Fundamental Principles of Life Insurance

Life insurance, while a contract, is built upon a foundation of fundamental principles that ensure fairness and stability within the industry. Here are the key principles:

1. Principle of Insurable Interest:

Meaning: The policyholder must have a genuine financial interest in the life of the insured person. This prevents wagering or gambling on someone's life. Purpose: To ensure that the policyholder would suffer a financial loss upon the death of the insured. To prevent moral hazard (the temptation to intentionally cause harm). Examples: A spouse has an insurable interest in their partner. A parent has an insurable interest in their child. A business partner has an insurable interest in their fellow partner.

2. Principle of Utmost Good Faith (Uberrimae Fidei):

Meaning: Both the insurer and the policyholder must disclose all relevant information truthfully and completely. There should be no concealment or misrepresentation of material facts. Purpose: To ensure that the insurer can accurately assess the risk and determine the appropriate premium. To maintain trust and transparency in the insurance relationship. Examples: The policyholder must disclose their medical history accurately. The insurer must clearly explain the terms and conditions of the policy.

3. Principle of Indemnity (with exceptions):

Meaning: In general insurance, the insured is restored to their pre-loss financial position. However, life insurance is an exception. Exception in Life Insurance: Human life has no measurable monetary value. Therefore, life insurance is a "valued policy," where a predetermined sum assured is paid upon the insured's death. Purpose: To provide financial security to the beneficiaries, rather than attempting to replace the deceased's life.

4. Principle of Contribution (Related to multiple policies):

Meaning: If a person has multiple life insurance policies covering the same risk, all insurers contribute proportionally to the claim. This prevents the beneficiary from profiting from multiple policies. Purpose: To ensure fairness among insurers and prevent over-indemnification. Applicability: This is more relevant to general insurance, but can apply in cases of multiple life insurance policies with overlapping beneficiaries.

5. Principle of Subrogation (Generally not applicable):

Meaning: The insurer steps into the shoes of the insured to recover losses from a responsible third party. This is generally not applicable to life insurance, as there is no third party to pursue. Purpose: To prevent the insured from recovering twice for the same loss.

6. Principle of Causa Proxima (Proximate Cause):

Meaning: The loss must be directly and proximately caused by the insured peril. The insurer is liable only for losses directly resulting from the covered event. Purpose: To determine whether a loss is covered under the policy. These principles form the ethical and legal framework for life insurance, ensuring that the system operates fairly and effectively for all parties involved.