UNIT 2
MEANING OF LIFE INSURANCE
Life insurance is a contract in which the insured agrees to pay certain sums, called
premiums, at specified times and in consideration, thereof the insurer agrees to pay
a certain sum of money on certain conditions and in a specified way, upon happening
of a particular event contingent upon the duration of human life.
DEFINITIONS OF LIFE INSURANCE-
Joseph Vs Law Integrity Insurance Company (1912) - It was observed by Bunyon J
that " A contract of life Insurance may further be defined to be that in which one
party agrees to pay a given sum of money upon the happening of a particular event
contingent upon the duration of human life in consideration of immediate payment
of a smaller sum or other equivalent periodical payment by the other.
According to R.S. Sharma " Life Insurance Contract may be defined whereby the
insurer, in consideration of premium paid either installment, undertakes to pay an
annuity on the death of the insured of a certain number of years.
According to Magee J.H - "The Life Insurance contract embodies an agreement in
which broadly stated, the insurer undertakes to pay a stipulated sum upon the death
of the insurer to a designated beneficiary.
NATURE AND SCOPE OF LIFE INSURANCE
It is not possible to predict the future or prevent many serious hazards events such
as fire, disability, and premature death, etc.
It is the function of insurance in its numerous forms to enable individual to
safeguard themselves against such misfortunes.
Life Insurance Contract is not a contract of indemnity.
The Loss due to loss of life cannot be measured in the term of actual loss, therefore
the insurer undertakes to pay a fixed amount in such kind of contingency.
It is, therefore in the nature of Contingency Insurance. It provides payment on a
contingent event.
In developing countries like India, it is very common and popular practice to bundle
together a risk coverage and savings in the form of life insurance
ESSENTIALS OF LIFE INSURANCE CONTRACT
Essentials of Life Insurance Contract are as follows -
a) Offer and Acceptance
b) Agreement
c) Competency- Section 10 of ICA
Who is competent for a valid contract -
According to Section 10 of the Indian Contract Act, 1872 every person is competent
to a contract - one who is major, Sound Mind, not disqualified by law,
i) Major - who is of the age of majority according to the law.
ii) Sound Mind - One who is of sound mind.
iii) Not disqualified by law - who is not disqualified from contracting by any
law to which he is subject of.
However, the person who is not competent to contract can still be beneficiary of the
contract with the help of provisions of section 11 of the Contract Act 1872.
d) Free Concent- Section 13 of ICA
Where the consent is obtained through coercion, fraud, undue influence,
misrepresentation or mistake about an essential fact, the contract becomes voidable
at the option of the party whose consent was so caused, except fraud.
e) Legal Consideration-
f) Lawful Object-
The object of the life insurance contract should not be unlawful. According to
Section 23 of the Indian Contract Act 1872 the object is unlawful which is -
(i) Forbidden by law
(ii) Immoral
(iii) Opposed to public policy or
(iv) which defeats the provision of any law
g) Consensus ad idem (Meeting of Mind)
h) Utmost Good faith
i) Insurable interest
EVENT INSURED AGAINST LIFE INSURANCE
In any ordinary life insurance, the event insured against in the death of life assured
from generally disease or accident.
It is immaterial whether the death is caused by me accidental causes or even due to
the criminal act of a third party.
It is important for any contract to be legally enforceable and the same can happen
only if the object is not against the public policy. One of the cardinal rules of legal
theory based on public policy is that no man shall be allowed to take advantage of
his own wrong and this rule
ex turpi causa non oritur - no cause of action arises out of a wrong
Based on this principle, in law of insurance, to the above general rule that the legal
representatives of the assured can recover on a life policy of the assured on his death,
whether the death is due to natural or accidental causes including death caused by a
criminal act of a third party.
Two exceptions have been laid down, namely:
(i) where death of the assured is caused due to the violation of a rule of criminal
law by the assured himself; and
(ii) Where death is the result of a suicide
LIBERTY NATIONAL LIFE INSURANCE V. WELDON
A registered nurse effected three policies from different companies on the life of her
niece without the knowledge of the parents of the life assured.
The niece was a child of two years. One day the nurse visited the child’s house and
gave her soft drink containing arsenic as a result of which the child died within few
hours.
The nurse was prosecuted and convicted for murder.
Not only this, but the companies were held to pay damages to the parents of the
child for their in-issuing policies to one who had no interest in the life of the assured.
Where the misconduct which resulted in the loss is caused even by a willful act of
an independent third party, the implied exception does not apply and the assured or
his representatives are not deprived of their right to recover under the policy
provided the assured is not a party to the misconduct. The major source of the risk
is from the willful or negligent conduct of the third parties.
