How Life Insurance Policy Is Not a Contract of Indemnity?

You may have heard of the term contract of indemnity in the context of insurance. But do you know what it means and how it differs from life insurance? Here, we will explain the concepts of contract of indemnity and life insurance and show you why life insurance is not a contract of indemnity but a contract of guarantee.

What is a Contract of Indemnity?

A contract of indemnity is a type of contract where one party (the indemnifier) agrees to compensate another party (the indemnity holder) for any damage that may arise due to a specified event or cause. The indemnifier is liable to pay only the actual value of loss or damage sustained by the indemnity holder and not more than that. The purpose of a contract of indemnity is to restore the indemnity holder to the same position as they were before the loss or damage occurred.

Some examples of indemnity contracts are fire and marine insurance. In fire insurance, the indemnifier (the insurance company) agrees to pay the indemnity holder (the policyholder) for any loss or damage caused by fire to their property. In marine insurance, the indemnifier agrees to pay the indemnity holder for any loss or damage caused by perils of the sea to their cargo or ship.

What is Life Insurance?

If you are thinking about what is life insurance, then it is a type of contract where one party (the insurer) agrees to pay another party (the insured) or their nominee a fixed sum (the sum assured) upon the occurrence of a specified event or cause, such as death, disability, or maturity. The insured pays a periodic amount of money (the premium) to the insurer for the promise of payment. Life insurance aims to provide financial security and protection to the insured and their dependents in case of any unforeseen event or cause.

Some examples of this plan are term, endowment, and whole life.

In term insurance, the insurer agrees to pay the sum assured only if the insured dies within a specified period (the term). In endowment insurance, the insurer agrees to pay the sum assured either on the insured’s death or on the completion of a specified period (the endowment period), whichever is earlier. In whole life insurance, the insurer agrees to pay the sum assured whenever the insured dies, irrespective of the time of death.

How are Contracts of Indemnity and Life Insurance Different?

Now that you have understood the concept of a contract of indemnity and life insurance, you may wonder how they differ. Here are some key differences between them:

• The nature of payment: In a contract of indemnity, the indemnifier pays the indemnity holder the actual amount of loss or damage, which may vary based on the degree of the loss or damage. In life insurance, the insurer pays the insured or their nominee a fixed sum, which does not depend on the extent of the loss or damage.
• The purpose of payment: In a contract of indemnity, the purpose is to restore the indemnity holder to the same position as before the loss or damage occurred. In life insurance, the purpose of payment is to provide financial security and protection to the insured and their dependents in case of any unforeseen event or cause.
• The amount of payment: In a contract of indemnity, the amount of payment is limited by the principle of indemnity, which means that the indemnifier cannot pay more than the actual amount of loss or damage suffered by the indemnity holder. In life insurance, the payment amount is determined by the principle of insurable interest, which means that the insured or their nominee must have a legal or financial interest in the insured’s life.

Conclusion

From the above differences, you can see that life insurance is not a contract of indemnity but a contract of guarantee. A contract of guarantee is a type of contract where one party (the guarantor) agrees to pay another party (the creditor) a fixed sum of money (the guaranteed amount) if a third party (the debtor) fails to perform their obligation. The guarantor is liable to pay only the guaranteed amount and not more than that. The purpose of a contract of guarantee is to ensure the performance of the obligation by the debtor.

Life insurance is a guarantee contract because the insurer agrees to pay the insured or their nominee a fixed sum if the insured dies or suffers from any other specified event or cause. The insurer is liable to pay only the sum assured and not more than that. Life insurance aims to ensure the financial security and protection of the insured and their dependents.