Key Principles of Insurance
Principles
of
insurance
1) Insurable
interest
•
Insurable
interest
means
that
the
person
opting
for
insurance
must
have
pecuniary
interest
in
the
property
he
is
going
to
get
insured
and
will
suffer
financial
loss
on
the
occurrence
of
the
insured
event.
•
This
is
one
of
the
essential
requirements
of
any
insurance
contract.
•
Therefore
,
a
person
can
go
for
insurance
of
only
those
properties
where
he
stands
to
benefit
by
the
safety
of
the
property,
and
will
suffer
loss,
damage,
injury
if
any
harm
takes
place
to
such
property.
E
x
ample
•
If
the
house
you
own
is
damaged
by
fire,
the
value
of
your
house
has
been
reduced
by
the
damages
sustained
in
the
fire.
•
Whether
you
pay
to
have
the
house
rebuilt
or
you
and
up
selling
it
at
a
reduced
price.
You
have
to
suffered
a
financial
loss
resulting
from the
fire.
•
By
contrast,
if
your
neighbor’s
house,
which
you
do
not
own,
is
damaged
by
fire,
you
may
feel
sympathy
for
your
neighbor
and
you
may
even
be
emotionally
upset,
but
you
have
not
suffered
a
financial
loss
from
the
fire,
but
in
this
example
you
do
not
have
an
insurable
interest
in
your
neighbor’s
house.
2)
At most good faith
•
Uberrima
fides
–
Almost
good
faith
•
The
insurance
contract
must
be
based
on
good
faith.
•
If
the
insurance
contract
is
obtained
by
way
of
fraud
or
misrepresentation
it
is
void.
•
When
an
individual
apply
for
life
insurance,
it
is
important
to
answer
all
questions
truthfully
and
to
volunteer
any
information
even
if
not
asked,
if
in
doubt,
just
disclose
it.
Failure
to
disclose
material
facts
could
render
the
entire
contract
void.
E
x
ample
•
If
a
person
was
suffering
from
sinusitis
but
did
not
disclose
it,
the
entire
contract
could
be
cancelled
when
the
insurer
discover
non-disclosure.
•
Cancellation
of
the
entire
contract
means
other
non-
related
illnesses
like
cancer
could
no longer
be
covered.
•
Some
financial
advisors
who
in
their
enthusiasm
in
closing
the
sale
advice
their
clients
not
to
disclose
their
pre-existing
conditions
for
fear
that
the underwriter
would
reject
the
case.
•
Therefore
it
is
important
to
engage
an
ethical financial
advisor.
To
avoid
any
conflict
of
interest,
ensure
you
pay
a
fee
for
consultation.
3)
Material
facts
disclosure
•
In
the
insurance
contract,
the
proposer
is
required
to
disclosure
to
the
insurer
all
the
material
facts
in
respect
of
the
proposed
insurance.
•
This
duty
of
disclosing
the
material
facts
not
only
applies
to
the
material
facts
which
are
known
to
him
but
also
extends
to
material
facts
which
he
is
supposed
to
know.
Examples
•
Acquisition
of
new
companies
and/or
mergers
•
Changes
to
your
business
description.
•
Additional product
lines
and/or
new
services
•
Hazardous
trade
processes,
or
storage
of
hazardous
matter,
including
changes
or
additons
to
processes
or
storage
already
declared
•
Incidents
not
reported
to
insurers
that
might
otherwise
have
led
to
a
claim
e.g
theft
or
small
fires.
4)
Indemnity
•
The
insurance
contract
should
always
be
a
contract
of
indemnity
only
and
nothing
more.
•
Insured
can’t
make
any
profit
from the
insurance
contract.
Insurance
contract
means
for
coverage
of
losses
only.
•
Indemnity
means
a
guarantee
to
put
the
insured
in
the
position
as
he
was
before
accident.
•
This
principle
does
not
apply
to
life
insurance
contracts.
•
The
main
object
of
this
principle
is
to
ensure
that
the
insured
is
not
able
to
use
this
contract
for
speculation
or
gambling.
5)
contribution
•
In
case
the
insured
took
more
than
one
insurance
policy
for
same
subject
matter,
he/she
can’t
make
profit
by
making
claim
for
same
loss
more
than
once.
•
For
example:
Raj
has
a
property
worth
Rs
5
lakhs.
