Chapter 13 – Documentation – Policy Conditions
Grace Period: The “Grace Period” clause grants the policyholder an additional period of time to pay the premium after it has become due. The standard length of the grace period is one month or 31 days. If premium is paid within the grace period, it is considered as payment on time. There is no penalty payable in such cases. The days of grace may be computed from the next day after the due date is fixed for payment of premium.
Policy Lapse – Scenario 1
The insurance policy lapses on the following two grounds:
The policyholder does not pay premium on due date/within the grace period
He wants to discontinue the policy after a certain period of time
“Ramaswamy has taken a life insurance cover of Rs. 5 lakhs for 15 years in the year 2009. He has paid all his premiums on the due date. Unfortunately, he dies of a sudden heart attack before making the premium payment for 2013. However, the grace period was still there. What happens in such a scenario? Will his family get the death benefit?”
A policy is not considered to have lapsed during the grace period and a premium paid within the grace period is a payment made on the due date.
The premium has to be paid on the dates specified in the policy. These dates are called “due dates”. If the policyholder dies during the grace period, the insurer will deduct the outstanding premium from the death benefit and pay the balance to his family.
Policy Lapse Scenario 2:
Ramaswamy has taken a life insurance cover of Rs. 5 lakhs for 15 years in the year 2009. So far, he has paid all his premiums on the due date. Unfortunately, he dies of a sudden heart attack. The premium payment did not happen even after the grace period for 2013. Will the insurance company pay the death benefits?
In this case, the policy is considered to be lapsed. The insurance company is not under any obligation to pay the death benefit to Ramaswamy’s family.The only amount payable would be whatever is applicable under the non-forfeiture provisions.
Lapse – Restatement and Revival
Raj took a policy worth Rs. 5 lakhs. He paid his premiums regularly for two years. He was all excited about his only daughter’s marriage that he forgot about his policy. Only after a long period of time did he realise that his policy had lapsed. If Raj had been a little more cautious, he would have reaped the benefits!
Does a policyholder intentionally let an insurance policy lapse? In most cases, it is not so. It may be because of any one of the two reasons:
- Negligence/oversight on the part of the policyholder
- Temporary financial difficulty
When a policy lapses, neither the insurer nor the insured benefits. Hence, the insurer takes all possible steps to bring the policy back into existence. This process is called “Revival”, which is the opposite of lapse. A revival is as important as a new policy proposal.
The general underwriting formalities will be carried out at the time of revival of the policy such as:
- Assessment of risk at the time of revival
- Risk should be the same as the original sum assured less paid-up value on the date of lapse
The underwriter has the option to:
- revive as per the original policy terms
- revive the modified terms
- decline the revival
Continued good health is necessary for revival.
Revival is often more advantageous because buying a new policy would call for a higher premium rate based on the age the insured has attained on the date of revival
When a policy lapses, the policyholder has several choices under the Insurance Act. These are known as non-forfeiture options.
The options are:
- Eligibility of surrender value
- Making the policy paid up
- Keeping the policy in force through premiums advanced from the surrender value
- Providing term insurance cover from the surrender value
The law in India, thus provides that if premiums have been paid for at least three consecutive years, there shall be a guaranteed surrender value. If the policy has not been surrendered, it shall subsist as a policy with a reduced paid-up value. The policy provisions usually provide for a more liberal surrender value than that required by law.
Let us understand how the surrender value of a life insurance policy is calculated.
- Life insurers normally have a chart that lists the surrender values at various times. The chart also gives the method that will be used for calculating the surrender values
- The formula takes into account the type and plan of insurance, age of the policy and the length of the policy premium-paying period
Sometimes, the actual amount of cash one gets in hand on surrender may be different from the surrender value amount prescribed in the policy. Why?
This is because the following items may cause additions or subtractions from the surrender value:
- Paid-up additions
- Bonuses or dividend accumulations
- Advance premium payments
- Gaps in premiums
- Policy loans
The amount the policyholder ultimately receives is the net surrender value. Surrender Value is a percentage of paid-up value.
Surrender Value arrived as a percentage of premiums paid is called Guaranteed Surrender Value.
The policy loan is usually limited to a percentage of the policy’s surrender value (say 90%).
Insurers usually charge interest on policy loans, which are payable semi-annually or annually. If the interest charges are not paid, they become part of the policy loan and are included in the loan outstanding.
What will happen if the policyholder does not pay the interest on loan and also the future premium amounts after taking the loan?
In such a scenario, the policy becomes lapsed. When no new premiums are forthcoming, a situation can arise where the amount of outstanding loan plus unpaid interest (the total debt) becomes greater than the amount of policy’s cash value.
