Module II: Life & General Insurance

Life Insurance Contract

A Life Insurance Contract may be defined as
- a contract in which the insurer,
- in consideration of a certain premium, either in a lump sum or by other periodical payments,
- agrees to pay the assured, or to the person for whose benefit the policy is taken,
- the assured sum of money,
- on happening of a specified event contingent on the human life.
In another word Life insurance is a corporate effort to provide security against economic hazards
of man. It is a contract between the insurer and the insured to pay a stated sum of money, for a
consideration in the form of premium, on happening of any future event on the life of the assured.

Definition-
Huebner and Black- “Life insurance is a contract whether for a specified consideration, called
premium, one party (the insurer) agrees to pay to the other (the insured) or a beneficiary, a defined
amount upon the death, disablement or some other specified event.”

Characteristics of Life Insurance-

▪ It is a contract between the insurer and insured.
▪ Insurance of human hazards is covered by life insurance policy.
▪ It is a promise to pay the money insured in consideration to a premium.
▪ The insurance premium is sometimes paid at a lump sum together or periodically.
▪ A default in remitting the premium may cause discharge of the insurance contract and the
insurer shall be relieved from his liability.
▪ The money insured is paid by the insurer to the insured or assignee on happening of the event
specified in the policy.
▪ The proposal for affecting an insurance policy is executed in the prescribed form.
▪ The policy is signed by the insurer only.

A person can assure in his own life and every part of it, and can insure for any sum whatsoever,
as he likes. Similarly, a wife has an insurable interest in her husband and vice-versa. However,
mere natural love and affection is not sufficient to constitute an insurable interest. It must be
shown that the person affecting an assurance on the life of another is so related to that other
person as to have a claim of support.
For example, a sister has an insurable interest in the life of a brother who supports her.
 Even a person not related to the other can have insurable interest on that other person.
For example- a creditor has insurable interest in the life of his debtor to the extent of the debt.

Nature of Life Insurance Contract:

❖ It is a Unilateral Contract.
Only one party to the contract makes legally enforceable promise. The insurer can repudiate the
contract of payment of full policy, but he cannot compel the insured to pay the subsequent
premiums. On the other hand, if the insured continues to pay the premium, the insurer has to
accept them and continue the contract.

❖ It is a Conditional Contract.
Life insurance is subject to the conditions and privilege provided on the back of the policy. The
conditions whether precedent or subsequent of the legal rights must be fulfilled in order to
complete the contract.

❖ It is an Aleatory Contract.
In such a kind of contract, no mutual exchange of equal monetary value is done. It is the
happening of the contingency on which the payment is made. The happening is a matter of chance
which may occur or not. If death occurs only after payment of a few premiums, full policy amount
is paid.

❖ It is a Contract of Adhesion.
In such a contract, the terms of the contract are not arrived at by mutual negotiations.
Similarly, in a life insurance contract, the contract is decided upon by the insurer only. The party
on the other side has to choose between the two options, i.e. either to accept or reject the policy.

❖ It is not a Contract of Indemnity.

All Insurance Contracts except Life insurance are 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.
Scope of Life Insurance:
The scope of life insurance refers to the breadth of coverage and the various aspects involved in
a life insurance policy.
➢ Financial Protection: Life insurance provides financial protection to the insured's beneficiaries
in the event of the insured's death. This protection typically comes in the form of a lump sum
payment, known as the death benefit, which is paid out to the designated beneficiaries upon
the insured's death. It helps replace lost income, cover outstanding debts, funeral expenses,
and provide for the ongoing financial needs of dependents.

➢ Different Types of Coverage: Life insurance offers various types of coverage to suit different
needs and preferences. These include term life insurance, which provides coverage for a
specified period, usually 10, 20, or 30 years; whole life insurance, which provides coverage
for the insured's entire life and includes a savings component known as cash value; universal
life insurance, which offers flexible premiums and death benefits; and variable life insurance,
which allows the policyholder to allocate premiums into investment options.

