Formation of Life Insurance Contract

              In simple words, Insurance is a contract in which one party (the insurer), for a consideration (the premium), assumes a particular risk of the other party (the insured) and promises to pay to the other party or his beneficiary, a certain or ascertainable sum of amount on the happening of specified contingency against which the insurance is asked for.There are Various types of Insurance See >>>> Types of Insurance. As above said Insurance is a Contract and all fundamental Principles of a Valid Contract under the Indian Contract Act, 1872 are applicable for the formation of Life Insurance Contract.

Life Insurance -

          Life insurance is a contract which guarantees a specific promised sum of money to a designated beneficiary upon the death of the insured, or the insurance if he survives the term of the policy. Life being the most important asset of an individual, Life Insurance enjoys the maximum scope.

Types of Life Insurance Contract -

There are two general types of life insurance -

1) Term Insurance

2) Whole-life Insurance.

     Term insurance provides coverage only during the term of the policy and pays off only on the insured's death, on the other hand, Whole-Life Insurance provides saving as well as insurance and can let the insured collect before death. See in Detail  >>>> Types of Life Insurance  

Formation of Life Insurance Contract -

    Life Insurance is Legal Contract and its formation is subject to fulfillment of the requisites of a valid contract under Indian Contract Act 1872. Since Insurance is a contract section 2(h) and Section 10 of the Indian Contract Act 1872 are applicable.

I) Parties to a Contract 

          To constitute a contract, there must be an offer/ proposal and acceptance. One person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal. When a person to whom the proposal is made, signifies his assent thereto the proposal is said to be accepted. A proposal, when accepted, becomes a promise. The person making the proposal is called the “promisor”, and the person accepting the proposal is called “promisee”.Therefore in every contract, there must be two or more parties/persons at least two parties/persons. For the Formation of Life Insurance Contract, there must be two Parties.

II) Agreement  - 

        Agreement between the parties is an essential element for the formation of Valid Contract. Like other all Contracts, a Contract of Life Insurance there must be Agreement between the party. The people who wish to get ensured intend to buy the policy make the 'offer' and the other party who is ready to assume the risk stated, as the acceptance. In case of life insurance offer is called the proposal. If life insurance company accept the proposal, it is converted into an agreement.  Anyone who is willing to buy life insurance policy proposes to enter into the contract is an offer and when this offer is accepted by another party who agrees to assume the risk stated, it is an acceptance.

III) Competency of the parties or capacity to contract - 

       According to Section 11 of the Indian Contract Act, 1872 To constitute a valid contract, contracting parties must be competent. Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is sound mind and is not disqualified from contracting by any law to which he is subject. That means one who is Major, Sound Mind and not disqualified is competent to enter into a contract. In the Contract of Life Insurance, It (Competency of the Parties) is essential. 

See also... Who is Minor? Effects of Minor's Agreement

IV) Free consent -

     Free Consent is an essential element for formation of a contract. According to Section 10 of the Indian Contract Act, 1872, All agreements are contracts, if they are made by the free consent. Section 13 and Section 14 of the Indian Contract Act, 1872 defines 'Consent' and 'Free Consent' respectively. According to Section 10 of the Indian Contract Act, 1872, to constitute a valid contract, parties should enter into the contract with their free Consent. Consent is said to be free when it is not obtained by coercion, or undue influence or fraud or misrepresentation or mistake.

V) Legal Consideration -

     Consideration is necessary for the formation of a contract. It means "something return". It is the price paid for the contract. It must be Lawful. A contract without consideration is void. According to Section 2(d) of the Indian Contract Act 1872, there are three kinds of Consideration, viz Past, Present and Future Consideration. In a contract of life insurance, the insured gives premium as a consideration in return of which insurer undertakes to pay a certain amount at a specified contingency. The contract of life insurance cannot be termed as a valid contract without the payment of the first premium.

VI) Lawful object - 

      To constitute a valid contract the object of the contract must be lawful. It must not be against public policy.  According to Section 23 of the Indian Contract Act 1872, the object is unlawful which is -
a) Forbidden by law

b) Opposed to public policy

c) Immoral


d) Which defeats the provision by any Law


Case Law

New India Assurance Limited Vs Kesavan Ramamurthy

     In this case, court held that nothing is found to be unlawful in insurance policy if it provides that no compensation would be paid if an unlicensed person or a person holding learning license drive be insured vehicle.