IPTM1100 - Fundamental concepts: what is insurance?

There is no statutory definition of insurance in either taxes or regulatory legislation. This probably reflects the antiquity of insurance as a concept and commercial practice. In an early stamp duty case, Prudential Insurance Company vCIR(1904) 2KB 658, Channell J summed up the characteristics of a contract of insurance in the following passage at page 663:

A contract of insurance, then, must be the contract for the payment of a sum of money, or for some corresponding benefit … to become due on the happening of an event, which event must have some degree of uncertainty about it and must be of a character more or less adverse to the interest of the person effecting the insurance.

This is a description rather than an all-embracing definition, but it usefully emphasises the point that insurance, including the type of life insurance that has a heavy investment character, depends on the terms of the contract between insurer and insured. All underlying investments are owned by the insurer and not by the insured.

More details of the legal, accounting and regulatory basis of insurance may be found in the General Insurance Manual.

Life insurance

Life insurance is sometimes called life assurance. Some authorities draw a distinction between insurance where the peril insured against may or may not occur, and assurance where the event (death) is inevitable, though not necessarily within the assurance term. In practice, though, the terms may be used interchangeably. There must be some life contingency for a policy to be one of life assurance, or for a life annuity contract to be such. But for life policies the payment on death need be no more than the investment return. More details about life policies are available at IPTM1115, and more details about purchased life annuity contracts at IPTM1135.

Term assurance

This is pure protection, reflecting mortality risk only, and pays out only on death of the life assured before a predetermined date.

Whole of life assurance

Assurance under which benefit is payable on death whenever it occurs. It can be with or without profits, see IPTM1410, or unit-linked, see IPTM1400. Whole of life policies have some of the characteristics of both protection and investment policies.

Investment bond

Generally a unit-linked, single premium whole of life or endowment policy providing minimal guaranteed death benefits, and often capable of surrender without penalty, particularly later in the term. An investment rather than insurance in the general sense.

Endowment policy

The meaning is considered at IPTM2040.

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