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A presentation on

Nature of Life Insurance Contract

Nature of Life Insurance Contract
Life 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
Features of Life Insurance Contract
Nature of General Contract
Insurable Interest
Utmost Good Faith
Proximate Cause
Assignment and Nomination
Return of Premium
Other Features
1. Nature of General Contract
Offer and Acceptance
Deals begin when one person makes a proposal to
another person. The proposal to make an exchange is
called the offer.
If the second person agrees to the exchange, this is called
1. Nature of General Contract
Competency of the Parties
Persons of Sound Mind
Other Disqualification
Free Consent of the Parties
Both parties must be of the same mind at the time of
Free from coercion, undue influence, fraud,
misrepresentation, or mistake
1. Nature of General Contract
Legal Consideration
The presence of a lawful consideration is essential
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 Interest
Own life
Others life;
Where proof is not required
Proof is required
Business relationship
Family relationship
2. Insurable Interest Classification
Own Life

Proof not Proof

Required Required


2. Insurable Interest
Insurable Interest in Owns Life
The person will continue to gain financially while
Will suffer loss if he is dead because he will be unable to
earn or to protect the property.
Unlimited insurable interest
Loss cannot be measured in terms of money
So no limit can be placed
2. Insurable Interest
Insurable Interest in Others Life;
Proof not Required
Wife has insurable interest in the life of her husband
Husband has insurable interest in the life of wife
Proof required
Business relationship
A creditor has in the life or his debtor
A trustee has insurable interest in respect of the interest of which he is
A surety has insurable interest in the life of his principal
A partner has insurable interest in life of each partner
An employer has in the life of a key-person
An insurer has in the life assured.
2. Insurable Interest

Family 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 proposal
But not essential at the time of claim
Only to spouse, not to relatives
Must 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 determined
Should be Valid;
The Legal Responsibility May be Basis;
Must be Definite;
Legal Consequence;
3. Utmost Good Faith
Material facts
Age, income, occupation, health, habits, residence, family history, and plan
of insurance
Duty of Both Parties
Full and True Disclosure
No concealment, misrepresentation, half disclosure, fraud
Extent of the Duty
A full disclosure and correctly fulfilled
Legal Consequence
Non-disclosure leads to a voidable contract
Contest provision
3. Utmost Good Faith
Facts not Required to be Disclosed;
Circumstances which are diminishing the risk
Facts which are known to the insurer
Facts which the insurer should infer from the information
Facts which are waived by the insurer
Facts which are superfluous to disclose by reason of a
condition or warranty
Facts of public knowledge
3. Warranties
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 contract
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 intentions
Breach of Warranties
5. Proximate Cause
The efficient or effective cause which causes the
loss (peril)
If the peril is insured, the insurer will pay
In life insurance the doctrine of Causa Proxima is
not applicable.
Accident benefit
6. Assignment and Nomination
Freely endorsed in the policy or by a separate deed
Notice must be given to the insurer
Once the assignment is completed, it cannot be revoked
Nomination can be assigned at any time by the holder of
the insurance
Can be cancelled before maturity but notice must be
given to the insurer
7. Return of Premium
Generally cannot be refunded unless;
The insurer is incapable to run the risk
A void contract on account of misrepresentation or breach
of warranties
The insured can claim the return of premiums paid
8. Other Features
Aleatory Contract;
Unilateral Contract;
Conditional Contract;
Contract of Adhesion;
Not a Contract of Indemnity;