Life insurance: nature, kinds, formation and risk

1. Definition and nature

Section 2(11) of the Insurance Act, 1938 defines life insurance business as the business of effecting contracts of insurance upon human life, including any contract whereby the payment of money is assured on death (except death by accident only) or the happening of any contingency dependent on human life, and any contract subject to payment of premiums for a term dependent on human life. It is deemed to include disability and double or triple indemnity accident benefits if so provided, and annuities upon human life.

Features:

• Not indemnity. A life has no market value. The insurer pays the agreed sum, not a measured loss, so there is no contribution or subrogation.
• The event is certain, the time is not. Death will happen; the risk is that it happens early. Endowment policies also pay if the life assured survives the term.
• Long-term. The contract runs for many years with level premiums; the insurer builds a reserve in the early years against the higher mortality of later years.
• Insurable interest at inception only (see the Unit II note).
• Utmost good faith, with section 45 limiting the insurer’s right to question the policy after three years.
• An investment as well as protection in most plans other than pure term insurance.

2. Kinds of life insurance policies

• Whole life policy: sum assured payable on death whenever it occurs; premiums payable for life or for a limited number of years (limited-payment whole life).
• Endowment policy: sum assured payable on death within the term or on survival to the end of the term. More expensive than whole life because payment is certain within the term.
• Term insurance: pays only if death occurs within a fixed term; nothing on survival. Cheapest form of pure protection.
• Money-back policy: an endowment paying instalments of the sum assured at intervals during the term, with the full sum still payable on death.
• With-profit and without-profit policies: with-profit policies share in the insurer’s surplus through bonuses added to the sum assured.
• Joint life policy: on two or more lives (spouses, business partners), payable on the first death.
• Children’s policies: taken by a parent on a child’s life or for the child’s benefit; the risk commences at a stated age.
• Annuity and pension policies: the insured pays a lump sum or premiums and receives periodic payments for life or a term; the risk is that he lives long.
• Unit-linked insurance plans (ULIPs): premiums invested in funds chosen by the policyholder; the policyholder bears the investment risk.
• Group insurance: one master policy covering employees or members of a group, often without medical examination.
• Policies under the Married Women’s Property Act, 1874, s.6: a policy taken by a husband on his own life expressed to be for the benefit of his wife and children creates a trust for them, beyond the reach of his creditors.

3. The policy and formation of the contract

The contract follows the ordinary rules of offer and acceptance.

• Proposal. The proposer fills the insurer’s proposal form, answering questions on age, health, family history, occupation, habits and other insurance. The proposal is the offer. The agent who helps fill it is, for formation of the contract, the insurer’s agent (Explanation to s.45(3)).
• Medical examination where the sum assured or age requires it, and proof of age.
• Underwriting and acceptance. The insurer may accept at ordinary rates, with an extra premium, with a lien or exclusion, or decline. A counter-offer on different terms must in turn be accepted by the proposer.
• First premium. Under s.64VB the risk cannot begin before premium is received.
• Issue of the policy, the document that evidences the contract and contains its terms, the schedule and the conditions.

The key rule is that the contract is concluded only when the insurer’s acceptance is communicated. In Life Insurance Corporation of India v. Raja Vasireddy Komalavalli Kamba, 1984 INSC 71, (1984) 2 SCC 719, the proposer had submitted a proposal and paid a deposit; the LIC had not communicated acceptance when he died. The heirs sued. The Supreme Court dismissed the suit: the mere receipt and retention of premium, or preparation of a policy document, is not acceptance; silence is not acceptance; and the decision to accept must be communicated before there is a binding contract.

4. The event insured against

The event is death (in whole life, term and endowment policies) or survival to a date (endowment, annuity). Riders add disability or accidental death. Points that arise:

• Death from any cause is covered unless expressly excluded. There is no requirement of accident or fortuity.
• Suicide. Policies exclude suicide within a stated period. Under IRDAI’s product rules the exclusion may apply only to suicide within twelve months of commencement of risk or revival, and even then the nominee receives at least 80% of the premiums paid (or the surrender value, if higher). Suicide after that period is covered like any other death.
• Death by the act of the beneficiary. A beneficiary who murders the life assured cannot claim; public policy forbids a person to profit from his crime. The sum goes to the other heirs.
• Disappearance. Where the life assured has not been heard of for seven years by those who would naturally have heard of him, the burden shifts to the person who says he is alive (s.111, Bharatiya Sakshya Adhiniyam, 2023, formerly s.108 of the Evidence Act). The claim may then be pursued on presumed death.
• War, aviation and hazardous pursuits may be excluded or charged extra if the policy says so.

5. Circumstances affecting the risk

The insurer prices the risk on facts existing at the proposal. Those that matter most:

• Age, the main factor; misstatement of age is corrected on proof under s.45(5) by adjusting the sum assured, not by avoiding the policy.
• Health and medical history: present illness, past operations, hospital stays, chronic conditions such as diabetes, hypertension, heart disease.
• Family history: hereditary diseases, age at death of parents.
• Personal habits: smoking, alcohol, drugs.
• Occupation: hazardous work (mining, armed forces, aviation, explosives).
• Residence and travel: areas of disturbance or epidemic.
• Build (height and weight) and sex.
• Other insurance held, which shows whether total cover is in line with income (Rekhaben, Unit II note).

All these must be disclosed truthfully. Unlike fire insurance, a life policy is not generally affected by later changes (taking up a dangerous job after issue), unless the policy contains a condition requiring notice of such change.

6. Problem

Mr. Robert insured his life for ₹5,00,000 on 31-01-2020. He committed suicide on 31-12-2021. Can his heirs recover the policy amount? (June 2025)

Issue. Whether a suicide occurring about twenty-three months after the policy began is covered, and whether the insurer can avoid the policy within the three-year period of section 45.

Law. A life policy covers death from any cause except those excluded. The suicide exclusion permitted by IRDAI product rules applies only to suicide within twelve months of commencement of risk or revival. Section 45 allows the insurer, within three years, to question the policy only for fraud (s.45(2)) or misstatement or suppression of a fact material to the expectancy of life (s.45(4)), with the onus on the insurer.

Application. The policy began on 31-01-2020 and the twelve-month exclusion ended on 30-01-2021. The suicide on 31-12-2021 falls outside it. Death came within three years, so the insurer could still question the policy, but only on the grounds in s.45(2) or (4), not on the ground that the death was by suicide. If the proposal was truthful, there is nothing to question. If Robert had died by suicide in, say, November 2020, the nominee would get only the refund allowed by the exclusion clause.

Conclusion. The heirs (strictly, the nominee, who under s.39(7) is beneficially entitled if he is a parent, spouse or child) can recover ₹5,00,000 with bonuses, unless the insurer proves fraud or a material misstatement in the proposal.

How this is examined

“Define life insurance. Discuss different kinds of life insurance policies” and “Discuss the circumstances affecting the risk in life insurance” (January 2026); short notes on life insurance and the risk in life insurance (February 2025); the suicide problem (June 2025). The kinds of policies are best written as a list with one line on each. For the circumstances question, add that a misstatement of age is corrected, not fatal.