Introduction To Insurance

The Indian Contract Act 1872

A contract is an agreement between two or more parties to do or to
abstain from doing an act and which is

intended to create a legally binding relationship

An Agreement
enforceable
by Law is a
contract

Essentials of a Valid Contract
Two or
More
Parties
Lawful
Objectiv
e
Offer &
Acceptance
Free
Consent
Lawful
Consider
ation
The Life Insurance Contract











Insured
will pay
Premiums
Insurer
will pay
claims
On happening of insured event or
survival to a specified term
Agreement
Is Life Insurance a Legal Contract?
Intention is legal
Proposer offers-insurer accepts
Premium is consideration
Insured must be major with sound mind-capacity to contract
Insured and Insurer are in agreement of same mind and free
consent
Yes, since all essentials of valid contract are present
Principles of Life Insurance
Utmost
good
faith
Insurable
Interest
Insurance Contract is based on Fair Play
Insurance Contract Vs Commercial Contract
COMMERCIAL CONTRACT

When one buys a TV or Fridge he
examines the quality/quantity

Buyer has no right to come later
and ask for termination of contract

Buyer Beware or Caveat Emptor
applies
INSURANCE CONTRACT

In Life Insurance proposer has all
the facts

The Insurer Knows only those
facts that the proposer discloses

Ordinary faith is not sufficient-
Utmost Good Faith is required
Utmost Good Faith
A Positive Duty to voluntarily disclose,accurately and fully, all facts
material to risk being proposed, whether requested or not.

What is a material Fact?
Any Fact or Circumstance
In Fixing the
premium
Which
Influences
The Mind of a
Prudent
Underwriter
In determining
whether to take
the risk
What must be disclosed?
Facts of higher Risk

External Factors that make the risk higher

Any refusal/special terms imposed on previous proposals

Existence of other policies

Facts relating to health
Declaration








Proposal Form is the Basis Of Contract
If any statement/declaration by the proposer is found untrue
The Contract can be made Null and Void and
Premiums Forfeited
The Effect of declaration is to turn Representations in the proposal
form into warranties
Breach Of Utmost Good Faith
Breach of Utmost Good Faith
Misrepresentation
Non-Disclosure
Section 45 of the Insurance Act,1938
Policy
Start
Date
2 years
If Material Facts discovered
within 2 years of the policy
then the insurer can declare
the policy null and void
The policy cannot be called in question
after 2 years, on the grounds of
inaccurate or false statement unless it is
proved to be material and fraudulent.
What is Insurable Interest ?
Insurable Interest is not defined in Insurance Act 1938

If No Insurable Interest .A contract is a
Wagering Contract which is void
Section
30
Indian
Contrac
t Act
1872
Insurable Interest is a Legal Prerequisite
Insurable Interest
All risks are not Insurable

Insured must suffer a loss, if the risk is not covered

Financial interest in Subject matter of Insurance


The insured must be interested in the safety and
the well being of the subject of Insurance
He Should not benefit from loss or damage to it
What is Insurable Interest ?



Insurable Interest is the monetary interest
Relationship with subject
Matter
Recognized in Law and
gives Legal Right to a
person
To insure that Subject Matter
Who have insurable interest in each other
Any person in himself
Husband and wife in each other
Creditor on Debtor(To the Extent of Outstanding Mortgage with
Interest)
Surety on Principal(To the extent of Debt)
Partners in business
Employer on its employees
Parents in Lives of their Minor Children
When do these principles apply?
Insurable Interest interest is required at the time of entering the
contract

Utmost Good Faith is required Throughout the contract

Principle Of Indemnity


Insurance is meant to compensate the losses

The Mechanism of Insurance cannot be used to make profits

Amount of claim cannot exceed the amount of loss incurred

Insurance makes good the loss

In Life Insurance, insurable interest on own life is unlimited hence
Principle of indeminity does not apply but it does apply in General
Insurance

Risk Management
Avoidance
Retention
Transfer
Risk can be managed
Classification of Needs
Protection of the standard of living of family incase of early death

Future Expenses eg. Children Education

Income incase of Retirement or Disability

Helps by facilitating borrowing
Case Study 1
In a village there are 400 houses, each valued at Rs 20,000.

Every year on an average, 4 houses get burnt, resulting into a total
loss of Rs 80,000.
Find a Solution
Sharing Risk
400 owners come together
and contributed Rs 200 each
Fund
Fund Size
= 400200
= Rs 80,000
Sharing Risk
Risk of 4 house owners
Type of Risks
Risks
Pure
Speculative
No prospect of gain Offers possibility of loss
or gain
Example: Fire in a
building
Example: Investing in
stocks
Type of Risks
Risks
Fundamental
Particular
Affect large section
of society
Consequences are
comparatively
restricted
Example: Most insurable
risks
Example: Famine
How to Manage Risk
Avoiding Risk

Controlling Risk

Accepting Risk

Transferring Risk



Dependents
Support
Why we need life insurance



Education
Costs



Estate
Planning



Retirement
Income
Insurance vs. Gambling
Insurance Gambling
Risk already exist Risk not existent. It is created.
No total loss. Entire group provides
for themselves.
One gains at the cost of others.
It is based on mathematical
prediction.
It is highly speculative.

Basic Life Insurance Policy
Term Insurance
Provides a death benefit if the insured dies during a
specified period
1 2 3 30
No of years the policy is in force
D
e
a
t
h

b
e
n
e
f
i
t

50,000
100,000
150,000
Term Insurance
In case of death during the policy
term, the SA = 100,000 is paid
1 2 3 30
No of years the policy is in force
Whole Life Policy
Whole life insurance provides insurance coverage
throughout the insureds lifetime.
Insureds Age
30 40 50 60 100 or death 70
Policy purchased at age 30
50,000
100,000
150,000
D
e
a
t
h

B
e
n
e
f
i
t

Regular - Premium Policies Limited Payment Policies
Premiums are payable
until the insureds death
Premiums are payable
until some stated period
expires
Date of
policy
purchase
Insureds
death
Date of
policy
purchase
End of
specified
period
Types of Whole Life Policies
Endowment Policies
Endowment policies provide insurance coverage for a specified
period.

On surviving the specified period, policyholder gets the sum assured
+ bonuses.

On death during the specified term, policyholder gets the sum
assured + bonuses.
Endowment Policies
Policy purchased at age 30
30 35 40 45 50 55
SA
SA +
Bonuses
50,000
100,000
150,000
D
e
a
t
h

B
e
n
e
f
i
t

Insureds Age
Endowment Policies
Policy purchased at age 30
30 35 40 45 50 55
SA +
Bonuses
50,000
100,000
150,000
D
e
a
t
h

B
e
n
e
f
i
t

Insureds Age
On death at
age 45
Annuities
An annuity is a series of periodic payments. In annuity contract, a
person agrees to pay to the insurer a specified capital sum in
return for a series of payments.
Annuity benefit payment
Periodic Payments made
Factors Affecting Annuity Benefits
The amount of money invested
The interest rate earned on investment
The number & timing of annuity payments
The time over which money grows at interest
How Immediate Annuity Works
Age 30
Age 31
You made
lump sum
payment
Your annuity
payments start
from age 31
How Deferred Annuity works
Age 30 Age 60
Age 85
Deferment Period Annuity Period
You pay premium
while you work
Insurer pays you
annuity/pensions
during your
retirement
Retirement Age 60