Advantages and Disadvantages of Life Insurance Policy

Let’s discuss the advantages and disadvantages of life insurance policy. Life assurance is a contract by which the insurer, in consideration of one or more premiums, undertakes to pay a certain sum of money on the death of the person insured or to pay a certain sum of money or in some cases an annuity on his attaining a certain age. That’s not all there is also some limitation of the life insurance policy.

It is not a contract of indemnity. The payment of a certain sum (or periodical sum) is assured. Life policies are one of the most common types of security offered to a bank.

Advantages and disadvantages of life insurance policy

It has certain definite advantages over the other forms of banking security. It also has some disadvantages. So, here we describe the advantages and disadvantages of life insurance policy.

Advantages of life insurance policy

Advantages of life insurance policy
Advantages of life insurance policy
  1. No market fluctuations in value: To the banker, it is more attractive than the stock exchange securities as the valuation of the policy can easily be done and it is not subject to market fluctuations in value.
  2. No security expenses: The security requires no supervision and expenses, and the banker has to keep only a watch on the premium payment.
  3. Policy assignments title easily obtainable: Assignments of policy in favor of the bank can be effected simply and a perfect title easily obtained.
  4. Increase in value: Its value steadily increases as each successive premium is paid.
  5. Surrender value: Its ‘Surrender Value’ can be easily ascertained from the company concerned.
  6. No technical defects in documentation: Realization of the insured amount, on the maturity of the policy or death of the assured, is easy if proper care has been taken in getting formalities completed and there are no technical defects in the documents.
  7. Policy surrenders possible in case of default: In case of default, it is open to the bank to surrender the policy upon due notice given to the assured and adjust the loan from the proceeds of the policy.

Disadvantages of life insurance policy

Advantages and Disadvantages of Life Insurance Policy
Disadvantages of Life Insurance Policy
  1. Policy material omitted can be fatal: They are contracts of the utmost good faith; and requires utmost accuracy and truth from the proposer. Any non-disclosure of material facts, even if omitted innocently, is fatal to the contract of life assurance and may render the policy invalid. The bank should, therefore, entertain advance proposals against life policies from respectable parties only.
  2. Risk of not paying policy: There is always the risk that the borrower may not pay the premium in which case the bank may need to increase its lending to pay them to keep the policy alive or prevent its surrender value from falling.
  3. Insurable Interest: The persons claiming under any policy of insurance must have ‘Insurable Interest’ in the life assured, otherwise the contract is void. Such an interest must be a pecuniary one.
  4. Policies containing restricted clauses are not acceptable: Policies usually contain a “suicide clause” whereby if the assured commits suicide within a particular period, the policy becomes invalid.

When a life policy is offered as security to a banker, he must see that either the policy is on the life of a customer himself or he has an insurable interest that existed in the life of the persons assured at the time the policy was issued.

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