Insurance Planning – Meaning & Legal Principles

Insurance is not just a product; it is a Legal Contract. For this contract to be valid, it must follow 7 fundamental principles. (This is a guaranteed Exam Question).

1. The 7 Principles of Insurance

Loading diagram…

2. Deep Dive: Key Principles

A. Principle of Utmost Good Faith (Uberrimae Fidei)

• Concept: You must disclose all material facts to the insurer.
• Example: If you smoke, you MUST tell the life insurer. If you hide it and die of lung cancer, the claim will be rejected.

B. Principle of Insurable Interest

• Concept: You can only insure something if its loss hurts you financially.
• Application:
  • You can insure your own car or life.
  • You cannot insure your neighbor’s car (because you don't lose money if it crashes).

C. Principle of Indemnity

• Concept: Insurance is to restore you to the same position as before the loss, not to make you rich.
• Example: If your ₹5 Lakh car is stolen, Insurance pays ₹5 Lakhs (Market Value), not ₹10 Lakhs.
• Exception: Life Insurance (Human life value cannot be measured, so Indemnity doesn't apply).

3. Case Study: The Hidden Truth

Loading case study…

4. Insurance vs Investment

Loading comparison…

5. Exam Notes: Writing the Answer

Question: "Explain the Principle of Utmost Good Faith and Insurable Interest." (10 Marks)

Answering Strategy:

1. Latin Name: Mention Uberrimae Fidei for extra marks.
2. Definition: "Positive duty to voluntarily disclose...".
3. Examples: Give the Smoker example.
4. Insurable Interest: Explain that it must exist at the time of taking the policy (Life) or at time of loss (Fire).

Summary

• Contract: Insurance is a legal binding agreement.
• Transparency: Hiding facts leads to claim rejection (Good Faith).
• Ownership: You need a financial stake in the object (Insurable Interest).
• No Profit: You cannot profit from a loss (Indemnity).

Quiz Time! 🎯

Loading quiz…