Risk Analysis

Answers 1 B 7 A 13 C 19 B 25 B 2 C 8 B 14 D 20 A 26 C 3 A 9 A 15 B 21 C 4 C 10 B 16 C 22 C 5 B 11 C 17 B 23 C 6 B 12 A 18 C 24 C CFP Level 3: Module 1 – Risk Analysis - Global Page 45

Contract Terms and Sections  Aleatory: The outcome depends on chance and the financial participation between parties is substantially unequal. Consider that after the insured pays one relatively small premium for a life insurance policy, the insurer is required to pay a large claim on the death of the insured.  Adhesion: The insurer is required to abide by the terms of its contracts. In other words, because the company wrote the contract, it must honour its terms.  Unilateral: Only the insurance company can legally be required to honour contractual terms. The insured must abide by any conditions in the contract if he or she wants the policy to pay, but the insurer cannot require insured’s to maintain a policy against their will. On the other hand, the insurer is legally bound to abide by policy terms for coverage.  Conditional: As previously mentioned, insurance contracts include conditions that must be followed for the policy to pay. For example, an insured may be required to provide an inventory of household items for the insurer to pay a claim for damage to that property. Insurance Policy Sections Insurance policies usually contain the same sections.  Duty of Disclosure: a statement reminding potential insured’s about their obligations to disclose all the information asked for in the proposal form; why honest answers are important in assessing the application and the consequences of making a false declaration  Declarations: statements made by the policy owner, often supplied on the application for coverage. This is known as the ‘basis clause’ and has been discontinued in some jurisdictions CFP Level 3: Module 1 – Risk Analysis - Global Page 46

 Insuring Agreement: what is being insured and the conditions of coverage.  Conditions: the process or procedures (or rules) that must be followed for the insurer to be required to pay a claim  Exclusions: any related items or instances that will not be covered by the policy The policy conditions are important and insurance contracts almost always include conditions that must be met for the policy to pay. That is, conditions impose an obligation on the policyholder to comply with these requirements. This goes beyond the requirement to pay premiums. As an example, a policy owner may be required to file a claim form within a set period following an insured event, or to take reasonable precautions to protect the insured property. Therefore, if the policy owner does not file a claim form within the required time limits, or the insured leaves the keys in the ignition and the car unlocked while unattended, the insurance company may not pay the claim (e.g., filing a claim months or years after an event might invalidate the claim). Often, insurance companies require evidence of insurable interest. Other conditions usually apply as well, making insurance policies conditional contracts. Insurance policies may also include items known as riders or endorsements. These serve to modify policy coverage or terms and conditions. Rider and endorsement essentially describe the same thing. Some policies use the term rider, while others use endorsement. Sometimes insurers initiate endorsements. These often make contractual changes to limit coverage or add requirements for continued coverage. Other times the insurer will voluntarily increase coverage or add some other policy benefit. This also would be accomplished through an endorsement. At still other times, the policy owner may wish to add or otherwise modify coverage. As an example, a policy owner may wish to add a family insurance rider to a life insurance policy. This request would be made in writing, and, if accepted, the policy would be endorsed with the additional coverage. CFP Level 3: Module 1 – Risk Analysis - Global Page 47

Chapter 2: Risk Exposures 2.1 Financial Obligations Existing and Potential A person should consider how much financial loss he or she reasonably can sustain. Another way of saying this is to calculate the amount of financial damage a person is capable of incurring, or is willing to incur. When the potential loss gets too high, the rule, “Don’t risk more than you can afford to lose” becomes applicable. Any loss that has too high a financial cost is a candidate for risk transfer (i.e., insurance). Types of Risk and Potential Impact Some of the risks of which advisors should be aware include:  Risk of premature death  Longevity risk (outliving your retirement money)  Health risk (declining health, including making one uninsurable or requiring a substandard insurance rating)  Risk of unemployment  Risk of disability  Property risks—direct and indirect  Liability risks A common thread through these risks is that each holds the potential to be financially devastating to your clients. A premature death or extended period of disability with the accompanying healthcare costs could force clients to drastically change their lifestyle for the worse. Clients could have a lifetime of savings wiped out because of a liability claim for which they are found to be responsible. While some property losses could be minor, the loss of the family home would be devastating. Lifestyle issues cover a wide array of potential risks. These can range from certain hobbies and habits, alcohol or drug abuse, nutritional issues and eating disorders, and many additional areas. Some of these, like recreational hobbies such as mountain climbing, SCUBA diving, or race-car driving can be positive and enjoyable, but also present potential risks for liability, loss CFP Level 3: Module 1 – Risk Analysis - Global Page 48

of income due to injury and the like. Others, including alcohol or drug abuse, create risks by their very nature. For our purposes, it is important to identify that a person’s life choices can have an impact – sometimes a large impact – on risk management. Consider mountain climbing as we viewed previously. It can be enjoyable to be outdoors in the mountains, but natural hazards, slips and falls can create losses for climbers. Weather can change from pleasant to potentially deadly in a very short period. Rock slides can be severe enough to cause serious injury and disability. If a climber gets caught in an unexpected snow storm he or she could die or be greatly harmed by excess exposure. Lightning strikes in the high mountains cause injury and death. The preceding perils are common to the mountain climbing experience. As a result, if a climber wants insurance coverage, he or she may have to pay an increased premium because of greater exposure to risk. It’s possible the climber may not even be able to purchase some types of insurance cover. With or without coverage, the climber should practice risk reduction by wearing appropriate clothing, using proper gear, climbing with a partner, notifying appropriate authorities about climbing routes and other plans, and generally taking all reasonable precautions. In an extreme, a climber might accidentally dislodge a boulder that falls onto a house and creates a liability exposure. You can see how such lifestyle choices can have risk management consequences. Those choices that are inherently harmful, such as drug abuse, create even greater problems. Health-related issues can also have significant financial implications. Health issues often go together with lifestyle issues in the realm of risk management. This is not to say that individuals have the same degree of choice in both areas. Many health concerns are unrelated to choices made by individuals, although there may be a relationship with some. The real concern is how to prepare and how to mitigate potential losses when a health-related issue arises. Without going into detail about good nutrition, proper medical care, exercise, etc., we can summarize by stating the obvious need to maintain one’s health. More relevant to this discussion is what happens when a significant health-related event occurs. Some of the answer to that depends on whether the individual had health-related insurance cover prior to the event. As you know, insurance does not prevent such events, just as life insurance does not prevent death. People get coverage because they want to prevent against financial loss in the event of a covered event. We will explore various types of insurance cover in Chapter 3, so for now, we will summarize. Some health-related events can cause hundreds of thousands of dollars’ worth of loss. Between actual medical expenses and loss of income due to disability, related expenses can seriously harm an individual’s financial well-being. Appropriate insurance cover, in addition to government-provided benefits, can minimize the damage. CFP Level 3: Module 1 – Risk Analysis - Global Page 49

There is one additional area of concern that we should mention at this point. You cannot purchase insurance to cover a loss after it happens. Similarly, an individual cannot get appropriate medical cover to take care of a significant health-related issue once it has been diagnosed. This means people must purchase the insurance prior to the event happening, but they often do not see the value of doing this. To some extent, it’s human nature. People don’t want an umbrella until it starts to rain. They may not lock the car doors until after personal property has been taken. Unfortunately, after the event, it’s too late to take adequate precautions. This is why, as an advisor, you should make sure to discuss these things with clients and do what you can to encourage them to take appropriate action before an event needing insurance coverage happens. 2.2 Analysis and Evaluation of Risk Exposures To help with the analysis and evaluation process, we will consider the Conway family case. James and Mary Conway married following graduation from university 22 years ago. They are both age 45 and have three children – Jamie, Nancy and Barbara. Jamie, age 19, is a first-year medical student. Nancy (age 16) and Barbara (age 14) are in school and living at home. James is an executive with a global firm and Mary, following a successful early career in law, is a stay-at-home mother, focusing on raising the couple’s children. Mary also volunteers with a legal aid organization and sits on the board of their neighborhood homeowner’s association. Both are active in competitive sports, as are Nancy and Barbara. James has been successful in the firm and has risen to the level of the firm’s chief financial officer. In addition to a strong benefits package, James earns enough to allow the family to live in a beautiful house on a small lake. The family enjoys many hours of boating and other water-oriented activities. James and Mary recently purchased a holiday home, also on a lake, in which the family plans to spend many spring and summer days. The house sits back from the lake’s shoreline, but still close enough to provide easy access. James and Mary are a little concerned about potential weather-related damage during the winter months when the family plans to leave the house vacant. Jamie is a diligent student and has done well in his first year. However, he’s also a 19-year old who likes to party from time-to-time. His parents have given Jamie a car, and he has not been quite as careful as he could be about driving after drinking at a party. Many of his student friends do not have vehicles, so Jamie is often the driver of choice. A teacher friend of the family has confided in James and Mary that she is a little concerned about some of Jamie’s activities, especially the potential of driving and drinking. CFP Level 3: Module 1 – Risk Analysis - Global Page 50

