PRINCIPLES

OF LIFE
INSURANCE
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LIFE INSURANCE
CONTRACTS
A life insurance policy is a contract, in
terms of the Indian Contract Act, 1872. A
contract is an agreement between two or
more parties to do, or not to do, so as to
create a legally binding relationship

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 A simple contract must have the following
essentials
 Offer and acceptance  Consideration 
Capacity to contract  Consensus ad idem‘
(genuine meeting of minds) — Legality of
object or purpose  Capability of
performance  Intention to create legal
relationship

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Insurance is a specialized type of
contract. Apart from the usual
essentials of a valid contract,
insurance contracts are subject
to two additional principles viz.
Principle of Utmost Good Faith
& Principle of Insurable Interest
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PRINCIPLE OF UTMOST GOOD FAITH
Commercial contracts are normally subject to the
principle of caveat emptor i.e. let the buyer
beware. It is assumed that each party to the
contract can examine the item or service, which
is the subject matter of the contract. Each party
can verify the correctness of the statements of
the other party. There is no need to take the
statements on trust. Proof can be asked for.

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In the case of insurance contracts,
this principle does not apply. Most
of the facts relating to health,
habits, personal history, family
history, etc., which form the basis of
the life insurance contract, are
known only to the proposer
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 The insurer cannot know them, if the proposer does
not disclose them.
The underwriter can ask for a medical report.
Yet there may be certain aspects, which may not be
brought out even by the best medical examination.
For example, a person suffering from Blood Pressure
or diabetes can, through appropriate medication, hide
these facts from the examining doctor.
History of past sicknesses, operations, injuries can be
suppressed.
Some of these may affect the life expectancy of the
proposer.
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HOW IT AFFECTS THE INSURER ?
Some of these may affect the life expectancy of the
proposer. Hence, these constitute material information from
the underwriter‘s point of view.
Non-disclosure of such facts would put the insurer as well
as the community of policyholders, at a disadvantage.
When a proposer puts an insurer and the community of
policyholders at a disadvantage, there is what is called
adverse selection‘. The contract is unfair, because
one of the parties to the contract is in a more
advantageous position.

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A summary of the doctrine of utmost good faith
was given in the case of Rozanes vs Bowen in
1928 as follows ―As the underwriter knows
nothing and the man who comes to him to
ask for insurance knows everything, it is the
duty of the assured to make a full disclosure
to the underwriter without being asked, of all
material circumstances. This is expressed by
saying that it is a contract of utmost good faith.

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 This duty is one of utmost good faith
or Uberrimae Fides. It is the duty of
the proposer to make a full disclosure
to the underwriter. The implication is
that, in the event of failure to disclose
material facts, the contract can be
held to be void ab initio.LATIN WORD
VOID FROM THE BEGINNING.
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Therefore, facts regarding age, height,
weight, build, nature of occupation,
smoking / drinking habits, medical
history, surgeries, earlier insurances,
etc., must be disclosed. The proposer
cannot defend non-disclosure by
contending that he did not think that the
fact was not material.

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In a proposal for life insurance, the proposer
makes a declaration to the effect that all the
statements in the proposal form are true in
every respect and if any untrue statement be
contained therein, the insurer would be entitled
to treat the contract as null and void and forfeit
all the moneys paid there for. The effect of this
declaration is to turn the representations in the
proposal into warranties, which must be
complied in toto.
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 However, the insurer‘s right to cancel
the contract is limited by the provisions
of section 45 of the Indian Insurance
Act, 1938. This section stipulates
that a 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.
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INSURABLE INTEREST

All risks are not insurable. Otherwise,

an insurance contract would be no
different from a wagering contract.
Wagering contract is illegal in terms
of Section 30 of the Indian Contract
Act and therefore invalidMy. LIC My Pride – STC WARANGAL
 In simple terms, it means that the proposer
must have a stake in the continuance of the
subject insured and could suffer a loss, if
the risk is not covered through insurance.
What is insured is the financial or
pecuniary interest in the subject matter of
insurance. The insured must be in a
relationship with the subject of insurance
whereby he benefits from its safety and
well- being and would be prejudiced by its
loss or damage.
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The Insurance Act, 1938 does not
define insurable interest. Court
judgments have established the
circumstances in which insurable
interest is deemed to exist. It has been
held that a person has unlimited
insurable interest in his own life.

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 A husband has insurable interest in the life of
his wife and vice-versa  An employer has
insurable interest in his employee to the extent of
the value of his services.  An employee has
insurable interest in the life of his employer to the
extent of his remuneration for the period of his
notice  A creditor has an insurable interest in
the life of the debtor, to the extent of the debt —
Partners have insurable interests in the lives of
each other  A surety has an insurable interest in
the life of his co- surety to the extent of the debt
and also on the life of the principal debtor. 
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 A company has an insurable interest in the life of a key valuable
employee.  If members of families are in business together or
there are some other financial relationship, insurable interest
arises as a result of such financial involvement. The insurable
interest arises, not because of the family ties, but because of the
business ties.  Partners can insure each other‘s lives, because
they stand to lose in the event of death of any of them.  A
creditor may lose financially if a debtor dies before repaying a
loan. His interest would be limited to the outstanding loan with
outstanding interest.  The legal position about children‘s
assurances is not quite clear. It is presumed that parents have
insurable interest in the life of a child as a child i.e. so long as he
is a child Therefore, most of the L.I.C‘s children‘s policies
incorporate a vesting clause, whereby the policy vests in the
child on attainment of majority.

