Life Insurance Principles and Practice
Core principles
Life insurance rests on risk pooling: many policyholders contribute premiums so the few who suffer an insured event are compensated. Candidates must understand insurable interest (the policyholder must benefit from the continued life of the insured and lose financially if that life ends), utmost good faith (both parties disclose material facts), indemnity (life cover is generally not indemnity because a life has no measurable monetary value, so a stated sum assured is paid), subrogation (not applicable in life claims), and proximate cause (the dominant cause of loss determines whether it is covered).
Contract fundamentals
Know the elements of a valid contract: offer, acceptance, consideration, capacity and legality. In life insurance the application is the offer, acceptance occurs on issue or on the first premium, and consideration is the premium and the promise to pay benefits. Also grasp material facts (those that would influence an underwriter's decision) and the duty to disclose them.
Traps
Questions often confuse indemnity with life cover, or subrogation with contribution. Another common trap is treating the agent as the insurer's alter ego for disclosure purposes. Remember that a policyholder's duty of disclosure usually ends at inception, but the insurer's ongoing duty of good faith continues.
Worked example
A policyholder dies in a car crash while fleeing police. The insurer asks: was the crash the proximate cause of death, or the criminal act? If the policy has a general exclusion for criminal activity, the insurer may deny. If the exclusion is narrower, the crash may be covered. The rule of thumb: identify the dominant, effective cause, not the last event.
Key rule
For life cover, the sum assured is agreed at inception and paid on the insured event; it is not a reimbursement of loss.