He
took
insurance
from
company
A
worth
Rs.
3
lakhs
and
from
company
B
–Rs
1
lakhs.
•
In
case
of
accident,
he
incured
a
loss
of
Rs.
3
lakhs
to
the
property.
Raj
can
claim
Rs
3
lakhs
from
company
A
but
after
then
he
can’t
make
profit
by
making
a
claim
from
company
B.
•
Now
company
A
can
make
a
claim
from
company
B
to
for
proportional
loss
claim
value.
6)
Subrogation
What
is
subrogation?
Subrogation is defined as a legal right that allows
one party (e.g., your insurance company) to
make a payment that is actually owed by another
party (e.g., the other driver’s insurance
company) and then collect the money from the
party that owes the debt after the fact.
Subrogation is one of the ways that car insurance
companies recover money that was paid out in
claims to drivers insured by them.
How
subrogation
works?
Example
:
•
Suppose
another
driver
runs
a
red
light
and
your
car
is
totaled.
You
have
insurance
on
your
car,
so
you
call
your
insurance
carrier
and
they
pay
you
for
all
of
your
expenses
related
to
the
accident.
•
Your
insurance
company
realizing
that
the other
driver
had
an
insurance
policy,
then
seeks
reimbursement
from the
as
fault
party’s
insurance
carrier.
•
Your
insurer
is
“subrogated”
to
the
rights
of
your
policy
and
can
“step
in
your
shoes”
to
recover
any
amount
paid
out
on
your
behalf.
Partial
fault
and
subrogation
•
If
the
insurance
company’s
investigation
finds
that
you’re
partially
at
fault
in
the
accident,
the
amount
of
the
deductible
you
can
recover
will
be
prorated
to
the
percentage
of
your
fault.
•
Example
–
if
the
judgment
is
that
you
were
40
%
of
fault,
for
example
and
your
insurer
chooses
to
subrogate
your
claim,
you’ll
be
entitled
to
60%
refund
of
your
deductible.
Waiving
subrogation
•
If
you
sign
any
settlement
with
other
driver’s
insurance
company,
be
careful
to
read
the
fine
print.
•
Some
insurers
attempt
to
insert
a
“waiver
of
subrogation”
clause
to
prevent your
insurance
company
from
attempting
to
get
reimbursement
for
money
that
it
has
paid
out
to
you.
•
If
you waive
subrogation
after
an
accident,
your
auto
insurance
company
may
refuse
to
pay
your
claim
because
they
will
not
be
able
to
seek
reimbursement
from the other
driver’s
insurance
company.
7)
Loss
minimisation
•
This
principle
states
that
the
insured
must
take
all
the
necessary
steps
to
minimize
the
losses
to
insured
assets.
•
For
example
–
Ram
took
insurance
policy
for
his
house.
In
an
cylinder
blast,
his
house
burnt.
He
should
have
called
nearest
fire
station
so
that
the
loss
could
be
minimised.
8)
Causa
proxima
•
Word
“Causa
Proxima”
means
“Nearest
Loss”
•
An
accident
may
be
caused
by
more
than
one
cause.
•
In
case
property
insured
for
only
one
cause.
In
such
case
nearest
cause
of
the
accident
is
fount
out.
•
Insurer
pays
the
claim
money
only
if
the
nearest
cause
is
insured.
A
Unit
Linked
Insurance
Plan
(ULIP)
•
It
is
a
product
offered
by
insurance
company
that
unlike
a
pure
insurance
policy,
gives
investors
both
insurance and
investment
under
single
integrated
plan.
Reasons to have life insurance
We list 10 compelling reasons for buying a life insurance policy.
1. LOOKING AFTER YOUR LOVED ONES EVEN AFTER YOU'RE
GONE:
This is the most important aspect of life insurance that
one needs to factor in. Your family is dependent on you even
after you're gone and you certainly don't want to let them down.
Whether it's for replacing lost income, paying for your child's
education or making sure your spouse get the much-needed
financial security, life insurance could save the day for your
surviving dependents.
2. DEALING WITH DEBT:
You don't want your family to deal with
financial liabilities during a crisis. Any outstanding debt-a home
loan, auto loan, personal loan, or a loan on credit cards-will be
taken care of if you happen to buy the right life insurance policy.
