The contract of life insurance

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So far, we have discussed various insurance products you can apply for in different companies based on your needs. Once you have applied for the appropriate insurance and undergone the necessary underwriting, if applicable, the insurance company decides whether or not to accept the application.

Once the application is accepted, the insurance company will draft an insurance contract. The contract is a legal and binding document that stipulates the parameters which are applicable to the insurance you applied for. It explains both your rights and responsibilities between you and the insurance company.

A life insurance contract on the life of a minor (child), for instance, provides for a restriction on the amount of cover that can be taken. It also provides the maximum cover in the case of an unborn child or under six years as well as maximum covers for children over six years and under 14.

The insurance policy must be provided under one or more of assistance, life, disability or health contracts. It must be on the life of the owner or their spouse and have been in force for at least three to six months. Other policy contracts stipulate no waiting periods for deaths as a result of accidents.

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The contract provides protection so that the policy will not be attached by creditors during your lifetime. On your death, the policy benefits will be protected if they are payable to your spouse, your child, stepchild, or your parent subject to the prescribed limit.

However, the protection does not apply to debts secured with the policy benefits. The protection is limited and applies to assets acquired with the proceeds for a period of five years from the date the benefits was provided. The benefits and assets acquired with the proceeds are protected to a stipulated aggregate amount to be disclosed by your insurance company.

Insurable interest

The owner (proposer) of a policy must have insurable interest in the life of the person who is insured under the policy. Insurable interest relates to the fact that the owner of the policy stands to suffer financial loss if the event insured like death or disability occurs.

The principle of law applies to all insurance contracts, both short-term and life assurance contracts. It is required to draw a distinction between wagers (to wager is to bet) and insurance. If insurable interest was not required, any person could insure strangers’ life as a money-making scheme.  

The insurable interest must exist at inception of the policy in the case of life assurance. Insurable interest examples include: Person in their own life, where everybody has an insurable interest in their own life. Insurers require that the sum assured be related to the proposer’s financial and social standing.

Spouses in the life of each otheris an insurable interest between spouses. It is customary to require a sum assured to be in keeping with the financial and social standing of the proposer and the other spouse.

Children may have an insurable interest in the lives of their parents if they are still dependent on them. Parents may have an insurable interest in the lives of their children if they are dependent on the children.

Also, a creditor has an insurable interest in the life of his debtor. The insurable interest for the amount of the debt plus interest up to the time effecting the policy plus future interest plus the premiums on the policy of a term equivalent to the debtor’s expectation of life.

A partner has an insurable interest in the life of his business partner. The extent of a partner’s insurable interest is the value of his partner’s (the life assured’s) share of the capital of the partnership.

An employer has an insurable interest in the life of an employee as the company may suffer a loss if the employee dies.

Legal capacity

The ability to take out a contract is known as legal capacity. For an example, entrepreneurs are legally able to enter into binding contracts because they have legal capacity to do so. But do you think a 10 year-old child has the legal capacity to take out a life insurance policy? The answer is no because the child is still a minor and is therefore not old enough to enter into any type of binding contracts.

Legal capacity of minors

According to law, an 18 year-old or older persons may take out a policy on their own life and pay the premiums due on the policy. They may take a loan, surrender or cede (offer as collateral or security) the policy. The proceeds of this policy can be paid directly to the owner and need not be paid to the parent or guardian since an 18 year-old is considered to be a major (adult) with full contractual capacity.

Finally, you have basic insurance needs such as protecting your wealth, life, disability, illness, retirement and pension. Insurance companies provide products that you can apply for that will help you in meeting these needs.