CONCEPT OF LIFE INSURANCE

This article has discussed about the Concept of Life Insurance including its definition, nature and scope, kinds and formation of the Life Insurance

 

DEFINITION OF LIFE INSURANCE

 

The Supreme Court of India held that although there is no statutory definition of Life insurance but it has been defined as a contract of insurance whereby the insured agrees to pay certain sums, called premiums, at specified times, and in consideration thereof the insurer agrees to pay certain sums of money on certain conditions and in specified way, upon happening of a particular event contingent upon the duration of human life.

 

In Dalby v. India and London Life Assurance Co., 1854, the definition of life insurance is well explained as, "a contract to pay a certain sum of money on the death of a person in consideration of the due payment of a certain annuity for his life calculated according to the probable duration of life."

 

NATURE AND SCOPE

 

Life insurance is a contract whereby for a stipulated compensation, called the premium, one party (the insurer) agrees to pay the other (the insured), or his beneficiary, a fixed sum upon the happening of death or some other specified event.

 

Although the basic nature of life insurance is to provide risk coverage, when the contract period extends over a long time, premium payments serve two-fold purpose-the immediate or short-range and the remote or long-range. The immediate purpose is served by paying a definite sum or amount at damage or death of the insured. Obviously, in the case of death, it is paid to the beneficiaries or nominee of the insured. The remote purpose is served when indirectly the economic growth of the country is accelerated. The savings or funds of numerous policyholders are invested in organised commerce and industry. In developing countries like India, it is very common and popular practice to bundle together risk coverage and savings in the form of life insurance.

 

KINDS OF LIFE INSURANCE

 

The life insurance is intangible, i.e., no one can feel or see it. In modem times, throughout the world, the life insurance policies fall under the five important kinds, viz,

 

1) Term Insurance Policy,

2) Whole Life Policy,

3) Endowment Policy,

4) Money back Policy, and

5) Annuities and Pension.

 

1) Term Life Insurance Policy

 

A term insurance policy is a pure risk cover for a specified period of time. In general terms it means that the sum assured is payable only if the policyholder dies within the policy term. For instance, if a person buys Rs. 20 lakh policy for a term of 30 years, his nominee or beneficiary is entitled to the money if he dies within those 30 years period. If the policyholder survives the 30 years period, the insurance company keeps the entire premium paid during the 30 years period. No premium shall be refunded.

 

2) Whole Life Insurance Policy

 

A Whole Life Policy is another different insurance cover against death, irrespective of when it occurs. Under this plan, the policyholder pays regular premiums until his death, following which the money is handed over to his legal representatives.

 

3) Endowment Life Insurance Policy

 

It is a combination of risk cover and financial savings. Endowment policies are the most popular policies in the world of life insurance. In an Endowment Policy, the sum assured is payable even if the insured survives the policy term. If the insured dies during the tenure of the policy, the insurance firm has to pay the sum assured just as any other pure risk cover. A pure endowment policy is also a form of financial saving, whereby if the person covered remains alive beyond the tenure of the policy, he gets back the sum assured with some other investment benefits. The cost of such a policy is slightly higher but worth its value.

 

4) Money Back Policy

 

These policies are structured to provide sums required as anticipated expenses (marriage, education, etc.) over a stipulated period of time. With inflation becoming a big issue, companies have realized that sometimes the money value of the policy is eroded. That is why profit policies are also being introduced to offset some of the losses incurred on account of inflation. A portion of the sum assured is payable at regular intervals. On survival the remainder of the sum assured is payable. In case of death, the full sum assured is payable to the insured. The premium is payable for a particular period of time.

 

5) Annuities and Pension

 

In an annuity, the insurer agrees to pay the insured a stipulated sum of money periodically. The purpose of an annuity is to protect against risk as well as provide money in the form of pension at regular intervals. Over the years, insurers have added various features to basic Insurance policies in order to address specific needs of a cross section of people.

