Part Two: Life Insurance

Part Two: Life InsuranceNature of Life InsuranceClassification of PoliciesAnnuitiesSelection of RiskMeasurement of Risk & Mortality TableCalculation of PremiumTreatment of Substandard RisksInvestment of FundsSurrender ValueValuation and SurplusPolicy Condition

12/7/2015Slide by: Abdullah Al Yousuf KhanFIN - 404, Management of Insurance BusinessNature of Life Insurance Contract

Slide prepared by: Abdullah Al Yousuf KhanAssistant Professor - IUBAT5

ChapterMcGraw-Hill/IrwinCopyright 2006 by The McGraw-Hill Companies, Inc. All rights reserved.Nature of Life Insurance ContractLife insurance 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.

Features of Life Insurance ContractNature of General ContractInsurable InterestUtmost Good FaithWarrantiesProximate CauseAssignment and NominationReturn of PremiumOther FeaturesNature of General ContractA valid contract must have the following essentials;Agreement (Offer and Acceptance)Competency of the PartiesFree Consent of the PartiesLegal ConsiderationLegal ObjectiveNature of General ContractOffer and Acceptance; Deals begin when one person makes a proposal to exchange something of value with another person. The proposal to make an exchange is called the offer.If the second person agrees to the exchange, this is called acceptance.

Nature of General ContractCompetency of the Parties;MajorityPersons of Sound MindOther Disqualification Free Consent of the Parties;Both parties must be of the same mind at the time of consent. If they do not meet in this respect, there is no perfect agreement. Free from coercion, undue influence, fraud, misrepresentation, or mistakeNature of General ContractLegal Consideration;The presence of a lawful consideration is essential for a legal contract. The insurer must have some consideration (premium) in return of his promise to pay a fixed sum (sum insured) at maturity or death.Legal Objective;The objective will be legal only when there is insurable interest and when the object is legal.

2.Insurable InterestPecuniary interest arises out of the pecuniary relationship that exists between the policy-holder and the life assured. Categories;Own lifeOthers life;Where proof is not requiredProof is requiredBusiness relationshipFamily relationship

Insurable Interest Classification2.Insurable InterestInsurable Interest in Owns Life The person will continue to gain financially while surviving.Will suffer loss if he is dead because he will be unable to earn or to protect the property. Unlimited insurable interestLoss cannot be measured in terms of moneySo no limit can be placed 2.Insurable InterestInsurable Interest in Others Life;Proof not RequiredWife has insurable interest in the life of her husbandHusband has insurable interest in the life of wifeProof requiredBusiness relationshipA creditor has in the life or his debtorA trustee has insurable interest in respect of the interest of which he is trusteeA surety has insurable interest in the life of his principalA partner has insurable interest in life of each partnerAn employer has in the life of a key-personAn insurer has in the life assured.

2.Insurable InterestFamily Relationship; The insurable interest may arise due to family relationship if pecuniary interest exists between the policy-holders and life assured.Mere relationship or ties of blood and of affection does not constitute insurable interest.The proposer must have a reasonable expectation of financial benefit from the continuance of the life of the person to be insured or financial loss from the his death.

General Rule of Insurable Interest in Life Insurance Time of Insurable Interest; Must exist at the time of proposalBut not essential at the time of claimServices;Only to spouse, not to relativesMust have a financial relationship between the proposer and the assured.

General Rule of Insurable Interest in Life Insurance Must be Valuable;The value must be determinedShould be Valid;The Legal Responsibility May be Basis;Must be Definite;Legal Consequence;3.Utmost Good FaithMaterial facts;Age, income, occupation, health, habits, residence, family history, and plan of insuranceDuty of Both Parties; Full and True Disclosure;No concealment, misrepresentation, half disclosure, fraudExtent of the Duty;A full disclosure and correctly fulfilled Legal Consequence;Non-disclosure leads to a voidable contractIndisputability;Contest provision3.Utmost Good FaithFacts not Required to be Disclosed;Circumstances which are diminishing the riskFacts which are known to the insurerFacts which the insurer should infer from the information givenFacts which are waived by the insurerFacts which are superfluous to disclose by reason of a condition or warrantyFacts of public knowledge3.Warranties Representation; Information given by a proposer for insurance to the insurer during the negotiations is a representation.False or untrue representation may lead to a voidable contractWarranties; Informative warranties the proposer is expected to disclose all the material facts to the best of knowledge and belief.Promissory warranties relating to the future may be statements about his expectations or intentionsBreach of Warranties;

5.Proximate CauseThe efficient or effective cause which causes the loss (peril)If the peril is insured, the insurer will payIn life insurance the doctrine of Causa Proxima is not applicable. War-riskSuicideAccident benefit6.Assignment and NominationAssignment;Freely endorsed in the policy or by a separate deedNotice must be given to the insurer Once the assignment is completed, it cannot be revokedNomination; Nomination can be assigned at any time by the holder of the insuranceCan be cancelled before maturity but notice must be given to the insurer7.Return of PremiumGenerally cannot be refunded unless;The insurer is incapable to run the risk A void contract on account of misrepresentation or breach of warrantiesThe insured can claim the return of premiums paid8.Other Features Aleatory Contract;Unilateral Contract;Conditional Contract;Contract of Adhesion;Not a Contract of Indemnity;