Nancy and Barbara are good students and seem destined for acceptance in their preferred universities. Nancy has just begun working at a job several days after school and on week-ends. She plans to increase her hours during summer break. Barbara plans to follow in her sister’s footsteps when she gets old enough. For now, she’s just enjoying being with friends and being a teenager. She is also an avid animal lover and relishes the time she spends caring for the family’s German Shepherd dog. James and Mary, both being quite busy, have a part-time household staff of two to help maintain the inside and outside of their primary residence. James, during his global travels, has begun collecting a small, but already valuable, fine art collection. Mary, although generally healthy and having an active lifestyle, recently received a disturbing report from her physician. Nothing to be done for now, but requiring additional tests and monitoring. Jamie has been complaining about an increase in headaches, some of which get so bad that he must rest to recover. Think about the Conway’s and their situation for a moment. What risk exposures does the family have now? What seems to have potential to have an impact in the future? If they were your clients what concerns would you have and what risk management considerations might you recommend? Without trying to recommend any specific solutions, here are some of the areas of potential concern along with questions you might consider.  James travels globally. Does he have medical insurance to cover him when he is away from his home country?  James is reasonably wealthy and a significant member of the firm’s upper-management team. Are there any concerns about possible kidnapping and holding for ransom?  Mary received a troubling medical diagnosis. What are the implications of this?  James and Mary are active in competitive sports. What is the potential for either to be injured? Is there any increased liability exposure that might come from their activities?  The family lives on one lake and has a holiday home on another. Both create opportunities for water-related perils and hazards. If any friends or neighbours join the family on the water, and someone gets hurt, do the Conway’s have adequate liability cover? CFP Level 3: Module 1 – Risk Analysis - Global Page 51

 James’ art collection will not be adequately insured by the homeowner’s policy. Do they have insurance cover for the collection?  Mary is an association director, which creates a potential liability situation. Does the association carry adequate cover to protect Mary?  James and Mary have a small household staff. What are the potential risk implications and are these covered?  If the family’s dog bites or otherwise harms a guest, what are the financial implications?  Jamie’s partying and driving creates both legal and civil liability concerns. What can James and Mary do to address these? There are other potential areas of concern, but the preceding list should give you an idea of the considerations you should have as a financial advisor. As you evaluate a client’s risk exposures, one question you should keep top-of-mind is whether they have adequate insurance cover. This is not to say that other risk management solutions will not be important. Rather, as we have discussed, insurance is often the best solution to mitigate financial losses. Also, are key areas included or excluded, and should coverage be increased. It’s also possible that certain areas of coverage might be coordinated, thereby reducing premium cost. As we have been discussing the use of insurance as a risk management tool, it’s time to explore the types of coverage that are available and may be used to address client concerns. We will do this in the next chapter. Exclusion Clauses Exclusion or exception clauses are important in insurance policies because they define the boundaries (extent of cover) that will apply. Some exclusions are common to most insurance policies, e.g. those excluding cover for claims arising from such events as ‘war, riots, civil commotion and radiation’. Other exclusion clauses will relate specifically to the type of cover provided by the policy. In some jurisdictions, insurance legislation prevents insurers from relying on an exclusion relating to a pre-existing defect or imperfection in the insured property or a pre-existing illness or disability of the insured, if the insured was not aware of this when the contract was entered into. In addition, if an exclusion clause states that the insurer will not be liable for some act or omission of the insured or third party, the insurer will not be able to refuse to pay a claim if the specific act or omission does not cause or contribute to the loss. For example, cars are expected CFP Level 3: Module 1 – Risk Analysis - Global Page 52

to be maintained in a roadworthy condition, but if an insured was stopped at a traffic light and was hit in the rear by another vehicle, the insurer will be prevented from denying a claim because the insured vehicle had bald tires. However, if the same vehicle slid off a wet road during a rain storm and suffered damage because of the bald tires then the insurer would be able to rely on the exclusion. Fraudulent Claims Insurance fraud is a major problem for insurers. In the insurance industry, the term ‘insurance fraud’ is most often associated with some form of manipulation of an insurance claim. In some cases, this may involve fabricating the entire claim, including deliberately causing damage to the insured property. Unfortunately, the cost of fraudulent claims must be covered so this ultimately results in a cost increase on all insurance premiums. Loss by Own Act The basic purpose of insurance is to indemnify insured’s for losses caused by fortuitous and unexpected events. Indeed, the very principle of the pooling of losses, the ability of losses to be calculable and the ability of an insurer to strike an economically viable premium relies on the fortuitous presumption. If an insured causes a loss with the intention of making a claim, then they will be denied the right to recover. For example, if an insured deliberately sets fire to their house to recover from their insurance policy, such a claim will be fraudulent and will not be admissible under the policy. In some jurisdictions where a policy is issued over jointly owned property, arson by one policyholder does not prevent recovery on the joint policy by an innocent co-insured policyholder for the latter’s share of the joint property. Unfortunately, this does not apply in all jurisdictions so in the instance of an aggrieved spouse burning down the jointly owned property, the innocent co-insured spouse will be denied compensation under the jointly owned policy. Measurement of the Loss The principle of indemnity requires the insurer to fully compensate the insured for the loss up to the maximum sum insured during the currency of the policy. This restricts the insurer’s CFP Level 3: Module 1 – Risk Analysis - Global Page 53

maximum liability even if the values of the property or reinstatement costs are greater than the sum insured. The objective is to put the insured back in the position they occupied before the loss occurred. It is not intended that the insured make a profit from the loss. Establishing the actual amount of the loss is the cause of a large number of disputes between insurers and their insured’s. Where the insured suffers a total loss of property or goods, the measurement of the loss will be the market value of the property or goods at the time of the loss. For example, assume a house listed for sale for $300,000 is destroyed by a wind storm. The current value of the house would be the sale price less the value of the land (land is not covered by insurance), assuming the sale price was not overinflated. In the case of a life policy, the policy face amount or death benefit determines the amount payable under the policy. However, with accident policies the economic loss sustained by the insured is calculated by referring to lost income, medical bills, set amounts detailed in the policy for specified injuries or sicknesses and, in the case of residual injuries, the levels of damages awarded by the courts. For liability policies, the amount that an insured can recover is the amount of their liability to the third party, but restricted to the limit of liability specified in the policy. Valued policies, as mention above, are an exception to the principle of indemnity, which allows the insured to claim the sum insured regardless of the actual value of the property at the time of the loss. In most cases, the calculation of agreed value will be based on the value declared by the insured in the contract proposal. This declaration often leads to disputes when cars are insured, and in common law, a breach of a warranty of value will allow an insurer to void the policy if the value is inaccurate at the time. However, in some jurisdictions insurance law prevents insurers from voiding a policy based on a misstatement of value. In these cases insurers are allowed to reduce the amount of the claim by the amount they have been harmed. For example, if a car is purchased for $25,000 and insured for $30,000 an insurer would be required to only pay $25,000 and be prevented from voiding the policy. Underinsurance Insurance premiums are based on the belief that insured’s will insure for the full value of their property. Therefore, if the property was insured for less than its value (underinsurance) then an insurer is receiving insufficient premium income to maintain the viability of their insurance pool. To overcome this problem most policies contain an ‘average’ or ‘coinsurance’ clause to protect insurers from the economic effects of underinsurance. CFP Level 3: Module 1 – Risk Analysis - Global Page 54

Under a coinsurance clause, only those insured’s whose property has been totally destroyed will be covered for the property’s insured value. Where an insured has underinsured the property and the loss is partial, the insured bears a pro-rata proportion of any loss, which is calculated as follows: For example, if a house that is worth $400,000 (also the required amount of insurance) is only insured for $200,000 and the property suffers damage of $100,000, assuming no deductible, the insured will only be paid $50,000 by their insurer. In some jurisdictions, insurance law recognizes that it is difficult to precisely determine the true value of a household property, particularly as inflation and rising property values can lead to underinsurance. Remember, this value will be determined at the time of the loss and not when the insurance was taken out. In these jurisdictions insurers are restricted from applying the average clause to homes and contents unless the sum insured is below a specified amount, such as 80 percent or more of the value. When this is the case, the insured’s claim payment will be reduced because of the underinsurance. As an example, assume a house valued at $300,000 is insured only for $200,000 (67 percent of value). If the house suffered damage of $120,000, the claim payment would be based on the 80 percent ($240,000) coinsurance requirement for coverage. $200,000 divided by $240,000 is .83. Multiply .83 by the $120,000 loss, and the insurer will pay $100,000, because of the underinsurance amount. This is also known as the coinsurance penalty. In this chapter we saw an overview of risk and some ways to address it, especially risk transfer or insurance. We will look more closely at insurance products and types in Chapter 3. Next, we will explore some of the risk exposures people face. CFP Level 3: Module 1 – Risk Analysis - Global Page 55

Chapter 3: General Insurance Insurance can be widely segregated in three categories–life, health and general. General insurance is insurance for valuables other than our life and health. General insurance covers the insurer against damage, loss and theft of your valuables. The premium and cover of general insurance depends upon the type and extent of insurance. A general insurance policy typically has a period of a few years. In India, general insurance policies are of the following types: Motor insurance Insurance for the damage or theft of your motor vehicle, two-wheeler, three-wheeler or four-wheeler, is covered under this type of insurance. The damage caused to the vehicle can be caused natural or man-made circumstances, the extent of which would change from policy to policy. Under the Motors Vehicle Act, motor insurance is mandatory in India. New motor vehicles come with a third-party insurance right from the showroom itself. Home insurance Home and household insurance protects your home and the items inside it. A home insurance policy would also cover natural and man-made circumstances. The contents that are covered under a home insurance policy would depend on the type of policy you buy. Travel insurance Another popular type of general insurance is travel insurance, which covers your trips abroad. Travel insurance can be taken to cover loss or theft of your valuables as well as documents. Some travel insurance policies also cover flight delays and medical emergencies. Travel insurance can be taken for personal as well as business trips. Other types of general insurance:  Marine insurance  Commercial insurance CFP Level 3: Module 1 – Risk Analysis - Global Page 56

