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“Law Master’s” Publication “Life Insurance Contracts”
Prof. S.D. Bhosale
(..6..)
Life Insurance Contracts.
QUESTION BANK
Q.1. What is the amount recoverable under the Life Policy? Explain the Persons entitled to
the payment.
Q.2. What is the amount recoverable under the life insurance policy?
Q.3. What is Risk? Explain circumstances affecting Risk in Life Insurance Contract.
Q.4.. Explain the following concepts:
a) Circumstances affecting the risk in insurance contracts.
b) Settlement of claim and payment of money.
Q.5.. Explain the nature and scope of the life insurance contract with special reference to
persons entitled to payment.
Q.6. What are the salient features of the Life Insurance Act, of 1956?
Short Notes
1. Nominee.
2. Risk.
3. Circumstances affecting risk.
4. Settlement of claim and payment of money.
5. Premium.
6. IRDA
Table of Contents
I. Introduction:-.................................................................. Error! Bookmark not defined.
II. Essential elements of a life insurance contract are:...... Error! Bookmark not defined.
1. An agreement:............................................................................................................68
2. Competency of parties: ..............................................................................................68
3. Free consent: ............................................................................................................. .
4. Consideration:............................................................................................................69
5. Lawful object: ............................................................................................................69
6. Principle of utmost good faith: ..................................................................................69
7. Principle of insurable interest: ...................................................................................69
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“Law Master’s” Publication “Life Insurance Contracts”
Prof. S.D. Bhosale
1. Age:...........................................................................................................................69
2. Gender:.......................................................................................................................70
3. Health:........................................................................................................................70
4. Lifestyle: ....................................................................................................................70
5. Occupation:................................................................................................................70
6. Family History:..........................................................................................................70
7. Driving Record: .........................................................................................................70
8. Geographic Location: ................................................................................................70
IV. Some of the rights under a life insurance contract are:-..............................................70
1. Right of assignment: ..................................................................................................71
2. Right of nomination:..................................................................................................71
3. Right of surrender:.....................................................................................................71
4. Right of loan: .............................................................................................................71
payment of a life insurance policy:- ..................................................................................71
a. The amount recoverable under a life insurance policy:-............................................71
i. The Amount Insured:-.............................................................................................71
ii. Bonus:-...................................................................................................................71
iii. Share of the profit:-...............................................................................................71
iv. Surrender value:-...................................................................................................71
b. The persons entitled to the payment of a life insurance policy:-...............................72
i. The policyholder: ....................................................................................................72
ii. The nominee: .........................................................................................................72
iii. The assignee:.........................................................................................................72
VI. Settlement of Claim and payment of money:- ............................................................73
Composition of IRDIA:-................................................................................................74
Functions of IRDAI:-.....................................................................................................74
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“Law Master’s” Publication “Life Insurance Contracts”
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3. Product Approval: ..................................................................................................74
4. Market Development:.............................................................................................74
5. Financial Soundness of Insurers: ...........................................................................75
6. Policyholder Education:.........................................................................................75
7. Dispute Resolution:................................................................................................75
8. Insurance Intermediary Oversight:.........................................................................75
9. Research and Data Collection:...............................................................................75
10. Policy Formulation:..............................................................................................75
11. International Cooperation: ...................................................................................75
12. Promoting Microinsurance and Rural Insurance: ................................................76
I. Introduction:-
A life insurance contract is a legally binding agreement between an insurer
(Insurance Company) and a policyholder (insured) in which the insurer promises to pay a
certain sum of money to the policyholder's beneficiaries upon the occurrence of a specified
event, such as death or the maturity of the policy. The policyholder pays the insurer a
regular or single premium in exchange for this protection.
The main function of life insurance is to provide financial security to the
policyholder's dependents in case of his or her premature death. Life insurance also serves
as a long-term savings and investment tool, offering various benefits such as tax
deductions, bonuses, and maturity value. Life insurance can also be used for specific
purposes, such as education, marriage, retirement, or estate planning.