3. HELPS ACHIEVE LONG-TERM GOALS:
Since it is an instrument
that keeps you invested for the long term, it would help you
achieve your long-term goals such as buying a home or planning
your retirement. It also provides you with diverse investment
options that come along with different types of policies.
4. LIFE INSURANCE SUPPLEMENTS YOUR RETIREMENT
GOALS:
Who wouldn't like their retirement savings to last until
they do? With a life insurance plan, you can ensure you have a
regular stream of income every month. Putting money in an
annuity is like a pension plan- put in some money regularly in a
life insurance product and enjoy a steady income every month
even after retirement.
5. BUYING INSURANCE IS CHEAPER WHEN YOU'RE
YOUNGER:
Not every millennial needs a life insurance policy. If
you haven't created an emergency fund or you're still living off
your parents' money, insurance shouldn't be a priority.
6. YOUR BUSINESS IS ALSO TAKEN CARE OF:
Life insurance isn't
only for yourself and your family. Some insurance policies also
take care of your business. If you own a business, then your
business partner can purchase your portion of the business
without hassle. Your business partner( s) will enter a buy-sell
agreement and the payout would go to the deceased partner's
nominees, but without giving them a stake in the company.
There are two types of life insurance policies-a term insurance
policy and a life insurance policy.
7. TAX-SAVING PURPOSES:
You could save taxes with insurance
policies irrespective of what plan you buy. The premium you pay
on an insurance policy is eligible for a maximum tax benefit of Rs
1.5 lakh under Section 80C, and for tax-free proceeds on
death/maturity under Section 10 (D) of the Income Tax Act,
1961.
8. A TOOL FOR FORCED SAVINGS:
If you choose a traditional or
unit-liked policy, you pay a premium each month, which is higher
than what it costs to insure you. This bit of extra money is
invested and it accrues cash value. This cash can then be
borrowed against the policy or you can choose to sell it or draw
income from it.
9. YOU MAY NOT BE QUALIFIED FOR IT LATER:
Life insurance
policies run on uncertainties. You may be healthy now and
paying a premium for life insurance may seem to be an added
financial burden, but if you suddenly fall ill, you may not be
allowed to but a life insurance policy. Therefore, it is imperative
to buy one early on in your life because it remains in force if your
health deteriorates later on. Insurance companies allow you to
attach certain riders or benefits to your existing or new policy.
10. PEACE OF MIND:
Death is unavoidable. In the face of
tragedy, the least you can do for your family is to secure their
financial future. Even if it is a small policy, you know that you've
done all you can to help them tide over difficult times.
Retirement plans
As you retire, your monthly source of income comes to an end too.
This may be a source of your worries and tension. But a life insurance
will ensure that you have no worries as such.
Helps to Buy various Options
Life insurance helps you get great deals and profits through a vast
number of policies. As you invest in those policies and finish the
term, you get the benefits of it. Therefore, it is an instrument, which
helps you invest for a long time and achieve your goals later on.
A Savings Tool
There is no doubt, life insurance acts as a tool and source for saving
money. It is your real life piggy bank where you can add and invest in
it, take up a variety of policies to secure your future and save the
money lifelong. There are various policies, which will benefit you
when you invest in them as early as possible. Hence, it is imperative
that you buy such policies early in life.
Understanding insurable interest, utmost good faith, and material facts disclosure are essential principles in the insurance industry. Insurable interest requires a financial stake in the insured property, utmost good faith mandates honesty in the contract, and material facts disclosure ensures all relevant information is shared. These principles form the foundation of insurance agreements, emphasizing trust and full transparency between insurers and policyholders.
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Presentation Transcript
1) Insurable interest Insurable interest means that the person opting for insurancemust havepecuniaryinterest in the property heisgoingto get insuredandwill suffer financial loss on the occurrence of the insured event. Thisisoneof the essentialrequirements of any insurancecontract. Therefore, apersoncangofor insuranceof only those properties where he stands to benefit by the safety of the property, and will suffer loss, damage, injury if any harm takes place to such property.
Example If the house you own is damagedby fire, the value of your house has been reduced by the damages sustainedin thefire. Whether you pay to have the house rebuilt or you and up selling it at a reduced price. You have to suffered a financial lossresulting from thefire. By contrast, if your neighbor s house, which you do not own, is damaged by fire, you may feel sympathy for your neighbor and you may even be emotionally upset, but you have not suffered a financial loss from the fire, but in this example you do not have an insurableinterest in your neighbor shouse.