 Rural insurance  Crop insurance Motor insurance policy is a must for every car owner. Hence, it is important to understand these features in order to extract maximum benefits. You can now get your car repaired at one of the listed garages without paying cash. The repair bill will be taken care of by the insurance company. The facility is referred to as cashless claim. Owning a car has been a dream for many. In fact, most of us have nurtured this dream since childhood. Getting it insured will protect this investment. Motor insurance policy, also known as auto insurance or car insurance is usually bought for cars. The major benefit of having one is that it ensures higher level of protection against losses incurred due to road accidents. It also protects us against complications arising from third party liability Before you buy car insurance, it is vital to understand the types of car insurances available in India: A motor insurance policy is categorized into two types: 1. Comprehensive car insurance 2. Third Party car insurance 1. Comprehensive Car Insurance The comprehensive plan will cover you and your vehicle against number of risks arising out of destruction done to the vehicle due to an accident, theft etc. It also covers death of driver and/or passengers inside the vehicle in the event of an accident. The plan offers cover against damage caused by the car to the third party or his/her property. Features of Comprehensive Car Insurance A standard comprehensive car insurance plan insures your car against the following listed below: Natural Calamities It covers against listed damage and destruction done to the car due to floods, earthquakes, typhoons etc. CFP Level 3: Module 1 – Risk Analysis - Global Page 57

Man-made Calamities It covers damage and destruction caused to the vehicle due to theft, burglary, strikes, riots, etc. Personal Accident Cover The cover offers protection for the owner/driver of the car and co-passengers while travelling. The cover is also valid for damage and destruction caused during mounting or dismounting from the car. 2. Third Party Insurance Cover This plan will protect insurance buyer against damage or destruction done by your vehicle to another vehicle or property. You will not be covered for theft, burglary, accidents, or any other damage to the car. Features of Third Party Insurance The third party liability cover will protect you against any legal liability caused due to unintentional damages including: Permanent injury of the individual  Death of the individual  Damage caused to the property of the individual Damage caused while driving the insured vehicle on road  Both Comprehensive and Third Party car insurance plans are valid for about 12 months. One needs to renew the plan each year to avail of the benefits offered by the insurance company. Premium Features of Motor Insurance Policy The premium of car policy depends on some specific parameters such as classification of vehicle (model, year of make, type etc.), value etc. Motor Insurance Policy Clauses There are certain clauses which very much an integral part of car insurance that a buyer should be aware of. You as an insurance owner cannot claim for destruction or damage occurring to the car due to the following: CFP Level 3: Module 1 – Risk Analysis - Global Page 58

 General wear and tear of car  General aging of vehicle  Depreciation  Consequential loss  Mechanical breakdown  Breakdown due to electrical faults  Wear and tear of tubes and tires If the vehicle is used for purposes other than stated in the 'restrictions' of usage in the policy agreement  Car being used outside India geographical boundaries  Driving without a valid license  Driver under the influence of alcohol or drugs  Loss or damage occurred due to nuclear risk, war, or mutiny Making Claims for Car Insurance If you are involved in an accident or damaged someone's car, you can claim for insurance. In order to make such as a claim, you require doing the following listed below: Record the licence plate number of car vehicle involved (if any) Record names and phone numbers of witnesses (if any) Reach out to the car insurance company and file a claim. Note down the claim reference number offered to you and make a list of documents needed for processing of claim. Confirm whether the insurance corporation has a list for preferred garaged. If yes, then you must get details of the same. File an FIR (First Information Report) at the nearest police station if major damages, physical injury, theft, or property damage have occurred. Submit documents to the representative of car insurance company. You should also verify the documents with originals. Pay the garage authorities for additional charges. Cashless Claims and Reimbursement Claims You can get your car repaired at any of the listed garages and claim for the insurance. The car insurance company will pay for the repairs. This facility is referred to as a cashless claim. CFP Level 3: Module 1 – Risk Analysis - Global Page 59

Another way is to get the car serviced or repaired at a garage of your choice. Thereafter, you can ask the company to reimburse the expenses. This facility is referred to as a reimbursement claim. Benefits of Motor Insurance Policy Cashless Claims  The responsibility completely lies with the insurance company  The inspector will take the car to the garage and get it repaired. He will also return it back to you  The garage network of car insurance company is reliable The service offered by garage network is of high standards as compared to a local garage Benefits of Motor Insurance Policy Reimbursement Claims  You can repair your car at any of the garages preferred by you  Instant action will take place soon after the inspection  The garage you choose may fit into your budget. This is important because you need to pay for some specific expenses from your own pocket  You can repair other parts of car that are damaged at the time of accident Cost of Insurance Several factors are used to determine the cost of car insurance. Some of the factors relate to the owner/driver of the vehicle being insured; the others have to do with location of the vehicle, the vehicle itself, and deductibles. The five primary owner/driver factors are: 1. Age and gender of the driver 2. Use of the vehicle 3. Type of vehicle 4. The driver’s record 5. Credit CFP Level 3: Module 1 – Risk Analysis - Global Page 60

Age and Gender of Driver: Single male drivers under the age of 25 are put in the highest risk category. All things being equal, their premiums are the highest. After age 25, rates are essentially equal between men and women, again, all other factors being equal. In some areas, when drivers reach older ages, such as age 75, rates may increase again. This reflects the diminished reflexes of older drivers as a group. Vehicle Use: A car that is driven only for pleasure costs less to insure than one that is driven to work daily. Cars driven less on an annual basis also allow for lower premiums. Longer drives to work and use of the car for business both increase the premium. The geographical location of the car/driver also has a significant impact on premiums (e.g., urban or rural, large city or small). Type of Vehicle: The type of car will affect rates. High performance cars and sports cars tend to have higher premiums. Sport utility vehicles also tend to have higher than average premiums due to the increased amount of damage they can inflict. Generally, when an insured purchases insurance on more than one vehicle, the premium per vehicle is lower than if the same vehicles were insured by different companies. This is commonly referred to as a multi-car discount. Driver’s Record: The driving record of an individual directly impacts the rate that will be charged by an insurer to offer auto coverage. In some instances, as in the case of operating while intoxicated or too many speeding tickets, an individual may be denied coverage, and in severe cases even the privilege to drive may be revoked. However, before these extremes occur, a company will often offer coverage with steeper and steeper premiums reflecting the increased risk being taken in insuring these drivers. Credit: Most insurance companies now use credit/credit score/credit characteristics to determine rates because they have found a significant correlation between credit scores and claims history. Insurers typically use a different model than lenders as they are attempting to predict the propensity for a loss rather than the ability to repay a loan. Those with higher credit scores are considered better risks than those with lower credit scores. Owning your own home is a truly wonderful feeling. But have you taken all possible measures to protect it? Just locking up your home, doesn’t guarantee its safety. There are several other factors which are beyond your control. Taking up a home insurance policy is a crucial step towards securing your home. Most of us, don’t realize the CFP Level 3: Module 1 – Risk Analysis - Global Page 61

importance of taking up a home insurance policy until it’s too late. If you are new to the concept of home insurance, here’s a beginner’s guide to home insurance. Why is home insurance important? Coverage Against Natural / Man - Made Disasters Natural disasters such as floods, cyclones and earthquakes, often cause extensive damage to life and property. A home insurance policy will provide compensation for the loss/damage caused to your home due to such causes. Besides natural disasters, a home insurance policy also provides compensation for damages caused due to manmade hazards such as fire, theft, vandalism etc. The policy comprises of 10 sections as given here under Section – I: Fire & Allied Perils a) Coverage for building b) Covers contents of the dwelling belonging to the proposer and his/her family members permanently residing with him/her. Allied Perils:  Fire, Lightening, Explosion of gas in domestic appliances  Bursting and overflowing of water tanks, apparatus or pipes.  Damage caused by Aircraft  Riot, Strike, Malicious or Terrorist Act  Earthquake, Fire and/or Shock, subsidence and Landslide (including Rockslide) damage  Flood, Inundation, Storm, Tempest, Typhoon, Hurricane, Tomado or Cyclone. Impact damage Section –II: Burglary & House Breaking including larceny and theft. Covers contents of the dwelling against loss due to burglary, house breaking, larceny or theft. CFP Level 3: Module 1 – Risk Analysis - Global Page 62

Section – III: All Risks (Jewellry & Valuables) Covers loss or damage to your jewellery and valuables by accident or misfortune whilst kept, worn or carried anywhere in India subject to the value declared in the schedule. Section – IV: Plate Glass Loss or damage to fixed plate glass in the insured premises by accidental breakage subject to limit of sum insured Section – V: Breakdown of Domestic appliances Covers domestic appliances against unforeseen and sudden physical damage due to mechanical or electrical breakdown. Section – VI: T.V. Set including VCP/VCR (ALL RISKS) Covers loss or damage to T.V. Set including VCP/VCR by fire and allied perils, burglary, house breaking or theft, breakage due to accidental external means, mechanical or electrical breakdown. Any legal liability arising out of bodily injury or accidental death of any person other than insured's family members or employee as also damage to property not belonging to or in the custody of insured , caused by use of the T.V. Set is also covered upto a limit of ₹25,000/-. Section – VII: Pedal Cycles (All Risks) Covers loss or damage to pedal cycles by :  Fire & allied perils  Burglary, housebreaking, theft  Accidental external means  Third party personal injury or Third party property damage for ₹10,000/- Section – VII: Baggage Insurance Covers loss or damage to insured's accompanied baggage by accident or misfortune whilst the insured is traveling on tour or holiday anywhere in India. CFP Level 3: Module 1 – Risk Analysis - Global Page 63

