Investing in life insurance products is a preferred strategy for many who wish to safeguard their family’s financial future from unforeseen circumstances. There are also several types of life insurance policies tailored to suit the diverse requirements of policyholders and their families. Many of us know the basic concept behind life insurance, i.e. the insurance company offers life coverage to the insured person for a particular duration in return for the premium payments as agreed.
At the same time, in case of the individual’s demise within the policy tenure or upon the policy’s maturity, the insurance company pays out an agreed amount accordingly. Many life insurance policies have varying terms and features in this context. Yet, did you know that all life insurance policies essentially function on the basis of a few core principles? Here’s diving deeper into the same in this article.
Core Principles of Life Insurance
Life insurance products operate on the basis of several core principles which many do not know about. These are principles that should be legally and technically upheld and contribute towards shaping the contours of these products and services as well. So here’s taking a closer look at the same:
- Principle of Utmost Good Faith – This is a fundamental principle behind insurance. Based on this principle, customers have to voluntarily and transparently disclose all their relevant information linked to risks. This has to be disclosed to the insurance company accordingly. The insured person should disclose all facts that impact the policy and are requested by the insurance company. Any disclosure in the future may lead to the cancellation of the policy. Simultaneously, the insurance company should transparently disclose all the policy features while explaining every aspect clearly, including the terms and conditions. This principle thus operates at both ends, i.e. the insurer and the policyholder.
- Principle of Insurable Interest – This is another vital principle of the life insurance industry. This means that you should possess an interest in the life insured, which is insurable. This means that you will have a financial impact in case of the demise of the person insured. You cannot purchase any life insurance for an individual upon whom you do not have any such insurable interest. Hence, this talks about the right to insure that arises from the financial and legally upheld relationship discussed here.
- Principle of Proximate Cause – This is another core principle that states how the proximate cause should be considered whenever any claim for a loss is calculated. This means the scenario or cause which is the nearest and the primary reason behind any loss. This is not always used across life insurance, although it is a crucial factor behind various insurance types. This may mean any effective or active cause or a chain of circumstances/events which lead to the event, loss or result.
- Principle of Subrogation – This principle comes into effect for specific circumstances. This happens whenever any loss occurs due to any other party or individual and not the person insured. In this scenario, the insurance company will have legal rights to access this party for recovery purposes.
- Principle of Indemnity – The principle states that insurance will only cover the customer or family members for any loss that has taken place. The insurance company will closely examine and work out the losses in question. The core objective behind the same is to put the party in the same financial position compared to the scenario before the loss.
- Principle of Contribution – This principle states that if someone has obtained insurance coverage from more than a single insurance company, then both insurance firms will share the loss based on their respective coverage proportions. If one insurer pays the amount in total, it will have the legal right to contact the other companies to get the proportionate sum in question.
- Principle of Loss Minimization – All appropriate steps should be taken to restrict the loss whenever it takes place. One must take all precautions necessary to prevent or bypass the loss even after buying the insurance product. This is the meaning of the principle of loss minimization.
Hence, these are the key principles governing the execution and formulation of life insurance policies and their features. You should keep them in mind to better understand how the industry functions and some of your responsibilities as a policyholder. Once you understand these aspects better, you can choose life insurance policies depending on your specific life stage, age, coverage needs, liabilities, and your family’s future needs.