Baca Juga
Life insurance business is driven based on several basic principles. It must be understood that life insurance is to compensate for the financial loss faced by the family on the unfortunate and untimely death of an earning member of the family. Insurance does not and cannotcompensate for the emotional loss. Hence, insurance is only given on those people’s lives who are either earning or whose death may result into extra expense for the family (housewives etc.). With this as the basic premise we will discuss the principles of life insurance below.
1. Insurable interest
The most important principle of life insurance is insurable interest. It says that the proposer (who buys the policy)can buy insurance on another person’s life if and only if the proposer has genuine interest in the life of the life assured. This is an important principle to avoid any misuse of life insurance.
E.g. a father buying life insurance in the name of child has ‘insurable interest’ in his child. A father would want his child to live.
However, if a person wants to buy policy in his neighbor’s name then it cannot be allowed because there is no insurable interest. Such an arrangement may lead proposer to harm the neighbor for gain. To avoid such situations insurance policy is not allowed unless ‘Insurable interest’ is established.
2. Principle of Indemnity:
This principle states that the benefit from insurance policy shall not be more than the financial value of life insured.
E.g. a person has one more year of service left and he wants to buy an insurance policy. His annual income is 5 lakh. In this case, insurance company cannot offer cover of more than 5 lakh for the person because the family members would benefit financially upon his death than his survival if more than 5 lakhs is offered.. To avoid such a situation insurance to the extent of financial value is given.
This is controlled by the insurance company at the underwriting stage through assigning multiples of salary based on age for arriving at maximum insurance cover. So for a young man insurance company may give a cover of 20 times his annual income as the person will have 20-30 more years of earning but for an older person the company may only give a cover of upto 10 times his salary.
3. Utmost Good Faith
According to this principle, the insurance contract is based on the assumption of good faith between the two parties. As a client, it is the customer’s duty to disclose all the important information.
With this as basis, many a times the company relies on the information and declaration provided by the customer and does not fact-check everything. However, any fraud discovered later may result into cancellation of the policy or rejection of claims.
4. Material Facts disclosure
In the insurance contract, it is required and expected to disclose all important information which is relevant for insurance, especially the information regarding the health of the life assured.
Basic Principles of Life Insurance
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