Types of Insurance

Insurance is broadly classified into life insurance, fire insurance and marine insurance.

Life Insurance

Since life itself is uncertain, individuals seek to assure themselves of a sum of money for the future. Two kinds of risk arise:

• The certain event of death, which threatens the income of dependent family members.
• The risk of living too long (retirement), when a person may become too old to earn.

To cover these, life insurance companies offer protection, and the scope has widened into products such as disability insurance, health/medical insurance, annuity insurance and life insurance proper.

Definition — Life insurance is a contract in which the insurer, in consideration of a certain premium (lump sum or periodical), agrees to pay the assured sum to the assured (or the person for whose benefit the policy is taken) on the happening of a specified event contingent on human life, or on the expiry of a certain period. Premiums may be paid monthly, quarterly, half-yearly or yearly. The person is thus assured that a specified amount will be paid on attaining a certain age, or to his dependents on his death.

Nature — Life insurance is protection plus investment (a sum is returnable to the insured on death or on expiry of the period) and it also encourages saving, giving the insured and his dependents a sense of security. Terms: the person whose life is insured is the assured, the company is the insurer, and the consideration is the premium.

Main elements of a life insurance contract

• It must have all the essentials of a valid contract — offer and acceptance, free consent, capacity to contract, lawful consideration and lawful object.
• It is a contract of utmost good faith — the assured must honestly disclose all material facts about his health, even if the insurer does not ask.
• The insured must have insurable interest in the life assured; it must exist when the insurance is effected (not necessarily at maturity). Examples: a person in his own life, a creditor in the life of his debtor, and a drama-company proprietor in the lives of the actors.
• It is not a contract of indemnity — a human life cannot be compensated, so a fixed sum, decided at the time of the contract, is paid.

Examples of facts to be disclosed

• Fire: construction of the building, fire-detection and fire-fighting equipment, nature of its use.
• Motor: type of vehicle, driver details.
• Personal Accident: age, height, weight, occupation, previous medical history.
• Life: age, previous medical history, smoking/drinking habits.

Types of life insurance policies

The policy is the written contract between insurer and insured; it is issued after the proposal form is filled in and the insurer accepts the form and the premium. People's needs vary — family, children, old age and special needs — so insurers offer products such as Whole Life, Endowment, combinations of the two, Children's Assurance and Annuity plans.

• Whole Life Policy — the sum is not payable before the death of the assured; it becomes payable only to the beneficiaries/heirs. The premium is payable for a fixed period (say 20 or 30 years) or for the whole life; if for a fixed period, the policy continues until death.
• Endowment Life Assurance Policy — the insurer pays a specified sum when the insured attains a particular age or on his earlier death. It matures after a limited number of years — paid to heirs/nominee on death, or to the assured on reaching the fixed age.
• Joint Life Policy — taken by two or more persons; premium paid jointly or by either; the sum is payable on the death of any one person to the survivor(s). Usually taken by husband and wife or by two partners in a firm.
• Annuity Policy — the sum is payable after the assured attains a certain age, in monthly, quarterly, half-yearly or annual instalments; premium is paid in instalments or as a single premium. Useful for those who want a regular income after a certain age.
• Children's Endowment Policy — taken by a parent for a child's education or marriage; a certain sum is paid when the children attain a particular age. The premium is paid by the person entering the contract, and no premium is payable if he dies before the policy matures.

Fire Insurance

Fire insurance is a contract whereby the insurer, in consideration of the premium paid, undertakes to make good any loss or damage caused by fire during a specified period, up to the amount specified in the policy. It is normally for one year (renewable), with premium paid in lump sum or instalments.

Conditions for a fire claim

• There must be an actual loss; and
• The fire must be accidental and non-intentional.

The risk covered is loss resulting from fire (or a cause of which fire is the proximate cause). Overheating without ignition is not a fire loss and cannot be recovered.

Main elements of a fire insurance contract

• Insurable interest must exist both at the time of insurance and at the time of loss (unlike life insurance). Examples: an owner in his property, a businessman in his stock/plant/machinery/building, an agent in the principal's property, a partner in the firm's property, and a mortgagee in the mortgaged property.
• It is a contract of utmost good faith — the insured must honestly disclose all facts about the property's nature and risks, and the insurer must disclose the policy terms.
• It is a contract of strict indemnity — the insured recovers the actual loss, subject to the maximum insured amount. For example, if a house is insured for ₹4,00,000 and is destroyed by fire, the insurer pays the actual loss after deducting depreciation, within the ₹4,00,000 limit — not automatically the full sum — so that no one gains from insurance.
• The insurer is liable only when fire is the proximate cause of the loss.

Marine Insurance

Marine insurance is an agreement whereby the insurer undertakes to indemnify the insured against marine losses — protection against marine perils / perils of the sea, such as collision with rocks, attack by enemies, fire, capture by pirates, and the actions of the ship's captain and crew, which cause damage, destruction or disappearance of the ship and cargo and non-payment of freight. The insurer here is called the underwriter.

Marine insurance covers three things:

• Ship or hull insurance — indemnifies the insured for losses from damage to the ship exposed to sea dangers.
• Cargo insurance — covers the cargo against risks at port (theft, lost goods) and during the voyage.
• Freight insurance — reimburses the shipping company (the insured) for the freight it loses when cargo fails to reach the destination due to damage or loss in transit.

Main elements of a marine insurance contract

• It is a contract of indemnity (unlike life insurance); the insured recovers the actual loss and can never make a profit. However, cargo policies give commercial indemnity rather than strict indemnity, and in a hull policy the amount insured is fixed above the current market value.
• It is a contract of utmost good faith — both parties must disclose everything within their knowledge, and the insured must accurately disclose the nature of the shipment and the risk of damage.
• Insurable interest must exist at the time of loss, not necessarily when the policy was taken.
• The principle of causa proxima (proximate cause) applies — the insurer is liable only if the nearest cause of loss is covered by the policy.

Difference between Life, Fire and Marine Insurance

• Subject matter — Life: human life. Fire: any physical property or asset. Marine: a ship, cargo or freight.
• Element — Life: protection and investment. Fire: protection only. Marine: protection only.
• Insurable interest — Life: must exist when effecting the policy, not necessarily when the claim falls due. Fire: must exist both at effecting and when the claim falls due. Marine: must exist at the time of loss (when the claim falls due) only.
• Duration — Life: usually more than a year, from 5 to 30 years or whole life. Fire: usually not more than a year. Marine: for one voyage, a period, or mixed.
• Indemnity — Life: not based on indemnity (the sum assured is paid on the event or on maturity). Fire: a contract of indemnity (actual loss up to the policy limit). Marine: a contract of indemnity (market value of the ship and cost of goods destroyed).
• Loss measurement — Life: not measurable. Fire: measurable. Marine: measurable.
• Surrender / paid-up value — Life: has a surrender or paid-up value. Fire: none. Marine: none.
• Policy amount — Life: one may insure for any amount. Fire: cannot exceed the value of the subject matter. Marine: can be the market value of the ship or cargo.
• Contingency of risk — Life: an element of certainty (death or maturity is bound to happen, so a claim will arise). Fire: an element of uncertainty (destruction by fire may not happen). Marine: an element of uncertainty (a loss at sea may not occur).

Difference between Life, Fire and Marine Insurance

Having looked at life, fire and marine insurance one by one, this NCERT Class 11 Business Studies chapter sets the three side by side across nine bases of comparison — an ideal revision aid before an exam.