Life insurance is a contract under which the insurer (Insurance Company) in consideration of a premium paid undertakes to pay a fixed sum of money on the death of the insured or on the expiry of a specified period of time whichever is earlier.
In case of life insurance, the payment for life insurance policy is certain. The event insured against is sure to happen only the time of its happening is not known. So life insurance is known as ‘Life Assurance’. The subject matter of insurance is life of human being. Life insurance provides risk coverage to the life of a person. On death of the person insurance offers protection against loss of income and compensate the titleholders of the policy.
Basic Principles of Life Insurance contract.
The insured must have insurable interest in the life assured. In absence of insurable interest, Contract of insurance is void. Insurable interest must be present at the time of entering into contract with insurance company for life insurance. It is not necessary that the assured should have insurable interest at the time of maturity also. Insurable interest exists in the following cases:
a.person has an unlimited insurable interest in his/her own life.
b.A person has an insurable interest in the life of his/her spouse.
c.A father has an insurable interest in the life of his son or daughter on whom he is dependent. Likewise d.a son may have insurable interest in life of his parents.
e.A creditor has an insurable interest in the life of the debtor, to the extent of the debt.
f.A servant employed for a specified period has insurable interest in the life of his employer.
2.Utmost good faith
The contract of life insurance is a contract of utmost good faith. The insured should be open and truthful and should not conceal any material fact in giving information to the insurance company, while entering into a contract with insurance company. Misrepresentation or concealment of any fact will entitle the insurer to repudiate the contract if he wishes to do so.
3.Not a contract of indemnity
A Contract of life insurance is not a contract of indemnity. The loss of life cannot be compensated and only a fixed sum of money is paid in the event of death of the insured. So, the life insurance contract is not a contract of indemnity. The loss resulting from the death of life assured cannot be calculated in terms of money.
Importance of life insurance.
Life Insurance is of great importance to individuals, groups, business community and general public. Some of the main benefits of life insurance are given below.
i.Protection against untimely death
Life insurance provides protection to the dependents of the life insured and the family of the assured in case of his untimely death. The dependents or family members get a fixed sum of money in case of death of the assured.
ii.Saving for old age
After retirement the earning capacity of a person reduces. Life insurance enables a person to enjoy peace of mind and a sense of security in his/her old age.
iii.Promotion of savings
Life insurance encourages people to save money compulsorily. When a life policy is taken, the assured is to pay premiums regularly to keep the policy in force and he cannot get back the premiums, only surrender value can be returned to him. In case of surrender of policy, the policyholder gets the surrendered value only after the expiry of duration of the policy.
Life Insurance Corporation encourages and mobilizes the public savings and channelises the same in various investments for the economic development of the country. Life insurance is an important tool for the mobilization and investment of small savings.
Life insurance policy can be used as a security to raise loans. It improves the credit worthiness of business.
Life insurance is important for the society as a whole also. Life insurance enables a person to provide for education and marriage of children and for construction of house. It helps a person to make financial base for future.
Under the Income Tax Act, premium paid is allowed as a deduction from the total income under section 80C.