Section – IX: Personal Accident Covers Death or bodily injury by accidental, violent, external and visible means to the insured person named in the schedule and subject to limits specified therein. Section – X: Public Liability Covers Insured's legal liability for bodily injury or loss of or damage to property of third party limited to amount specified in the schedule and workmen's compensation liability to domestic servants engaged in insured's premises. Types of home insurance policies Building/Structure Insurance To buy this type of home insurance policy, you need to be a homeowner. Structural insurance generally covers damage caused to the home structure as well as outdoor structures such as garages, and sheds. Home Contents Insurance A home content insurance covers damage/loss of your personal belongings such as clothes, furniture etc. This type of home insurance can be purchased even if you live in a rented space. Home Insurance Valuation Under home insurance, you will be compensated for damage to your home and property. The amount of claim you receive in case of damage is dependent upon the valuation of your home and assets. You can choose to insure your home based on two types of valuation. (i) Reinstatement as a basis of indemnity: This basis of indemnity is generally applied to buildings and machinery if the Insured requests that the policy be issued subject to ‘reinstatement value clause'. The Insured then selects the sum Insured of the Insured property so as to reflect the new replacement value of the property. In such a policy Insurers agree to pay the claims on the basis of full cost of replacement of the property at the time of reinstatement, without deduction for wear and tear. CFP Level 3: Module 1 – Risk Analysis - Global Page 64

Reinstatement of sum Insured following a loss under the policy: In most of the policies except the policies like motor, the sum Insured of the property Insured gets reduced by the amount of loss as from the date of loss and needs to be reinstated by payment of additional premium to avoid the operation of average clause for further claims. However, some policies provide for an auto reinstatement of sum Insured following a loss like fire policy. The premium for this is adjusted from the claim amount at the time of claim payment. (B) Market value basis This represents the amount at which property of the same age and condition can be bought or sold. This value takes into account both depreciation to the physical asset and appreciation due to inflation. The current cost of construction of similar building is taken and to this is applied depreciation for age, usage, maintenance, wear & tear, etc. For determining the sum insured for buildings, apart from excluding the value of land and plinth, the present cost of construction of similar building should be taken and then the depreciation for age and usage deducted. The generally accepted method currently in use for building is to apply unit cost rate to the gross external areas of the building or cubic measurement of building and adjust subsequently to suit particular circumstances (built up area and construction specification). Understand Copay, Coinsurance & Deductible with an Example Suppose a person has a health insurance policy of Rs. 5 Lakh. with a 10% copay on it and Rs. 5000 deductibles. With the deductible, he further has a 10% coinsurance clause. If the treatment for a certain disease costs Rs. 10,000, his liabilities from these clauses will be: CFP Level 3: Module 1 – Risk Analysis - Global Page 65

Replacement Provisions Actual Cash Value: The actual cash value is the replacement cost minus depreciation. Replacement Cost: In the event of a total loss, the policy will reimburse a policy owner the amount required to replace the property up to policy limits. Guaranteed Replacement Cost: While a homeowner may be adequately covered by having insurance equal to 80 percent of the replacement cost of the home, he or she may have a substantial out-of-pocket expense if the home is destroyed. There also are circumstances where even 100 percent coverage may not be adequate. When a natural disaster strikes, such as a hurricane, the cost of rebuilding may increase due to the lack of building materials and/or shortage of skilled labour. When this happens, the replacement cost is often higher than the insurance amount. A guaranteed replacement cost benefit takes care of this problem. Inflation Guard Endorsement: To acknowledge the effects of inflation, insurance companies generally offer an inflation guard endorsement. This endorsement automatically increases the dwelling coverage each year by an amount that is usually tied to an index. Many insurance companies subscribe to services that track costs of construction materials and labor and can even refine the data to account for the specific community where the home is. A periodic review by the insurance agent, the insurance company, or a contractor can be used to confirm the replacement value. CFP Level 3: Module 1 – Risk Analysis - Global Page 66

Factors Affecting the Cost of Homeowners Coverage The cost of a homeowner’s policy and its endorsements are affected by the factors mentioned previously, and listed below. Construction: The way a home is built and maintained — materials, age, upkeep — is important in determining the cost of a homeowner’s policy. Brick or stone costs more than siding. A shake shingle roof is more expensive than one made of composite materials and is a greater fire hazard. Heavy landscape growth around a home creates a fire hazard that is greater than that caused by a landscape of well-maintained trees, shrubs, and plants. Older homes have older plumbing and wiring, which are more likely to cause problems than new plumbing or wiring. Location: In what type of community is the house located? Is it a fire prone area or is there a high vandalism and crime rate in the area? The location of the local fire department, the available water supply, and the accessibility of the home itself also will affect insurance rates. Deductible: For obvious reasons, the size of the deductible will affect the cost of the policy. The higher the deductible, the lower the premium. Insurer: The insurer does make a difference. Some insurers offer insurance only to certain groups. When insurance availability is limited, the group’s claims may become quite predictable, often resulting in better rates. Some insurance companies offer a discount to those who also have their car insurance with them. Additionally, each insurance company will have unique claims results and this will affect how they price their policies. With all of the various factors that go into determining homeowner’s insurance premiums, you should encourage your clients to shop for this coverage every few years to ensure they are receiving the best value for their premium dollar. General Exclusions Homeowners forms contain eight general exclusions to the property insuring agreement. Ordinance or Law: It is common that after a home is built, building codes change. When a partial loss is incurred and the room is being rebuilt, it will need to be brought up to the current code. For example, many cities require that electrical outlets be placed a certain distance from each other. The cost of bringing the room up to code is considered “betterment” and is not covered by the standard insurance policy. With the Ordinance or Law endorsement, the additional expenses would be covered up to the limit listed in the declarations page. The amount is generally expressed as a percentage of Coverage A (i.e., the dwelling amount). CFP Level 3: Module 1 – Risk Analysis - Global Page 67

Earth Movement: This excludes coverage for a loss caused by earth movement, except direct loss by fire, explosion, theft, or breakage of glass. When losses are caused by these other things, the concept of concurrent causation applies. Concurrent causation applies when two actions cause a loss and one of them is a covered peril while the other isn’t. The insurer will be liable based on the perils that are covered. Insured’s may be able to add this coverage by endorsement or separate policy. Water Damage: This excludes coverage for a loss caused by flood, water backing up in sewers or drains, water below the ground surface seeping through basement walls, foundation, floors, etc. Damage from backup of sewers and drains may be added by endorsement. Power Failure: This denies coverage for losses resulting directly from an interruption of power or other utility service, if the interruption takes place away from residence premises (i.e., a neighborhood power outage as opposed to a specific outage at the home). Neglect: This excludes losses resulting directly or indirectly from neglect of the property by the insured and failure to use reasonable means at or after a loss to save the property. War: This excludes losses caused by war in all forms (e.g., undeclared war, insurrections, rebellion, revolution, or discharge of a nuclear weapon). Nuclear Hazard: This excludes losses from nuclear reactions, radiation, and radioactive contamination. Intentional Loss: This excludes intentional damage to one’s own property. Other Homeowner’s Products TENNATS also can take home policy but they are not allowed to cover the dwelling house and garage etc. More importantly, renter’s insurance policies include the liability protection like 1. Comprehensive liability insurance. 2. Medical payments to others, claims expenses, and damage to property of others. Another type of homeowner’s insurance covers condominium unit owners, and is available for people who own a unit in a multi-unit complex. Condominium unit owner's insurance provides all the coverage like building coverage, content and liability cover. CFP Level 3: Module 1 – Risk Analysis - Global Page 68

Personal property Standard home owner’s policies typically cover personal property at 50 percent of the dwelling coverage. With the cost of furniture, rugs, clothes, appliances (not permanently installed), books, etc., this level of coverage may be inadequate. Some companies issue policies with personal property covered at 75 percent to 100 percent of the dwelling coverage. Most homeowner’s policies provide only limited coverage for personal property with higher value. The following items have relatively low limits of coverage (examples of limited coverage in parentheses):  Money, bank notes, coins, bullion ($200 limit)  Securities ($1,500 limit)  Stamp collections ($1,500 limit)  Watercraft and their trailers (1,500 limit)  Jewelry, furs, cameras (loss by theft - $1,500)  Firearms (theft - $2,500 limit)  Silverware, gold ware, etc. (by theft - $2,500 limit)  Business property at home ($2,500 limit) Actual limits will vary by policy. An inland marine policy (or personal property endorsement—covered below) can be used to provide adequate coverage; however, it is a practical impossibility to increase the personal property coverage within a standard homeowner’s policy to the extent that limited coverage items (e.g., jewelry, silverware) will be adequately protected. The only viable method to provide sufficient coverage on these items is to add a personal property endorsement or purchase a separate inland marine policy; both methods provide essentially the same coverage options. Personal Property Exclusions Nine classes of property are usually excluded under Coverage C of all homeowner’s forms. The classes are: CFP Level 3: Module 1 – Risk Analysis - Global Page 69

1. Articles separately described and specifically insured under homeowners or other insurance 2. Animals, birds or fish (the animal itself, not the liability it creates) 3. Motorized land vehicles (with some exceptions) 4. Aircraft and their parts (except model or hobby aircraft) 5. Property of roomers, boarders and other unrelated tenants 6. Property contained in an apartment that is regularly rented or held for rental to others by the insured 7. Property rented or held for rental to others away from the premises 8. Books of account, drawings, paper records, and software media containing business data 9. Credit cards or fund transfer cards, except as provided under the heading of Additional Coverage’s Personal Property Endorsement For high-value items like those listed in the previous section, adequate protection generally is available as an endorsement to the policy. Coverage is in the amount of the item’s stated (or appraised) value, not the replacement cost or actual cash value. For this reason, a client may be required to provide appraisals, invoices, photographs, or other evidence of ownership to obtain coverage. This information should be properly filed and stored, most likely in a location not on the main premises (in case of fire or significant destruction). It is important to review the value of items periodically. Occasionally, new appraisals are required. Coverage of this type may be called a personal property endorsement, personal property floater, or inland marine coverage. Legal Liability Let us now try to understand the concepts of legal liability. Unlike policies we have already examined for property protection, liability insurance covers events to third parties. This insurance gives protection to individuals and organizations against financial implications due to lawsuits. CFP Level 3: Module 1 – Risk Analysis - Global Page 70

