exchange the present policy for a different one. If the change is to a higher premium plan, such as exchanging an ordinary life policy for an endowment at age sixty-five, the policy owner must pay the

difference in cash values between the two contracts plus interest at a stipulated rate.

Important Points 

• If the net amount at risk is reduced, evidence of insurability is not required. 

• If the net amount at risk is increased, evidence of insurability is required.

Life Insurance Premiums as Percentage of Income

Using the Premiums as Percentage of Income rule, a minimum of six percent of the insured’s gross income (as the primary income earner) should be spent on life insurance premiums. Add an additional one percent for each dependent. Once the applicant determines the percentage of the income that should be spent on life insurance premiums, the agent may advise purchasing as much life insurance as the applicant can get for that premium amount. 

There are other more comprehensive methods used to calculate life insurance need. Overall, these methods are more detailed than rules of thumb and provide a more complete view of insurance needs. These methods are: 

• The Family Needs Approach 
• Income Replacement 
• Estate Preservation and Liquidity Needs

The Family Needs Approach requires the applicant to purchase enough life insurance to allow his/her family to meet its various expenses in the event of the applicant’s death. Under the family needs approach, the applicant divides his/her family's needs into two main categories: 

1. Immediate Needs at Death (Cash Needs)
2. Ongoing Needs (Net Income Needs) 

Once the applicant determines the total amount of his/her family's needs, he/she may purchase enough life insurance to cover that amount.

The Income Replacement calculation is based on the theory that the purpose of life insurance is to replace the loss of the applicant’s income when he/she dies. Under this approach, the amount of life insurance the applicant should purchase is based on the value of the income that he/she can expect to earn during his/her lifetime, taking into account such factors as inflation and anticipated salary increases.

The Estate Preservation And Liquidity Needs approach attempts to calculate the amount of life insurance needed upon the applicant’s death for items such as taxes, expenses, fees, and debts, while preserving the value of his/her estate. This method takes into consideration the amount of life insurance needed to maintain the current value of his/her estate for his/her family, while providing the cash needed to cover death expenses and taxes

THE APPLICATION PROCESS

Introduction

First things first—to get insured, one needs to get an application from the insurance company. The applicant then fills out the form, signs it, and returns it for consideration. It is often required that the applicant be physically present in front of the agent while the questions are being filled out on the application. The information provided in the application form gives the underwriters of the insurance company a basis for

determining if they will issue a policy.

Parties involved in an Insurance Application

There are three parties relevant to an insurance application, namely: 

The Proposed Insured – This is the person whose life is being insured by the life insurance policy. 

The Applicant – This is the person applying to the insurance company for life insurance and may or may not be the proposed insured. 

The Policy Owner – This is the person that usually pays the premiums and the person who retains all rights to any values or options contained in the policy.

Factors affecting the car insurance cost

FACTOR # 1

Value of your Car Insured Declared Value (IDV): Your insurance premium depends on a market value for your vehicle set by the insurer. It is known as Insured Declared Value or IDV. This IDV varies based on your car age due to depreciation as the value of your car get depreciated due to wear & tear with time. IDV Affects Your Premium Amount payable to insurance company. The lower the IDV, the lower is your premium and in similar way the higher the IDV, the higher is your premium. If we opt for a lower IDV, but doing so might result in a lower claim amount for your policy. If the damages incurred to your car are more than the IDV, that you declared, you may have to pay the difference from your pocket.

FACTOR # 2

Type of Car Insurance: Not every vehicle insurance policy offers the same coverage. It depends on the type of insurance policy you buy for your vehicle. In India there are two main kinds of car insurance policies:

1. Third-party Car Insurance: A Third-party Policy is one of the most basic type of insurance policy. It covers such as, the injuries caused to another person and his/her damaged property. This type of insurance policy has the lowest premium. Purchasing the third-party car insurance policy is mandatory by Indian law.
2. Comprehensive Car Insurance. This type of policy covers all kinds of damages related to your car, another person’s property, and the insured car's owner-driver. Cause of damages can include Collision, Theft, Fire, Sabotage, Natural occurrences or Man-made calamities.

Since Comprehensive Car Insurance offers more coverage than a Third-party Insurance, it costs also increases and subscriber need to pay more premium. Your basic Comprehensive Car Insurance premium consists of Cost of Third-party Cover, Cost of Own Damage Cover, and Personal Accident Cover for the owner

FACTOR # 3

Add-on Coverage: In order to increase the protection of four-wheeler, various offers are made with the help of Add-ons. As the number of Add-ons on your auto insurance policy increases, so the higher the car insurance premium. Add-ons will give an extra layer of buffer to your Comprehensive car insurance policy. You can choose from a different types of Add-on to make your motor car insurance cover extensive. Need to ensure that you buy only those Add-ons that will add value to your policy. The 5 most common Add-ons are

1. Zero Depreciation
2. Engine protection
3. NCB protection
4. Invoice Cover
5. Roadside Assistance

Zero Depreciation or Bumper to Bumper Add-on: It is an Add-on to a Comprehensive Car Insurance Policy. If you opt for this add-on cover, your insurer will not take depreciation into account at the time of a claim. It has the highest premium as compared to a Third-party Liability and Comprehensive Car Insurance Policy. Unlimited claims are allowed under the Benefit Zero Depreciation.

Why Zero Depreciation Add-on? The value of your motor or automobile decreases with time. This is called depreciation. Insurance company pays a portion of the bill and the remaining amount is deducted on the account of depreciation. If subscriber avails this add-on, then insurer will pay the maximum payable amount of the whole bill without considering depreciation.

Engine Protection Usually: damage to the car’s engine is not covered under a regular Comprehensive car insurance policy. An engine is the most important part of a car, also most expensive. Hence it is important to cover your car’s engine under your car insurance policy. You can do so by purchasing an Engine Protection Add-on.

No Claim Bonus (NCB) Protection: No Claim Bonus is offered by Insurance companies, in case you do not raise a claim against a Comprehensive car insurance policy during the previous policy period. While renewing the policy this discount can be availed. However, if you raise a claim then the insurance company will not offer the NCB. But there is a way out. You can get benefit by purchasing the NCB protection Add-on and your NCB will remain intact even if you raise two claims during the policy period.

Invoice Cover: This Add-on is popularly known as Return to Invoice cover or Invoice Protection Add-on. The purpose of this add-on is that in case your vehicle undergoes total loss or is stolen; your insurer will provide you the amount mentioned in the invoice as compensation. If this Add-on is not availed then you will be offered the Insured Declared Value of your car in case of a total loss or theft.

Roadside Assistance: This Add-on comes extremely handy in case you need the services of a mechanic in the middle of your journey. When subscriber avails with a Roadside Assistance Add-on, all you have to do in such a situation is call your insurance company and they will send help right away.

FACTOR # 4

Your Car’s AgeThe Insured Declared Value or IDV depends on your car’s value. However, the value of your car reduces every year. So, the older a car is, the lower is its value. This can lower your premium and the sum assured. Hence we can say, age also makes a car riskier and more vulnerable to damages. Car insurance companies often check your car’s health while deciding the premium.

FACTOR # 5

Extra Security Features: One of the easiest ways to reduce your four-wheeler insurance premium is by installing anti-theft and other security features. This is because insurance companies are in the business of lowering your risk. The lower the risk, the lower is the price of your premium.

FACTOR # 6

Your Claim History: Car insurance companies reward those subscribers those who do not claim.This is done through a ‘No Claim Bonus’ and is in the form of a discount on your insurance premium. No Claim Bonus reduces your car insurance cost.