2) At most good faith Uberrima fides Almost goodfaith The insurance contract must be based on good faith. If the insurance contract is obtained by way of fraud or misrepresentation itisvoid. When an individual apply for life insurance, it is important to answer all questions truthfully and to volunteer any information even if not asked, if in doubt, just disclose it. Failure to disclose material factscould render the entire contract void.
Example If a person was suffering from sinusitis but did not discloseit, the entire contract couldbecancelledwhen the insurer discovernon-disclosure. Cancellationof the entire contract meansother non- related illnesses like cancer could no longer be covered. Some financial advisors who in their enthusiasm in closingthe saleadvicetheir clients not to disclosetheir pre-existing conditions for fear that the underwriter would reject thecase. Thereforeit isimportant to engageanethical financial advisor.T oavoidany conflict of interest, ensure you payafeefor consultation.
3) Material factsdisclosure In the insurance contract, the proposer is required to disclosureto the insurer all the material facts in respect of the proposed insurance. This duty of disclosingthe material factsnot only applies to the material facts which are known to him but also extends to material factswhich heissupposedtoknow.
Examples Acquisition of new companiesand/ormergers Changesto your businessdescription. Additional product lines and/or newservices Hazardous trade processes, or storage of hazardous matter, including changesor additons to processesor storagealreadydeclared Incidents not reported to insurers that might otherwise haveled to aclaime.gtheft or small fires.
4)Indemnity Theinsurancecontract shouldalwaysbeacontract of indemnity only andnothingmore. Insured can t make any profit from the insurance contract. Insurancecontract meansfor coverageof lossesonly. Indemnity meansaguaranteeto put the insuredin the position ashewasbeforeaccident. Thisprinciple doesnot apply to life insurance contracts. Themain object of this principle is to ensure that the insuredisnot ableto usethis contract for speculation or gambling.
5)contribution In case the insured took more than one insurance policy for same subject matter, he/she can t make profit bymakingclaim for samelossmore thanonce. For example: Rajhas a property worth Rs5 lakhs. He took insurancefrom companyAworth Rs.3lakhsand from companyB Rs1lakhs. In case of accident, he incured a loss of Rs.3 lakhs to the property. Rajcanclaim Rs3lakhsfrom companyA but after then he can t make profit by making a claim from companyB. NowcompanyAcanmakeaclaim from companyBto for proportional lossclaimvalue.
6)Subrogation What issubrogation? Subrogation is defined as a legal right that allows one party (e.g., your insurance company) to make a payment that is actually owed by another party (e.g., the other driver s insurance company) and then collect the money from the party that owes the debt after the fact. Subrogation is one of the ways that car insurance companies recover money that was paid out in claims to drivers insured by them.
How subrogationworks? Example: Supposeanother driver runsared light andyour caris totaled. You have insurance on your car, so you call your insurance carrier and they pay you for all of your expensesrelated to theaccident. Yourinsurance company realizing that the other driver had an insurance policy, then seeks reimbursement from the asfault party s insurancecarrier. Yourinsurer is subrogated to the rights of your policy and can step in your shoes to recover any amount paid out on yourbehalf.
Partial fault andsubrogation If the insurance company s investigation finds that you re partially at fault in the accident, the amount of the deductible youcanrecover will be prorated to the percentage of your fault. Example ifthe judgment isthat youwere 40 %of fault, for exampleandyourinsurer choosesto subrogate your claim, you ll be entitled to 60%refund of yourdeductible.
Waivingsubrogation If yousignanysettlement with other driver s insurance company,becareful to readthe fineprint. Some insurers attempt to insert a waiver of subrogation clause to prevent your insurance companyfrom attempting to get reimbursement for moneythat it haspaidout to you. If you waive subrogation after anaccident, your auto insurance company may refuse to pay your claim becausethey will not beableto seekreimbursement from the other driver s insurancecompany.
7) Lossminimisation This principle states that the insured must takeall the necessarystepsto minimizethe lossesto insuredassets. Forexample Ramtook insurancepolicy for hishouse. In an cylinder blast, his house burnt. He should have called nearest fire station sothat the losscould beminimised.