For understanding this insurance it is essential to understand some legal principles. The concept of legal liability has developed from the English common law principle of Duty of care'. In simple words it means that every individual owes a duty of care, which means not causing any injury or suffering to fellow citizens. When this duty of care is breached, the person is legally liable to compensate the affected parties. Broadly speaking there are three areas of law under which legal liability risks may arise: Under Statute: It refers to those liabilities that arise under the Acts of Central or State Governments and delegated legislation e.g. Consumer Protection Act, 1986 in case of product liability. Under Contract: It refers to those liabilities that are consequential to the voluntary entering of multiple parties in a legal contract e.g. contract of lease of premises. At Common Law: It refers to those liabilities that arise are primarily guided by the provisions of common law e.g. careless driving of motor vehicle. Law of Torts - Breach of Duty of Care Torts Torts are a civil wrong. Torts can be classified as under:  Intentional torts  Absolute liability/strict liability  Negligence Let us discuss each of them. Duty of Care How to decide whether a duty of care exists? For deciding this Lord Atkins Neighbour principle' comes to some help. It states that a general duty of care exists towards all legal neighbours - those closely and directly affected by our act or omission at the time the tort is committed. The next problem will be deciding whether a breach of that duty of care has been committed. Mostly, the decision is subjective and courts will decide, depending upon the facts of a particular case and considering the precedents i.e. case laws. The degree of care also may vary from circumstance to circumstance. This means there is no single standard of care applicable for all circumstances. CFP Level 3: Module 1 – Risk Analysis - Global Page 71

The degree of duty of care also varies according to different classes of persons. The degree of care exercisable by owners or occupiers of a property is different in case of trespassers, licensees, invitees, passers - by and children in ascending order with degree of care towards children being the utmost. 1.1 Intentional Torts These are intentional acts, which may result in injury or suffering to others. Examples of intentional torts are: Assault, false imprisonment, slander and libel. Many a time it is difficult to differentiate these torts from criminal acts. Moreover, since these acts are committed intentionally and are within the control of the insured, they can be avoided generally and are not insurable. Those intentional torts which result in physical injury to others like assault are not insurable. Intentional torts like libel, slander, etc. which do not result into physical injury are insurable.  Libel: It is the publication of a false statement in a permanent form designed to damage the reputation of another person.  Slander: It is similar to libel but in verbal form  Assault: It is touching another person unlawfully. 1.2 Absolute Liability It is also known as No Fault Liability'. Many a time this liability arises because of statute - which means the law dictates it. This type of liability is different from other types of liabilities in one important aspect - the negligence or fault need not be established by the affected party. Examples of this liability are:  Employer's liability for his employee's injury or suffering even when there is no negligence or fault of the employer. Even in cases where the employee himself or his co-employees are responsible for the injury, the employer is made responsible by statute. (Workmen's Compensation Act, 1923). Here, let us appreciate the difference between strict liability and absolute liability. Strict Liability The principle of strict liability was laid down in the English case Ry lands vs Fletcher (1868). An interesting Indian case applying this rule is that of Mukesh Textile Mills (P) Ltd. Vs. H.R. CFP Level 3: Module 1 – Risk Analysis - Global Page 72

Subramanya Sastry (1987). This concept mainly emerges in case of a type of tort - private nuisance. Strict liability means that: If land is used unnaturally by bringing or collecting or keeping something for one's own purposes which can cause mischief to others if it escapes, the person is prima facie answerable for all the damage which is the natural consequence of its escape. In case of strict liability certain defenses are allowed. For example, if an employee has sustained injuries resulting from his direct disobedience or drunkenness then the employer is not liable. But in case of absolute liability, such defenses are not allowed. Absolute liability arises in case of injuries resulting from inherently hazardous activities. A famous landmark Indian case which proposed the absolute liability concept is MC Mehta V. Union of India (1986) in which Oleum gas leaked from Sriram Foods and Fertilizer Industries causing personal injuries to several people. Strict Liability Absolute Liability Requires hazardous and inherently Requires non-natural use of land and dangerous activity escape of material capable of causing loss/damage Makes no distinction between ’within’ and ‘outside’ the premises Will not cover the cases of persons No defences available within the premises No such test required Some defences available to defending Damages may be exemplary and party punitive besides compensatory Test of foresee ability is required Damages awardable will be ordinary or compensatory Statutory Liability Many Acts/statutes in India also give rise to legal liability. Mostly, this is in the form of strict or absolute liability. Let us note some of the important statutes, which we will be referring to, when we discuss different liability insurance products:  The Public Liability Insurance Act, 1991: this statute imposes ‘absolute liability' in respect of handling of hazardous materials as specified in the Act. The compulsory public liability insurance takes care of the provisions of this Act. CFP Level 3: Module 1 – Risk Analysis - Global Page 73

 Other important statutes, which have relevance for public liability insurance in India, are:  Water (Prevention and Control of Pollution) Act, 1974  Air (Prevention and Control of Pollution) Act, 1981  The Environment Protection Act, 1986  The Factories Act, 1948  Important statutes which have relevance for employers' liability:  Workmen's Compensation Act, 1923  Fatal Accident Act, 1855  Consumer Protection Act, 1986 has relevance for product liability insurance and professional indemnity insurance  Companies Act has a bearing on directors' and officers' liability insurance 1.3 Law of Negligence In simple terms negligence means not doing something, which a reasonable man would do, and doing something, which a reasonable man would not do. For understanding this we must be clear about the definition of a reasonable man. Here, a reasonable man means someone who possesses all the normal faculties of humans e.g. to think, to speak or to act with reason and who is honest and prudent in all activities. However, deciding whether a person has acted reasonably is a question of fact to be decided by the court of law based on the circumstances of the case. In other words negligence means absence of care'. It implies that for proving negligence the following conditions have to be satisfied:  There exists a duty of care towards the injured person.  That duty of care has been breached.  Injury or damage has resulted as a consequence of that breach.  There is a direct causal relationship between that breach and the injury. CFP Level 3: Module 1 – Risk Analysis - Global Page 74

Liability Exclusions The general exclusions include intentional injury and business or professional activities. All forms of personal liability insurance exclude these (because intentional injury is never covered, and business and professional activities are not personal liability exposures) and some additional sources of liability, which are discussed below. Losses covered under homeowners Section I, along with owned and rented property, are also not covered under a CPL policy. Business Pursuits: Although business pursuits generally are excluded from personal liability policies, certain persons can obtain a Business Pursuits Endorsement. Clerical office employees, salespersons, collectors, messengers, and teachers can get this extension. It is not available to provide coverage for the business pursuits of business owners. There are some other minor exclusions to this coverage. Business-related insurance will be covered below. Rental of Property: Personal liability policies generally do not cover losses related to the insured’s renting his or her property to others. However, occasional rentals of the residence are covered. The insured may also rent out a room or two, if there are no more than two roomers. Additionally, the exclusion doesn’t apply to rental of part of the residence used as an office, private garage, school, or studio. Professional Liability: Liability that may be incurred by a professional such as a CERTIFIED FINANCIAL PLANNER certificant, insurance agent, lawyer, physician, etc., is excluded and must be covered by a professional liability policy. These policies are discussed later. Motor Vehicles: Since registered motor vehicles typically require their own liability coverage, liability arising out of the use of an automobile is excluded from comprehensive personal liability policies. Some nonregistered motorized vehicles are covered under such policies under certain circumstances. Comprehensive personal liability policies also exclude coverage for negligent entrustment. Negligent entrustment occurs when an insured allows someone known to be careless to use the insured’s property, and the result is damage to another person or another person’s property. Remember that there is no coverage to the insured’s property under these policies, because they are not property insurance policies, they are liability insurance policies. Watercraft: Comprehensive personal liability policies also exclude most watercraft from coverage. Certain small watercraft rented to the insured will be covered. Negligent entrustment is also excluded. CFP Level 3: Module 1 – Risk Analysis - Global Page 75

