Why Life Insurance Is Not a Contract of Indemnity?

Written by : Knowledge Centre Team

2025-12-29

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Are you wondering why is life insurance is not a contract of indemnity? Perhaps you want to learn the difference between them. With a mere 2.70% of India's population having life insurance coverage, it becomes essential to ensure that people are fully informed about its features and essence. Keep reading this article to understand the concepts of life insurance and indemnity contracts and how they are different.

Key Takeaways

A contract of indemnity is an agreement where one party promises to compensate the other for any loss, expense, or legal consequence caused by a third party or themselves
Life insurance involves a policyholder paying premiums in exchange for a payout to beneficiaries upon death or after a set period
Life insurance is a long-term investment, while indemnity contracts are usually short-term
In life insurance, the insurable interest must be present at the time of the contract, but in indemnity contracts, it must be present both at the contract and at the time of the
Life insurance payouts occur after death or policy maturity, while indemnity claims are made based on the actual loss incurred from uncertain events

What is a Contract of Indemnity?

Elaborated in section 124 of the Indian Contract Act, a contract of indemnity is a contract between two parties or people where one party promises to indemnify the other party in case the promised party suffers from any loss or incurs any expenses or to protect them against any legal consequences which were caused by a third party or the promiser (first-party) himself.

For example, if A states that he shall compensate for the losses incurred by B by the act of a third party. So, the whole point of an indemnity contract is that it is a commercial contract that protects the affected party from any loss or liability incurred.

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What is Life Insurance?

To define life insurance, we can say that it is a contract between an insurance policyholder and an insurance company where the insurer pays the promised amount of money in exchange for a premium. It is received upon the death of the insured person or after a set period.

Understand: what is life insurance premium?

Life coverage is then given to support the family or loved ones in case of an unfortunate event.

Did You Know?

In 2023, India’s insurance premium penetration accounted for 4% of the national GDP.

Source: India Brand Equity Foundation

Why Life Insurance is Not a Contract of Indemnity?

If you wonder why life insurance is not a contract of indemnity, it's because life insurance does not compensate for a direct loss or damage. Rather, it is a promise to pay a predetermined sum to the policyholder's beneficiaries upon their death or after a specific event, such as an accident or illness.

The key difference lies in the nature of compensation:

Contract of Indemnity: The goal is to make the insured whole again, i.e., restore the financial position that existed before the loss.
Life Insurance: The goal is to provide a financial safety net for loved ones in the policyholder's absence, often in a fixed sum, irrespective of the actual financial loss.

Thus, to address the most asked question is life insurance a contract of indemnity? It is not.

Life insurance is more of a risk management tool that helps protect against uncertainty and not a method of compensating for a tangible loss.

Difference Between Contract of Indemnity and Life Insurance

There is a fundamental difference between a contract of indemnity and life insurance. While a contract of indemnity compensates for actual financial loss, life insurance is a contract of guarantee and not indemnity. This distinction is often misunderstood, leading many to incorrectly classify life insurance as a contract of indemnity. To clarify this further, the table below highlights the key differences between the two.

Parameters	Life Insurance	Contract of Indemnity
Definition	An insurance contract that covers the life risk of the policyholder	It is a form of security or protection against a loss, either financial or physical
Form	It is a type of investment	It is a contract
Length of contract	It’s a long-term investment	It’s a short-term contract
Premiums	Premiums are paid throughout the year	Premiums are paid in lump sum
Insurance Claim	Insurance is paid either after the death of a policyholder or after maturity.	Loss is reimbursed on the occurrence of an uncertain event
Insurable Interest	The amount must be present at the time of the contract	The amount must be present both at the time of contract and loss
Policy Value	Value can be determined based on the premium policy	The amount payable is limited to the losses suffered

The insured pays a premium to the insurer to ensure that a predetermined sum is paid to their representatives in the event of death. Since the loss arising from death cannot be measured in monetary terms, there is no question of indemnification. Life insurance is therefore viewed as a means of financial protection and savings, and the principle of indemnity does not apply to it.

Conclusion

Understanding why life insurance is not a contract of indemnity is essential for making informed financial decisions. Unlike indemnity-based insurance, which aims to restore the insured to the same financial position after a measurable loss, life insurance operates on a fundamentally different principle. Human life cannot be valued or replaced in monetary terms, and therefore, the concept of indemnification does not apply. Instead, life insurance promises a predetermined sum assured, payable on death or policy maturity, irrespective of the actual financial loss suffered.

This makes life insurance a unique combination of financial protection, long-term planning, and disciplined savings. It is designed not to compensate for loss but to provide certainty, stability, and financial security to dependents during uncertain times. By clearly distinguishing between indemnity and non-indemnity insurance, policyholders can better appreciate the true purpose and value of life insurance.

Glossary:

Indian Contract Act: This law sets and prescribes laws relating to India. It is the key act regulating Indian Contract Law.
Commercial Contract: A written or verbal agreement between businesses or individuals engaged in commercial activities.
Sum Assured: This is a fixed amount paid to the nominee of a life insurance plan in the event of a policyholder’s demise.
Insurable Interest: A type of investment that protects an object or person from some kind of financial loss.

FAQs related to Contract of Indemnity

An Indemnification contract transfers risk between contracting parties through a non-insurance agreement. Insurance transfers risk from one party to another in exchange for payment.

Life insurance is not a contract of indemnity. An insurer does not promise to indemnify a policyholder on any loss in maturity or death.

An example of indemnity of contract is when an insurance policy reimburses a policyholder for the financial loss incurred due to a covered event, such as damage to property or medical expenses. Indemnity ensures that the insured is restored to the same financial position as before the loss, as per the terms of the contract.

It’s a legal agreement by one party to hold another party blameless – not liable – for potential losses or damages.

No, insurance is not always indemnity; life insurance and personal accident insurance are non-indemnity contracts.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.

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