8) Causaproxima Word CausaProxima means NearestLoss Anaccident maybecausedby more than one cause. In caseproperty insuredfor only onecause.In such case nearest cause of the accident is fount out. Insurer paysthe claim moneyonly if the nearestcauseisinsured.
A Unit Linked Insurance Plan(ULIP) It is a product offered by insurancecompany that unlike a pure insurance policy, gives investors both insurance and investment under single integratedplan.
Reasons to have life insurance We list 10 compelling reasons for buying a life insurance policy. 1. LOOKING AFTER YOUR LOVED ONES EVEN AFTER YOU'RE GONE: This is the most important aspect of life insurance that one needs to factor in. Your family is dependent on you even after you're gone and you certainly don't want to let them down. Whether it's for replacing lost income, paying for your child's education or making sure your spouse get the much-needed financial security, life insurance could save the day for your surviving dependents. 2. DEALING WITH DEBT: You don't want your family to deal with financial liabilities during a crisis. Any outstanding debt-a home loan, auto loan, personal loan, or a loan on credit cards-will be taken care of if you happen to buy the right life insurance policy.
3. HELPS ACHIEVE LONG-TERM GOALS: Since it is an instrument that keeps you invested for the long term, it would help you achieve your long-term goals such as buying a home or planning your retirement. It also provides you with diverse investment options that come along with different types of policies. 4. LIFE INSURANCE SUPPLEMENTS YOUR RETIREMENT GOALS: Who wouldn't like their retirement savings to last until they do? With a life insurance plan, you can ensure you have a regular stream of income every month. Putting money in an annuity is like a pension plan- put in some money regularly in a life insurance product and enjoy a steady income every month even after retirement.
5. YOUNGER: Not every millennial needs a life insurance policy. If you haven't created an emergency fund or you're still living off your parents' money, insurance shouldn't be a priority. BUYING INSURANCE IS CHEAPER WHEN YOU'RE 6. YOUR BUSINESS IS ALSO TAKEN CARE OF: Life insurance isn't only for yourself and your family. Some insurance policies also take care of your business. If you own a business, then your business partner can purchase your portion of the business without hassle. Your business partner( s) will enter a buy-sell agreement and the payout would go to the deceased partner's nominees, but without giving them a stake in the company. There are two types of life insurance policies-a term insurance policy and a life insurance policy.
7. TAX-SAVING PURPOSES: You could save taxes with insurance policies irrespective of what plan you buy. The premium you pay on an insurance policy is eligible for a maximum tax benefit of Rs 1.5 lakh under Section 80C, and for tax-free proceeds on death/maturity under Section 10 (D) of the Income Tax Act, 1961. 8. A TOOL FOR FORCED SAVINGS: If you choose a traditional or unit-liked policy, you pay a premium each month, which is higher than what it costs to insure you. This bit of extra money is invested and it accrues cash value. This cash can then be borrowed against the policy or you can choose to sell it or draw income from it.
9. YOU MAY NOT BE QUALIFIED FOR IT LATER: Life insurance policies run on uncertainties. You may be healthy now and paying a premium for life insurance may seem to be an added financial burden, but if you suddenly fall ill, you may not be allowed to but a life insurance policy. Therefore, it is imperative to buy one early on in your life because it remains in force if your health deteriorates later on. Insurance companies allow you to attach certain riders or benefits to your existing or new policy. 10. PEACE OF MIND: Death is unavoidable. In the face of tragedy, the least you can do for your family is to secure their financial future. Even if it is a small policy, you know that you've done all you can to help them tide over difficult times.
Retirement plans As you retire, your monthly source of income comes to an end too. This may be a source of your worries and tension. But a life insurance will ensure that you have no worries as such. Helps to Buy various Options Life insurance helps you get great deals and profits through a vast number of policies. As you invest in those policies and finish the term, you get the benefits of it. Therefore, it is an instrument, which helps you invest for a long time and achieve your goals later on. A Savings Tool There is no doubt, life insurance acts as a tool and source for saving money. It is your real life piggy bank where you can add and invest in it, take up a variety of policies to secure your future and save the money lifelong. There are various policies, which will benefit you when you invest in them as early as possible. Hence, it is imperative that you buy such policies early in life.