➢ Policy Flexibility: Life insurance policies offer flexibility in terms of coverage amounts,
premium payments, and policy terms. Policyholders can choose the coverage amount based
on their financial needs and budget, adjust premium payment schedules, and select additional
riders or benefits to customize their coverage.

➢ Tax Benefits: Life insurance policies may offer certain tax benefits, such as tax-deferred
growth on cash value accumulation within permanent life insurance policies and tax-free death
benefits for beneficiaries. These tax advantages can help policyholders maximize the value of
their life insurance coverage.

➢ Risk Management: Life insurance serves as a risk management tool by helping individuals
and families mitigate the financial risks associated with premature death. It provides peace of
mind knowing that loved ones will be financially protected in the event of the insured's death.

Types of Life Insurance Policies

Life insurance can be classified into 7 main categories:
i. Term Plan: Pure risk cover for a limited period of
time.
ii. Whole Life Plan: Protection against death +
maturity benefit for whole life.
iii. Money-Back Plan: Insurance cover with periodic
returns as survival benefit.
iv. Endowment Plan: Insurance + savings (low risk-return factor).
v. Unit Linked Insurance Plan: Insurance + investment (high risk-return factor).
vi. Children’s Policy: Insurance cover for expenses related to the child’s educational,
matrimonial, etc.
vii. Retirement/Pension Plan: Financial benefit for the post-retirement period.

1. Term Life Insurance:

It provides a risk cover only for a prescribed period. Usually, these policies are short-term plans
and the term ranges from one year onwards.
If the policyholder survives till the end of this period, the risk cover lapses and no insurance
benefit payment is made to him.
The amount of premium to be paid for these policies is lower than all other life insurance policies.
This plan is most suitable for those who are initially unable to pay high premium.

2. Whole Life Insurance:

This policy runs for the whole life of the assured. The sum assured becomes payable to the legal
heir only after the death of the assured.
The whole life policy can be of three types.
(i) Ordinary whole life policy- In this case premium is payable periodically throughout the life
of the assured.
(ii) Limited payment whole life policy- In this case premium is payable for a specified period
(Say 20 Years or 25 Years) Only.
(iii) Single Premium whole life policy- In this type of policy the entire premium is payable in one
single payment.

3. Endowment Policy:
In this policy the insurer agrees to pay the assured or his nominees a specified sum of money on
his death or on the maturity of the policy whichever is earlier.
The premium for endowment policy is comparatively higher than that of the whole life policy.
The premium is payable till the maturity of the policy or until the death of the assured whichever
is earlier.
It provides protection to the family against the untimely death of the assured.
4. Money-Back Policy:
A money-back plan is a type of endowment plan in which a pre-decided percentage of sum
assured is paid back to the sum assured at fixed intervals. These paybacks are called Survival
Benefits.
This type of insurance plan works best for those who are risk-averse and wish to save in an
insurance plan while maintaining liquidity throughout.

• If the policyholder outlives the term of the policy, he/she gets the remaining sum assured.
• On the death of the policyholder, the beneficiary gets the full sum assured, irrespective of the
payments made during the policy term.

5. Unit Linked Insurance Plan (ULIP):

This is an upgraded version of an insurance plan where a person is provided with protection for
a fixed period of time while a part of the premium paid towards the policies in invested in the
capital market like bonds, equities, etc. selected either by the policyholder or the financial experts
of the insurance company. Thus, there is a good profit component involved in a ULIP along with
considerable risk factor involved too.
Such an insurance plan works perfectly for someone who has a good risk-return appetite and
wants to invest in addition to an insurance cover.

• The plan provides long term investment option with the flexibility to switch funds.
• Maturity and/or death benefits provided, whichever deems suitable.
• Option to add riders to enhance the coverage.