Aircraft: Damages inflicted through the ownership, maintenance, or use of an aircraft are also excluded from coverage under CPL policies. This exclusion extends to ultralight aircraft and hang gliders as well. Communicable Disease: Comprehensive personal liability policies generally exclude coverage for damages claimed because the insured infected someone with a communicable disease. Without this exclusion, transmission of such infection could be considered bodily injury. It would be difficult to know if the insured knowingly transmitted the disease. The exclusion avoids the problem of determining intent. Other Exclusions: Other exclusions generally are included in personal liability policies. These include war; sexual molestation or abuse; use or sale of controlled substances; contractual liability; damage to property owned by, rented to, or in the care of the insured; workers’ compensation; nuclear perils; and injury to insured persons. Medical Payments to Others This coverage is identical to the coverage provided under Section II coverage F of a homeowner’s insurance policy. It provides for the payment of medical expenses for people who do not live at the insured’s residence regardless of fault. The purpose of this coverage is to be able to pay for medical expenses incurred so that potential lawsuits can be avoided. Umbrella Policy Most individuals obtain liability insurance through their homeowners and motor vehicle policies. However, in today’s litigious world, many people want more protection than the typical homeowners or motor vehicle policy offers. Rather than merely increase the coverage on the other two policies, your clients will often be better served if they can obtain an umbrella liability policy. This is sometimes called catastrophic liability insurance. While a basic liability policy may have low coverage limits, an umbrella policy has very high coverage limits. Umbrella, or excess liability, policies take over where basic policies stop. Thus, the insured person can get protection against potential liabilities resulting from financial awards that are quite high. Limits and exclusions exist, as is true with all insurance policies, but umbrella liability insurance provides significant protection against liability-related losses. In most cases, the person seeking coverage will need to carry a minimum level of liability coverage under both homeowners and auto policies. There is no standard policy form. Each CFP Level 3: Module 1 – Risk Analysis - Global Page 76

company will have its own specific set of requirements and criteria that must be met to issue an umbrella liability policy. The umbrella liability policy not only increases the coverage that is part of the homeowners and auto policies, but it broadens the coverage as well. Some optional cover ages, such as personal injury coverage, are standard under an umbrella liability policy. If the insured gets sued and the claim falls under the insured’s homeowners or auto policy, the appropriate policy will pay first. It is helpful to think of the liability payment that is being made from the car or homeowners insurance as a deductible to be paid prior to the umbrella liability policy being called upon. If the car or homeowner’s policy isn’t adequate to pay the claim, then the umbrella policy picks up the difference up to its limit of liability. For this reason, it is typically best to have both the umbrella policy as well as the underlying policies with the same insurance company. Exclusions Umbrella liability policies do have some exclusions. If watercraft, aircraft, professional services, or business pursuits are covered by endorsements to the homeowners or motor vehicle policy, they usually will be covered by the umbrella policy. If they are not covered by the base policies, they usually will not be covered by the umbrella policy. Following are the normal exclusions (remember, these are liability, rather than property, cover ages):  Owned or leased aircraft excluded under the base policy  Watercraft of the type excluded under the basic homeowner’s policy  Damage to rented or borrowed aircraft and watercraft  Business pursuits  Professional services (unless the underlying insurance program includes coverage for this risk)  Workers’ compensation  Any act committed by, or at the direction of, the insured with the intent to cause personal injury or property damage 2.0 Professional Liability Personal liability policies do not cover an insured’s business activities. Most individuals who are employees are covered for liability by their employer for activities undertaken as employees. CFP Level 3: Module 1 – Risk Analysis - Global Page 77

However, though personal liability lawsuits are not a common occurrence, professional liability lawsuits take place with significantly greater frequency. Professionals require liability protection for their activities. Two forms of liability coverage which are available for professionals include: 1. Malpractice insurance 2. Errors and omissions insurance The cost of professional liability insurance can be high, because people are more likely to sue professionals for failure to use reasonable care in pursuit of their profession. 2.1 Malpractice and Errors and Omissions Malpractice When a medical professional’s activities unintentionally cause physical harm to a person, malpractice insurance provides liability protection. Physicians, dentists, surgeons, and hospitals may use this form. Anaesthesiologist’s, chiropractors, hygienists, nurses, opticians, etc., receive coverage using special forms that focus on their particular professional areas. There is no standard form for malpractice insurance. There are a relatively select group of providers offering this insurance to the medical field; and each of those companies designs its own form. Companies that offer malpractice insurance provide different forms for various specialties rather than using a one-size-fits-all approach. Interestingly, there is technically no exclusion for a medical professional’s intentional acts with most malpractice insurance. The reason for this is that what doctors, dentists, etc., do intentionally in their practice is expected, but may have an undesirable outcome. For example, the surgeon intended to cut open the patient (technically assault and battery); he or she just did not intend for the operation to have negative results. Occurrence versus Claims Made Forms Insurers use two general approaches to determine which malpractice policy covers a specific claim. In the past, virtually all professional liability policies used an occurrence form. When a claim is made under an occurrence form, the policy that was in place when the alleged mistake was made must pay for the loss. Under this form, if a physician provided care in 2010, and in 2015 the patient developed problems related to the procedure done in 2010, the policy in place CFP Level 3: Module 1 – Risk Analysis - Global Page 78

in 2010 would be responsible for paying any settlement. This creates what is called a “long tail” of coverage. A major concern with this approach is the insurance company collected premiums in 2010 dollars, but would have to pay a claim in current dollars (this becomes more of an issue when the original policy is many years old). The occurrence form creates several problems. First, there is no way insurance companies can anticipate claims that might be made 10, 20 or more years in the future. Even if they could, it is not likely they could have charged adequate premiums to cover those claims. Similarly, it can sometimes be difficult—if not impossible—to pinpoint exactly when the damage being referenced occurred. This can become a problem when the professional changed insurers at some point during the period in dispute (i.e., which insurer should pay). An additional problem is that the company that wrote the policy in 2010 may no longer exist or may be out of the professional liability business. These problems led to the shift toward the claims made form of liability insurance. Under this form, the insurance company that issued the policy in place when the claim is made is the insurance company responsible for any required settlement. In the example above, the company providing coverage in 2015 (when the claim was made) would be responsible for paying the claim. Defence and settlement In years past, especially in the medical field, the insured had the right to force the insurance company to fight claims in court. This generally was done because of the perception that any settlement was an admission of guilt. However, perceptions have changed, and many people have come to view liability cases more in terms of economics rather than as a determination of guilt. Under current conditions, if it will cost less to settle a case than to fight it, even if the insured can win the case, the insurer generally will try to settle the case out of court. Few insurance companies and even fewer policies today will allow an insured to prevent an out-of-court settlement. Errors and Omissions Insurance When a professional is in a position to cause fiscal (financial) harm (as opposed to physical harm) to a client, those types of liabilities will generally call for the use of errors and omissions insurance rather than malpractice insurance. An accountant, lawyer, insurance agent, stockbroker, or financial advisor would use this form of insurance. Very little difference exists between the general structure of this form and malpractice insurance. All the issues discussed above also apply to this form of professional liability insurance. CFP Level 3: Module 1 – Risk Analysis - Global Page 79

Life insurance is one of the best known (although not necessarily best understood) insurance types. Further, many people have at least some level of life insurance cover. This is so much so that when people talk about insurance, they often are actually referring to life insurance. There is much to know about life insurance and its annuity counterpart. We will explore this area next. Life Insurance Life Insurance is defined as a contract between the policy holder and the insurance company, where the life insurance company pays a specific sum to the insured individual's family upon his death. The life insurance sum is paid in exchange for a specific amount of premium. Life is beautiful, but also uncertain. Whatever you do, however smart and hard you work, you are never sure what life has in store for you. It is therefore important that you do not leave anything to chance, especially ‘life insurance’. As death is the only certain thing in life, apart from taxes, it pays to insure it well in advance. If you were to go by the dictionary definition, “life insurance” is a financial product that pays you or your dependents a sum of money either after a set period or upon your death as the case may be. However, if you were to understand the term clearly and also appreciate its importance in your life, consider “life insurance” as a back-up plan for life. Life insurance in its simplest form means being prepared financially, come what may. It ensures that your family and you receive financial support in case you are not able to bring in the much-needed income yourself (maybe due to an accident, retirement, or untimely demise). In legal terms, life insurance is a contract between an insurance policy holder (insured) and an insurance company (insurer). Under this contract, the insurer promises to pay a pre-decided sum of money (also known as “Sum Assured” or “Cover Amount”) upon the death of the insured person or after a certain period. Benefits of Life Insurance Life insurance is designed to minimize the impact of the financial loss your family may incur upon your demise. The benefits of such plans are fourfold, aptly contained within the acronym “LIFE”: CFP Level 3: Module 1 – Risk Analysis - Global Page 80

1. Liability Free Life insurance gives your family the power to be independent and self-reliant. A good term plan can help them repay financial liabilities like home loan, auto loan, personal loan, or a loan on credit card. The term plan may also cover hospitalization charges and critical illness treatment, giving you a comprehensive protection package 2. Income Replacement If you are the sole breadwinner in your family, a life insurance plan becomes can provide a guaranteed income to your family every month, making sure that their everyday life is not disrupted and they remain financially stable. 3. Education and other expenses for dependents The payouts from life insurance can help to pay the bills for the education of your children, as well as expenses for their wedding or medical costs if any. 4. Immediate Expenses after Demise It will also help your family cover a part of essential expenses immediately after your demise, such as funeral costs and/or medical bills. CFP Level 3: Module 1 – Risk Analysis - Global Page 81

Types of life insurance – Traditional and Market linked Following are the types of Life Insurance 1. Traditional Life Insurance Traditional Life Insurance plans offer multiple benefits in terms of life cover and returns, thus providing safety and security to the insured. These policies are considered risk-free. This is because they provide a fixed benefit (Cover Amount) in case of death of the insured person or at end of the term. Following are the three types of Traditional Life Insurance plans:  Term Insurance Plans Term policies are considered largely risk-free, low cost and usually with the highest coverage. These plans are purchased for a fixed period of time (such as 10 years or 20 years). They provide a fixed payout in case of death of the insured person or at the end of the term. These plans have evolved to also provide survival benefits so customers get double protection – for family and regular income for retirement needs. Let us understand the plan with an example: CFP Level 3: Module 1 – Risk Analysis - Global Page 82

WHOLE LIFE INSURANCE Whole Life plan is also called as straight life, ordinary life. It remains throughout the insured whole lifetime provided the premiums are paid. A certain aforementioned amount is paid to the nominee in the event the insured dies. The policyholders at any time withdraw the policy or borrow against it. The maturity age for this policy is 100 years. If the insured lives past the maturity age, the policy will become matured endowment. The death benefit under this plan is tax free. CFP Level 3: Module 1 – Risk Analysis - Global Page 83

