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

Essentia

ls of a

valid Contra

ct

Two or More

Parties

Two or More

Parties

Lawful Objectiv

e

Lawful Objectiv

e

Offer & Acceptance

Offer & Acceptance

Free Consent

Free Consent

Lawful Consider

ation

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 termOn 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 FaithBreach of Utmost Good Faith

MisrepresentationMisrepresentation Non-DisclosureNon-Disclosure

Section 45 of the Insurance Act,1938

PolicyStart 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

30Indian

Contract 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

Risk Management

Avoidance

Retention

TransferRisk 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

Spread o

ver 4

00

Spread over 400

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

How to Manage Risk

• Avoiding Risk

• Controlling Risk

• Accepting Risk

• Transferring Risk

Dependents’Support

Why we need life insurance

Education Costs

EstatePlanning

RetirementIncome

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

Death

b

en

efi

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 insured’s lifetime.

Insured’s Age

30 40 50 60 100 or death70

Policy purchased at age 30

50,000

100,000

150,000

Death

B

enefit

Regular - Premium Policies Limited Payment PoliciesLimited Payment Policies

Premiums are payable until the insured’s death

Premiums are payable until some stated period

expires

Date of policy

purchase

Insured’s 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

Death

B

en

efi

t

Insured’s Age

Endowment Policies

Policy purchased at age 30

30 35 40 45 50 55

SA + Bonuses

50,000

100,000

150,000

Death

B

en

efi

t

Insured’s 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 30Age 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