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Difficulty: MediumInsurance: Principles and Types

An investor took out an Endowment Life Assurance policy for N10,000,000\text{N}10,000,000. Upon reaching the policy's maturity date, the insurance company paid the full agreed sum to the policyholder. Which of the following best explains why the principle of indemnity was not applied to this payment?

  1. Human life cannot be assigned an exact monetary value to restore the insured to their precise pre-loss financial position.Answer
  2. B
    The principle of indemnity applies strictly when financial loss is recovered through subrogation from a negligent third party.
  3. C
    Endowment maturity benefits require the insurer to pass half of the financial liability to another firm through co-insurance.
  4. D
    Indemnity is waived only if the policyholder surrenders the policy before reaching the stipulated maturity period.

Answer

Human life cannot be assigned an exact monetary value to restore the insured to their precise pre-loss financial position.
The correct answer highlights that life assurance contracts are not contracts of indemnity. Indemnity aims to restore an insured to their exact financial state before a loss, which is impossible for human life. Consequently, life assurance policies guarantee the payment of a predetermined sum of money upon death or policy maturity.

Step-by-Step Solution

1
Define the Principle of Indemnity in insurance.
Indemnity ensures that an insured party is compensated to place them in the exact financial position they occupied immediately before the occurrence of a loss, without making a profit.
Understanding indemnity helps distinguish contracts of indemnity from contracts of assurance.
2
Examine the nature of Life Assurance contracts.
Because human life and personal safety cannot be measured in exact monetary terms, life assurance is a contract to pay a fixed sum upon maturity or death, rather than a contract of indemnity.
This distinction explains why the full agreed sum of N10,000,000\text{N}10,000,000 is paid upon maturity without calculating actual financial damage.

Key Concept

Non-applicability of the Principle of Indemnity to Life Assurance
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Topics

Insurance: Principles and Types

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