II. Essential elements of a life insurance contract are:
A life insurance contract has some essential elements that make it valid and
enforceable. These are:
1. An agreement:
The parties must mutually consent to enter into the contract. The agreement is
usually expressed through an offer and an acceptance. The insured makes the offer when
they fill out an application form and pay the first premium. The insurer accepts.
2. Competency of parties:
The parties to the contract must be legally capable of entering into a contract. This means
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“Law Master’s” Publication “Life Insurance Contracts”
Prof. S.D. Bhosale
4. Consideration:
There must be a lawful exchange of value between the parties. The consideration
5. Lawful object:
The object of the contract must be legal, moral, and not opposed to public policy.
6. Principle of utmost good faith:
The parties to the contract must disclose all material facts relevant to the risk and
the terms of the contract. A material fact is one that would influence a prudent insurer's
decision to accept or reject the risk. aggrieved party may void the contract.
7. Principle of insurable interest:
The insured must have a legitimate interest in the preservation of the life of the
person whose life is insured. Insurable interest means that the insured would suffer a
contract without ‘insurable interest’ under S. 30 of the Indian Contract Act, 1872. [Refer
to earlier topic also].
These are the essential elements of a life insurance contract. The contract may be
invalid, void, or unenforceable if any of these elements are missing or violated. Therefore,
it is important for both the insurer and the insured to understand and comply with these
elements when entering into a life insurance contract.
III. Risk factors in Life Insurance Contracts;-
In the context of insurance, ‘risk’ refers to the uncertainty of whether or not an
insured event will occur and the potential financial loss that could result from such an
event. In life insurance, the insured event is the death of the insured. The risk that the
insurer faces is that the insured will die before the premiums paid covering the death
benefit.
Circumstances Affecting Risk in Life Insurance Contract:-
Several factors can influence the risk associated with a life insurance contract. These
factors determine the likelihood of the insured's death and, consequently, the premium that
the insured must pay.
1. Age:
The risk of death increases with age. As individuals age increases, they are more
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Prof. S.D. Bhosale
likely to develop health conditions that could lead to death. Insurance companies typically
charge higher premiums for older individuals to reflect this increased risk.
2. Gender:
Historically, men have had shorter life expectancies than women. This difference in
life expectancy is reflected in insurance premiums, with men generally paying higher
premiums than women for similar coverage.
3. Health:
An individual's health status significantly impacts the risk of death. Individuals with
pre-existing health conditions, such as heart disease, cancer, or diabetes, are considered
higher risk and will face higher premiums.
4. Lifestyle:
Certain lifestyle choices can increase the risk of death. For instance, smoking,
excessive alcohol consumption, and risky hobbies like skydiving or rock climbing can lead
to higher premiums.
5. Occupation:
Some occupations carry a higher risk of death due to hazards or exposure to
dangerous environments. Individuals working in these occupations may face higher
premiums or even be denied coverage altogether.
6. Family History:
An individual's family medical history can also influence their risk profile. If there
is a family history of certain diseases, such as heart disease or cancer, the insurer may
consider the insured to be at higher risk and adjust the premium accordingly.
7. Driving Record:
Reckless driving or a history of traffic accidents can indicate a higher risk of death
from accidents. Insurers may consider an individual's driving record when determining
premiums.
8. Geographic Location:
In some cases, an individual's geographic location can influence their risk profile.
For instance, individuals living in areas with high crime rates or natural disaster zones may
face higher premiums.
By carefully considering these factors, insurance companies can manage their risk
exposure and provide affordable coverage to policyholders. Policyholders can also take
steps to reduce their risk profile, such as adopting healthy habits, maintaining a safe
lifestyle, and seeking preventive healthcare, potentially leading to lower premiums and
better overall health.
IV. Some of the rights under a life insurance contract are:-
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Prof. S.D. Bhosale
1. Right of assignment:
The policyholder can transfer the rights and benefits of the policy to another person,
subject to certain conditions.
2. Right of nomination:
The policyholder can nominate one or more persons to receive the policy proceeds
in the event of his or her death.
3. Right of surrender:
The policyholder can terminate the policy before its maturity and receive a certain
amount of money, known as the surrender value.
