Policy condition

7/27/2019 Policy condition

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Chapter 7

Policy Conditions


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Introduction to Policyconditions

The policy states the rights and obligations of theinsurer and the policyholder. The policyholder has to pay the premiums on the

due dates mentioned in the policy. In consideration, the insurer undertakes to pay the

benefits on the happening of the events mentionedin the policy.

The policy document also states the terms andconditions of the policy.

The terms and conditions of the policy could differ between insurers and also between plans of thesame insurer.

This chapter deals with some of the terms andconditions which would apply to all life insurancepolicies.


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Age

Proof of age is required to be submitted with theproposal for insurance. This is because

Calculation of premium depends upon age atentry of the life assured.

Underwriting of risk depends upon age at entry of the life assured.

Therefore, life assured has to submit proof of hisage to the satisfaction of the insurer.

If false proof of age is given by the life assured, theinsurer can declare the policy ab initio (from thebeginning itself) void on the ground of suppressionof material facts.


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Age - continued

If age of the life assured proves to be higher thanthe stated age in the proposal form on subsequentproduction of age proof then Premium at the higher rate will have to be paid by

the policyholder from the date of commencement,with interest.

Medical report to be called for, if age of thepolicyholder exceeds the maximum permissibleage at entry, in non-medical cases.

Written consent to be obtained from thepolicyholder for acceptance of modified terms of the policy, if required and pass endorsement bothfor modified terms and age admission.


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Age - continued

If age proves to be lower than the statedage in the proposal form on subsequentproduction of age proof then If found minor at the time of proposal but

major now, Life assured has to ratify thestatements made by him in proposal and/or Personal statement form.

Excess of premium already paid is to berefunded and necessary endorsement is to bepassed.

If minor even at the time of production of ageproof, the policy will have to be cancelled.


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Documents accepted as proof of age Certified extract from the municipal records

Certificate of baptism Certified extract from family Bible if it contains date of

birth Certified extract from school or college records

Certified extract from service register of employer Passport Identity cards, issued by Defence department in case

of Defence personnel

Marriage certificate issued by a Roman CatholicChurch.

In absence of above, horoscopes, self-declaration byway of affidavit, elder s declaration, or certificate by

village panchayat, may be accepted as proof of age.


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Payment of Premium Premiums are required to be paid on the dates mentioned

in the policy. These dates are called due dates . Premiums may be paid by cash, cheque, demand draft,

postal order, money order, bankers order, credit card, debitcard.

Insurer allows payment of premium by monthly, quarterly,half-yearly and yearly modes.

In case of Salary Saving Scheme (SSS), the premiums arededucted by the employer from the salary of thepolicyholder and remitted to the insurer.

Due to limited number of offices of the insurer,arrangements are made with the banks by the insurer for

collection of premiums from the policyholders. Suchcollecting branches send a cheque for the consolidatedamount collected, alongwith the list of policies to the insurer at specified intervals.

Insurer has the option to decide whether the collectioncharges should be collected from the policyholder.


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Days of Grace Insurer allow a grace period for payment of

premium. Grace period is the additional time given to the

policyholder over and above the due date mentionedin the policy for payment of the premium.

Payment made within the grace period is consideredto be payment on time.

The grace period is one month, but not less than 30days for yearly, half-yearly or quarterly modes of premium and 15 days for monthly modes of premium.

If the premium is not paid within the grace period, it isconsidered a default and the policy lapses. If the insured dies within the days of grace and the

premium has not been paid, the claim will beadmitted in full and the premium for the current year will be deducted from the claim amount.


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Receipt of premium Premium is deemed to be paid when the

cheque or demand draft is received by theinsurer. Renewal premium receipt is issuedsubject to clearance .

In case of Salary Saving Scheme (SSS), if

there is delay in remitting the premium amountby the employer to the insurer, the delay isusually condoned. If the delay happensfrequently, the Salary saving schemearrangement may be terminated.

In case of arrangements made with banks for collection of premium, date of collection by thecollecting bank is considered the actual dateof payment of premium.


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Receipt of premium - continued

In case of death claims where the deathhas occurred before the premium isreceived by the insurer, it may consider

that the premium has been paid, if thereis proof that the policyholder had sentthe money. Such proof may be available

in case of Money Orders or bank drafts. The benefit is given to the policyholder because the premium had left his hand

and was in transit.


