Life insurance differs
from non-life insurance such as fire, marine, miscellaneous insurance, on the
following counts: (I) Nature of Contract: A life insurance contract is a
contingent contract. It combines protection with investment. But a contract of
fire and marine insurance is a contract of indemnity. (II) Duration of
Contract: Life insurance is a long-term contract, while non-life insurance is a
short-term contract made generally for a year. (III) Happening of event: The
event of death in life insurance is certain but only uncertainty is the time
when the death will occur. But in non-life insurance, the contingency insured
may or may not happen. (IV) Insurable Interest: In life insurance, the
insurable interest must exist at the time of the contract and need not exist at
the time a claim is made. In fire insurance, the insurable interest should be
present both at the time of insurance and at the time of loss. In marine
insurance, the insurable interest should be present at the time of loss. (V)
Premium: In the case of life insurance, the premium depends upon the age,
health, occupation of the insured.
Whereas in non-life insurance, the
premium varies according to the degree of risk. (VI) Surrender Value: In the case
the policyholder is unable to pay premium continuously, he can surrender the
policy for a surrender value amount with the LIC. There is no such facility in
non-life insurance. (VII) Maximum Sum Assured: A life insurance can be taken
for any amount subject to the premium paying capacity of the individual. But in
non-life insurance, the policy can be taken up to the value of property. (VIII)
Purpose: Life insurance policy is taken for the protection of the family of the
insured. While the non-life insurance, the policy is taken for the protection
of properties. (IX) Partial losses: Life insurance never gives protection
against partial losses. But non-life insurance gives protection against partial
losses. (X) Classification of risk: In life insurance, the lives are graded in
three categories i.e. standard life, sub-standard life and life liable to be
rejected. But in non-life insurance, gradation of risks is rather difficult.
(XI) Examination of the subject: In life insurance it is mandatory to undergo
medical examination at the time of taking a policy, whereas in non-life
insurance, a survey is made on the property insured.
Fundamental Principles of
Life Insurance- The essential elements that are required for creation of a
valid contract such as offer, and acceptance, competence of the parties to
contract, free consent of the parties, legal object and lawful consideration,
are applicable to life insurance contract too. In addition to these, the life
insurance contract should be based upon two important principles viz., utmost
goodfaith and insurable interest. (1) Offer and acceptance: Offer is an
intimation of proposer’s intention to buy life assurance. The offer in life
assurance is called proposal and has usually the following forms: (a) Proposal
for assurance. (b) Medical Reports. © Agent’s Report. Proposal form gives
information about the moral hazard involved, while medical report reveals the
physical fitness of the life to be assured. The agent’s report brings out moral
hazard in the proposal as also bonafides of the proposal. If after assessing
the proposal for assurance, the insurer is prepared to issue a policy, it sends
a letter of “Acceptance” to the proposer. This letter of acceptance is also
called counter offer which is accepted by the proposer by paying the first
premium. In some cases insurer may modify the terms of offer. So there is no
acceptance unless proposer accepts the revised terms and pays the premium. (2)
Capacity of parties: Minors, persons of unsound mind and enemy, aliens cannot
effect assurance. Similarly only those insurers can grant policies, which are
licensed by the IRD Authority: (A) A minor is not competent to contract, but a
natural guardian (parent) can enter into a valid contract on behalf of a minor.
(B) Under the Children Deferred Assurance, the parent or guardian proposes for
assurance on the life of the child. Till the child attains the age of majority
(18 years), the policy remains the property of the proposer. After the policy
has invested in the child automatically, on attainment of the age of majority,
proposer, (parent) has no control over the policy. © Children
Endowment policy
is effected on the life of the parent for the benefit of the child. Premiums
are charged according to the age of the parent or guardian. Premiums may cease
at the death of parent but benefits are payable at the end of the term. Thus,
minor child is not a party to the contract. (D) Persons of unsound mind: A
person of unsound mind cannot enter into any contract: (I) When a person of
apparently sound mind enters into a contract of life assurance which is
bonafide and properly completed, it is a valid contract. (II) When an
originally valid contract has been entered into, it will not be affected if one
of the parties becomes insane afterwards. It means that if life assured becomes
lunatic after taking the insurance policy, the contract will remain valid. (E)
Other disqualifications- (I) A contract with an alien enemy is void. (II) An
insolvent cannot enter into a contract. (3) Free Consent: When parties to the
contract agree upon the terms and condition of the agreement in the same sense,
they are said to have consented. Consent is considered free when it is not
obtained by coercion, undue influence, fraud, misrepresentation or mistake.
Importance of Free Consent and agent:
Where a person signs a proposal, he gives
his consent. But when he signs in vernacular or a language different from that
of for, he must declare in his own hand that the contents of proposal were
explained to him and he has signed the proposal after fully understanding them.
The witness to the proposal should also certify that he has explained the
contents of the form to the proposer, only then the consent is considered to be
free.