A default in premium can endanger the continuance of the policy. If that happens, the policy will be treated as “lapsed” and the expected benefits may not be available. The consequences of default are specified in the policy conditions.The calculation of a premium is a complex technical process, involving actuarial and statistical principles. Only trained professionals, called actuaries, do it.

In simple terms, it means that the proposer must have a stake in the continuance of the subject matter insured and could suffer a loss, if the risk occurs. What is insured is the financial or pecuniary interest in the subject matter of insurance. The insured must be in a relationship with the subject matter of insurance, whereby he benefits from its safety and well being and would be prejudiced by its loss or damage.

A life insurance policy promises that the insurer will pay to the policyholder a certain sum of money if the person insured dies or any other specified contingency happens. It is a contract, within the meaning of the Indian Contract Act, 1872. A contract is an agreement between two or more parties to do, or not to do, so as to create a legally binding relationship. A simple contract must have the following essentials

Offer and acceptance

Consideration

Capacity to contract

Consensus ‘ad item’

Legality of object or purpose

Capability of performance

Intention to create legal relationship

Insurance is a contract between the insurer and the policyholder. The policyholder can be different from the person whose life is insured, as will be seen later. Insurance is a specialised type of contract. Apart from the usual essentials of a valid contract, insurance contracts are subject to two additional principles viz. Principle of Utmost Good Faith and the Principle of Insurable Interest. These apply to all insurances, both life and non-life.

Insurers protect themselves from such situations, which may be beyond their capacity, by reinsuring the risk with other insurers. If there is a claim, the burden by the primary insurer and the reinsurers. There are some companies which are exclusively in the business of reinsurance. In India the General Insurance Corporation of India is the national reinsurer. Reinsurance business is placed globally. Where there is a major calamity, the claims affect several insurers all over the world, though the system of reinsurance.

The geeks had started benevolent societies in the late 7th century AD, to take care of the funeral and families of members who died. The friendly societies of England were similarly constituted.  The Great Fire of London in 1666, in which more than 13000 houses were lost, gave a boost to insurance and the first fire insurance company, called the Fire Office, was started in 1680.

Like this, different kinds of risks can be identified and separate groups made, including those exposed to such risks. By this method, the heavy loss that any one of them in the group may suffer (all of them may not suffer such losses at the same time) is divided into bearable small losses by all the others in the group. In other words, the risk is spread among the community and the likely big impact on one is reduced to smaller manageable impacts on all. Insurance helps to spread the cost or risks.

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The L.I.C is not an exception. All good life insurance companies have huge funds, accumulated through the payments of small amounts of premia of individuals. These funds are invested in ways that contribute substantially for the economic development of the countries in which they do business. The private insurers in India are new and have accumuated funds equal to about one-eight of the L.I.C’s. But even their investments in the various sectors and contributing directly and indirectly to the country’s economic development, would be of similar proportions.

In India , Social security finds a place in our Constitution. Article 41 requires the state, within the limits of its economic capacity and development, to make effective provision for securing the right to work, to education and to provide public assistance in case of unemployment, old age, sickness and disablement and in other cases of undeserved want. Part of the State’s obligations to the poorer sections are met through the mechanism of the life insurance. As per the law and the directions of the regulatory authorities, insurance companies in India are obliged to extend insurance benefits to economically weaker sections of the society in the unorganized sector.

Doctors and other professionals run the risk of being charged with negligence and subsequent liability for damages. The amounts in question can be fairly large, beyond the capacity of individuals to bear. These are insured. Thus, insurance is extended to intangibles. In some countries, the voice of a singer or the legs of a dancer may be insured. These are assets which produce the income and provide living to the owners. The object insured is intangible, but it is linked to a financial loss, and therefore becomes insurable. Indian non-life insurers are perhaps, considering the feasibility to insure such risks.