6. Children’s Policy:
The policy is opted by the insured for the financial assistance for his child’s future. This plan
ensures a financial corpus for the child when the policy matures (usually when the child turns
18). This can help the insured sponsor his child’s education or wedding smoothly. If unfortunately,
the insured passes away, the immediate payout is provided to the nominees.
• Helps the insured to financially secure the future of his/her child.
• Financial security in case of insured’s demise is also a major benefit that ensures that the child
will be financially protected even after the demise of the breadwinner.
7. Retirement/ Pension Plan:
A retirement plan is a type of insurance product that is designed to provide financial security
when one retires, i.e. when the regular income stops. It’s more than just a vanilla insurance plan
and thus provides one with investment opportunities so that one doesn’t have to compromise on
the standard of living when the regular income starts to ebb.
• The policyholder shall start receiving benefits at the start of vesting age.
• There is an option to buy additional riders to amp-up the insurance cover.
• One may surrender the policy before the expiration of the policy term, although this may lead
to certain charges.

Life Insurance Corporation of India (LIC)

▪ The Life Insurance Act is established in the year 1956 which started working to provide
insurance to the people.
▪ Prior to the commencement of L.I.C. Act, 1956, there were 243 insurance companies which
used to deal with the concept of insurance. Because of the establishment of this Act the
business of them was taken over by this Act.
▪ It is an institution of investment under which various people invest their funds in different
policies and the savings are spread into different types of securities to protect the interest on a
long period of time.
▪ This act also helps other institutions which are working for lending money by providing loans.
▪ This Act establishes a biggest insurance company or corporation of India.

Objectives of LIC of India:

➢ It especially works for the rural areas as well so that the people can know about the various
insurance policies.
➢ Convert the savings into activities of nation-building.
➢ To provide the full security and efficient service to them at reasonable rates.
➢ To safely handle the money of the holders.
➢ To act as trustees.
➢ To fulfill the different needs of the community.
➢ To indulge all the people who are working in the corporation to protect the interest as well as
to provide efficient service.
➢ To promote the employees to have dedication towards their achievement.
Establishment And Incorporation of Life Corporation of India (Section 3):
The Central Government appoints a corporation which is called as Life Corporation of India by
giving notification in the official gazette.
It shall be a corporation which acquires perpetual existence and a common seal. It has the power
to acquire, dispose and hold the property and if necessary it may be sue and sued by its name.

Functions of LIC:
• The main function of LIC is to collect the savings of the people through a life insurance policy
and invest that money in various financial markets.

• One of the main functions of LIC is to invest fund into government securities so as to protect
the capital of the people who have given their money to LIC.

• LIC has to issue an insurance policy at affordable rates to people.

• LIC provides direct loans to industries at lower interest rates. The rate of interest is as low as
12% for the entire tenure.

• It is one of the major stakeholders in many of the blue-chip companies in the Indian stock
market.

• It also provides refinancing activities through SFCs in different states and cities.

• It also invests in the various corporates via bonds and securities, thus supports corporate
funding in an indirect way.

• It also gives loan to the various national projects which are important for economic growth.

• It provides financial supports to socially-oriented projects like electrification, sewage, and

water channelizing, etc

• It also gives a housing loan at reasonable rates.

• It is the main channel between savings and investment for the people in India.
 Event Insured Against in Life Insurance
In life insurance, the primary event insured against is the death of the individual covered by the
policy, known as the life assured. This coverage extends to various causes of death, including
illnesses, accidents, and even death resulting from criminal acts committed by the third party. The
underlying principle is to provide financial protection to the beneficiaries designated in the policy
in the event of the insured's death.
Exceptions-
❖ However, there are important exceptions and considerations within life insurance policies.
One such exception pertains to deaths caused by the insured's own actions that violate criminal
law. For instance, if the insured is involved in criminal activity leading to their death, the
insurance coverage may be rendered void.

❖ Another exception is suicide. Many life insurance policies include clauses specifying that
suicide within a certain period after the policy's issuance may not be covered. This is to deter
individuals from taking out policies with the intent to harm themselves and benefit their
beneficiaries. While some policies may cover suicide after a certain period of time has elapsed
since the policy's inception, deliberate self-harm often falls outside the scope of coverage.

