Introduction to Life Insurance-I by Dr. Amitabh Mishra

Introduction to Life Insurance-I
Dr.Amitabh Mishra, life Insurance 1

Life Insurance: Meaning & Concept
 Life insurance is
◦ “A contract between an insurance policy holder and an insurer or
assurer, where the insurer promises to pay a designated beneficiary a
sum of money (the benefit) in exchange for a premium, upon the
death of an insured person (often the policy holder).”
◦ “An legal agreement between the policy owner and the insurer, where
the insurer for a consideration agrees to pay a sum of money upon the
occurrence of the insured individual's or individuals' death or other
event, such as terminal illness, critical illness or maturity of the policy”

Nature of Life Insurance
 Life policies are legal contracts and the terms of the contract describe the
limitations of the insured events.
 Depending on the contract, other events such as terminal illness or critical
illness can also trigger payment.
 The policy holder typically pays a premium, either regularly or as one lump
sum.
 Other expenses, such as funeral expenses, can also be included in the
benefits.
 Life insurance deals with the insurance of individuals, groups, and pension
plans.

HISTORY OF
LIFE INSURANCE

History of Life Insurance:World
 Burial clubs: An early form of life insurance dates to Ancient Rome;
“burial clubs” covered the cost of members' funeral expenses and
assisted survivors financially.
 Amicable Society for a Perpetual Assurance Office: The first
company to offer life insurance in modern times was the Amicable
Society for a Perpetual Assurance Office founded in London in
1706 byWilliamTalbot and SirThomas Allen.
◦ The Amicable Society started with 2000 members.
Amicable Society for a
Perpetual Assurance Office

 Life Table: The first life table was written by Edmund Halley in 1693, but it was only
in the 1750s that the necessary mathematical and statistical tools were in place for
the development of modern life insurance.
 In actuarial science and demography, a life table (also called a mortality table or actuarial table) is
a table which shows, for each age, what the probability is that a person of that age will die before his or
her next birthday ("probability of death"). In other words, it represents the survivorship of people from
a certain population.s
 Society for Equitable Assurances on Lives and Survivorship(1762): Edward
Rowe Mores, established the Society for Equitable Assurances on Lives and
Survivorship in 1762. It was the world's first mutual insurer and it pioneered age
based premiums based on mortality rate/death rate laying "the framework for
scientific insurance practice and development" and “the basis of modern life
assurance upon which all life assurance schemes were subsequently based”.
Edmund Halley
Edward Rowe
Mores

 Actuary: Edward Rowe Mores firstly used the name actuary to the chief
official of insurance organizations.
◦ The first modern actuary was William Morgan, who served from 1775 to 1830.
 Life insurance in US:
◦ The sale of life insurance in the U.S. began in the 1760s. The Presbyterian Synods
in Philadelphia and New York City created the Corporation for Relief of Poor
and Distressed Widows and Children of Presbyterian Ministers in 1759;
◦ Episcopalian priests organized a similar fund in 1769. Between 1787 and 1837
more than two dozen life insurance companies were started.
◦ In the 1870s, military officers banded together to found both the Army and
the Navy Mutual Aid Association (Navy Mutual), inspired by the plight of widows
and orphans left stranded in the West after the Battle of the Little Big Horn, and
of the families of U.S. sailors who died at sea.
William Morgan

History of Life Insurance: India
 Insurance in India can be traced back to the Vedas. For
instance, “YOGAKSHEMA”, the name of Life Insurance
Corporation of India's corporate headquarters, Mumbai is
derived from the RigVeda.
अनन्याश्चिन्तयन्तो माां ये जनााः पययुपासते।
तेषाां ननत्याभिययक्तानाां योगक्षेमं वहाम्यहम्।।
(Srimad Bhagavad Gita 9.22)
There are those who, excluding all else, think of Me and worship Me, aspiring after eternal
union with Me. Their prosperity and welfare are looked
after by Me.

