PRINCIPLES OF LIFE INSURANCE

Insurance is achieved through a contract between the insurer and the insured. This contract is called a ‘policy’. Under this contract, the insurer promises to pay to the insured or his heirs a certain sum of money if a specified contingency happens within a specified period. In return, the insured agrees to pay a predetermined amount called ‘premium’ either as a lump sum or as small installments over a period.

Any legal contract must have the following essentials; a) offer and acceptance, b) consideration, c) capacity to contract, d) meeting of minds, e) legality of purpose, f) capacity of performance, and g) intention to create legal relationship. Accordingly, a person who is interested in getting life insurance for himself or for others economically related to him sends in a proposal which the insurer scrutinize and accepts or rejects. The consideration involves the premium and the sum to be paid by the insurer as ‘claim’ to the insured. The proposer must be legally eligible to enter into a contract, i.e. He must be above 18 years of age and of sound mind. Similarly, the insurer must be capable of paying the claim when required. Besides these, life insurance contracts are subject to two additional principles, viz, the principle of utmost good faith, and the principle of insurable interest.

In commercial contracts each party can verify the correctness of the statements of the other party. In life insurance this is not true. Most of the facts relating to health, habits, personal history, family history etc, which form the basis of the contract, are known only to the proposer and not to the insurer. So it is essential that the proposer truthfully reveals all the personal details of the insured before a policy can be issued. So a life insurance policy is a contract of utmost good faith. The law dictates that the proposer make a full disclosure to the insurer, and in the event of failure to do so, the policy will become void ab initio.

All risks are not insurable. The purpose of insurance is to compensate, partially, the loss, and not to make profit out of the loss. So speculation or betting is not allowed. This is ensured by the principle of insurable interest. The proposer must have a stake in the well being of the person insured, and could suffer a loss if the risk occurs. He must be in a relationship with the insured, whereby he benefits from the safety and well being of the latter. For example, one has unlimited insurable interest on his own life. Similarly, he has insurable interest in the lives of his wife, children, employee/ employer, debtor or business partner. Parents can take life insurance policies on the lives of their children, but the policy must be transferred to the offspring as he/she attains 18 years of age. Hence, insurable interest must exist at the beginning of the policy, but is not necessary at the time of claim.