 

FORMATION OF LIFE INSURANCE CONTRACT

 

1) FUNDAMENTAL PRINCIPLES

 

Obviously, life insurance contract is a contract, there are certain fundamental principles of contract under Section 2(h) and Section 10 of Indian Contact Act, 1872 that they are applied on all kinds of contracts. These principles are

 

(a) Agreement (Offer and Acceptance);

 

(b) Competency or Capacity to Contract

 

(c) Free Consent, in, parties must be ad idem;

 

(d) Legal consideration;

 

(e) Lawful object.

 

a) Agreement

 

Like all other contracts, a contract of life insurance is also concluded through offer and acceptance. The people who wish to get insured intend to buy the policy make the 'offer' and the other party who is ready to assume the risk stated, is the 'acceptance'. In case of life insurance, offer is called as proposal. If life insurance companies accept the proposal, it is converted into an agreement. Generally, the offer is made from the side of insured but some time it may come from the insurer's side. Whatever may be the case, the main fact is its acceptance. The publications of prospectus, the canvassing by agents is invitation to offer and not the 'offer. Any person who is willing to buy a life insurance policy proposes to enter into the contract is an offer and when this offer is accepted by other party, who agrees to assume the risks stated, it is an acceptance.

 

In LIC v. Annamma, 1999, it was held that acceptance is complete only when it is communicated to the proposer. Mere silence after receipt and retention of premium cannot be construed as acceptance.

 

b) Competency or Capacity to Contract

 

Again, it is a very essential principle of contract of life insurance. The parties must be competent to enter into a contract. Every person is competent to contract (a) who is of the age of majority according to the law. (b) who is of sound mind, (c) who is not disqualified from contracting by any law to which he is subject of. However, a 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.

 

In Great American Insurance Co. v. Madan Lal Sonu Lal, 1935, it was contended by the insurance company that the person was minor on whose behalf the goods were insured. The Court observed that the minor would be entitled to recover the insurance amount.

 

Similarly, in Mohoribibi v. Dharmodas Ghose, it was observed that a contract entered into by a minor himself is not only voidable but also void ab initio but a minor can enter into a contract through his parents or guardians. Such contract, though binds the minor, does not impose personal liability upon him. As far as insurer is concerned, it has to be qualified for the purpose, i.e., it must possess a licence from IRDA to carry on insurance business in India.

 

c) Free Consent

 

When both parties to contract agreed to and willing to abide by the terms and conditions of contract in the same sense and spirit, they are said to have a free consent? 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." The contract would be void in case of fraud.

 

In LIC v. B. Kusuma T. Rai, 1989, it was held that the burden of proof lies: on the insurer to prove that the facts were mis-stated or hidden which were of material in nature to ascertain the risk of contract.

 

In Oriental Insurance Co. Ltd. v. Mantora Oil Products (P) Ltd., 2002, it was held that if an insurance company wants to raise plea such as coercion, misrepresentation, undue influence etc., then it must be raised at the time of entering into contract or soon after the discovery of facts. Once the contract has run its full period, such plea may cease to be available.

 

In LIC v. Kaloa Subhadramma, 2009, the court held that where the proposal form was filled by the agent of the corporation who admitted that he also filled in the questionnaire without explaining things to the assured, it could not be inferred that the assured was made aware of all the questions and the corporation was not allowed to repudiate the claim.

 

d) Legal Consideration

 

In a contract of life insurance, the insured gives premium as a consideration in return of which insurer undertakes to pay a certain amount at a specified contingency. It must not be money but may be rights, sum, profit, interest or benefit. Value of amount of premium is not important what is important is that premium has been given as consideration to ensure the liability of insurer. The contract of life insurance cannot be termed as valid contract without the payment of first premium. In other words, consideration is the price (premium) for which the promise (policy) is bought and the promise thus given for value is enforceable.

 

e) Lawful Object

 

The object of the life insurance contract should not be unlawful. As per Section 23 of the Indian Contract Act, 1872, the object is unlawful which is (a) forbidden by law, (b) immoral, (c) opposed to public policy, or (d) which defeats the provision of any law

 

In New India Assurance Ltd. v. Kesanan Ramamurthy, 1977, it was held that nothing is found to be unlawful in insurance policy if it provides that no compensation would be paid if an unlicensed person or a person holding learning licence would drive the insured vehicle.