❖ Actions that are deemed contrary to public policy or morality can impact the validity of life
insurance coverage. For example, if the insured engages in activities that are considered
inherently risky, illegal, or morally reprehensible, such as participating in duels or committing
acts of violence, the insurance company may refuse to pay out the death benefit.

❖ If the insured intentionally causes harm or death to themselves or others, it can invalidate the
insurance coverage. This principle ensures that individuals cannot profit from their own
wrongful or culpable conduct. Thus, if the insured is found to have intentionally caused their
own death or the death of another, the insurance company may deny the claim.
Overall, while life insurance serves as a crucial financial safety net for beneficiaries, it is subject
to various legal and ethical considerations. These include exceptions based on criminal behavior,
suicide, actions contrary to public policy, and intentional harm. Insurers carefully evaluate claims
to ensure compliance with the terms of the policy and applicable legal principles.
 Nomination and Assignment in Life Insurance
In life insurance plans, Nomination and Assignment are the two important terms that are
frequently used. Acknowledging these terms helps the policyholder to extract the benefits
available under the life insurance policy without making a hole in his/her pocket.

What is the Nomination?

The nomination is a right given to the policyholder that authorizes him/her to appoint a person
(usually a close family member) to receive the benefits in the event of the death of the life assured.
The person who is appointed by the policyholder to receive the benefit is called a Nominee.
The nomination is governed under Section 39 of the Insurance Act, 1938.

Types of Nominees-
Under the life insurance policy, the policyholder nominates a person who is entitled to receive
the benefits in case something happens to the life assured.
Some of the different types of nominees given below:

1. Beneficial Nominees:
As per the law, any immediate family member (like spouse, children or parents) nominated by
the policyholder is entitled to receive the monetary benefits and will be the beneficial owner of
the claim benefits. It is important to note that only immediate family members can be termed as
Beneficial Nominees.

2. Minor Nominees:
Many individuals appoint their children as beneficiaries of their life insurance policies. Minor
nominees (who are less than 18 years of age) are not considered eligible to handle claim amounts.
For this, the policyholder needs to assign an appointee or custodian. The claim amount is paid to
the appointee until the minor turns 18.

3. Non-family Nominees:
These types of nominees can be distant relatives or even friends as the beneficiary of the life
insurance policy.

4. Changing Nominees:
Policyholders can change their nominees as many times as they want, but the latest nominee
should supersede all previous ones.
Key Points to Know Regarding Nomination
• The nomination is possible only when the policyholder and life assured are the same. In case,
the policyholder and life assured are different, the claim benefits will be availed by the
policyholder only.
• The nominee cannot ask for changes/modifications to the policy.
• There can be more than one nominee in the policy.
• In the successive nomination, if the life assured appoints person A to be the first person to
receive the claim benefits in case of assured's death and person A is no more, then the claim
benefits will be passed to person B. However, if Nominee A and Nominee B have passed
away, later Nominee C will be appointed to avail the benefits and so on.

What is Assignment?
Assignment of the policy refers to the transfer of rights, title, and policy ownership from the
policyholder to another person or entity. The person involved in assigning/transferring the policy
is called assignor, and the person/institution to which it is assigned is called the assignee.
The assignment is regulated under Section 38 of the Insurance Act, 1938.

Types of Assignment-
The assignment is categorized under two different types:

1. Absolute Assignment
Under the absolute assignment, all rights, title and interest are transferred by the assignor to an
assignee without reversion to the assignor (in case of any event). It shifts the ownership of the
insurance policy to other parties without any terms and conditions. This assignment is usually
done for money consideration such as raising a loan, out of love or affection towards family
members.

2. Conditional Assignment
It means that the transfer of rights will happen from the Assignor to the Assignee subject to certain
terms and conditions. If the conditions are fulfilled, only then the policy will be transferred.