4. Right of loan:
The policyholder can borrow money from the insurer by pledging the policy as
collateral, subject to certain terms and conditions.
v. The amount recoverable under a life insurance policy and the persons entitled to
the payment of a life insurance policy:-
a. The amount recoverable under a life insurance policy:-
i. The Amount Insured:-
The amount recoverable under a life insurance policy is the amount that the insurer
agrees to pay to the policyholder or the beneficiary upon the occurrence of a specified
event, such as death or the policy's maturity. This amount is commonly known as the "death
benefit" or "face amount" of the policy. The recoverable amount depends on the policy's
type and terms, the premium paid, the bonuses accrued, and the surrender value, if any.
The amount insured is recoverable upon the occurrence of the insured event or after
the completion of the policy period.
ii. Bonus:-
The bonus declared by the company is recoverable with the policy amount.
iii. Share of the profit:-
In cases of participation policy, a share in profit may be recovered in addition to the
policy amount.
iv. Surrender value:-
In the event of a policy lapse due to non-payment of premium or in a case where the
Insured surrenders the policy, the insurance company may pay a percentage of the premium
paid as per the company's rules.
The amount of surrender value depends upon the longevity of the policy premium
paid.
S. 113 of the Insurance Act 1938 deals with the amount recoverable on life
insurance.
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b. The persons entitled to the payment of a life insurance policy:-
The persons entitled to the payment of a life insurance policy are the persons who
have a legal right to receive the policy proceeds from the insurer. These persons may vary
depending on the situation and the policy's provisions. Generally, the following persons
may be entitled to the payment of a life insurance policy:
i. The policyholder:
The policyholder is the person who owns the policy and pays the premium. He or
she may be entitled to the payment of the policy if the policy provides for living benefits,
such as critical illness, disability, or old age. The policyholder may also be entitled to the
payment of the policy if he or she survives the term of the policy and receives the maturity
value.
ii. The nominee:
The nominee is the person who is nominated by the policyholder to receive the
policy proceeds in the event of his or her death. The nomination is governed by Section 39
policy or at any time before the policy matures for payment. The nomination can be
changed or cancelled by the policyholder at any time. The nomination can be incorporated
in the text of the policy itself or by a separate instrument. The nomination should be signed
by the policyholder or his or her agent and attested by at least one witness. The nomination
should specifically mention the name and address of the nominee and the share of the
policy proceeds that he or she is entitled to. The nomination does not confer any ownership
rights to the nominee but only a right to receive the policy proceeds. The nominee is subject
iii. The assignee:
The assignee is the person who acquires the rights and benefits of the policy from
the policyholder by a valid assignment or transfer.Section 38 of the Insurance Act, 1938,
12 governs the assignment or transfer. The assignment or transfer can be made for valuable
consideration or as a gift. The assignment or transfer can be made by an endorsement of
the policy itself or by a separate instrument. The assignment or transfer should be signed
by the policyholder or his or her agent and attested by at least one witness. It should
specifically set forth the fact of assignment or transfer. The assignment or transfer should
be communicated to the insurer in writing and registered by the insurer in its books. The
assignment or transfer confers the ownership rights to the assignee, subject to the terms
and conditions of the policy. The assignee is entitled to the payment of the policy proceeds
unless the assignment or transfer is conditional or partial.
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The legal representative: The legal representative is the person who is authorised
by law to represent the estate of the deceased policyholder. The legal representative may
be entitled to the payment of the policy proceeds if there is no valid nomination,
assignment, or transfer of the policy or if the nominee or the assignee dies before the
policyholder. The legal representative may be the executor or administrator of the will of
the deceased policyholder or the heir or legatee of the deceased policyholder, as per the
applicable law of succession. The legal representative should obtain a succession
certificate, probate, or letter of administration from the competent court to establish his or
her right to receive the policy proceeds. The legal representative is subject to the claims of
the deceased policyholder's other legal heirs and creditors.
