Life Insurance

2. Life Insurance

Life Insurance is a contract under which the insurer agrees to pay a fixed sum of money — the sum assured — either on the death of the person whose life is insured, or on that person surviving to the end of a stated period (maturity), in return for the payment of premium, at fixed intervals, over the term of the policy.

Why life insurance is NOT a contract of indemnity — the single most tested distinction in this section:

• A human life has no objectively measurable "market value" the way a building or a cargo shipment does, so there is no fixed loss amount a claim could be capped at.
• Death (or survival to maturity) is a CERTAIN event for every human being — only its exact TIMING is uncertain — whereas the events covered by General Insurance (a fire, an accident, a theft) may never occur at all during the policy period.
• Because of these two facts, life insurance is more accurately described as a contract of assurance rather than a contract of indemnity: the insurer pays the FULL sum assured stated in the policy, regardless of the insured's actual financial circumstances at the time of the claim, and a person may validly hold several life policies at once, on the same life, without any "contribution" being applied between them.

Main types of life insurance policies:

1. Term Insurance — provides pure risk cover for a fixed term of years; the sum assured is paid ONLY if the insured dies within that term. If the insured survives the term, no maturity benefit is paid and the policy simply lapses. Because it carries no savings element, term insurance offers the highest sum assured for the lowest premium among life policies, making it the most economical pure protection cover.
2. Whole Life Policy — covers the insured for their ENTIRE life; the sum assured is paid to the nominee only on the insured's death, whenever that occurs, in exchange for premiums that are typically payable throughout life (or for a limited premium-paying term). There is no fixed maturity date at which the sum is paid to the insured personally.
3. Endowment Policy — combines protection with savings, for a FIXED term: the sum assured is paid either on the insured's death within the term, or on survival to the end of the term (maturity), whichever happens first — making it the standard "savings-cum-protection" policy in Indian life insurance.
4. Money-Back Policy — a variant of the endowment policy in which a percentage of the sum assured is paid back to the insured periodically at fixed intervals DURING the policy term itself (survival benefits), with the balance, plus any bonus, paid at maturity or on earlier death — giving the insured periodic liquidity rather than one lump sum at the very end.
5. Unit Linked Insurance Plan (ULIP) — part of the premium provides life cover and the remaining part is invested in market-linked funds (equity/debt) chosen by the policyholder, so the eventual benefit combines insurance protection with an investment return that varies with market performance, unlike the fixed sum assured of a traditional policy.
6. Annuity/Pension Plans — instead of paying a lump sum on death, the insurer pays the policyholder a regular periodic income (an annuity), typically after a chosen retirement age, in exchange for either a lump-sum payment or a series of premiums paid earlier — designed to provide financial security during old age.
7. Group Insurance — a single policy covering a defined group of persons (commonly the employees of one employer) under one master contract, at a premium rate that is usually lower per head than an equivalent set of individual policies, because the group's overall risk is shared and administration is simpler. …