Key Points to know Regarding Assignment-

• Under the assignment, only the ownership is transferred/changed, not the risk of the policy.
This means the life assured is/will be considered as the person insured.
• The assignment may lead to cancellation of the nomination in the policy only when it is done
in favour of the insurance company due to a policy loan.
• The assignment applies to all the insurance plans except Pensions Plan and Married Women's
Property Act (MWP).
• The assignment is effected through an endorsement on the policy contract.

Difference between Nomination and Assignment

Nomination and Assignment serve different purposes. The nomination protects the interests of
the insured as well as an insurer in offering claim benefits under the life insurance policy. On the
other hand, assignment protects the interests of an assignee in availing the monetary benefits
under the policy. The policyholder should be aware of both of them before buying life insurance.

General Insurance
General Insurance provides much needed protection against unforeseen events such as accidents,
illness, fire, burglary, consumer etc.
o Unlike life insurance, General insurance is not meant to offer returns but is a protection against
contingencies. Almost everything that has a financial value in life and has a probability of
getting lost, stolen or damaged can be covered through General insurance policy.
o Property (both movable and immovable) vehicle, cash, household goods, health, dishonesty
and also one’s liability towards others can be covered under General insurance policy.
o Under certain acts of parliament, some types of insurance like motor insurance and public
liability insurance have been made compulsory.

Meaning: General insurance means managing risk against financial loss arising due to fire,
marine or miscellaneous events as a result of contingencies, which may or may not occur.

Some General Insurance:

1. Fire Insurance:
Fire insurance is a contract under which the insurer in return for a consideration (premium) agrees
to indemnify the insured for the financial loss which the later may suffer due to destruction of or
damage to property or goods, caused by fire, during a specified period.
o The contract specifies the maximum amount, agreed to by the parties at the time of the
contract, which the insured can claim in case of loss.
o This amount is not, however, the measure of the loss. The loss can be ascertained only after
the fire has occurred. The insurer is liable to make good the actual amount of loss not
exceeding the maximum amount fixed under the policy.

o A fire insurance policy cannot be assigned without the permission of the insurer because the
insured must have insurable interest in the property at the time of contract as well as at the
time of loss.
o The insurable interest in goods may arise out on account of (1) ownership (2) possession (3)
contract. A person with a limited interest in a property or goods may insure them to cover not
only his own interest but also the interest of others in them.

Under the fire insurance, the following persons have insurable interest in the subject matter:
• Owner
• Mortgagee
• Pawnee
• Pawn broker
• Official receiver or assignee in insolvency proceedings
• Warehouse keeper in the goods of customer
• A person in lawful possession e.g. common carrier, wharfinger, commission agent.

The types of losses covered by fire insurance are:

➢ Goods spoiled or property damaged by water used to extinguish the fire.
➢ Pulling down of adjacent premises by the fire brigade in order to prevent the progress of flame.
➢ Breakage of goods in the process of their removal from the building where fire is raging.

The types of losses not covered by a fire insurance policy are:

➢ Loss due to fire caused by earthquake, invasion, act of foreign enemy, hostilities or war, civil
strife, riots mutiny, martial law, military rising.
➢ Loss caused by subterranean (underground) fire.
➢ Loss caused by burning of property by border of any public authority.
➢ Loss by theft during or after the occurrence of fire.
➢ Loss of damage to property caused by its own fermentation or spontaneous combustion.
E.g. exploding of a bomb due to an inherent defect in it.
➢ Loss or damage by lightening or explosion is not covered unless these cause actual ignition
which spread into fire.
A claim for loss by fire must satisfy the following conditions:
❖ The loss must be caused by actual fire or ignition and not just by high temperature.
❖ The proximate cause of loss should be fire.
❖ The loss or damage must relate to subject matter of policy.
❖ The ignition must be either of the goods or of the premises where goods are kept.
❖ The fire must be accidental, not intentional. If the fire is caused through a malicious or
deliberate act of the insured or his agents, the insurer will not be liable for the loss.