VI. Settlement of Claim and payment of money:-
VII. The Insurance Regulatory and Development Authority of India (IRDAI):-
After 1991, liberalisation in the insurance field started. With liberalisation, many
private players started businesses in the life insurance field, which brought unhealthy
competition in the field. Therefore, the Malhotra Committee was formed to suggest
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regulatory measures for insurance companies. The Committee suggested the establishment
of the Insurance Regulatory and Development Authority (IRDA). Life insurance in India
is regulated by the Insurance Regulatory and Development Authority of India (IRDAI),
which is a statutory body established under the IRDAI Act of 1999. The IRDAI is
responsible for issuing licenses, framing rules and regulations, monitoring and supervising
the insurance sector, and protecting the interests of policyholders. The Life Insurance
Corporation of India (LIC) is India's largest and oldest life insurance company, established
under the LIC Act of 1956. LIC is a public sector undertaking which operates under the
administrative control of the Ministry of Finance. Apart from LIC, many other private life
insurance companies in India offer various products and services to cater to the diverse
needs of customers.
Composition of IRDIA:-
As per S. 4 of the IRDAI Act, the IRDAI is a ten-member body consisting of a
chairman, five full-time members and four part-time members appointed by the
Government of India.
Functions of IRDAI:-
S. 14 lays down the functions of IRDAI as follows-
1. Regulation and Supervision:
Licensing: IRDAI is responsible for issuing licenses to insurance companies,
intermediaries, and other entities operating in the insurance sector.
Supervision: It monitors the functioning of insurers and ensures compliance with
regulations to protect the interests of policyholders.
2. Policyholder Protection:
Safeguarding Interests: IRDAI protects policyholders' interests by regulating and
overseeing insurance products and services offered by insurance companies.
Ensuring Fair Practices: It ensures that insurance companies adhere to fair and
transparent business practices.
3. Product Approval:
Product Evaluation: IRDAI examines and approves insurance products to ensure
they meet regulatory standards and provide value to policyholders.
Preventing Unfair Practices: It prevents the introduction of products that might
be detrimental to policyholders or the stability of the insurance market.
4. Market Development:
Promoting Growth: IRDAI plays a role in the development and growth of India's
insurance market.
Encouraging Innovation: It encourages innovation in insurance products and
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services to meet the evolving needs of consumers.
5. Financial Soundness of Insurers:
Financial Oversight: IRDAI monitors insurance companies' financial health and
solvency to ensure their ability to fulfil their obligations to policyholders.
Risk Management: It establishes guidelines for risk management and investment
policies to maintain insurers' financial stability.
6. Policyholder Education:
Promoting Awareness: IRDAI enhances public awareness about insurance
products and educates policyholders on their rights and responsibilities.
Financial Literacy: It contributes to improving consumers' financial literacy
regarding insurance matters.
7. Dispute Resolution:
Handling Grievances: IRDAI provides a platform for policyholders to address
grievances and complaints against insurance companies.
Ensuring Fair Resolution: It ensures that policyholders and insurers resolve
disputes fairly and efficiently.
8. Insurance Intermediary Oversight:
Licensing and Regulation: IRDAI regulates insurance intermediaries such as
agents, brokers, and third-party administrators.
Setting Standards: It sets standards for the conduct and professionalism of
insurance intermediaries.
9. Research and Data Collection:
Industry Analysis: IRDAI conducts research and collects data on the insurance
industry to analyse trends and make informed policy decisions.
Market Reports: It publishes reports and statistics that provide insights into the
performance and dynamics of the insurance sector.
10. Policy Formulation:
Setting Regulations: IRDAI formulates and revises regulations to ensure the
orderly growth and development of the insurance industry.
Adapting to Changes: It adapts regulations to economic and regulatory
environment changes.
11. International Cooperation:
Collaboration: IRDAI collaborates with international insurance regulatory bodies
to exchange information and best practices.
Adopting Global Standards: It works towards aligning Indian insurance
regulations with international standards.
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12. Promoting Microinsurance and Rural Insurance:
Inclusive Growth: IRDAI promotes the development of microinsurance and
insurance services in rural areas to achieve financial inclusion.
Sustainable Development: It supports initiatives that enhance insurance
penetration in underserved and rural communities.
References:-