Which statement correctly describes how the principle of indemnity applies to life insurance?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Life insurance is a valued contract rather than a strict indemnity contract. Because human life cannot be assigned a dollar value, the policy pays the stated face amount at death regardless of the actual financial loss suffered. Indemnity, which restores the insured to the pre-loss financial position, applies strictly to property insurance where the measure of loss is the value of the damaged property. This distinction is why a life policy pays its full face amount even if the insured had minimal measurable economic value, and why policyowners select a face amount rather than waiting for a loss to be valued.
Why the other options are wrong
- B) A life policy pays the contracted face amount set at issue, which is unrelated to the actual funeral costs later incurred.
- C) The insured's earnings at death do not determine the payment; the face amount agreed upon at issue governs.
- D) Life insurance does not require proof of a financial loss amount; it pays the stated amount upon proof of the insured's death.
Memory hook
Life pays what the policy says; property pays what the loss was. One contract is valued, the other indemnifying.