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Basics of Insurance

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Principles of Life Insurance

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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

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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

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Principles of Life Insurance

Insurance Contract is based on Fair Play

Utmost good faith

Insurable Interest

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Utmost Good Faith

A Positive Duty to voluntarily disclose, accurately and fully, all facts material to risk being proposed, whether requested or not

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What is a material Fact

Any Fact or Circumstance

In Fixing the

premium

Which Influences

The Mind of a Prudent Underwriter

In determining whether to

take the risk

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Materials facts that need not to be disclosed

Facts Of LawFacts Of Common Knowledge

Facts that can be discoveredWith reasonable diligence

Facts Which Lessen Risk

Material Facts

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Breach Of Utmost Good Faith

Breach Of Utmost Good Faith

Misrepresentation Non-Disclosure

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Section 45 of the Insurance Act,1938

PolicyStart Date 2 years

If Material Facts discovered within2 years of the policy then the insurer can declare the policy null and void

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.

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What is Insurable Interest ?

Insurable Interest is the monetary interest

Relationship with subject Matter

Recognized in Law and gives Legal Right to a person

To insure that Subject Matter

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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 Sectio

n 30Indian Contract Act 1872

Insurable Interest is a Legal Pre Requisite

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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

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When do these principles apply?

Insurable Interest interest is required at the time of inception of the contract

Utmost Good Faith is required Throughout the contract

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Principle Of Indemnity

Insurance is meant to compensate the losses The Mechanism of Insurance cannot be used to

make profits Amount of claim cannot exceed the amount of

loss incurred Insurance makes good the loss In Life Insurance, insurable interest on own life is

unlimited hence Principle of indeminity does not apply but it does apply in General Insurance

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Risk Management

Avoidance

Retention

TransferRisk can Be managed

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Risks Management

AvoidanceYou can avoid accidents by driving safely

RetentionYou have your own resources to take care of needs; (savings for rainy days)

TransferBuying insurance; transfer your risk to insurer

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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

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Key Learnings

Life Insurance contract is also a legal contract

The proposer must declare all the facts properly in utmost good faith

Proposal Form is the basis of Contract

Section 45 of Indian Insurance Act, stipulates that a policy cannot be called for question after 2 years

Insurable Interest is a legal pre-requisite

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Thank You