 

In Cleaner v. Mutual Reserve Fund Life Association,1892, it was observed that no person is allowed to benefit from his own crime. This rule is also expressed in the maxim ex turpi causa non oritur actio, i.e., no cause of action arises out of one's own wrong.

 

2) INSURABLE INTEREST

 

Insurable Interest is another necessary aspect to form a life insurance contract. It is presumed that every contract entered into is enforceable by the parties to it provided it is not illegal, immoral or contrary to public policy. In the beginning insurable interest was not necessary element for the formation of a contract. The 'insurable interest' means an interest that insured must possess in the subject-matter of the insurance and which can be protected by a contract of insurance.

 

It is pecuniary in nature. The insurable interest must be recognised by the law of the country concerned. The insurable contract by its very nature requires some interest to be involved in the subject-matter (financial interest).

 

INSURABLE INTEREST AND LIFE INSURANCE

 

The subject-matter of life insurance is the life being insured.

 

In Dalby v. India and London Life Assurance Co.,1854, it was held that a creditor may ensure his debtor's life and the policy remains valid even after the debtor has paid off the creditor. But it is also noteworthy what was decided in Gadsall v. Baldero, 1807, that where the debtor died without making payment which was subsequently made by his executors, the assured could not recover anything on the policy of his life.

 

Insurable interest in life insurance may be classified into two broad categories, viz.,

 

1) Insurable interest in one's own life,

2) Insurable interest in other's life.

 

1) Insurable Interest in one's own life

 

In Dalby v. India and London Life Assurance Co., 1854, it was held that a creditor may insure his debtor's life and the policy remains valid even after the debtor has paid off the creditor. A person can take a policy to any unlimited amount on his own life as many times as he likes for his own benefit, even though at the time he has the intention of assigning the policies to another person.

 

(2) Insurable Interest in other's life

 

(a) Husband and Wife

 

In Reed v. Royal Exchange Assurance Co., 1795, it was observed by Lord Kenyon, CJ. that, "it must be presumed that every wife has interest in the life of her husband and vice versa is equally true."

 

In Griffith's v. Fleming Farewell. 1909, CJ. observed that. The interest in this statute means general pecuniary interest. The interest of a father in the life of a child is not sufficient alone to support insurance on the child's life. But a wife may insure a husband's life, and the husband his wife's"

 

b) Parent, child and relatives

 

In Halford v. Kymer, 1830, the court observed that a father can insure his son's life in the name of the son and for his benefit. There is no law to prevent it. It is in essence an assurance by the son on his own life. The only thing is that premiums are being paid by the father. Similarly, where a son does not depend upon his father, he cannot effect an insurance on his father's life. Such a policy would be a wagering policy and even the premiums already paid under it would not be recoverable. Thus, a son can insure his father's life only when he is dependant on him and the father can take insurance policy on his son's life only when he is dependant on his son. Sisters have no insurable interest in each other's lives

 

c) Debtor and Creditor

 

In Dalby v. India and London Life Assurance Co., 1854, it was held that a creditor may insure his debtor's life and the policy remains valid even after the debtor has paid off the creditor. But it is also noteworthy what was decided in Gadsall v. Baldero, 1807, that where the debtor died without making payment which was subsequently made by his executors, the assured could not recover anything on the policy of his life. At one place Dr. S.S. Huebner observed that, "Life Insurance is a husband's privilege, a wife's right and a child's claim." In the same way a surety has insurable interest in the life of his principal (debtor), all the partners in a firm can collectively purchase insurance policies on the life of each partner through its firm.

 

In the same way a trustee has insurable interest in respect of the interest of which he is trustee, a surety in the life of his principal, a partner in the life of each partner, an employer in the life of his employee.

 

CONCLUSION

 

A life insurance policy protects against the possibility of an early demise. The policy promises to pay a death benefit if the life insured passes away during the policy's term. Life insurance policies are contracts that require you to pay a premium in exchange for the coverage that the insurance company offers. In addition, many life insurance policies also include coverage for living to the end of the policy term, at which point a maturity benefit is paid, in addition to premature death.