A life insurance policy is an agreement with an insurance company. The insurance company promises death assistance in contemplation of the disbursement of premium by the insured. In exchange for premium payments, the insurance company provides a lump-sum payment, known as a death benefit, to beneficiaries upon the insured’s death. The most familiar component of a life insurance policy is to protect the finances of one’s family or in case of a wage earner’s death, but that’s not its only component.
The main elements of a life insurance contract are:
(i) The life insurance contract must have all the essentials of a valid contract. The essential element of a valid Contract is that the parties to it must be lawfully proficient to contract. Every person is proficient to contract who is of the age of majority according to the law, who is of sound mind, and who is not ineligible from contracting by any law. Certain elements like offer and acceptance, free consent, capacity to enter into a contract, lawful consideration and lawful object must be present for the contract to be valid;
(ii) The contract of life insurance is a contract of utmost good faith. Life insurance requires that the standard of utmost good, faith should be conserved by both the parties. The assured should be honest and truthful in giving information to the insurance company. The standard of utmost good faith says that the parties, proposer (insured) and the insurer must be of a similar mind at the time of contract because only then the risk might be properly ascertained. He must disclose all material facts about his health to the insurer. They must make full and true disclosure of the facts material to the risk. It is his duty to disclose accurately all material facts known to him even if the insurer does not ask him;
(iii) In life insurance, the insured must have an insurable interest in the life assured. Insurable interest is financial interest. Without insurable interest the contract of insurance is void. The insured must have an insurable interest in the life to be insured for a valid contract. In the case of life insurance, insurable interest must be present at the time when the insurance is affected. It is not necessary that the assured should have an insurable interest at the time of maturity also. Insurable interest arises out of the financial relationship that exists between the policy-holder and the life assured so that the former stands to lose by the death of the latter and/or continues to gain by his survival.
For example, a person is presumed to have an interest in his own life and every part of it, a creditor has an insurable interest in the life of his debtor, and a proprietor of a drama company has an insurable interest in the lives of the actors;
(iv) The life insurance contract is not a contract of indemnity. The life of a human being cannot be compensated and only a specified sum of money is paid. That is why the amount payable in life insurance on the happening of the event is fixed in advance. The sum of money payable is fixed, at the time of entering into the contract. A contract of life Insurance, therefore, riots a contract of indemnity.
The two basic plans catering to the aforesaid elements are:
- Term Assurance – It provides cover alongside the risk of death. The sum guaranteed is paid only on the death of life guaranteed if it occurs within the procedure term.
- Pure Endowment – provides cover against the risk of living a too long life. The sum guaranteed is paid on termination of policy term only if the life assured does not die within that term.