Types of Fire Insurance Policy

1. Specific policy- It is a policy which covers the loss up to a specific amount which is less than
the real value of the property. The actual value of the property is not taken into consideration
while determining the amount of indemnity. Such a policy is not subject to ‘average clause’
(Average clause is a clause by which the insured is called upon to bear a portion of the loss himself).
If the insurer has inserted an average clause, the policy is known as ‘Average policy’.

2. Comprehensive policy- It is also known as ‘all in one policy’ and covers risk like fire, theft,
burglary, third party risks etc. It may also cover loss of profits during the period of business
remains closed due to fire.

3. Valued policy- It is a departure from the contract of indemnity. Under it the insured can
recover a fixed amount agreed to at the time the policy is taken. In the event of loss, only the
fixed amount is payable, irrespective of the actual amount of loss.

4. Floating policy- It is a policy which covers loss of fire caused to property belonging to the
same person but located at different places under a single sum and for one premium. Such a
policy might cover goods lying in two warehouses at two different locations. This policy is
always subject to ‘Average clause’.

5. Replacement or Re-installment policy- It is a policy in which the insurer inserts a Re-

installment clause, whereby he undertakes to pay the cost of replacement of the property
damaged or destroyed by fire. Thus, he may re-instate or replace the property instead of paying
cash. In such a policy, the insurer has to select one of the two alternatives, i.e. either to pay
cash or to replace the property, and afterwards he cannot change to the other option.
2. Burglary Insurance:
A burglary insurance policy offers an additional layer of security to your property. It offers
coverage for damages or misfortunes caused to your property and its contents. For example, your
home, office, factory, and go-down against burglary and housebreaking. It provides cover under
the accompanying circumstances:
- Theft by persuasive/ violent/fierce entry
- Attempted theft or theft by a criminal on the said premises
- Armed robbery or Hold-up

Why do you Need Burglary Insurance?

On the off chance that someone breaks into your home and takes the things in your home then it
will be both emotionally and monetarily decimating. You can likewise get add-on coverage for
your costly jewellery, diamonds or stones, under Home Burglary Insurance policy.
In the event that some pariah breaks into your office premises and figures out how to take the
merchandise in trust, fittings, stock-in-exchange, instruments of the exchange, for example,
typewriters, number crunchers, and so forth then likewise burglary insurance or theft insurance
would act the hero. It offers the ideal money related help to assist you with adapting up to such
occurrences.

The primary reason that burglary insurance policies solve is that they risk-proof the insured
premises from a violent or forceful attempt to theft. In the event that burglaries and house-
breaking incidents are regular in your general vicinity, then at that point, you should get theft or
burglary insurance cover to ensure the well-being and security of your house/office/go down.

Who Needs to Buy Burglary Insurance Cover?

➢ People who have to leave their premises unattended for a longer period of time.
➢ Owners of a business corporation, with many people entering their business premises on a
daily basis.
➢ Anybody who owns a godown where goods are stored.

Classification of Burglary Insurance Plans

Burglary insurance plans can be classified into three types, which are:

1. Full Value Insurance: A full value insurance plan provides the complete value of the property
insured.
2. First Loss Insurance: Under first loss insurance, when there is an improbability of a total loss,
it offers the policyholder to select a certain percentage of the stocks to be insured.
3. Stock Declaration Insurance: This plan is beneficial when a large number of stocks fluctuate
frequently during a financial year. The sum assured is locked at the highest stock value that is
anticipated by the policyholder.

Salient Features of Burglary Insurance

• They are intended to offer protection to business premises against forceful/commanding
housebreaking and burglary.
• Accessibility of add-on benefits, for example, cash cover, other risks emerging because of
strikes, riots, theft, and malevolent damage.
• Accessibility of coverage on the first-loss premise.
• Coverage for death, disabilities (perpetual/fractional), and transitory disability.