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Lapse Policyholder has to pay the premium within

the days of grace to keep the policy in force. If premium is not paid within the days of

grace, there is a default on the part of thepolicyholder. The insurer is entitled to say that the policy

comes to an end. Such termination is calleda Lapse .

No claims arise on the policy after a lapse,and all premiums are forfeited.


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Lapse - continued In practice, however, insurers do not forfeitall the premiums paid when the policy

lapses. The Insurance Act does not allow such

forfeiture. This is because, every policy acquires a

reserve as - Premiums in the early years of the policy

are more than what is justified and- Savings element in the premium.- It would not be fair to forfeit this reserve.


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Non-Forfeiture optionsThe policy conditions provide various safeguardsto policyholders, when there is a premium default.These provisions are called Non-forfeitureprovisions. The options are as under:

1. Payment of Surrender Value or Cash Value . 2. Making the policy Paid-up.3. Keeping policy in force through premiums

advanced from the surrender value.4. Providing term insurance cover from the surrender

value.Life Insurance Corporation of India allows only thepaid up value option. The policy becomesautomatically paid up, unless the policyholder surrenders the policy.


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Surrender Value It is the payment of an amount that represents thereserve under the policy, on voluntary termination of

the insurance contract by the policyholder. The Insurance Act (Section 113) requires that every

policy shall have a guaranteed surrender value, if atleast 3 years premiums have been paid. This is theminimum that has to be paid to the policyholder.

Insurers actually pay more than the guaranteedamount.

Surrender value is payable when the policy hasbeen in force for at least 3 years, because in the first year, most of the premium goes out in

expenses. There is little left for accumulation.


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Paid Up ValuePaid up value = Number of premiums paid X Sum Assured

Number of premiums payable

Only the Sum Assured is reducedproportionately.

Bonus vested already is unaffected. Paid Up policy will

not participate in bonuses and

will also not be entitled to any interimbonus. Premiums are not paid on a policy which has

become paid up.


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Paid Up Value - continued If other benefits related to the Sum Assured are payable, the benefits will be

related to the reduced paid up value.

Policy remains in force for reduced sumassured for the entire policy period. If the paid up value is less than the

minimum amount provided for by theinsurer, then this non-forfeiture benefitwould not apply.


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Example showing calculation of Paid up value -

Sum Assured - Rs.10,000/-;Term - 25 years; Mode - half yearly.

Total number of premium instalments payable - 50 half yearly.

Default occurs after 25 half yearly instalments are paid

Paid up value = Number of premiums paid X Sum Assured

Number of premium payable

= 25 X 10000

50

= Rs. 5000/-.

This means that the sum assured is Rs.5,000/- instead of theoriginal Rs.10,000/- with effect from the date the 26 th premiuminstalment was due.

If Rs.6,000/- had vested as bonus before the policy lapsed, thepaid up value, including bonus, will be Rs.11,000/-.


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Keeping policy in force - continued

It the policy is With profits , it will beentitled to bonus additions. If the surrender value is not sufficient to

advance a full instalment of premium, thepolicy is finally determined and anysurrender value left over is paid to thepolicyholder.

Insurers prefer to offer the paid up optionas the sense of loss to the insured ismuch more, if the arrears are not paidand the surrender value is exhausted.


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Extended Term Insurance

Insurer converts the policy into a single premium terminsurance for the full Sum Assured of the policy for sucha period as the net surrender value will purchase, at theinsured s age at the time of lapse of the policy.

Premium advanced from the Surrender value is thepremium necessary to provide a term insurance cover,equal to the Sum Assured.

Policy remains in full force for the full sum assured for alimited period.

Surrender value would not increase as the savingselement of the premium is not being advanced. Even if the life assured survives till the original date of

maturity, the amount payable at maturity will not be thesum assured.


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Revival It is a decision to underwrite a risk, the risk being

equal to the original Sum Assured under thepolicy less the paid up value (not includingvested bonus) on the date of lapse.

Insurer allows revival of policy because lapsationaffects both the insurer and the insured.

Insured loses the insurance risk cover for the fullamount and exposes himself to possible adversecircumstances.

It also suggests that the agent had not fullyconvinced the policyholder about the usefulnessof the insurance plan.


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Revival - continued If the policy lapses and is not revived, insurer

may not be able to recover the heavy initialexpenses like medical fees, stamp duty, agentscommission incurred on proposals.

