Principles of Insurance That Every Investor Should Know About

Posted in Investment By Saptarshi Ghosh-Dec 11,2021
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There’s a popular song by the band called Blue, you must’ve heard it! It’s called One Love.

It goes like this..

“It’s kind of funny, how life can change

Can flip 180, in a matter of days”

Wise words! Life can change in a jiffy. So, we must prepare ourselves for all situations, especially the unforeseen ones. In times like these, where almost every situation demands you to spend a substantial amount of money to tackle them properly, insurance policies can help you ease out to a great extent.

Health can deteriorate, accidents can happen. An insurance policy can cover a huge amount of your expenses in such situations. As an investor, you should know and understand some of the fundamental principles of insurance.

Good Faith

This is probably the most important principle of insurance. It applies to all kinds of policies available in the market. The individual who is getting insured should willfully disclose all information associated with the insurance policy to the insurer. This information must be true and complete.

You must never hide any information or present something falsely when you are sending across your information to the insurer.

For example, if you are planning to go for a health insurance plan or a term plan, you must mention the following things to your insurer:

  • Your smoking habits
  • Your drinking habits
  • Any history of family illness
  • Income
  • Age
  • Work status
  • Current illnesses if any

Insurable Interest

According to this principle, if you are taking the insurance, you must have an insurable interest which is getting insured. This suggests that if the insured is destroyed, there is financial loss.

For example, if the breadwinner in the family gets a life insurance policy, and in an unforeseen event she/he passes away, the family will face financial losses.

Similarly, your bike, car, gold, etc. can be insured as you have an insurable interest in it. You don’t really have any insurable interest in your neighbour’s car, so you cannot get it insured.


According to this principle, an insurance policy is not designed to make profits. It helps you to get the compensation for losses that you have incurred. We must remember that the compensation that is paid out can never be more than losses incurred.

When you take a term insurance plan, you might have this question in your mind – “Why are my income details being asked for?” This is done so that the insurance limits are in line with the financial status of the individual taking the policy. Also, the insurance amount should be good enough to take care of the family’s lifestyle in the absence of the policyholder.

Loss Minimization

It is the responsibility of the insured individual to ensure that losses, if any, are kept under control. All necessary steps must be taken by you as an insured individual to control losses as much as you can.

Causa Proxima

You, as an insured individual, must be well aware of this principle. As per this principle, when there is a loss due to multiple causes or events, the closest or nearest cause must be considered for deciding the insurer’s liability.

The closest cause must be covered by the insurance company. That is the only time when insurer liability will be considered and you/your family as a policy holder will receive the lumpsum. The insurer is never liable for the farthest cause.


Understanding the principles of insurance is a good start to get how insurance works. You can also understand the claim process better. Hard truth -you are not entitled to get the claim amount just because you have taken an insurance policy. The insurer liability must come into consideration for the claim to be settled. Also, do a thorough research before you choose an insurance policy. Happy hunting!

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