The impact of life insurance over the world

TomorrowMakers ™

The impact of life insurance over the world

22 November 2017
Life insurance has often been seen only as a tax saving instrument in India. But it plays a much bigger role for both, individuals and the nation as a whole.
 
 
Visitors to the webpage of Life Happens – a non-profit organisation promoted by US life insurers – will find videos of beneficiaries explaining how life insurance can be a godsend. Their accounts are supposedly based on real life experiences, and you would not be faulted for dismissing them as an industry-driven commercial initiative, to make people buy more life insurance.
 
However, the fact remains that a life insurance plan does provide a safety umbrella – offering more than one benefit. Broadly, it provides life protection and maturity proceeds, unless it is purely a term plan.
 
In a spin-off, this is not only beneficial at a personal level, but adds to the national GDP as well.
 
Impact: Personal Level
 
The social impact of life insurance cannot be emphasized enough. Millions of families have indeed benefited from a fundamental principle of a life insurance plan; that is, it can be utilised according to the policyholder’s unique needs, ensuring a financial leg-up for him or her.
 
 
The plan can be used as a second income over the family’s primary one, thereby improving the policyholder’s lifestyle, or in the case of a one-time pay out after maturity, used for just about any purpose.
 
Life insurance eventually builds up a cash amount that, if not claimed as a death benefit, can be withdrawn during specific needs. This creates a kind of forced savings plan. 
 
Thus, a life insurance plan broadly provides 
 
1. Financial cover for dependents in case of death of the main breadwinner, who is also the policyholder
2. Lifestyle protection, both in the present and the future 
3. Tax benefits 
 

 

An ideal life insurance plan can give a person both, insurance cover and an investment. It can help enable savings – i.e. enables wealth creation over a period – and provides security.
 
It is also the only investment tool that provides customised plans for different stages of the policyholder’s life. Plus, it helps in tax saving.
 
 
Impact: National Level
 
The insurance sector – especially life insurance – not only provides a social security net in developing economies, but it also contributes to the GDP of both, emerging economies (like India) and developed ones (like the US).
 
For instance, according to the Insurance Information Institute – an industry-promoted non-profit in the US – the contribution of life insurance segment to India’s GDP in 2016 was almost 3%.
 
Impact of life insurance on India’s GDP over the last 5 years
 
 
According to the same institute, in 2015, American life and health insurers invested $2,734 billion in bonds, accounting for almost 74% of their total investments. (In 2013, it was almost 75%).
 
As the bond market’s principal objective is to provide a mechanism for long-term funding of public and private projects – like developing road infrastructure or a company expansion – what this means is that investments by life insurers has a direct role in nation-building.
 
The world’s first insurance company was established in 1667 – after the Great Fire of London the previous year – when a law was passed for the incorporation of an organisation to indemnify for losses due to fire.
 
According to the Encyclopaedia of American Business History, life insurance in the US started off as a welfare tool in 1759, when the Presbyterian Synods in Philadelphia and New York set up the Corporation for Relief of Poor and Distressed Widows and Children of Presbyterian Ministers.
 
As subsequent events show, it had far-reaching socio-legal consequences.
 
 
Impact on Women’s Rights
 
The American life insurance sector has had a positive impact on the devolution of greater economic rights for women – by initiating a process that led to pro-women’s Acts.
 
In the 18th century, although life insurance companies in the US claimed women and children as their main beneficiaries, women were prevented by law from enjoying the offered insurance protection if their husbands died.
 
This was because of two major hurdles. First, in the eyes of the law, familial ties (including that between husband and wife, or parent and child) were not considered “adequate evidence” of insurable interest.
 
Insurable interest implies that any person taking out insurance on the life of another should have specific monetary interest in that person’s continued life. Apparently, at the time, a woman was seen as having no monetary interest in her husband being alive.  
 
