A contract of life
insurance may be defined as a contract whereby the insurer in consideration of
a premium paid 4either in lump sum or in periodical installments undertakes to
pay an annuity or a certain sum of money, either on the death of the insured or
on the expiry of a certain number of years, whichever is earlier. According to
the Insurance Act, 1938 life insurance business means, the business of
effecting contract of insurance upon human life. It includes-
(i) any contract whereby the payment of money is assured on
death (except death by accident only);
(ii) any contract
whereby the payment of money is assured on the happening of any contingency
dependent on human life; and
(iii) any contract
which is subject to payment of premiums for a term dependent on human life.
Contracts of life assurance
will also include –
(a) the granting of
disability and double or triple indemnity accident benefits if so provided in
the contract of insurance;
(b) the granting of
annuities upon human life; and
(c) the granting of
superannuation allowance and annuities payable out of any fund applicable
solely to the relief and maintenance of persons engaged in any particular
profession, trade or employment or of the dependents of such persons.
Distinction between insurance and assurance
The two terms
‘insurance’ and ‘assurance’ are often loosely used to mean one and the same
thing. But the terms are not synonymous. Assurance refers to a contract under
which the sum assured is bound to be payable sooner or later. A contract of
insurance is a contract for compensation for damage or loss as in case of fire
and marine insurance. The term insurance is used where the risk is uncertain-
it may or may not happen.
The following are the
points of distinction between life and other forms of insurance.
(1) In life
insurance, the event is bound to happen; the only uncertainty being the actual
time of its occurrence. But in case of other forms of assurance, e.g., fire,
marine or accident, it is not certain that the event insured against may happen
at all.
(2) The contract of
fire, marine and accident insurance is a contract of indemnity, but contract of
life assurance is not a contract of indemnity. In the former case, the amount
recoverable is measured by the extent of the assured’s pecuniary loss, while in
the case of latter the sum assured is payable irrespective of any proof of loss
and to the full extent of the amount insured.
(3) The insurable
interest in case of fire and marine insurance is capable of measurement in
terms of money. In case of life insurance, this is not possible.
(4) Life insurance
contracts are long term and continuing contracts. Marine, fire and other forms
of insurance are generally entered into for one year, though renewable
provided, the insured is willing to do so and pays the premium;
(5) In life insurance,
the insurable interest must exist at the time the contract of insurance is
entered into. In fire insurance there must be insurable interest both at the
time of insurance, and at the time of loss. In marine insurance, the insurable
interest must exist at the time of the loss.
(6) In life insurance
the subject matter of insurance is human life, whereas in other forms of
insurance, the subject matter insured is normally property.
(7) Life insurance
contains both the elements of protection and investment, whereas, in case of
fire or marine insurance, only the protection element exists.
(8) A life policy can
be surrendered by the assured before its maturity. In case of fire, or marine
policy the insured cannot do so.
(9) There is no
question of over or under insurance in case of the life insurance, whereas in
other forms of insurance the claim is dependent upon the loss suffered by the
assured.
Life Insurance not a
contract if indemnity
Fire and marine
insurance contracts, in general, are contracts of indemnity, that is, they
provide for compensating the insured for loss or damage sustained. A contract
of life insurance however, forms an exception to the general rule. A contract
of life insurance is mere contract to pay a certain sum of money on the death of
a person (or a maturity) in consideration of the payment of a certain sum of
money at periodical intervals. A life insurance contract does not resemble a
contract of indemnity because the insurer does not undertake to indemnify the
assured for any loss on maturity or death of the assured but promises to pay
sum assured in that event. A policy of insurance on one’s own life, is not an
indemnity because it is merely a contract to pay a certain sum in the event of
death. The assured merely pays the premium to the insurer in order to secure a
certain sum payable to him or to his representative in case of death. There is
no question of indemnification in such a case for the loss resulting from
death, cannot be estimated in money. Life insurance is adopted as a means of
saving, the idea of indemnity is foreign to it.
It is doubtful
whether the above view can universally be applied to all kinds of life
insurance. If a creditor insurers the life of his debtor, it is no more than a
contract which provides a security against the chance of the debtor’s dying
without repaying it. To say that such a contract is not a contract of indemnity
is not reasonable.
INSURABLE INTEREST
In order to effect a
valid insurance a person must prove some kind of interest in the life sought to
be insured. This interest is called insurable interest. A person has an
insurable interest in the life of another where there is a reasonable
probability that he will gain by the latter’s remaining alive or lose by his
death. It follows that one can have an insurable interest only when one would
stand to benefit financially by the continuance of the life insured, or when,
in other words, one would be put to a financial loss, by the happening of the
event against which the life of a person has been insured. Insurable interest
is thus a financial or other lawful interest in the preservation of the life to
be insured. But insurable interest is not a mere sentimental interest in the
object insured. Further, mere natural love and affection is not sufficient to
constitute an insurable interest.
In the case of life
insurance insurable interest must be present at the time when the policy is
taken. It may or may not be in existence at the time of the death of the person
whose life is insured. In the following three cases, insurable interest is
presumed and no proof is required- namely (i) own life, (ii) husband in the
life of wife, and (iii) wife in the life of husband. In all other cases
insurable interest has to be proved.
