why life insurance is not a contract of indemnity
By Okbima 10 Jun 2024

Why Life Insurance Is Not A Contract Of Indemnity?

 

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.

 

What Is A Contract Of Indemnity?

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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What is Life Insurance?

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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Difference Between Contract Of Indemnity And Life Insurance

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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Why Buy Life Insurance Plans Through Okbima?

Buying life insurance plans through Okbima offers many advantages that make the process easier and more beneficial. Here are some reasons why you might consider buying life insurance through Okbima.

  • Many Insurance Options: Okbima provides many life insurance plans from multiple insurers which allows you to compare and choose the best policy that fits your needs and budget.

  • Expert Advice: Okbima offers expert guidance and personalized advice, helping you understand different insurance products and select the most suitable one for your situation.

  • Convenient Online Platform: Okbima offers a user-friendly platform that allows you to compare policies, get quotes, and purchase insurance online from the comfort of your home.

  • 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

 

Conclusion

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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