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NEEDS AND INSURANCE
Risks arise because there are needs to be fulfilled.
The risks attached to early death arise because of
the need to maintain the family that is left behind. If
there were no needs, there would be no risks.
Insurance is, therefore, related to the needs of
individuals. Different plans are designed with different
benefits, so that they may cater to the different needs
of people. While selling life insurance, therefore, it is
necessary to be aware of the needs of people.

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CLASSIFICATION OF RISKS
The factors affecting risk on
the life of an individual are
called hazards. Hazards may
be (i) physical (ii)
occupational or (iii) moral.
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Physical hazards are  Age: As age increases, the
probability of death increases. These probabilities are
built into the mortality tables and thereby into the
premium rates. The underwriter looks into the factor of
age, mainly because of its relationship with other factors.
For example, being overweight is a positive factor
among young children while it may not be so among
older persons. Younger persons who are underweight
need closer scrutiny than elders who are underweight.
Certain risks increase with age. Certain other risks
decrease with age.

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SEX
BUILD
PHYSICAL CONDITION
PHYSICAL IMPAIRMENTS
FAMILY HISTORY
PERSONAL HISTORY

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Sex: Mortality of female lives are seen
to be more than male lives at younger
ages, among the poorer and
uneducated sections. One reason could
be the lack of adequate care in
maternity cases. Underwriting
considerations are also different in
female cases.
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 Build: Build including height,
weight, and chest and abdomen
measurements, may suggest
tendencies towards cardiac and
other ailments like diabetes or TB.
Underwriters view variations from
standard weights with care.
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Physical condition: The medical
examination of reflexes, blood pressure,
pulse rates, urine, etc. provides data with
regard to the condition of important
systems of the body.  Physical
impairments: Blindness, deafness, etc.
and other conditions, which are not
illnesses or degenerative, are hazards
affecting the probabilities of death 
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 Personal history: This is important as
pointers to the health as well as the life
style of the person.  Family history:
This is looked at to see whether there is
any hereditary factor that makes the
person susceptible to illnesses. Family
history of early deaths, of cardiac
illnesses or diabetes, could be
significant.
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Occupational hazards arise out of one‘s job. The nature of the
job or the place in which the job is done have effects on the
worker. Contact with and inhalation of fumes, excessive
temperatures, etc., affect health and life spans. Those on flight
duties on aircrafts run a greater risk of death by accident.
Those working in chemical factories are likely victims of various
respiratory diseases. Those working with high voltage electricity
are susceptible to electrocution and burns. The safety factor is
important in heavy engineering factories, working at heights,
working with high speedmachines, and so on. Studies have
identified occupations with various hazards and also tried to
quantify the excess hazard, so that the underwriters can
determine the appropriate extra premiums.

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Moral hazard refers to the intentions of the proposer. If the
proposal is being made because there is a genuine need for
insurance, there is no moral hazard. If the intention is to seek
undue advantage through the insurance policy, there is some
moral hazard. The undue advantage may be to get a lower
premium or to make some quick monetary gains. This has to
be judged largely from circumstantial evidence like life
styles, income as compared to premium payable, reputation
for integrity, and so on. Moral Hazard is not measurable.
There is no test to establish it. It is a matter of opinion. If
moral hazard is suspected, no amount of extra premium will
be appropriate. Underwriters would hesitate to accept such
proposals at any cost. But, they would like to be fairly certain
before deciding so.
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Some situations, which may give rise to moral hazard are :
 Insurable interest : If insurable interest is not there it may
give rise to moral hazard.  Insurance proposed is not
commensurate with the income of the proponent.  The
proposal is submitted at a place other than the normal
residence of the proponent.  Seeking large amount of
insurance for first time at advanced age.  Non-disclosure
of previous history regarding declinature or extra charged.
From the statement made in the proposal form, personal
statement and medical report (where required) the
Corporation is in a position to gauge the risk

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 To this extent the corporation is dependent upon the agent for a true
and correct picture of the individual to be given in the Agent‘s
confidential report, which he has to complete in all cases, because
Agent is the primary Underwriter.
Moral hazard can be assessed from proponents’ reactions to human
relations, occupation, social and Financial status, personal habits,
how he respects rights and obligations, capacity to withstand stress
and strain at home, in office and outside. An insurer is not interested
in moral judgement but departure from accepted mode of social
conduct does lead to increased risks resulting in extra mortality.
Such extra mortality cannot be measured. Extra premium can be
charged for physical hazard, but no amount of premium can
adequately compensate moral hazard.
The income of a proponent also plays a very important part in
deciding the moral hazard involved in acceptance of the risk on his
life.

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 Where there is no genuine need for insurance, the object in
taking insurance would be speculative in a number of cases and
even though Corporation takes all reasonable precautions to
control moral hazard, the mortality of a group of such assured
lives would be higher than normal. In view of this the Corporation
must be supplied with correct information as regards the means of
livelihood and income of the proponent to enable it to judge
whether the amount of assurance proposed is commensurate with
the proponent‘s income.
This is the reason why Corporation calls for moral hazard reports
from Development Officers, Assistant Branch Managers and
Branch Managers etc.
THANK YOU

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