Introduction To Insurance

The Indian Contract Act 1872

A contract is an agreement between two or more parties to do or to

abstain from doing an act and which is

intended to create a legally binding relationship

An Agreement
enforceable
by Law is a
contract

Essentials of a Valid Contract

Two or
More
Parties

Lawful
Objectiv
e

Free
Consent

a
f
o
s
l
t
a
c
i
t tra
n
e on
s
Es id C
l
a
v
Offer &
Acceptance

Lawful
Consider
ation

The Life Insurance Contract

Insurer
will pay
claims

Agreement

On happening of insured event or

survival to a specified term

Insured
will pay
Premiums

Is Life Insurance a Legal Contract?

Intention is legal
Proposer offers-insurer accepts
Premium is consideration
Insured must be major with sound mind-capacity to contract
Insured and Insurer are in agreement of same mind and free
consent

Yes, since all essentials of valid contract are present

Principles of Life Insurance

Utmost
good
faith

Insurable
Interest

Insurance Contract is based on Fair Play

Insurance Contract Vs Commercial Contract

INSURANCE CONTRACT

COMMERCIAL CONTRACT

In Life Insurance proposer has all

the facts

When one buys a TV or Fridge he

examines the quality/quantity

The Insurer Knows only those

facts that the proposer discloses

Buyer has no right to come later

and ask for termination of contract

Ordinary faith is not sufficientUtmost Good Faith is required

Buyer Beware or Caveat Emptor

applies

Utmost Good Faith

A Positive Duty to voluntarily disclose,accurately and fully, all facts

material to risk being proposed, whether requested or not.

What is a material Fact?

Any Fact or Circumstance

Which
Influences

In Fixing the
premium

The Mind of a
Prudent
Underwriter

In determining
whether to take
the risk

What must be disclosed?

Facts of higher Risk

External Factors that make the risk higher

Any refusal/special terms imposed on previous proposals

Existence of other policies

Facts relating to health

Declaration
Proposal Form is the Basis Of Contract

If any statement/declaration by the proposer is found untrue

The Contract can be made Null and Void and

Premiums Forfeited

The Effect of declaration is to turn Representations in the proposal

form into warranties

Breach Of Utmost Good Faith

Breach of Utmost Good Faith

Misrepresentation

Non-Disclosure

Section 45 of the Insurance Act,1938

Policy
Start
Date

If Material Facts discovered

within 2 years of the policy
then the insurer can declare
the policy null and void

2 years

The policy cannot be called in question

after 2 years, on the grounds of
inaccurate or false statement unless it is
proved to be material and fraudulent.

What is Insurable Interest ?

Insurable Interest is not defined in Insurance Act 1938

If No Insurable Interest .A contract is a

Wagering Contract which is void

Insurable Interest is a Legal Prerequisite

Section
30
Indian
Contrac
t Act
1872

Insurable Interest
All risks are not Insurable
Insured must suffer a loss, if the risk is not covered
Financial interest in Subject matter of Insurance

The insured must be interested in the safety and

the well being of the subject of Insurance
He Should not benefit from loss or damage to it

What is Insurable Interest ?

Relationship with subject
Matter

Recognized in Law and

gives Legal Right to a
person

To insure that Subject Matter

Insurable Interest is the monetary interest

Who have insurable interest in each other

Any person in himself

Husband and wife in each other
Creditor on Debtor(To the Extent of Outstanding Mortgage with
Interest)
Surety on Principal(To the extent of Debt)
Partners in business
Employer on its employees
Parents in Lives of their Minor Children

When do these principles apply?

Insurable Interest interest is required at the time of entering the

contract

Utmost Good Faith is required Throughout the contract

Risk Management
Avoidance

Risk can be managed

Retention

Transfer

Classification of Needs

Protection of the standard of living of family incase of early death

Future Expenses eg. Children Education

Income incase of Retirement or Disability

Helps by facilitating borrowing

Case Study 1

In a village there are 400 houses, each valued at Rs 20,000.

Every year on an average, 4 houses get burnt, resulting into a total

loss of Rs 80,000.

Find a Solution

Sharing Risk

400 owners come together

and contributed Rs 200 each

Fund
Fund Size
= 400200
= Rs 80,000

Sharing Risk
Risk of 4 house owners

ea
r
Sp

er
v
o

Sp
re
ad

0
0
4

ov
e

r4
00

Type of Risks
Risks

Pure
No prospect of gain

Example: Fire in a
building

Speculative
Offers possibility of loss
or gain

Example: Investing in
stocks

Type of Risks
Risks

Fundamental
Affect large section
of society

Particular
Consequences are
comparatively
restricted
Example: Most insurable
risks

How to Manage Risk

Avoiding Risk

Controlling Risk

Accepting Risk

Transferring Risk

Why we need life insurance

Dependents
Support

Education
Costs

Retirement
Income

Estate
Planning

Insurance vs. Gambling

Insurance

Gambling

Risk already exist

Risk not existent. It is created.

No total loss. Entire group provides

for themselves.

One gains at the cost of others.

It is based on mathematical
prediction.

It is highly speculative.

Basic Life Insurance Policy

Term Insurance
Provides a death benefit if the insured dies during a
specified period

Death
benefit

150,000
100,000
50,000

No of years the policy is in force

30

Term Insurance

In case of death during the policy

term, the SA = 100,000 is paid

No of years the policy is in force

30

Whole Life Policy

Whole life insurance provides insurance coverage
throughout the insureds lifetime.
Policy purchased at age 30

Death
Benefit

150,000

100,000

50,000

30

40

50

60

70

Insureds Age

100 or death

Types of Whole Life Policies

Regular - Premium Policies

Premiums are payable

until the insureds death

Date of
policy
purchase

Insureds
death

Limited Payment Policies

Premiums are payable

until some stated period
expires

Date of
policy
purchase

End of
specified
period

Endowment Policies

Endowment policies provide insurance coverage for a specified

period.

On surviving the specified period, policyholder gets the sum assured

+ bonuses.

On death during the specified term, policyholder gets the sum

assured + bonuses.

Endowment Policies

Death
Benefit

Policy purchased at age 30

SA +
Bonuses

150,000

100,000

SA

50,000
30

35

40

45

50

Insureds Age

55

Endowment Policies

Death
Benefit

Policy purchased at age 30

SA +
Bonuses

150,000

100,000

On death at age
45

50,000
30

35

40

45

50

Insureds Age

55

Annuities

An annuity is a series of periodic payments. In annuity contract,

a person agrees to pay to the insurer a specified capital sum in
return for a series of payments.

Periodic Payments made

Annuity benefit payment

Factors Affecting Annuity Benefits

The amount of money invested

The interest rate earned on investment
The number & timing of annuity payments
The time over which money grows at interest

How Immediate Annuity Works

You made
lump sum
payment

Age 30

Your annuity
payments start
from age 31

Age 31

How Deferred Annuity works

Retirement Age 60

Deferment Period

Age 30

Annuity Period

Age 60

You pay premium

while you work

Insurer pays you

annuity/pensions
during your
retirement

Age 85