The following have
been held to have an insurable interest:
1. A child has an
insurable interest in the life of his father.
2. A creditor has an
insurable interest in the life of the debtor to the extent of the debt.
3. A surety has an
insurable interest in the life of his principal debtor.
4. A partner in
business has an insurable interest in the life or lives of his co-partners.
5. A servant employed
for a specified period has an insurable interest in the life of his employer.
In the following
cases, there is considered to be no insurable interest.
1. A father has no
insurable interest in the life of his son excepts where he is dependent on him.
2. An elder brother
has no insurable interest in the life of his younger brother.
3. An uncle has no
insurable interest in the life of his nephew.
THE POLICY
An insurance policy
is a document that contains the contract between the insured and his insurance
company. It contains the terms and conditions of the contract, the date when
risk begins, the sum assured, the type of policy, age at entry, and such other
details. It is issued to the proposer after the proposal form duly filled in
and signed by him is accepted by the insurer and the first premium has been
paid. It is duly stamped and signed by the Divisional Manager and contains the
seal of the Corporation.
TYPES OF LIFE
INSURANCE POLICIES
The life insurance
policies are of many types. The principal types of policies are discussed
below:
(1) Whole life
policy: Under this policy premiums are paid throughout life and the sum insured
becomes payable only at the death of the insured. The policy remains in force
throughout the life of the assured and he continues to pay the premium till his
death. This is the cheapest policy as the premium charged is the lowest under
this policy. This is also known as ‘Ordinary Life Policy’. This policy is
suitable to persons who want to provide for payment of estate duty, make
bequeathments for charitable purpose and to provide for their families after
their death.
(2) Limited payment
Life policy: In the case of whole life policy there is one disadvantage in that
the assured must continue to pay the premium even during his old age when he is
no more employed. Under the Limited Payment Life Policy premiums are payable
for a selected number of years or until death, if, earlier. The assured knows
how much he will be required to pay, no matter how long he lives. The sum
insured becomes payable only at the death of the insured. It is a suitable
policy to meet the family needs.
(3) Endowment Policy:
It runs only for a limited period or up to a particular age. Under this policy
the sum assured becomes payable if the assured reaches a particular age or
after expiry of a fixed period called the endowment period or at the death of
the assured whichever is earlier. The premium under this policy is to be paid
up to the maturity of the policy i.e., the time when the policy becomes
payable. Premium is naturally a little higher in the case of this policy than
the whole life policy. This is a very popular policy these days as it serves
the dual purpose of family and old age pension.
(4) Double endowment
policy: Under this policy the insurer agrees to pay the assured double the
amount of the insured sum if he lives on beyond the date of maturity of the
policy. This policy is suitable for persons with physical disability who are
otherwise not acceptable for other classes of assurance at the normal tabular
rates. Premiums are to be paid for a selected term of years or until death, if
earlier.
(5) Joint life
Policy: This policy covers the risk on two lives and is generally available to
partners in business. Policies are however, issued on the lives of husband and
wife under specified circumstances. Sum assured becomes payable at the end of
the selected term or on the death of either of the two lives assured, if
earlier.
(6) With or Without
Profit policies: Under the ‘with profit
or participating policies’ the policy holder is allowed a share in the profits
of the Corporation in the form of bonus and it is added to the total sum assured
and paid at the time of maturity of the policy. In the case of ‘without profit
or non-participating policies’, no such profit is allowed. Premium in the first
case is higher and is lower in the later case.
(7) Convertible whole
life policy: This policy initially provides maximum insurance protection at
minimum cost and offers a flexible contract which can be altered at the end of
five years from the commencement of the policy to an endowment insurance.
(8) Convertible term
assurance policy: This policy meets the needs of those who are initially unable
to pay the larger premium required for a whole life or endowment assurance
policy but hope to be able to do so within a few years. It would also enable
such person to take final decision at a later date about the plan suitable for
their future needs.
(9) The fixed term
(marriage) endowment policy and the education annuity policy: It is a policy
suitable for making provisions for the marriage or education of children.
Premiums are payable for a selected term or till prior death. The benefits are
payable only at the end of selected term. In case of the marriage endowment the
sum assured is paid in lump sum, but in case of the educational annuity, it is
paid in equal half yearly installments over a period of five years.
(10) Annuities: It is
a policy under which the insured amount is payable to the assured by monthly or
annual installments after he attains a certain age. The assured may pay a lump
sum of money at the outset. These policies are useful to persons who wish to
provide a regular income for themselves and their dependents.
(11) Sinking fund
policy: Such a policy is taken with a view to providing for the payment of
liability or replacement of an asset.
(12) Multipurpose
policy: This policy meets several insurance needs of a person like provision
for himself in old age, income for his family and provision for the education,
marriage or the start in life of his children. It gives maximum protection to
the beneficiaries in the event of the early death of the assured, as it provides
(i) regular monthly income during the unexpired term; (ii) additional monthly
income for a period of two years from the date of death; (iii) payment of a
part of the sum assured on death and (iv) payment of the balance sum assured at
the end of the selected period. On maturity the assured may get the sum assured
in cash, in the form of a monthly pension, or an increased sum payable on
death. Premiums are payable during the selected term or till death, if earlier.
