Commercial Law and Preliminaries of Auditing · Ch 6 — Law of Insurance
Life Insurance
Life Insurance
(b) Life Insurance
Definition. A contract of life insurance is one whereby the insurer, in consideration of a
premium (paid as a lump sum or in periodic instalments), undertakes to pay a certain sum of money
— the sum assured — to the insured or his nominee, either on the death of the person
whose life is insured, or on the expiry of a specified period, or on the happening of some
other specified contingency dependent on human life.
Features.
- A contract of contingency, not strictly of indemnity. Because a human life has no fixed, objectively measurable pecuniary value, the insurer simply pays the agreed, FIXED sum assured on the insured event, regardless of what the insured's family's actual financial 'loss' turns out to be — this is a genuine and important contrast with general (fire/marine) insurance, which compensates only the actual loss suffered, never a pre-fixed sum.
- Insurable interest need exist only at inception. Unlike general insurance (see sub-topic (c)), life insurance requires insurable interest to exist only at the time the policy is taken out — once validly effected, the policy remains fully valid even if the insurable interest that originally justified it later ceases to exist.
- Certainty of the event. Death is a certain event — every human life insured will, eventually, end in death; only its exact TIMING is uncertain. This is precisely what distinguishes life insurance from general insurance, where the insured event itself (a fire, a marine loss) may or may not ever occur at all.
- A long-term contract. Life insurance policies typically run for many years, often decades, unlike general insurance, which is usually a short-term contract renewed annually.
- Savings-cum-protection instrument. Several life insurance products (endowment, money-back, ULIPs) combine genuine financial protection with a savings/investment element, unlike general insurance, which is purely protective.
Types of life insurance policies.
- Term Insurance — pure risk cover; the sum assured is payable only if death occurs within the policy term, with no maturity/survival benefit if the insured survives the term.
- Whole Life Policy — covers the insured for his entire life; the sum assured is payable whenever death occurs, however far in the future.
- Endowment Policy — the sum assured (plus any bonus) is payable on maturity (i.e., if the insured survives the full policy term), OR on earlier death, whichever happens first — combining savings with protection.
- Money-Back Policy — a fixed percentage of the sum assured is paid out periodically during the term as survival benefits, with the balance (plus bonus) paid at maturity.
- Unit-Linked Insurance Plan (ULIP) — part of the premium provides life cover, and part is invested in market-linked funds chosen by the policyholder.
- Pension/Annuity Plans — provide the policyholder a regular income, typically after retirement, in exchange for the accumulated premiums/corpus.
Surrender Value. If a policyholder wishes to discontinue paying premiums and exit the policy
before its full term, the insurer pays a Surrender Value — generally a percentage of the total
premiums already paid (available only after a minimum number of years' premiums, commonly at
least two to three years, have been paid), reduced by certain deductions. The surrender value is
normally LESS than the total premiums paid, since it also reflects the cost of the life cover
already provided up to that point.
Nomination. A life insurance policyholder has the right to nominate one or more persons to
receive the policy money in the event of the policyholder's death. Nomination exists primarily to
allow the insurer to make a prompt, valid payment to the named nominee without waiting for a
lengthy succession process. It is worth noting, as a point of nuance rather than a bright-line
rule, that a nominee does not automatically become the sole beneficial OWNER of the money in every
circumstance — depending on the facts, other legal heirs under succession law may still have a
claim to the money the nominee actually receives, unless the nominee is also the true beneficial
heir. Nomination can generally be changed by the policyholder at any time during the policy's
currency.
Life Insurance vs. General Insurance
| Basis | Life Insurance | General Insurance |
|---|---|---|
| Nature of contract | Contract of contingency (fixed sum on a certain event) | Contract of indemnity (actual loss only) |
| Insurable interest | Required only at the time the policy is taken (inception) | Required at BOTH inception AND the time of loss |
| Certainty of the insured event | Certain (death will occur; only timing is uncertain) | Uncertain (the event itself may never occur) |
| Duration | Typically long-term (many years) | Typically short-term, renewed annually |
| Amount payable | A fixed, pre-agreed sum assured | The actual assessed/valued loss, capped at the sum insured |
Effect of Suicide. Life insurance policies issued in India, in line with the standard
regulatory framework the IRDAI has laid down for life insurance products, generally include a …
A contract whereby the insurer, in consideration of premium, pays a fixed sum assured to the insured/nominee on the death of the life insured or on expiry of a specified period …
The amount an insurer pays a policyholder who discontinues a life insurance policy before its full term, generally a reduced percentage …
The policyholder's right to name a person to receive the policy money on death, enabling prompt payment by the insurer without awaiting a …