Life insurance is not considered a contract of indemnity because it does not reimburse the insured for their financial loss. Instead, life insurance provides a specified insured amount to the nominees on the death of the insured. In this way, life insurance is more of a contract to provide financial protection or security for the insured's family rather than a contract to indemnify or compensate for a loss.
A contract of indemnity is a legal agreement between two parties in which one party agrees to compensate the other party for any losses, damages, or liabilities that the other party may incur for a specified event or action. A contract of indemnity is meant to protect one party from having to pay for any potential losses or damages. This type of contract is commonly used in business deals, insurance policies, and other scenarios where there is a chance of losing money.
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Life insurance is a financial agreement between you (the policyholder) and an insurance company. In exchange for regular payments (premiums), the insurer agrees to pay a sum insured amount to the nominee on the death of an insured person. This death benefit can help your family cover expenses and maintain their financial stability.
Policyholder: You pay the premiums to keep the policy active.
Insurer: The insurance company that takes on the risk of paying out the death benefit.
Nominee: The person or people who will receive the death benefit payout.
Premium: The regular payment you make to the insurer to maintain the policy.
Death Benefit: The lump sum of money paid to the beneficiary upon your death.
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Here is the difference between a contract of indemnity and life insurance based on purpose, legality, compensation, claim payment, etc.
|
Feature |
Contract of Indemnity |
Life Insurance |
|---|---|---|
|
Definition |
A contract where one party promises to compensate the other for loss or damage. |
A contract where the insurer agrees to pay a sum of money on the death of the insured. |
|
Purpose |
To protect against actual losses incurred. |
To provide financial security to the insured's nominees. |
|
Legality |
Governed by the Indian Contract Act, of 1872. |
Governed by the Insurance Act, of 1938, and the regulations of the Insurance Regulatory and Development Authority of India (IRDAI). |
|
Compensation |
Based on the actual loss incurred, subject to the limit specified in the contract. |
The agreed sum assured is paid, irrespective of the actual financial loss. |
|
Examples |
Fire insurance, marine insurance, etc. |
Term insurance, endowment plans, whole life insurance, etc. |
|
Beneficiaries |
The insured party who suffers the loss. |
Nominee(s) or beneficiaries designated by the policyholder. |
|
Claim Payment |
Reimburses actual losses up to the policy limit. |
Pays a predetermined sum assured. |
|
Premium Calculation |
Based on the value of the insured asset and the risk of loss. |
Based on the sum assured, age, health, policy term, and other factors. |
|
Claim Process |
Need proof of loss and verification of the actual amount of damage. |
Requires proof of death or maturity. |
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Transparent Process: Okbima ensures transparency in terms of policy details, premiums, and benefits, making it easier for you to make informed decisions.
Read More:
Difference Between Insurance and Assurance: Meaning & Types
What is Life Insurance Policy? Benefits & How Does it Work in India
Types of Life Insurance: Definition & Benefits in India 2024
Life Insurance Tax Benefits In India: Eligibility Criteria & How To Save Tax?
Claim Settlement Ratio For Life Insurance In 2022-2023: Importance & Process
In conclusion, life insurance is not considered a contract of indemnity as it does not reimburse the insured for their financial loss but rather provides financial security for the insured's family. While a contract of indemnity is meant to compensate for actual losses incurred, life insurance pays out a predetermined sum assured to the nominees on the death of the insured.
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