It is a tool in the management of risks – a device through which the risks faced by the individuals are pooled together and thereby all the members of pool will share the losses suffered by a few individuals.
Transferring the risks from the individuals to the pool – reduction of the overall risk faced by the pool
Social tool – as a social safeguard against the losses expected to be suffered due to unexpected events by a few members of the society
Commercial or legal tool where a third party does this activity of pooling of risks and sharing of losses with a commercial interest
Kenneth Black (Jr.) and Harold Skipper (Jr.) have defined insurance under two different perspectives :
Economic Perspective – Insurance is a financial intermediation function by which individuals exposed to a specified contingency each contribute to a pool from which covered events suffered by participating individuals are paid. Individuals purchase the right to collect from the pool if the insured contingency occurs. Insurance then is a contingent claim contract on the pool’s assets .
Insurance is an agreement (the insurance policy or insurance contracts), by which one party, called the policy owner , pays a stipulated consideration, called premium , to the other party called Insurer in return for which the insurer agrees to pay a defined amount of money or provide a defined service if a covered event occurs during the policy term.
It is a contract in which the Insurer, in consideration of a certain premium, either in a lump sum or in any other periodical payments, in return agrees to pay to the assured, or to the person for whose benefit the policy is taken, a stated sum of money on the happening of a particular event contingent on the duration of human life.
The contract provides for payment of lump sum money
The amount is paid at the expiration of a certain period or on death of a person.
In India, Life Insurance business is defined under Section 2 (11) of Insurance Act, 1938, which reads :
“ Life Insurance business” means the business of effecting contracts of insurance upon human life, including any contract whereby the payment of money is assured on death (except death by accident only) or the happening of any contingency dependent upon human life and any contract which is subject to payment of premium for a term dependent on human life and shall be deemed to include the granting of :
Disability and double or triple indemnity accident benefits, if so provided in the contract of insurance;
Annuities upon human life; and
Superannuation allowances and annuities payable out of any fund applicable solely to the relief and maintenance of persons engaged or who have been engaged in any particular profession, trade or employment or of the dependents of such persons.
The object of insurance should be lawful. The person proposing for insurance must have interest in the continued life of the insured and would suffer pecuniary loss if the insured person dies. This is known as Insurable Interest.
In Life Insurance contracts, a very high degree of good faith is required to exist between the parties to the contract, viz., the insurer and the insured. This is called the principle of utmost good faith (Uberrima fides)
It is the duty of the proposer to disclose the material information for proper assessment of risk by the insurer
All the required information for the assessment of risk is known only to the proposer and the insurer has no knowledge of the risk
The proposer may not be having technical knowledge about the insurance products, the benefits, pricing aspects etc. and hence will have to rely upon the insurer to ensure that the terms of the contract are fair and equitable.
Insurance contracts other than life insurance contract are contracts of indemnity in the sense that the amount payable by the insurer in case of the contingency stated in the policy occurring is limited to the loss that the insured will suffer.
The insurance contract promises to keep the insured indemnified against the financial loss that he would suffer on account of the happening of the event.
There are groups of people who share something in common and are connected by some underlying similarity like occupation, profession, employment, social purposes or even entertainment can have a similar need for life insurance which can be met by a single insurance contract.
products with certain basic features like Endowmnet or Money-back. the customer to choose as per his needs and then expand it by rider benefits – accident cover, critical illness cover, disability benefits, hospitalisation cover etc.
Asha Deep II (with profits) – Endowment Plan with riders to cover four serious illnesses viz. cancer, paralytic stroke leading to permanent disability, kidney failure (both kidneys), and cardiac bye-pass surgery – except 1 st year – 50% of S.A. premium waiver – annuity of 10% of S.A. till maturity
Balance 50% of S.A. on death or maturity with bonus
Marriage Endowment or Education Annuity (with profits) – no immediate payment on death – payment in lumpsum in case of marriage – payment in half yearly instalments over 5 years in Education Annuity from date of maturity only.