Insurance is a contract where by insurer undertakes to indemnify the insured for any loss suffered due to specific risk. This is essentially a method of averaging the risks. Several people exposed to a particular risk contribute small amounts to an insurance fund from which the unfortunate who actually suffers the risk is compensated. The party which indemnifies the risk is normally an insurance company called insurer and the party which is indemnified called insured. The document containing the term of contract is known as policy.
Depending upon the type of risk, there are several forms of insurance such as:
- Fire Insurance
- Marine Insurance
- Burglary Insurance
- Workmen’s Compensation Insurance
- Life Insurance
Life insurance takes two forms:
- Endowment Policy – sum of money is paid by the insurer to the insured after the attainment of specific age or paid to his or her family after the death of insured.
- Whole Life Insurance – sum of money is paid to the family of insured after his or her dearth
Life insurance is different from other types of insurance in the sense that other forms of insurance are contracts of indemnity whereas life insurance is a contract of assurance. In contract of indemnity those who suffered loss are compensated to the extent of actual loss. In life insurance eventually the amount covered by the policy must be paid, therefore, life insurance is also known as assurance.
It is also difficult to evaluate a loss when someone dies and therefore amount of policy is the agreed amount which the insurance company pays. The main purpose of life insurance is protection of the family of insured either because of old age or death. Apart from the fact it covers the risk the distinctive advantage of life insurance is that it is also a form of investment and an investment that is increasingly preferred because of tax incentives.
In a contract of insurance, however, there is an implied condition that each party must disclose every material fact known to him. This is because all contracts of insurance are contract of uberrimae fidie i.e. contract of utmost good faith.