Life Insurance

Life insurance is designed to reduce the financial impact of the random event of ultimately death.

The insurance organization (insurer) would issue contracts (policies) that would promise to pay the customer's (insured) family an insurance benefit at the death of insured.

In return for the promise continued in the policy, the insured pays a consideration (premium) to the insurer.

In the general, the life insurance benefit is paid when the insured is dead.

FACTORS TO CONSIDER WHEN DRAWING UP A INSURANCE CONTRACT

Consideration:

In an insurance contract the insurer’s value exchanged is its promises defined in the policy. The insured’s consideration is the first premium payment and the insured’s application statements.

Insurable interest:

To be valid a contact must be for a legal purpose and conform to public policy, This, in life insurance the applicant must have an insurable interest in the person on whose life the policy is written; that is, a reasonable expectation of loss arising from the death of the subject insured. If the applicant and the person whose life is insured are the same, insurable interest is presumed (or held immaterial).

Utmost Good Faith

In insurance contracts, each party must depend on the utmost good faith of the other concerning the risk to be transferred, a level of good faith above that required in the usual commercial transaction. This principle provides the basis for the doctrine of warranty, representation and concealment. 

¨      Warranty ~ is a statement incorporated in the contract made by the insured concerning the risk upon which the insured presumably relied in issuing the contract.

¨      Representation ~ a representation in insurance is a statement made to the insurer by the applicant as an inducement to enter into the contract.

¨      Concealment ~ failure to disclose material facts is ground for rescission. In life insurance, in order to void a policy, a concealment must be both material and intentional. 

Summary

The practice of limiting amounts payable is common to insurance contracts. Thus, there are various kinds of deductibles, franchises, coinsurance arrangements, time limitations, named dollar limits of liability, and apportionment clauses. These clauses serve purposes other than merely keeping down the insurer’s loss payments. They may encourage the insured to take out complete insurance to value or they may discourage this course of action. They also serve to control the moral hazard and to define the insurer’s obligation more precisely than would be possible without them, thus converting what might be an uninsurable risk into one that is insurable.