Insurance and Life Insurance Fundamentals
What this domain tests
This domain checks whether you can define risk, explain how a life insurance contract is formed, and use the vocabulary that appears on LIC proposal forms, circulars and claim letters. Questions are usually one-liners on principles, insurable interest, premium structure and the governing statutes.
Core rules
- Insurance works by pooling: many policyholders contribute premium so that the few who suffer a loss are compensated. Life insurance pools mortality risk, not fire or theft risk.
- Insurable interest - the policyholder must benefit from the continued life of the insured. In life insurance it must exist at the time of the proposal, not at the time of claim; a person may insure his or her own life without limit.
- Utmost good faith - every material fact must be disclosed in the proposal. Non-disclosure can void a claim, but Section 45 of the Insurance Act 1938 protects policies in force for more than three years unless fraud or deliberate misstatement is proved.
- Life insurance is not indemnity. It is a benefit contract: the sum assured is paid on the event, not the measured value of the loss. Contribution, subrogation and proximate cause belong to general insurance.
- Premium = mortality charge + interest assumption + expense loading, calculated on mortality tables with level premiums so that cost does not rise with age.
- Types: term, whole life, endowment, money-back, ULIP and annuity. LIC was created by the LIC Act 1956 (245 insurers and provident societies merged); IRDAI was set up under the IRDA Act 1999.
Worked example
A person aged 30 earns ₹6,00,000 a year, spends 40% on himself, has 25 years to retirement and ₹5,00,000 of existing savings. Human Life Value ≈ (60% × 6,00,000) × 25 − 5,00,000 = 90,00,000 − 5,00,000 = ₹85,00,000. That figure, not the salary, justifies the sum assured. (Real calculations discount future income to present value.)
Traps
Reading insurable interest as a claim-time requirement; treating a life policy as indemnity; assuming the nominee owns the money; forgetting that Section 45 does not protect outright fraud.