by Life insurance is a contract between an insurer and a policyholder, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Life insurance is an important financial tool that can help provide for loved ones in the event of unexpected death.
There are several principles and practices that govern the life insurance industry. In this article, we will discuss the major principles and practices that life insurance companies follow.
Principle of Utmost Good Faith:
The principle of utmost good faith is the cornerstone of the insurance contract. It requires both the insurer and the policyholder to disclose all material facts that could affect the insurance policy. The policyholder must disclose all relevant information about their health, lifestyle, and any other factors that could affect their life expectancy. The insurer, on the other hand, must disclose all relevant information about the policy, including the terms and conditions, premiums, and benefits.
Principle of Insurable Interest:
The principle of insurable interest requires that the policyholder has an insurable interest in the insured person. This means that the policyholder must have a financial interest in the life of the insured person, such as a family member or business partner. Without an insurable interest, the policy would be considered a wager and would be against public policy.
Principle of Indemnity:
The principle of indemnity requires that the insurance policy pays the beneficiary only for the actual loss suffered. In the case of life insurance, the policy pays the beneficiary the face amount of the policy upon the death of the insured person. The beneficiary cannot receive more than the face amount of the policy, even if the insured person’s death results in a larger financial loss.
Principle of Contribution:
The principle of contribution applies when the policyholder has multiple insurance policies covering the same risk. If a loss occurs, the policyholder can only claim from one policy and must not receive more than the actual loss suffered. The other insurers are entitled to contribute to the payment of the claim in proportion to the amount of insurance they provide.
Principle of Subrogation:
The principle of subrogation allows the insurer to assume the legal rights of the policyholder after paying a claim. This means that the insurer can seek recovery from third parties who may be responsible for the loss. For example, if the insured person dies as a result of a car accident caused by another driver, the insurer may seek to recover the amount paid out to the beneficiary from the driver’s insurance company.
Principle of Proximate Cause:
The principle of proximate cause requires that the loss must be caused by an insured peril. If the loss is caused by an excluded peril or an event that is not covered by the policy, the insurer is not liable for the loss.
Practices of Life Insurance:
In addition to the principles that govern the life insurance industry, there are several practices that insurers follow. These practices include:
Underwriting:
Underwriting is the process of assessing the risk of insuring a person’s life. The insurer collects information about the person’s age, health, lifestyle, and other factors that could affect their life expectancy. Based on this information, the insurer determines the premium that the policyholder will pay.
Premiums:
Premiums are the payments that the policyholder makes to the insurer to maintain the policy. The premium amount is based on the risk of insuring the person’s life, as determined by the underwriting process. Premiums can be paid monthly, quarterly, semi-annually, or annually.
Beneficiary Designation:
The beneficiary is the person who receives the proceeds of the life insurance policy upon the death of the insured person. The policyholder can designate any person or entity as the beneficiary, including a family member, friend, or charity. The policyholder can also change the beneficiary at any time during the life of the policy.
Policy Options:
Life insurance policies come in a variety of options, including term life insurance, whole life insurance, universal life insurance, and variable life insurance. Each type of policy has its own features, benefits, and costs, and the policyholder can choose the one that best fits their needs and financial goals.
Policy Riders:
Policy riders are additional options that the policyholder can add to their policy to enhance its coverage. Common riders include accidental death benefit, waiver of premium, and accelerated death benefit.
Claims Processing:
When the insured person dies, the beneficiary must file a claim with the insurer to receive the policy proceeds. The insurer reviews the claim and pays the beneficiary the face amount of the policy if the claim is approved.
Renewability and Convertibility:
Term life insurance policies are typically renewable and convertible. Renewable means that the policy can be renewed at the end of the term without having to go through the underwriting process again. Convertible means that the policyholder can convert the term policy to a permanent policy without having to go through the underwriting process again.
Understanding the principles and practices of life insurance can have a number of benefits, both for insurance professionals and for consumers. Here are some of the key benefits:
- Transparency and Fairness: The principles and practices that govern the life insurance industry ensure that insurers and policyholders are transparent and fair in their dealings with each other. This helps build trust and confidence in the industry.
- Better Policy Decisions: Understanding the principles and practices of life insurance can help consumers make better policy decisions. For example, they can choose the right type of policy for their needs and understand the benefits and limitations of various policy options.
- Customized Coverage: By understanding the principles and practices of life insurance, consumers can tailor their coverage to their specific needs and financial goals. This can help ensure that they have the right amount of coverage for their individual situation.
- Competitive Pricing: Understanding the principles and practices of life insurance can also help consumers find the best policy at a competitive price. By understanding how insurers price policies and what factors they consider, consumers can compare policies and choose the one that offers the best value.
- Career Opportunities: For insurance professionals, understanding the principles and practices of life insurance is essential for building a successful career in the industry. It can help them provide better service to their clients, make more informed policy recommendations, and advance their careers.
