Proposer

Most life policies are simple: the person taking out the cover is also the person whose life it insures. But that is not always true. When it is not, the workbook gives the buyer a separate name.

The person whose life is covered is the insured. If a different person is the one buying the policy, that buyer is the proposer, also called the policyholder. And the workbook attaches one condition to this: the proposer should have insurable interest in the individual being covered.

Insurable interest is what stops the proposer relationship from being an open door. The workbook's test: the proposer must be better off if the insured survives, and adversely affected if the insured dies.

Some proposer-insured relationships carry insurable interest automatically — direct dependents and relationships of blood and marriage, so a spouse can straightforwardly propose a policy on a spouse, and a parent on a child. Others need proof: in relationships such as aunts, uncles, cousins, nieces and nephews, insurable interest exists only with proof of financial dependence. A lender who has advanced, say, Rs 15,00,000 may act as proposer on the borrower's life only up to that Rs 15,00,000 outstanding, shrinking as the loan is repaid, and an employer may propose on a key employee — the basis of Keyman insurance.

Without this test, a proposer could take out a large policy on the life of someone in whose survival they have no stake — turning a life insurance contract into a wager on that person's death, which is exactly what the requirement is designed to prevent.

Illustrative figures. Mr Verma, a businessman, wants to propose a life policy of Rs 40,00,000 on his 22-year-old nephew, who lives independently and is not financially dependent on him.

Because Mr Verma has no proven financial dependence in this case, he cannot act as proposer on his nephew's life — there is no insurable interest to support the policy.

Had the same proposal been made by the nephew's father, it would go through without any need to prove financial dependence, since a parent-child relationship carries insurable interest automatically. Similarly, if Mr Verma had lent his nephew Rs 15,00,000 for a business, he could propose a policy on his nephew's life, but only up to that Rs 15,00,000 outstanding, not for the full Rs 40,00,000 he originally wanted.

Chapter 2 (Features of Life Insurance Products), section 2.1, "Elements of Life Insurance Products," defines the proposer as distinct from the insured. Expect a definitional question distinguishing "insured" from "proposer," and a scenario question testing whether the proposer named has insurable interest in the life being covered.

• The proposer and the insured are not always the same person, and the exam tests exactly this gap. The proposer buys and pays; the insured is the life covered.
• The proposer must have insurable interest in the insured, not the other way round — it is the buyer's stake that is tested.
• A proposer is not automatically the same as the nominee or the beneficiary. These are three separate roles that can, but need not, sit with the same person.
• Insurable interest for a proposer follows the same rules as for any other insurable interest — automatic for close family, provable for distant relatives, capped at the outstanding amount for a lender.