How Does it Work? are very different from other types of life insurance plans. Understanding how they work can also help you decide whether they are fit for you or not. A whole life plan can be purchased against a payment which can be made as a one-off sum, on a monthly or a yearly basis. If you have purchased a unit-linked whole life policy, then your funds will be directed not only towards the purchase of your life insurance for payment of the sum assured amount and the remainder of the amount will be invested in an investment fund. In case of unit-linked/flexible whole life policies , the insurer will regularly review the policy to compare whether the value of the policy is equivalent with the cost of the life assurance which it is providing. In case the investment fund, where the remainder of the money is invested, is not performing to help cover the cost of benefits, your insurer may suggest you to either reduce the amount of your sum assured or to increase your regular contribution. Additionally, certain whole life policies also give customers the option of obtaining cover against specific illnesses or disability. Types of Whole Life Policy: There are different types of Whole Life Insurance Policies available in the market, each of which is designed to cater to specific requirements. Read about each of these to find out more about which one may suit your needs. 1. Non-Participating Whole Life Insurance: A non-participating whole life policy has a level premium and face amount during your entire life. The advantages of such a policy are its fixed costs and relatively low out-of-pocket premium payments. Since the policy is non-participating it does not pay you any dividends. 2. Participating Whole Life Insurance: The defining feature of a participating whole life policy is that it pays dividends. Payment of dividends essentially indicates that the excess earnings which the company has accumulated via investments, savings from expenses and favorable mortality of the organization. There is no guarantee that policy holders will receive dividends. However, if dividends are paid, they will be paid in the form of cash which will be utilized to bring down the premium payment amount or will be allowed to accumulate and will attract interest at a specified rate. The dividends can also be used to for purchasing paid-up additional insurance to enhance the face amount of coverage provided. CFP Level 3: Module 1 – Risk Analysis - Global Page 84

Under these two broad categories of participating and non-participating, there are several types of whole life policies which individuals can choose from: 1. Level Premium Whole Life Insurance: As the name suggests, level premium whole life insurance features level premium payments which must be paid till the insured is alive. The premiums collected in the early stages of this policy are sufficient to pay for the insurance protection costs. The surplus funds, inclusive of the interest earnings will contribute towards any shortfalls in premiums at a later stage when the annual premium payments may not be enough to cover the insurance costs. 2. Limited Payment Whole Life Insurance: Under the Limited Payment Whole Life Insurance, policyholders will be required to pay premiums for a limited period of time but will receive lifetime protection. However, since the premiums are to be paid for a shorter period of time, the premium amount will be relatively higher than the premium amount payable for an ordinary whole life plan. under this kind of plan, customers have to pay premiums for a specified number of years – 10 years, 20 years, etc. 3. Single Premium Whole Life Insurance: Under the single premium whole life insurance policy, individuals have to make the premium payment in a single lump sum. The payment must be made at the issue of the policy, making the policy fully paid up, with no requirements of any further premium payments. The single lump sum premium payment will provide the policy with loan value and immediate cash value, both of which could be significant in amount, depending on the amount of the lump sum premium. Given the sizeable amount of the lump sum premium payment, the Single Premium Whole Life policy is considered more as an investment insurance product. Universal Life (UL) Insurance Universal life (UL) insurance is permanent life insurance with an investment savings element and low premiums that are similar to those of term life insurance. Most UL insurance policies contain a flexible-premium option. However, some require a single premium (single lump-sum premium) or fixed premiums (scheduled fixed premiums). CFP Level 3: Module 1 – Risk Analysis - Global Page 85

KEY TAKEAWAYS  Universal life (UL) insurance is a form of permanent life insurance with an investment savings element plus low premiums.  The price tag on universal life (UL) insurance is the minimum amount of a premium payment required to keep the policy.  Beneficiaries only receive the death benefit.  Unlike term life insurance, a UL insurance policy can accumulate cash value. How Universal Life (UL) Insurance Works A UL insurance option provides more flexibility than whole life insurance. Policyholders can adjust their premiums and death benefits. UL insurance premiums consist of two components: a cost of insurance (COI) amount and a saving component, known as the cash value.1 As the name implies, the COI is the minimum amount of a premium payment required to keep the policy active. It consists of several items rolled together into one payment. COI includes the charges for mortality, policy administration, and other directly associated expenses to keeping the policy in force. COI will vary by policy based on the policyholder’s age, insurability, and the insured risk amount. Collected premiums in excess of the cost of UL insurance accumulate within the cash value portion of the policy. Over time the cost of insurance will increase as the insured ages. However, if sufficient, the accumulated cash value will cover the increases in the COI. Advantages and Disadvantages of Universal Life (UL) Insurance Cash Value Much like a savings account, a UL insurance policy can accumulate cash value. In a UL insurance policy, the cash value earns interest based on the current market or minimum interest rate, whichever is greater. As cash value accumulates, policyholders may access a portion of the cash value without affecting the guaranteed death benefit. However, policyholders who do will pay taxes on the withdrawals they make from the excess cash value of the UL insurance plan. Also, depending on when the policy and premium CFP Level 3: Module 1 – Risk Analysis - Global Page 86

payments are made, earnings will be available as either last in, first out (LIFO) or first in, first out (FIFO) funds. Upon the death of the insured, the insurance company will retain any remaining cash value, with beneficiaries only receiving the policy’s death benefit. Universal life policyholders may borrow against the accumulated cash value without tax implications. However, if they do, interest will be calculated on the loan amount, and there will be a cash surrender fee. Unpaid loans will reduce the death benefit by the outstanding amount, with unpaid interest on the loan deducted from the remaining cash value.2 There are no tax implications for policyholders who borrow against the accumulated cash value of their UL insurance policy. Flexible Premiums Unlike whole life insurance policies, which have fixed premiums over the life of the policy, a UL insurance policy can have flexible premiums. Policyholders can remit premiums that are more than the COI. The excess premium is added to the cash value and accumulates interest. If there is enough cash value, policyholders may skip payments without the threat of a policy lapse.3 That said, policyholders must be attentive to the rising cost of insurance as they age and plan accordingly. Depending on the credited interest, there may not be enough cash value to keep the policy in force, thus requiring them to pay higher premiums. Missed payments must be paid within a specific time frame for the policy to remain in force. Source: https://www.investopedia.com/terms/u/universallife.asp Variable Life Variable life was first introduced in the Netherlands, and later became popular in the United Kingdom and other parts of the world. It is estimated that variable life insurance sales account for 15 percent to 30 percent of Europe’s new business production. Variable life is essentially built on the same type of platform as traditional whole life, with one main difference. Rather than investing the cash value in the company’s general account, money is invested in one of the available sub-accounts. The sub-accounts are similar to pooled / collective investments (e.g., mutual funds or unit trusts). The investment concept is similar to that found in variable universal life policies, but usually not having quite the same amount of variety or opportunity for diversification. CFP Level 3: Module 1 – Risk Analysis - Global Page 87

Simply put, variable life combines the traditional protection and savings functions of life insurance with the growth potential of equities. A variable life policy normally includes a guarantee that the death benefit in any year will never be less than the initial face amount. However, the cash value is not guaranteed. Premiums are fixed, like traditional whole life. After deducting policy expenses, the company invests the remaining premium in mutual fund-like separate accounts (or sub-accounts) as directed by the policy owner. Variable insurance products require use of a prospectus that includes all the same types of information usually found in a mutual fund or unit trust prospectus. Variable life separate accounts are normally invested in equities, bonds, and/or money market instruments. In return for possible improved investment performance, the policy owner must be willing to give up a guaranteed cash value amount. The policy owner also assumes all policy investment risk. Variable Universal Life Variable universal life (VUL) policies are similar to universal life policies in the same way variable life policies are similar to whole life policies. The two have a similar structure, with VUL policies also providing the opportunity for the policy owner to invest in several mutual fund-type offerings. The investment risk is transferred from the insurance company to the policy owner, and there is greater potential for better investment returns. The policy also has potential for investment losses. VUL buyers need to be aware of policy investment performance to ensure there are adequate values to sustain the policy for life since the costs for insurance, and possibly administration expenses, increase as the insured ages. Unlike variable life policies, a VUL usually does not have a guaranteed death. Absent a guarantee, the entire contract can lapse with no residual coverage. Some VUL contracts offer a guaranteed death benefit rider at an additional cost to provide at least some protection if the performance of the subaccounts would result in the policy lapsing. VUL policies may also be called flexible premium variable life. This recognizes that essentially, VUL combines the flexibility of universal life with the investment aspect of variable life. Keep in mind, unlike variable life, VUL guarantees only mortality charges and the right to keep the policy in force. You can review information on UL policies to get a good idea of how VUL policies are structured (remembering that cash values are handled differently). CFP Level 3: Module 1 – Risk Analysis - Global Page 88

JOINT LIFE INSURANCE Life insurance has traditionally been designed to cover the life of the primary breadwinner of a family. However, with changing times, particularly with the rise in the number of working couples, an increasing need is now being felt for life insurance cover for the spouse also. One way to effectively do this is by opting for a joint life cover. Joint life insurance, as the name suggests, offers the opportunity to cover oneself along with spouse under one contract. Some joint life term policies pay out on first claim basis, i.e. the sum assured is paid on the death of whomever of the two policy holders dies first and the policy ends thereafter. However, in case of certain other joint life policies, there is a payment on the death of each of the two insured respectively. Some policies also offer additional benefits. For example, if either one of the spouses dies, some policies provide a regular income to the surviving spouse for a fixed period. There are two types of joint life policies—first-to-die and second-to die. First-to-die policies cover two or more individuals and pay the death benefit when the first covered person dies. Second-to-die (or last-to-die) policies cover two people as well, but do not pay a death benefit upon the first death. Instead, these policies pay the death benefit after both individuals pass away. As a result, they are also known as survivorship policies. This unique feature makes the product a good estate management tool CFP Level 3: Module 1 – Risk Analysis - Global Page 89