Secondly, married women could not take out life insurance policies as the law forbade them to enter into contracts on their own. And as a way out, married men began to take out the policy in their names, nominating their wives or children as beneficiaries.
 
But as the law also considered an insurance policy an integral part of a man’s estate, creditors could claim its benefits on his death. This negated the policy’s very purpose.
Subsequently, a campaign was launched to get life insurance policies protected from creditors’ claims – a watershed moment in the history of women’s rights.
 
 
New York’s 1840 Law
 
The New York Life and Trust led the campaign to get a state law passed on April 1, 1840, which spelt four breakthroughs in terms of women’s rights.
 
 • First, a woman could now take out insurance policies on her husband’s life “by herself and in her name, or in the name of any third person, with his assent, as her trustee.”
 • Second, the law stated that the policy would be “free from the claims of the representatives of her husband, or of any of his creditors” if the annual premium was less than $300 (roughly the premium for a $10,000-policy on the life of a 40-year-old).
 • Third, in case she (the policyholder) died before her husband, the policy reverted to the children, who were granted the same protection from creditors.
 • Finally, women no longer had to prove their monetary interest in the life of their (insured) husbands; this was the first time that insurable interest was made independent of monetary interest in the life of another.
 
The state of Maryland passed an identical law before the year ended, and four years later, Massachusetts followed with tighter norms. But New Jersey topped the others in 1851, capping annual premiums at $100.
 
Where similar laws did not exist, courts often went by the New York statute. When the insurance business spread to other parts of the world, these principles were a given.
 
 
The ‘Mutual’ Impact
 
Meanwhile, about 75 years before life insurance became accessible to women in the US, another concept had taken take roots in far-off England: that of Mutual Life Insurance. 
 
The Society for Equitable Assurances on Lives and Survivorships of London – today known as the Equitable Life Assurances Society – introduced the concept in 1762 when it was set up.
 
Under this, profits were shared among ordinary policyholders rather than proprietary stockholders – profits being the excess of invested premium income over death payments.
 
The redistribution was usually in the form of reduced premium payments, which decreased the pay-out burden on policyholders.
 
By the 1840s, it had become a reality in the US as well; its rise triggered by the financial crisis of 1837 that hit investments in infrastructure (e.g. railroads) and the financial sector (including life insurance).
 
But mutual life insurance, on the other hand, required little initial capital, as the pay-out for any death claims came from the premium payments from high-volume sales.
 
As a result, it quickly became the investors’ choice, with nearly 20 companies coming up by 1850. It also appealed to policyholders because it created wealth for them.
 
While earlier they could not afford to own stock in a proprietary insurance company, they could now share profits of mutual life insurance companies.
 
Thus, the concept of life insurance schemes also being an investment tool started gaining popularity among the working masses.
 
 
Global Overview Today
 
According to a recent study by McKinsey & Co, life insurance has fared “better” in emerging markets, despite losing ground to alternative savings schemes in mature markets.
 
In fact, McKinsey says the global growth in the life insurance sector will be spearheaded by four of the five BRICS markets – Brazil, Russia, India and China.
 
OECD (or the Organisation for Economic Co-operation and Development), a body of the more developed economies such as the US and the UK, explains why life insurance is faltering in mature markets.
 
 
“The growth of non-life gross premiums in 2015 was driven in some countries by growth in the motor vehicle insurance market as the number of policies and number of cars in circulation increased,” says the 2016 OECD report on the sector’s global trends.
 
In other words, in a market where social security is strong, the tilt is towards non-life areas like auto insurance, as opposed to markets like India, where it is relatively weaker.
 
Insurance markets in Asia
 
    
EY, formerly Ernst & Young, sees India as the driving force in “Emerging Asia’s” insurance market, comprising both life and non-life segments. (It excludes China from the list).
 
In its Global Insurance Trends Analysis 2016 report, EY shows India enjoying a massive 71.8% of the life and non-life segments.
 