In City Bank v Sovereign Assurance Co., the assured deposited the policy and
received a loan on the security of the policy. Later on, he committed suicide. There
were other securities also. It was held that the debt might be paid out of the insurance
amounts, because a bona fide assignee for valuable consideration is not subjected to
the disabilities incurred by the assured subsequent to the assignment
CIRCUMSTANCES AFFECTING THE RISK:
• Applicant’s age: Your age is one of the biggest determinants of insurance plan
premiums. Those individuals who are young are liable to pay fewer premiums
as compared to those individuals who are old. This is because younger age
individuals are associated with lesser health-related risks.
• Gender: Most of the insurance companies charge fewer premiums for women
as compared to men. Statistics show that women on average live five years
longer than men. Consequently, the number of premiums that women would
be paying will be comparatively more than men but at a lower rate which is a
plus point for them.
• Smoking/consumption of alcohol: The people who are in a habit of smoking
or consuming alcohol pay higher premiums than those who do not. This is
because of increased health hazards as they are more prone to get complicated
and life-threatening medical problems in the future.
• Family’s medical history: Your family's medical history also plays an important
role in determining the premium amount. If anyone in your family has
suffered or is suffering from a serious illness such as heart disease or cancer,
then, in that case, insurance companies will cover those diseases which will,
in turn, drive up your policy's premium.
• Your health history: The insurance companies also consider your past health
status while determining the premium amount of your policy. So, if you are
healthy and fit or have not come across any fatal or chronic illness, then the
premium charged in this case would be lesser and vice-versa.
• The tenure of your policy: The policy itself also affects the premium that you
will be paying, the longer the tenure of your policy, the larger will be the
amount of the benefit at the time of death, since you’re paying it for that time.
• Your profession: If you are in a risky profession such as shipping,
transportation, mining, fisheries, etc. the risk of accidental death would be
high, as a result, the premium charged by the insurer will be comparatively
higher compared to someone who is in a profession where the risk to life is
minimal such as desk job.
• Lifestyles choices: If you love to take risks or involve yourself in any risk-
taking activities such as skydiving, mountain climbing, car racing, etc, then the
premium charged by the insurers will be high.
• Obesity: Obesity is another factor that affects your policy's premium. A
person who is obese carries a higher risk of illnesses such as blood pressure,
diabetes, heart problems, stroke etc. As a result, the premium charged in this
case will be very high.
So, if you are planning to buy a life insurance policy, it would be wise to check and
understand all the above-mentioned factors which determine life insurance
premiums so that you can easily reduce your premium outgo.
AMOUNTS RECOVERABLE UNDER LIFE POLICY
1. MATURITY CLAIM
The life insured after surviving the complete policy term has to file a claim to the
insurance company to get the maturity benefit. The maturity claim can be filed at
the end of the policy term.
The life insured has to file for the claim along with the documents like original
policy documents.
After the verification of the documents, the insurance company will process
the claim and make the payment to the policyholder. The proceeds of the
maturity claim will be directly credited to the policyholder’s account once the
policy matures.
A policyholder will have to file with these documents like the policy discharge
form, original policy document, identity card, age proof, proof of bank details
and cancelled cheque.
2. DEATH BENEFIT
On the death of the life insured, if it occurs before the maturity of the policy,
provided policy is in force on the date of death, the death claims action begins
with an intimation being received in the Insurer's office.
The intimation may be received by the nominee, assignee, relatives, the
employer, agent or Development Officer of the area.
In case of death claim the following procedure should be followed:
• CLAIM INTIMATION/ NOTIFICATION: The claimant must
submit the written intimation as soon as possible to enable the
insurance company to initiate the claim processing. The claim
intimation should consist of basic information such as policy number,
name of the insured, date of death, cause of death, place of death, name
of the claimant.
The claimant can also get a claim intimation/notification form from
the nearest local branch office of the insurance company or their
insurance advisor/agent. Alternatively, some insurance companies also
provide the facility of downloading the form from their website.
• DOCUMENTS REQUIRED FOR CLAIM PROCESSING:
The claimant will be required to provide a claimant's statement, original
policy document, death certificate, police FIR and post mortem exam
report (for accidental death), certificate and records from the treating
doctor/hospital (for death due to illness) and advance discharge form
for claim processing. Based on the sum at risk, cause of death and
policy duration, insurance companies may also request some additional
documents.
• SUBMISSION OF REQUIRED DOCUMENTS FOR CLAIM
PROCESSING: For faster claim processing, it is essential that the
claimant submits complete documentation as early as possible. A life
insurer will not be able to take a decision until all the requirements are
complete. Once all relevant documents, records and forms have been
submitted, the life insurer can take a decision about the claim.