Insurance Policy Documents and their Legal Implications As life insurance contacts are long-term contracts, the terms and conditions in various documents should be well defined. The following are some of the important documents which are part of any insurance contract: (a) Proposal Forms (b) Agent Report (c) Medical Report (MR) (d) Personal statement (e) Special Questionnaire (f) Proof of Age (g) Deposit Receipt (h) First Premium Receipt (FPR) (i) Policy Document (j) Renewal Premium Receipt (RPR) (k) Renewal Notices (l) Endorsements (m) Bonus Notices (n) Need Analysis Form (o) Prospectus (p) Other documents Proposal Forms: It is an application form, which the prospective buyer completes for grant of insurance cover. The buyer is called the proposer. The buyer is also called the applicant. Some insurance companies name proposer form as application form. The agent helps the proposer to complete the form. Insurance companies make their own standardized proposal form available through Agents and servicing offices. There are standard guidelines issued by the Regulator as to how to frame the questions in the proposal forms. The questions contained in the proposal form seek information from the proposal in the following areas. The proposer name, address for correspondence, permanent address, sex, occupation, income, CFP Level 3: Module 1 – Risk Analysis - Global Page 90

date of birth and type of age proof. There are questions about sum assured/plan and term desired, premium payment mode, purpose of insurance, whether any additional benefit required etc. The insurer will also ask the name of nominee and relationship with the life to be assured. Previous insurance particulars are also required for assessing the total risk and also for comparison and authenticity. Some additional questions are asked from the female proposer. It may happen in some cases that the proposer and life to be insured are two different persons, say when father is proposing on the life of his minor son. In such cases the proposal form will be worded differently as questions will be asked to seek information about both the proposer and the life to be insured. The proposer should complete the form in his own handwriting and his signature needs to be witnessed. If someone else completes the proposal form, the person completing the form should make a declaration that the answers to all the questions were written as dictated by the proposer. If the language of the questions and answers differs, then there should be a declaration that answers were written after fully explaining to the proposer in his mother tongue. If the proposer is illiterate or puts his thumb impression then the thumb impression should be attested by a third party who should declare that the questions and answers were explained to the proposer in his own language. The attestation of the thumb impression should be by a person whose identity can easily be established as and when required and who should not be connected with the insurance industry. While completing the proposer form, the company guidelines should be strictly followed by the agent. In other words, all precautions should be taken that the proposer writes answers to the questions truthfully and give correct information about his health, habits and family history. All questions should be replied and answer to no question should be left blank. There should not be any reason for the proposer to say at any time that the answers to questions were written without his knowledge. As the proposer form is the basis of contract, the proposer has to sign a declaration at the end of the proposal form that all statements and answers given in the proposal form are true in every respect to best of his knowledge and if any statement and information is found to be untrue then the insurer is entitled to declare the contract null and void and forfeit the money already paid. Hence the proposal form is a very important document and should be filled very carefully to safe guard the interest of both the insured and insurer. CFP Level 3: Module 1 – Risk Analysis - Global Page 91

A sample proposal form is attached as Appendix 4 in Topic 3 on \"Gathering Client Data and Ascertaining Needs\" Other forms/documents required to be obtained along with the proposal form are as under: Agent Report: The Agent procuring the business completes this report. If sum assured is high and when agent is related to the insured, then such report may be completed by some higher rank official also. The report focuses on the financial status, general health, and insurance need of the proposer to rule out any type of moral hazard. Agent should complete the report after personally meeting the proposer and verifying various details about him. As agent is the primary underwrite, he should complete the report truthfully and diligently. Medical Report (MR): Every proposer need not undergo the medical examination. Every insurance company lays down the guidelines for its sales force as to under what type of cases medical reports are required. The proposals where medical reports are not required are called non-medical cases. A great deal of insurance business is procured without any medical examination. Under such cases, the Agent has to probe more closely and give elaborate report about the proposer. Personal Statement: In the personal statement the applicant is asked to give his age, history of illness, accidents, operations and surgery undergone and the present state of health and family history. If the proposal is being considered without medical examination then the proposer has to give his basic medical measurements i.e. height, weight etc. If medical examination is conducted then the medical examiner corroborates the replies to questions with his independent investigation during the examination wherever necessary. Wherever medical examination is needed the Doctor appointed by the insurer conducts the same. The agent renders help to the proposer for conducting the examination. The medical examiner submits the report direct to the Company. If there is history of accident or operation or surgery, the treating/operating Doctor may be asked to complete a form giving details of accident/operation. Special Questionnaire: Such a form is called when the applicant is having some hazardous occupation. The proposer completes the form giving details of his occupation. The Agent should have the knowledge as to under what type of occupations such a form is required. This form should be obtained at the time of filling the proposal form to avoid any delay in the completion of the case. Proof of Age: Knowing correct age is important to assess the risk of the proposer. Hence proper age proof must be insisted upon. There are standard age proofs like school certificate, Municipal birth certificate, Passport etc. Non-standard age proofs may include horoscope, age CFP Level 3: Module 1 – Risk Analysis - Global Page 92

in voter list/ration card, elder declaration etc. For nonstandard age proof some extra premium may be charged, called ₹Age Extra'. The Agent should ensure that the age proof is authentic. Types of Standard and Non-Standard age proofs are discussed in Topic 10 on \"Policy Conditions\". Deposit Receipt: The Agent submits the proposal form, personal statement, age proof, Agent report, special questionnaire and other forms along with the first premium to the office. On receipt of the forms and first premium, a deposit receipt is issued. This is the provisional receipt. The Agent should hand over this receipt to the proposer for any future reference. First Premium Receipt (FPR): After the underwriter accepts the case, the First Premium Receipt is issued. The risk commences from the date of issue of the receipt. First Premium Receipt contains all the important information about the completed case and is an important document in support of acceptance of risk by the insurer. The agent should ensure that this receipt is issued without any unreasonable delay. The insured should keep the receipt in safe custody till he receives the policy document. Policy Document: After the issue of First Premium Receipt, the insurer focus its attention to issue the Policy Document also called Policy Bond to the insured at the earliest. The Policy Bond contains all the terms and conditions of the contract in simple language. All the policy privileges/ concessions, restrictive clauses are incorporated in the Policy Band for the information of the insured. The Policy Bond is the evidence of contract while the proposal form is the basis of contract. Policy Bond should be kept at a safe place. The insurer will also send to the insured a copy of the proposal form along with the Policy Bond of separately. This document should also be kept at a safe place by the policyholder. Renewal Premium Receipt (RPR): The insured has to pay the subsequent premiums at regular interval as per the mode of payment chosen. In case of yearly mode the premiums are to be paid every year, in case of half- yearly mode the premiums are to be paid every six months and so on. On receipt of the premium the insurer has to issue the receipt. Such receipts are called Renewal Premium Receipts. Renewal Notices: The insured/ policyholder is reminded to pay the subsequent premiums. Such reminders are called renewal notices. Though the renewal notices are not mandatory to issue yet all the insurers send such notices so that policies remain in force. Endorsements: Most of tine important terms and conditions are printed at the back of the policy document. If some modification / deletians are required in the terms and conditions it is done by endorsement to be pasted or attached at the back of the policy document. Some endorsements in support of alterations etc. may be attached after the policy is issued as and when such alterations and modifications are made. The endorsements may also relate to the CFP Level 3: Module 1 – Risk Analysis - Global Page 93

change of nomination, assignment and reassignment of the policy and so on. Bonus Notices: If the policy is with profit, the insurer intimates the bonus amount to the insurer/policyholder as and when bonus is declared. Such communications strengthen customer relationship with the company and works as a great marketing tool. It also gives great satisfaction to the policyholder on knowing about the amount of bonus attached to the policy. Need Analysis Form: Now insurance companies have directed the Agent to complete a \"Need Analysis\" form before the sale of any product to the prospect. A copy of this form should be obtained by the applicant to be kept along with the policy documents. Prospectus: The IRDA (Protection of Policyholders Interests) Regulations stipulates that the Prospectus of brochure issued by the insurer, should explicitly state the scope of benefits, conditions, warranties entitlements, exceptions, right for participation in bonus, etc., under the insurance plan being offered. It also mentions the guaranteed and nan-guaranteed benefits. The prospectus or brochure should be obtained by the proposer and keep it with the insurance documents for any future reference, in case of dispute. Other Documents: There may be many other documents such as lapse notices, discharge forms issued by the insurer for making periodical payments under money back policy, documents regarding issue of duplicate policy bond etc. In market-linked insurance policies, the insured will receive periodical statement giving status of his policy such as number of units to his credit, various charges deducted, value of his units etc. These documents need to be preserved. 2.2 Loans Against Life Insurance Policies Loan facility is provided in most of the policies.  Loans can be given up to 80% or 90% of surrender value.  Policy loan is interest bearing  Loan may be repaid in full or in part during the currency of the policy or else it will remain as a debt on policy recoverable with interest from claim amount.  Payment of interest is not compulsory. If premiums are paid regularly, with the payment of every subsequent premium, surrender value will increase and would always be more than the outstanding loan with interest any point of time. Loan facility is not available on all policies: Rules regarding availability of loan under policies vary from insurer to insurer. However, a few examples of non-availability of loan are - CFP Level 3: Module 1 – Risk Analysis - Global Page 94