It was followed by Thailand (21.7%) and Indonesia (14.9%) as single entities with any sizeable share, with the remaining 29.3% being accounted for by “others”.   
 
Where does insurance stand in India?
 
As mentioned earlier, the life insurance sector accounts for 3% of India’s GDP. But the social security net that it throws over vast multitudes is also crucial.
 
Recognising this, Prime Minister Narendra Modi has launched a life insurance scheme for the poor, called the Pradhan Mantri Jeevan Jyoti Bima Yojana.
 
The state-owned Life Insurance Corp (LIC) dominates India’s insurance sector with a 72.16% market share, says the India Brand Equity Foundation (IBEF), citing official data.
 
The entry of private insurers has added vibrancy to the sector, with their share expanding from around 2% in FY03 to about 30% in FY16, as per IBEF data. This number is expected to grow in 2017.
 
 
With their entry, trends such as product innovation, multi-distribution, better claims management and newer regulatory mechanisms have been introduced in the Indian market.
EY says the main enabler in the “key market” of India is its “rapidly growing middle class”, with its increasing income, and an exponential growth in purchasing power and household savings.
 
According to IBEF data, India’s life insurance sector grew from $10.5 billion in FY02 to $ 54.58 billion in FY16, while premiums expanded at a CAGR of 12.5% over this period.
 
And it says the sector has the potential to grow 2-2.5 times by 2020 – “in spite of multiple challenges” – riding on the back of long-term trends and fundamentals, and underlying household savings.
 
 
 
Last Words
 
Without life insurance, there would probably be a larger divide in society as it allows people from across socioeconomic strata to access a common kitty.
 
Thus, in a developing economy like India, life insurance has emerged as the most preferred investment option for 70% of investors, according to 2015 investment survey.
 
And why not? Apart from reducing the financial burdens that a family may face in the event of a death, this instrument also offers tax-saving benefits.
 
Most insurance companies do not make a profit from investing their premiums; the profits come from investing the float.
 
Thus, a higher level of insurance means a higher level of money is invested in the financial markets. In the end, it is the nation that benefits from this wealth creation through a pooled risk.
 

Quotes of The Day

POLL

 

MOST VIEWED CONTENT

How Ulip can help in meeting long-term goals

How Ulip can help in meeting long-term goals

Learn how ULIPs can help you meet long-term goals

4 reasons why Child Plans make good sense

4 reasons why Child Plans make good sense

A glimpse into the features of a Child Plan.

Death Claim: Is it possible to claim from more than one Life Insurance policy?

Death Claim: Is it possible to claim from more than one Life Insurance policy?

It is perfectly legal to buy and hold more than one life insurance policy. Your beneficiary can rightfully claim from all the life insurance policies you hold in the unfortunate event of your death. Multiple policies offer an extra level of protection that a single plan might not necessarily provide you.

Term vs whole life insurance

Term vs whole life insurance

You’ve decided to provide financial security for your family and subscribe to a life insurance policy, but are stuck in the age-old debate – Term or Whole Life insurance?

Are you aware about the 4 essential Life Insurance riders?

Are you aware about the 4 essential Life Insurance riders?

The scope of an insurance policy is sometimes not sufficient to ensure your family’s financial security. However, you can fortify your insurance plan by buying an additional cover for extraordinary circumstances. These add-ons are called riders.

Term Insurance for Dummies

Term Insurance for Dummies

Term Insurance plans are pure protection plans which provide life cover at a nominal cost. These plans are the simplest type of life insurance plans.

Top 6 factors that affect how Life Insurance premium is calculated

Top 6 factors that affect how Life Insurance premium is calculated

Have you ever wondered why you are asked to pay lesser premium than your friend or family member? To end the confusion, we have prepared a list of factors that affect how life insurance premium is calculated.

boy

We would love to hear from you!

Question, comment or concern? Our contact form is the best way to get in touch. We will respond to you within 5 working days.

NEWSLETTER