What will the insurer do if the outstanding loan plus unpaid interest becomes greater than the amount of cash value of the policy?
The insurer will foreclose the contract. Notice is to be given to the policyholder before the insurance company resorts to foreclosure. The policy is terminated and subsisting cash value is adjusted to loan and interest that is outstanding. Any excess amount may be paid to the policyholder.
Nomination: Nomination is a process, which enables the settlement of claims in an easy way.
This is the place where the life assured proposes the name of the person(s) to whom the sum assured should be paid by the insurance company after his/her death.
The life assured can nominate one or more than one person as nominee(s).
Where more than one nominee is appointed, the death claim will be payable to them jointly, or to the survivor or survivors. No specific share for each nominee can be made. Nominations made after the commencement of the policy have to be intimated to the insurers to be effective.
Nomination can be done either at the time the policy is bought or later.
Note: Nomination only gives the nominee the right to receive the policy monies in the event of the death of the life assured. A nominee does not have any right to the whole (or part) of the claim.
Where the nominee is a minor, the policyholder needs to appoint an appointee.
The appointee needs to sign the policy document to show his or her consent to acting as an appointee. The appointees lose their status when the nominee reaches majority age. The life assured can change the appointee at any time. If no appointee is given, and the nominee is a minor, then on the death of the life assured, the death claim is paid to the legal heirs of the policyholder.
Assignment of Life Insurance Policy Under Section 38 of Insurance Act, 1938
An insurance policy is a property. It can be sold, mortgaged, charged, gifted or bequeathed.
In India, the assignment is governed by Section 38 of the Insurance Act. On execution of the assignment, the assignee gets all rights, title and interest in respect of property assigned and becomes the owner of the policy, subject to the provision that the assignee cannot have a better title than the assignor.
This last provision is very important. It means simply that the assignee would not be eligible to get a claim that for some reason is rejected to the assured. Assignment requires that the parties be competent to contract and are not subject to legal disqualifications.
The policyholder is the assignor and on whom the policy is assigned is the assignee.
Types of Assignments
There are two types of assignments.
|Absolute Assignment||All rights, title and interest, which the assignor has in|
|the policy are transferred to the assignee without|
|reversion to the former or his/her estate in any event.|
|The policy, thus vests absolutely with the assignee.|
|The latter can deal with the policy in whatever manner|
|he or she likes, without the consent of the assignor.|
|Conditional Assignment||Conditional assignment provides that the policy shall|
|revert to the life assured on his or her surviving the|
|date of maturity or on death of the assignee.|
Conditions for Valid Assignment
- The person executing it (the assignor) must have absolute right and title or assignable interest to the policy being assigned
- It is necessary that the assignment be supported by valuable consideration, which may include love and affection
- It is imperative that the assignment is not opposed to any law in force. For example, the assignment of a policy to a foreign national residing in another country may contravene exchange control regulations
- Assignee can do another assignment, but cannot do nomination because assignee is not the life assured
The assignment has to be in writing and must be signed and attested by at least one witness.
The fact of transfer of title has to be specifically set forth in the form of an endorsement on the policy. It is also necessary that the policyholder must give notice of the assignment to the insurer.
Unless such notice in writing is received by the insurer, the assignee would not have any right of title to the policy.
Reassignment of Policy
An assignee may reassign interest in the policy to the policyholder/life assured during the currency of the policy. On such reassignment, the latter may be advised to execute a fresh nomination or assignment for expeditious settlement of the claim.
Again, in the case of conditional assignment, the title to the policy would revert to the life assured in the event of death of the assignee. On the other hand, if the assignment were absolute, the title would pass to the estate of the deceased assignee.
I have taken a life insurance policy of Rs. 10 lakhs. I have a quarterly premium payment. Now, I want to change it to annual premium. Is it possible?
In the insurance policy I have taken, the sum assured is Rs. 5 lakhs. Now, I want to increase the sum assured to Rs. 10 lakhs. Is it possible?
Insurers allow alterations in the policy after the policy has been issued.
Normally, alterations may not be permitted during the first year of the policy. However, there are certain exceptions. Alterations are permitted for change in the mode of premium or for those which are of a compulsory nature – like change in name or / address; readmission of age, in case it is proved higher or lower; request for grant of double accident benefit or permanent disability benefit and so on.
Impacts of Alterations
Alterations require the approval of the underwriters as some may lead to increase in risk.
Change in sum assured to a higher side will increase the risk. Therefore, the underwriter has to go through the underwriting process again.
Alterations make the given two impacts on the insurer.