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Life Insurance: Meaning, Elements, and Types of Life Insurance Policies

Last Updated : 06 Apr, 2023
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What is Life Insurance?

Life Insurance is a contract in which the insurer in consideration of a certain premium, either in lump sum or by other periodical payments, agrees to pay the assured, or to the person for whose benefit the policy is taken, the assured sum of money, on the happening of a specified event contingent on the human life or at the expiry of a certain period.  

An insurance company (called the insurer) agrees to insure the life of a person (called the insured) in exchange for an amount of money called the premium, which can be paid in one lump sum, monthly, quarterly, semi-annually, or yearly. Life insurance is a type of investment since a certain sum is returned to the insured at the time of death or at the end of a certain period.

The life insurance application must accurately disclose the insured’s past and current health conditions, as well as high-risk activities, in order to enforce the contract. Life insurance policies are legal contracts, and the terms of each contract specify the limitations of the insured events. Contractual exclusions frequently limit the insurer’s liability; common examples include claims involving suicide, fraud, war, riot, or civil commotion.

Main Elements of Life Insurance Contract

The main elements of a Life Insurance Contract are as follows:

1. A life insurance contract must have all the essentials of a valid contract: The life insurance contract must have all the essentials of a valid contract. Certain elements like offer and acceptance, free consent, capacity to enter into a contract, lawful consideration and lawful object must be present for the contract to be valid.

2. A life insurance contract is a contract made in the utmost good faith: Life insurance contracts require that both parties should maintain the highest level of good faith. While giving the information to the insurance provider, the insured must be truthful and accurate. The parties, proposer (insured), and the insurer must have been of the same mind at the time of the contract, according to the standard of utmost good faith, as only then the risk can be accurately assessed. He must provide the insurer with all relevant information regarding his health. They must provide accurate and complete disclosure of all information relevant to the risk. Even if the insurer does not inquire, it is his responsibility to accurately report all material information that is in his knowledge.

3. There must be Insurable Interest of the insured at the time of making the contract: In order to be considered for life insurance, the insured must have an interest in the life being assured. A financial interest is an interest that is insurable. The insurance contract is null and invalid if there is no insurable interest. A legal contract of insurance requires that the insured have an insurable interest in the life. Insurable interest must exist at the time the insurance is effected in the case of life insurance. It’s not necessary for the assured to also have an insurable interest at maturity. 

4. Life Insurance is not a contract of Indemnity: Only a specified amount of money is paid as human life cannot be compensated. Because of this, the amount payable under a life insurance policy upon the occurrence of the event is fixed. Therefore, a contract for life insurance replaces a contract for indemnity.

What is Policy?

A policy is a written contract between the insurer and the insured along with the terms and conditions of insurance. It is a contract (usually a standard form contract) between the insurer and the policyholder that specifies the claims that the insurer is legally obligated to pay. The insurer promises to pay for loss caused by potential dangers covered by the policy language in exchange for an initial payment known as the premium.

Insurance contracts are designed to meet specific needs, so they contain many features that are not found in many other types of contracts. Because insurance policies are standard forms, they contain boilerplate language that is common to a wide range of different types of insurance policies.

Types of Life Insurance Policies

Types of Life Insurance Policies are as follows:

1. Term Plan

A term plan’s death benefit is only accessible for a certain time, such as 40 years from the date the insurance was purchased. Term insurance is the least expensive type of life insurance policy. The most distinguishing aspect of a term insurance policy is the high amount of coverage provided at exceptionally low premium rates. As a result, it is less expensive than other forms of life insurance coverage.

Term life insurance, in general, does not provide maturity benefits. However, certain types of term plans, such as term plans with return of premiums (TROP) if the policyholder outlives the policy period, also provide maturity benefits. A term plan’s coverage can also be increased by adding extra riders, such as Accidental Death Benefits or Child Support riders.

2. Endowment Life Assurance Policy : 

Endowment plans are a type of life insurance policy that combines insurance coverage with a savings plan. It allows you to save regularly over a set period of time in order to receive a lump sum payment at policy maturity if the policyholder survives the policy term.

The policyholder receives his or her sum assured on a future date specified in the policy terms and conditions. However, in the event of the policyholder’s early demise, the insurance company will pay the sum assured (plus the bonus) to the policy’s nominee. Furthermore, it can be used to secure yourself or your family’s post-retirement or to meet various financial needs such as funding for children’s education, marriage, or buying a home.

3. Joint Life Policy:

A Joint Life Policy is taken up by two or more persons. The premium is paid jointly or by either of them in instalments or lump sum. The assured sum is payable upon the death of any one person to the other survivor or survivors. Such type of policy is usually taken by husband and wife or partners in a firm. 

4. Annuity Policy: 

An annuity is a long-term investment agreement between an insurance company and an individual in which the individual makes series or lump sum payments in exchange for periodic disbursements or income, either immediately or later.

In the event of your death, the annuity benefits are automatically transferred to the nominee you initially assigned. Withdrawals from an annuity, on the other hand, are only permitted under certain conditions. The minimum age for an individual to begin an annuity is typically 30 years, with some having a maximum age of 85 years and others not having a maximum age limit.

5. Children’s Endowment Policy:

This policy is taken to provide funds for the education or marriage of children. The premium is paid by the person entering into the insurance contract. No premium is paid if the person entering into the contract dies before the maturity of the policy. The agreement states that a certain sum will be paid by the insurer when the children attain a particular age.

6. Whole Life Policy:

In such types of policies, the amount payable to the insured will not be paid before the death of the assured. But the sum is payable only to the beneficiaries or the heir of the deceased. The premium is payable for the whole life or for a fixed period. The policy will continue till the death of the assured if the premium is payable for a fixed period. 

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