Life insurance is a crucial financial tool that provides financial security to your loved ones in case of any unforeseen event. It is an agreement between the policyholder and the insurance company, wherein the policyholder pays a premium, and in return, the insurer provides a sum assured to the nominated beneficiary in case of the policyholder`s demise.
Many people believe that life insurance is a contract of indemnity, which means it is an agreement to indemnify or compensate the policyholder for a loss incurred. However, that is not the case. Life insurance is not a contract of indemnity, as it guarantees a sum assured, irrespective of the loss incurred.
Here are some reasons why life insurance is not a contract of indemnity:
1. Death is not a loss that can be indemnified:
Unlike other types of insurance, such as car or property insurance, where the policyholder can claim compensation for a loss incurred, death is not a loss that can be indemnified. Once a person passes away, they cannot be compensated for that loss. Therefore, life insurance is not a contract of indemnity.
2. Premiums are determined based on life expectancy:
In life insurance, the premiums are determined based on the policyholder`s life expectancy, age, medical history, and other factors. The insurer assesses the risk of the policyholder`s death and determines the premium amount accordingly. It means that the sum assured is not based on the actual loss incurred but rather on the risk associated with the policyholder`s death.
3. Guaranteed sum assured:
In a contract of indemnity, the compensation amount is determined based on the actual loss incurred by the policyholder. However, in life insurance, there is a guaranteed sum assured that is payable to the nominated beneficiary in case of the policyholder`s death. The sum assured is not dependent on the actual loss incurred but rather on the policy`s terms and conditions.
4. No concept of depreciation:
In a contract of indemnity, the compensation amount is determined based on the depreciated value of the item. However, in life insurance, there is no concept of depreciation as there is no loss that can be depreciated. The sum assured is fixed, and it does not change over time.
In conclusion, life insurance is not a contract of indemnity. It provides financial security to the policyholder`s loved ones in the event of their death and guarantees a sum assured irrespective of the loss incurred. It is essential to understand the difference between life insurance and other types of insurance to make an informed decision when purchasing a policy.