Why 'Uberrima Fides' is Important?

Why 'Uberrima Fides' is Important?

'Uberrima fides' is a Latin phrase which means 'in good faith' or 'utmost good faith'. This phrase is generally used in contracts, particularly in insurance contracts. The insurance contract is between the insurance company and the person who buys the policy. The insurance company covers the risk(s) specified in the policy and so the contract has to be transparent and binding.

The Importance of Trust.

Trust and money are like siblings. Trust is the elder one and money is the younger. Wherever trust goes, money follows. Money loves trust and trust loves money equally. Money won't remain without trust. Trust being elder guides money where to move next. Trust is therefore important if you want money to be with you.

Financial dealings won't take place without trust. People who run businesses should be trustworthy. Money made without trust has no future. The success of a contract depends upon mutual trust between the customer and the company. Trust is the unifying element in a contract. Utmost good faith is needed in insurance contract.

Disclosing Relevant Material Facts.

A person who buys an insurance policy has to disclose true and accurate information about himself and his family. Some of the information which is mandatory are:

(1) The age of the person and his family members: Age is the first thing an agent will ask a person who wants a policy. As life insurance policies have age limit, the financial advisor or the agent will enquire about it first before proceeding further.

(2) The health and medical history of the individual: Health is important for purchasing a life insurance policy. The health of a person is an important factor which an underwriter would always crosscheck before issuing policy. Personal details like height, weight, past illnesses, accidents or surgeries, if any, has to be disclosed by the person seeking policy. For some policies, like term plans, a medical examination is mandatory.

(3) The education, occupation and the source(s) of income: The level of education, present occupation and the annual income also has to be disclosed in the proposal form. These details are needed to assess the premium paying capacity of the individual. Some policies require proof of income like salary certificate or proof of income tax returns. Also, for some policies, the minimum qualification is graduation. It is important to check the monetary condition of the person and to ascertain his capacity to continue the policy before issuing him one.      

(4) Details of family members: Information regarding family members is equally important. The names and personal details of all close relatives are also required. 

(5) Name of the nominee: Name of the nominee is another important thing. If the nominee is a minor, then the name of appointee is required.

(6) The habits and the lifestyle in general of the person seeking insurance: Habits play a role in the health and well being of a person and so, it is also enquired about by insurance companies before issuing policy. Habits which are detrimental for health are bad indeed. Smoking is a bad habit. If a person smokes, he has to disclose it too in the proposal form.

This is required to check the insurability of the person before issuing him the policy.

The Preferred Risks.

Every insurance company covers risk, but the risk has to be within a limit. Insurance companies could easily cover risks of those who are young and healthy, who are financially sound and who don't have any risky behavior like smoking. Such people are preferred by insurance companies. They are categorized as preferred risks and are given more preference than others.

The Risks which are not Preferred.

Insurance companies would never like to cover risks of a person who lives hazardously and even if they do, they would charge a higher premium for issuing the policy. Involving in sports like mountaineering or deep sea diving and other risky activities are not encouraged by insurance companies.

The insurance company might be taking a huge risk by providing life cover for an individual who is not insurable. However, an underwriting decision may accept them for a higher premium and this depends entirely on the assessment of the proposal form.

The Proposal Form.

The proposal form should have all relevant information regarding the proposer and the life insured. All these information have to be disclosed by the person who wants a policy for himself or for his family. The disclosures have to be made truthfully. Utmost good faith is needed for this.

Responsibilities of Agents and the Insurance Company.

The agent of the insurance company should explain the policy in detail to his prospective customer. There are many things about the policy which the customer should know before he buys one. Some of them are:

(1) The premium: Every insurance policy has a premium. The premium is the price of the policy and it depends on lot of factors. The agents or the financial advisors should explain the prospective customer about the premium of the policy in detail.

(2) The number of years the premium has to be paid: There are many types of insurance policies. In some, the premium has to be paid only once and in some others, it has to be paid for some years. PPT - premium paying term which is the duration for which the customer has to pay the premium.

(3) The sum assured: Sum assured is the amount of money which the policyholder or his family will receive as per policy rules. There are two kinds of sum assured:

(a) SAM - Sum Assured on Maturity and

(b) SAD - Sum Assured on Death.

The agent should educate the customer about SAM and SAD. 

(4) The policy term: Policy term is the total duration of the policy. It is the duration for which a policy will remain live and functional.  

(5) The maturity benefit: It is the benefit which a customer will receive when his policy matures.

(6) Other benefits like bonuses: Some policies provide bonus to customers. The agent should explain details of bonus to the customer.

(7) The options for surrendering the policy and its risks: Policies could be surrendered after 2 years, but it will stop the policy and doing so will be risky too. The agent should explain it to the policyholder.

(8) The free look period: The free look period is the time allowed for a customer to discontinue the policy. It is the 15 days duration from the date of purchase of the policy.

(9) The policy riders: Riders are added to the main policy to get added risk covers. Riders could be added to the main policy for some extra amount of money usually called the rider premiums. The agent should explain the benefits of adding riders to the customer before selling him the policy.

(10) Nomination: Nomination too needs to be explained well to the customer. The agent should do that.

The insurance agent should explain these things to the person who is going to buy the policy. A customer pays premium for securing the life of his family and himself. He trusts the insurance company for this. The insurance company has the obligation of providing the customer or his family what they have promised. The agent and the insurance company should therefore adhere to the principles of utmost good faith.

Good Faith.

Good faith is needed for everything. It is not something which has to be followed by insurance companies or their agents alone. Good faith is the foundation for all human undertaking. Businesses which survive long, have the good faith of their customers. Good faith has the strength to overcome all odds in business as well as in social life. This is why 'uberrima fides' is so important and necessary.

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The previous post was: Economy.

The next post is: Liquidity.

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