 Bombay Mutual Assurance Society, the first Indian life assurance
society, was formed in 1870. Other companies like Oriental, Bharat and
Empire of India were also set up in the 1870-90s.
 Swadeshi movement: It was during the swadeshi movement in the early
20th century that insurance witnessed a big boom in India with several
more companies being set up.
◦ By the mid-1950s, there were around 170 insurance companies and 80 provident fund
societies in the country's life insurance scene.
 The Life Insurance Corporation: However, in the absence of
regulatory systems, scams and irregularities were prevalent in most of
these companies. As a result, the government decided to nationalize the life
assurance business in India. The Life Insurance Corporation of India
was set up in 1956 to take over around 250 life insurance companies.

 IRDA Act, 1999: Since 1st September, 1956, transacting life
insurance business in India was the exclusive privilege of the
nationalized insurance company viz., LIC. However, with the passing
of the IRDA Act, 1999, the life insurance sector has been thrown
open to private players.
◦ The Insurance Regulatory & Development Authority, an autonomous insurance
regulator set up in 2000, has extensive powers to oversee the insurance business
and regulate in a manner that will safeguard the interests of the insured.

DIFFERENCES BETWEEN
LIFE INSURANCE
AND
GENERAL INSURANCE

Parameters Life insurance General insurance
Meaning Covers life Covers non-life assets
Contract term Long-contract Generally, annual contracts
Premiums Paying premiums for several years. Renewed every year
Payment of
claim
Payable in case of the death or on
policy maturity
Reimbursed during an eventuality
Savings
component
Present Absent
Determination
of economic or
the financial
value
Difficult to determine value of life, Easy to determine financial value
of any asset
Form It is a form of investment. It is a contract of indemnity

FEATURES
OF
LIFE INSURANCE CONTRACT

Features of Life Insurance Contract
 Life insurance contract may be defined as
◦ “The contract, whereby the insurer in consideration
of a premium undertakes to pay a certain sum of
money either on the death of the insured or on the
expiry of a fixed period.”
◦ The definition of the life insurance contract is
enlarged by Section 2(ii) of the Insurance Act 1938 by
including annuity business.

Followings are the features of life insurance contract:
Features of life
insurance contract:
Nature of General Contract
Insurable Interest
Utmost Good Faith
Warranties
Proximate Cause
Assignment and Nomination

1. Nature of General Contract
 Life insurance contract is a sort of contract it is approved by the
Indian Contract Act.
 According to Section 2(H) and Section 10 of Indian Contract Act,
a valid contract must have the following essentialities:
a) Agreement (offer and acceptance)
b) Competency of the parties
c) Free consent of the parties
d) Legal consideration
e) Legal objective

a. Agreement (offer and acceptance):
• Offer and acceptance in life insurance is of typical nature. The Agents
canvassing or publication of prospectus and of uses of insurance
constitutes invitation to offer because the public in general and
individual in particular are invited to make proposal for
insurance.
• Submission of proposal along with the premium is an offer and
the dispatch of acceptance-letter is the acceptance.
• The risk will commence as soon as the acceptance letter is dispatched
by the insurer.

b. Competency of the Parties
 Parties to insurance must be legally competent to contract
◦ Age of majority (18 years).
◦ Of sound mind
 if person is capable of understanding contract and of forming a
rational judgment as to its effect upon his interests
 So, an intoxicated person cannot enter into a contract
◦ Not disqualified from contracting by any law
 A contract with an alien enemy is void.
◦ The insurer must have the license to carry on insurance business.

c. Free consent of the parties:
 Both parties must know the exact nature of the risk
to be underwritten.
 Consent is not free if it is obtained by
 Coercion
 Undue influence
 Fraud
 Misrepresentation/ mistake

d. Legal Consideration:
◦ The insurer must have some consideration in return of his
promise to pay a fixed sum at maturity or death.
◦ The consideration need not be money only. It should be
anything valuable or to which value may be assigned. (Ex:
interest, right, dividend, etc.)
◦ The first premium is consideration and subsequent premiums
are merely conditions to contract.

e. Legal Objective
 The objective of contract must be legal
◦ The object of a legal life insurance contract is to protect oneself
or ones family against financial losses at the death of the insured.
◦ The objective will be legal only when there is insurable interest.
Without having this interest, the object of the contract would
not be legal.