• SETTLEMENT OF CLAIM: As per the regulation 14 (2)(i) of the
IRDAI (Policy holder's Interest) Regulations, 2017, the insurer is
required to settle a claim within 30 days of receipt of all documents
including clarification sought by the insurer. However, the insurance
company can set a practice of settling the claim even earlier. If the claim
requires further investigation, the insurer has to complete its
procedures expeditiously, in any case not later than 90 days from the
date of receipt of claim intimation and claim shall be settled within 30
days thereafter.
3. BONUS
• The total premium which is collected creates an asset pool for the insurers
and when the same is invested further in bonds, securities, other debts, etc.,
it creates wealth for the insurer which is further distributed to the eligible life
insurance policy holders.
• Bonus is payable when declared by the insurance company. Generally bonuses
are not guaranteed and becomes guaranteed once declared by the insurer.
• Bonuses can be of different types:
o Simple Reversionary Bonus
A simple reversionary bonus is declared by the insurance companies at the end of
each fiscal year. But the same is payable only at the time of maturity or death.
o Compound Reversionary Bonus
Unlike a simple reversionary bonus, the percentage is applied to both the sum
assured and the previously accrued bonus in a compound reversionary bonus. F
o Interim Bonus
Usually bonus is done by the end of a fiscal year. However in cases where the death
of the insured or policy maturity happens before the end of such fiscal year, the
insurer declares an interim bonus.
This is because while the policy might have accrued a bonus from the last financial
year, the maturity or claim date falls between two bonus declaration dates.
o Cash Bonus
The cash bonus is paid to the policyholders in cash at the end of a financial year. It
is determined as a percentage of the yearly premium paid by the insured.
o Terminal Bonus
A terminal bonus is a one-time benefit paid to policyholders at the end of the policy
period. It is a benefit given to the policyholders for being insured under the policy
until maturity.
It is also known as Persistence Bonus.
Any individual who surrenders their life insurance policy before the maturity date
will not be eligible for the terminal bonus.
4. SURRENDER VALUE
• A surrender value is usually the sum owed by the life insurance provider when
you decide to surrender or give up on your life insurance policy.
• A policy acquires a surrender value in 2 scenarios:
o When the policy is originally for 10 years or more-
In this case, if the premium is paid for at least three consecutive years, than
the surrender value is payable.
o When the policy is originally for less than 10 year-
If the premium has been paid for at least 2 years.
• RULE 4 of IRDAI (Acquisition of Surrender and Paid Up Value)
Regulations 2015, provide-
Action in case of default by the Insurance Company and states that the
in such an event, the action must be taken in accordance with Section
102 of the Insurance Act 1938-
Penalty for default in complying with, or act in contravention of, this Act. —
If any person, who is required under this Act, or rules or regulations made thereunder, —
(a) to furnish any document, statement, account, return or report to the Authority, fails to furnish
the same; or
(b) to comply with the directions, fails to comply with such directions;
(c) to maintain solvency margin, fails to maintain such solvency margin;
(d) to comply with the directions on the insurance treaties, fails to comply with such directions on the
insurance treaties, he shall be liable to a penalty not exceeding five lakh rupees for each such failure
and punishable with fine.
5. PAID UP VALUE
• A paid-up value is the value of your sum assured after you stop paying
premiums.
• The sum assured decided at the start of the policy is reduced if you do not
pay all the premiums.
• The paid-up value of an insurance policy is proportional to the premium
payments. It is calculated using the paid-up value formula, which is: Paid-up
value = [(Number of years for which premium has been paid/Total policy
term) * (Total Sum Assured)]
• Generally the term after which you can convert a policy into a paid-up policy
is after paying premium for at 3 years. But the number of years generally
depends on the policy terms.
MITHULAL V LIC OF INDIA AIR 1962 SC 814
It was held- “No policy of life insurance effected before the commencement of this
Act shall after the expiry of two years from the date of commencement of this Act
and no policy of life insurance effected after the coming into force of this act shall,
after the expiry of two years from the date on which it was effected, be called in
question by an insurer on the ground that statement made in the proposal for
insurance or in any report of a medical officer or referee, or friend of the insured, or
in any other document leading to the issue of the policy, was inaccurate or false.
Unless the insurer shows that such statement was on a material matter or suppressed
facts which it was material to disclose and that it was fraudulently made by the policy-
holder and that the policy-holder knew at the time of making it that the statement
was false or that it suppressed facts which it was material to disclose.”
“…where the contract is bad on the ground of fraud, the party who has been guilty
of fraud or a person who claims under him cannot ask for a refund of the money
paid. It is a well-established principle that courts will not entertain an action for
money had and received, where, in order to succeed, the plaintiff has to prove his
own fraud.”
