Nature of Life Insurance Contract

Life insurance contract may be defined as the contract, whereby the insurer in consideration of a premium undertakes to pay a certain sum of money either on the death of the insured or on the expiry of a fixed period.

The definition of the life insurance contract is enlarged by Section 2 (ii) of the Insurance Act 1938 by including annuity business.

Since, the life insurance contract is not an indemnity contract, the undertaking of the part of the insurer is an absolute one to pay a definite sum on maturity of policy at the death or an amount in instalment for a fixed period or during the life.

Features of Life Insurance Contract

  1. Nature of General Contract
  2. Insurable Interest
  3. Utmost Good Faith
  4. Warranties
  5. Proximate Cause
  6. Assignment Nomination
  7. Return of Premium
  8. Other Features

In life insurance contract the first three features are very important while the rest of them are of complementary nature.

Other Features

Life insurance policies have the following additional features:

Life insurance contract is

(i) an Aleatory contract,
(ii) a unilateral contract,
(iii) a conditional contract,
(iv) a contract of Adhesion, and
(v) not a contract of indemnity.

(i) Aleatory Contract

Aleatory contract means contract depends on chance. In ordinary contract approximately equal value is exchanged by both parties; but in life insurance contract, the full sum assured may be payable even if all premiums are not paid. Thus, on the chance of death, higher amount is payable. It should be clear, here, that this does not make the contract of wager because of insurable interest.

(ii) Unilateral Contract

Life insurance contract is unilateral contract because, here, only the insurer makes an enforceable promise.

The proposer has already performed his duty of payment of premiums. If the first premium is paid, the insurer is bound to accept subsequent premium and to pay the amount claim when it arises except on the ground of fraud.

(iii) Conditional Contract

Life insurance contract is conditional contract because the insurer shall pay the assured sum only when the contract is continuing by payment of premium.

In addition, the insurer’s promise to pay the sum assured is also conditional upon the furnishing of satisfactory proof of death and other conditions mentioned in the policy.

(iv) Contract of Adhesion

Contact of adhesion means that the terms of the contract are not arrived by mutual negotiations between the parties as in the case of ordinary contracts.

The proposer is not in a position to bargain about the terms of contract because these terms are already determined.

The only course open to the proposer is whether to accept or not a particular policy.

(v) Indemnity Contract is not applied

In life insurance the indemnity contract is not applicable because the value of loss at death cannot be ascertained. It is not possible to ascertain the time up to which the insured would have survived and it is also difficult to ascertain the amount of money to be earned by him during life-time.

So, the doctrine of subrogation is also not applicable. In life insurance a fixed sum is paid which may be the sum assured and bonus if the policy is participating one.