2. Insurable Interest
 Insurable interest is the pecuniary interest.
 An insurable interest is an object which, if damaged or destroyed,
would result in financial hardship for the policyholder.
 Insurable interest arises out of the pecuniary relationship that
exists between the policy-holder and the life assured so that the
former stands to loose by the death of the latter and/or continues
to gain by his survival.
 The loss should be monetary or financial. Mere emotion and
expectation do not constitute insurable interest.

 Insurable interest in life insurance may be divided into
two categories:
Insurable Interest
Own life Others life
Proof is not required Proof is required
Business Relation Family Relation

 Insurable interest in own’s Life
◦ An individual always has an insurable interest in his own life. Bunyon
says:
“Every man is presumed to possess an insurable interest in his estate for
the loss of his future gains or savings which might be the result of his
premature death”.
◦ The insurable interest in own life is unlimited because the loss to the
insured or his dependents cannot be measured in terms of money and,
therefore, no limit can be placed to the amount of insurance that one
may take on ones own life.

 Insurable interest in other’s life: There are two types of
insurable interest in others life.
a) Where proof is not required and
b) Where proof is required.
 Proof is not required
◦ There are only two such cases where the presence of insurable interest
is legally presumed and therefore need not be proved.
◦ Wife has insurable interest in the life of her husband: It is
presumed and decided by Reed vs. Royal Exchange (1795) that wife has
an insurable interest in the life of her husband because husband is
legally bound to support his wife. The wife will suffer financially if the
husband is dead and will continue to gain if the husband is surviving.
◦ Husband has insurable interest in the life of his wife: It was
decided in Griffith vs. Fleming (1909) that the husband has insurable
interest in his wife‟s life because of domestic services performed, by the
wife. If the wife is dead, husband has to employ other person to render
the domestic services and other financial expenditures will involve at
her death which are not calculable..

 Proof is required : Insurable interest has to be proved in the following cases:
◦ Business Relationship: The policyholder may have insurable interest in the life
of assured due to business or contractual relationship.
◦ In this case, the amount of insurance depends on the amount of risk involved.
Example: a creditor may lose money if the debtor dies before the loan is repaid.
The continuance of debtor‟s life is financially meaningful to the creditor because
the latter will get all his money repaid at the former‟s survival.
◦ Family Relationship: The insurable interest may arise due to family relationship
if pecuniary interest exists between the policyholders and life assured.
◦ The interest must be based on value and not on mere sentiments.
◦ Similarly, mere moral obligation is not sufficient to warrant existence of insurable
interest.
◦ Thus a son can insure his fathers life only when he is dependent on him and the
father can take insurance policy on his son‟s life only when he is dependent on his
son.

3. Utmost Good Faith
 Life insurance requires that the principle of utmost good, faith
should be preserved by both the parties.
 The principle of utmost good faith says that:
◦ The parties, insured and insurer must be of the same mind at the
time of contract (because only then the risk may be correctly
ascertained).
◦ They must make full and true disclosure of the facts material to
the risk.
◦ Material facts are age, income, occupation, health, habits,
residence, family history and plan of insurance.

4. Warranties
 A warranty in an insurance policy is a promise by the insured party that
statements affecting the validity of the contract are true.
 And, if any statement is untrue, the contract shall be null and void and the
premium paid by him may be forfeited by the insurer.
 Warranties may be informative and promissory.
 The proposal is expected to disclose:
“All the material facts to the best of his knowledge and belief”

5. Proximate Cause
 The efficient or effective cause which causes the loss is called
proximate cause.
 It looks for the reason behind the loss. If the cause of loss (peril) is
insured, the insurer will pay; otherwise the insurer will not
compensate.
 In life insurance the doctrine of Causa Proxima (Proximate
Cause) is not applicable because the insurer is bound to
pay the amount of insurance whatever may be the reason of death.
It may be natural or unnatural.

Introduction to Life Insurance-I by Dr. Amitabh Mishra

Introduction to Life Insurance-I by Dr. Amitabh Mishra

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Introduction to Life Insurance-I by Dr. Amitabh Mishra