Principles of Life Insurance

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Life insurance is based on a number of principles that are tailored to meet market conditions and ensure insurance companies make profits, while offering security policies to insured individuals.

There are broadly four major insurance principles applied in India, these being:

1.     Insurable Interest – This principle pertains to the level of interest an individual is expected to have in a particular policy. The interest could be a family bond, a personal relationship and so on. Based on the interest level, an insurance company can choose to accept or reject an application in order to protect the misuse of a policy.

2.     Law of large numbers – This is a theory that ensures long-term stability and minimizes losses in the long run when experiments are done with large numbers.


3.     Good faith – Purchasing an insurance is entering into a contract between company and individual. This should be done in good faith by providing all relevant details with honesty. Covering any information from the insurance company may result in serious consequences for the individual in the future. This being said, the insurer must explain all aspects of a policy and ensure that there are no unexplained or hidden clauses and that the applicant is made aware of all terms and conditions.

4.     Risk & Minimal loss – Insurance is a risky and companies have to do business and make profits keeping in mind the risk factor. The principle of minimal risk states that the insured individual is expected to take necessary action to limit him/her self from any hazards. This includes following a healthy lifestyle, getting a regular health check-up and more.




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