Basics of Insurance for NISM certification
Insurance is the first building block of any financial plan: before money is invested for goals, the income that funds those goals must be protected. This chapter explains how insurance works, the legal principles behind every policy, the claim-sharing terms (co-pay, deductible, contribution) that change how much an insurer pays, and the rules that govern insurers and their intermediaries. Figures are as per the NISM X-B workbook (Sept 2026 version).
Advice & ResearchSeries X-B69 MCQs5 lessons27 flashcards6 memory tricks
Practise Basics of Insurance free
What you'll learn
- How an insurance pool works
Explain risk transfer through a pool and work out a fair premium from expected losses. - What makes a risk insurable
List the conditions a risk must meet before an insurer will cover it. - The legal principles: good faith, insurable interest and indemnity
Apply utmost good faith, insurable interest, indemnity, subrogation and contribution to claim situations. - Co-pay, deductible and cashless claims
Calculate the claim payable after a deductible and a co-pay, and judge how much cashless networks should matter. - Planning insurance and knowing the rules
Follow the five steps of insurance planning and recall the key IRDAI rules and intermediary types.
Key formulas
| Claim after deductible | Assessed claim − deductible |
|---|---|
| Insurer pays (deductible + co-pay) | (Claim − deductible) × (1 − co-pay %) |
| Super top-up pays | Claims in the year − deductible (threshold), up to its sum insured |
Concepts explained
Indemnity versus defined benefit
Indemnity policies pay the proven actual loss; defined benefit policies pay a fixed sum when the event happens.
What it means
- Indemnity restores the insured to the pre-loss position, never better.
- Defined benefit is used when the loss is hard to measure (death, critical illness) or too small to measure (hospital cash).
- Contribution and subrogation apply only to indemnity policies.
- Hospital bill ₹80,000 reimbursed in full (indemnity)
- Daily cash ₹1,000 × 5 days = ₹5,000 paid regardless of actual costs (benefit)
Answer: ₹85,000 received; only ₹80,000 was a measured loss
Related terms
- Principle of indemnity: insurance should not create a profit
- Sum assured: fixed amount under a benefit policy
Exam tip: If the question mentions bills or assessment, it's indemnity; if it mentions a lump sum on diagnosis or death, it's defined benefit.
Co-pay and deductible
A deductible is a fixed first part of a claim borne by the insured; a co-pay is a percentage of the claim borne by the insured.
What it means
- The deductible is subtracted first, then the co-pay applies to the remainder.
- Both reduce premiums because the insured shares the risk.
- Super top-up plans use a deductible (threshold) on total claims in a year.
- Claim ₹60,000, deductible ₹5,000 → ₹55,000
- Co-pay 20% of ₹55,000 = ₹11,000
- Insurer pays ₹55,000 − ₹11,000
Answer: ₹44,000
- Threshold ₹3 lakh; claims in the year ₹2 lakh and ₹2.5 lakh
- Total ₹4.5 lakh − ₹3 lakh
Answer: Super top-up pays ₹1.5 lakh
Related terms
- Compulsory deductible: ₹1,000 for cars up to 1,500 cc
- Voluntary deductible: chosen by the insured for a lower premium
Exam tip: Never apply the co-pay before the deductible.
Subrogation and contribution
Subrogation: the insurer takes over the insured's rights against a third party after paying. Contribution: insurers covering the same loss share it in proportion to their cover.
What it means
- Both stop the insured from being paid more than the loss.
- Both apply only to indemnity contracts.
- In health insurance the insured chooses the insurer; contribution applies only above that policy's sum insured.
- Policies of ₹3 lakh and ₹2 lakh; loss ₹1 lakh
- Shares 3/5 and 2/5
Answer: ₹60,000 and ₹40,000
Related terms
- Third party: the person who caused the loss
- Rateable proportion: share based on sum insured
Utmost good faith and incontestability
The proposer must disclose every material fact; the insurer's right to question a life policy ends after 3 years (Section 45) and a health claim after a 5-year moratorium.
What it means
- Material fact: anything that could affect the insurer's view of the risk.
- Section 45: after 3 years from issue, risk start or revival (later of these), a life policy can't be called in question on any ground.
- Health: after 5 continuous years, claims can be contested only for proven fraud or permanent exclusions.
- Smoker declares 'non-smoker'
- Dies of lung disease in year 2
- Investigation finds the habit
Answer: Claim can be rejected and the saved premium is wasted
Related terms
- Repudiation: rejection of a claim
- Revival: restarting a lapsed policy
Exam tip: Exclusions and non-payment of premium can still defeat a claim even after 3 years.
Steps in insurance planning
Identify the need, estimate the cover (amount and term), choose the product, optimise the premium and keep reviewing.
What it means
- Income replacement: life, critical illness, disability, annuities.
- Income protection: health and motor.
- Asset protection: home and contents.
- Single, no dependants
- Main risk is losing the ability to earn
Answer: Disability and critical illness cover before large life cover
Related terms
- Under-insurance: insured keeps part of the risk
- Over-insurance: wasted premium
Memory tricks
The seven requirements: large number of exposure units, insurable interest, accidental, determinable and measurable, no prospect of gain, calculable chance of loss, economically feasible premium.
Insurer pays (claim − deductible) × (1 − co-pay %).
After paying, the insurer takes over the insured's rights against the party at fault.
Life policies can't be questioned after 3 years; health claims can't be contested after 5 continuous years except proven fraud and permanent exclusions.
Under Section 39(7), a nominee who is parent, spouse or child is beneficially entitled to the policy money.
A composite corporate agent can work with up to 3 life, 3 general and 3 health insurers.
Try 3 NISM-style questions
Q1. Which expense under a health policy will usually still need a reimbursement claim even when the hospital stay was cashless?
- Post-hospitalisation medicines bought after discharge
- The room rent during the stay
- The surgeon's fee billed by the hospital
- ICU charges included in the hospital's final bill at discharge
Show answer
Answer: (1) Post-hospitalisation medicines bought after discharge
Pre- and post-hospitalisation expenses are outside the hospital bill and are claimed by reimbursement.
Q2. Who must sign a ULIP benefit illustration along with the policyholder, to show the client wasn't lured by inflated returns?
- The insurance agent
- The insurer's appointed actuary
- An IRDAI inspector
- A SEBI-registered investment adviser
Show answer
Answer: (1) The insurance agent
Agents sign the benefit illustration with the policyholder and must separate guaranteed from non-guaranteed benefits.
Q3. Under general law, a nominee in a bank fixed deposit who receives the money on the depositor's death
- Becomes its absolute owner in all cases
- Must return it to the bank after a year
- Gets it only if the depositor died without leaving behind a valid will
- Holds it as a trustee for the depositor's legal heirs
Show answer
Answer: (4) Holds it as a trustee for the depositor's legal heirs
A nominee normally just receives the money and holds it for the legal heirs.
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