Life Insurance: Definition, Types, Purposes, and Principles

In today's modern world, life is full of uncertainties. Financial risks, unexpected events, and increasing living costs make it necessary for individuals to plan and protect their future. One of the most essential tools for financial protection is life insurance. In this article, we’ll explore the definition, types, purposes, functions, and key principles of life insurance.

What Is Life Insurance?

Life insurance is a financial agreement between a policyholder and an insurance company, in which the insurer agrees to pay a specified amount of money to a beneficiary upon the death of the insured or after a certain period, as outlined in the contract.

According to Article 302 of the Indonesian Commercial Code (KUHD), life insurance can cover:

• The entire life of an individual, or
• A specific period agreed upon in the insurance contract.

In addition, Law No. 40 of 2014 on insurance defines life insurance as a risk management service that provides payment to the policyholder, the insured, or other entitled parties upon the death or survival of the insured, or at a specific time defined in the policy.

Types of Life Insurance

Life insurance can be categorized based on its duration, policyholder structure, and intended purpose:

By Duration:

1. Whole Life Insurance – Covers the insured for their entire lifetime.
2. Term Life Insurance – Provides coverage for a set period (e.g., 10, 20, or 30 years).

By Policy Structure:

1. Individual Life Insurance – Covers one person under a single policy.
2. Group Life Insurance – Covers multiple people under one policy, often offered by companies to their employees. This is divided into:
   • Contributory: Premiums are shared between employer and employee.
   • Non-Contributory: Premiums are fully paid by the employer.

By Purpose:

1. Education Life Insurance – Designed to provide funds for a child’s education in the future.
2. Hajj Savings Insurance – Combines savings for the Hajj pilgrimage with life insurance protection.
3. Credit Life Insurance – Protects the borrower’s family or the lender by covering outstanding loans in case of the borrower’s death.
4. Pension Insurance – Offers retirement income for employees post-employment.
5. Unit-Linked Insurance – A combination of life protection and investment benefits in one policy.

Purposes of Life Insurance

Life insurance serves different purposes from both a social and governmental perspective:

From a Social Perspective:

• Provides financial security for the family of the insured, especially in case of sudden death.
• Encourages long-term savings, which is crucial in areas with lower income levels.
• Offers steady income during retirement or for a certain period, depending on the policy terms.

From a Government Perspective:

• Reduces the financial burden on the state by encouraging individuals to secure their own financial protection.
• Promotes national awareness about financial planning and protection.
• Government involvement in founding national life insurance companies (e.g., Bumi Putra 1912) highlights the importance of life insurance.

Functions of Life Insurance

According to legal expert Sri Redjeki Hartono, life insurance has two major functions:

1. Protection Function – Provides risk coverage for policyholders by transferring potential financial losses to the insurer.
2. Economic Function – Generates employment opportunities and channels public funds through premium payments for future investment and development.

Key Principles of Life Insurance

Life insurance is built upon several core principles:

1. Economic Principle – Life insurance is a rational economic decision to transfer financial risk.
2. Mutual Agreement – A legally binding contract between the insurer and the insured.
3. Insurable Interest – The policyholder must have a legitimate interest in the life of the insured.
4. Utmost Good Faith – Both parties must act honestly and disclose all relevant information.
5. Fixed Benefit – Unlike indemnity insurance, life insurance pays a pre-agreed sum regardless of actual financial loss.

Conclusion

Life insurance plays a vital role in financial planning and provides peace of mind to individuals and their families. With a wide variety of policy types and benefits, it can be tailored to meet different financial goals, risk levels, and life stages. Whether you're looking to protect your loved ones or prepare for retirement, understanding life insurance is a crucial step toward financial security.