Insurer charges level premium on theassumption that, barring death claims, the policywill run for the full term.

People enjoying good health may not continuethe policy for the full term as compared to peopleenjoying bad health who are more likely to keep

the policies in force. In such a case, there is arisk of selection against the insurer . The insurer s liability will be greater than what

was assumed while fixing the cost of insurance.


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Revival - continued Insurer allows revival of lapsed policy because -

lapsation affects both the insurer and the insuredadversely. lapsation may occur due to just neglect to pay or

because of temporary financial difficulties of thepolicyholder.

Requirements for revival payment of outstanding premiums with interest. Proof of continued good health.

Life Insurance Corporation of India does not allowrevival if the policy has remained in lapsed conditionfor more than 5 years. This is because outstanding premiums on such a policy would be

too heavy

it would be better to take out a fresh policy.


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Revival - continuedRequirement of proof of good health variesaccording to the duration of lapse and alsoaccording to the Sum Assured.

Upto six months from the date of lapse, noproof is necessary. This period is extendedupto 12 months, if the policy has been in forcefor at least 5 years.

If the policy is due to mature within a year,

then also no proof is necessary. Nature of good proof can be a simpledeclaration or an elaborate medicalexamination with special reports.


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Revival - continued The underwriter may agree to revive the

policy as per the original policy terms or on modified terms or even decline torevive.

Decision is made after examining therisk factors at the time of revival, whichmay have changed since the originalpolicy was taken.


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Revival schemes

If the policy can be revived,following alternatives are offeredby Life Insurance Corporation of

India to suit the convenience of the policyholder.

1. Special Revival scheme.2. Instalment Revival scheme.3. Loan-cum-revival scheme.


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Special revival scheme

Requirements for revival Policy has not acquired any surrender

value on the date of lapse. Period expired after lapse is not less than

6 months and not more than 3 years. Policy has not been revived under this

scheme before. Amount required to be paid for reviving the

policy is quite low as premiums outstandingfor the entire period of lapse are not paid.


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Example showing Calculation of new date of commencement under special revival scheme

Original date of commencement 1.10.1999Policy lapsed 1.1.2001 commencement 1.4.2001, 1

year and 6 months forward from the original date of commencement.

2. If policy is to be revived on 1.4.2003 Period of lapse 2 years and1. Policy revived 1.7.2002 -Period of lapse 1 year and 6 months

New date of 3 monthsNew date of commencement 1.10.2001, only 2years forward from the original date of commencement and not 1.1.2002.


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Instalment revival scheme

Policyholder is not required to pay the full arrears of premium in one lump sum.

Policyholder pays only 6 monthly premium, two

quarterly premiums, one half yearly premium or half of the yearly premium. Balance of the arrears is spread over the remaining

due dates in the policy year current on the date of

revival, and two full policy years thereafter. Suitable for policyholders who cannot pay the fullarrears of premium in one lump sum.


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Instalment revival scheme - continued

Requirements for revival - Policy cannot be revived under the special

revival scheme

Premium is outstanding for more than 1year No loan is outstanding under the policy at

the time of revival. Policy should have acquired surrender

value as on date of revival.


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Assignment

It is the transfer of rights, title and interest of theassignor to the assignee. The person who transfers such rights is called the

Assignor and the person to whom the property istransferred is called the Assignee.

Assignor should have the right or title to the property and must be major and competent to contract.

It must be supported by a consideration.

Guardian is to be appointed, if assignee is a minor. In case of Children s Deferred Assurance plans, the

life assured can assign the policy after the vestingdate.


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Assignment - continued

Assured loses control over the policy. An assignment involving a part of the policymoneys is considered to be bad in law.

An assignment once made cannot be cancelledor even altered in form, by the assignor unlessthe assignee reassigns the policy.

The assignee is legally entitled to receive the

policy moneys. Absolute assignee is the owner of the policy and

can deal with it. Assignee has a right to sue under the policy.


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Assignment continued

It can be done by an endorsement onthe policy or by a separate deed.Separate deeds have to be stamped.

It must be signed by the transferor or his duly authorised agent. The signature must be attested by a

witness otherwise it will be invalidated. It is effective as soon as it is executed. It must be sent to the insurer along with

a notice.


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Types of assignment

1. Absolute The assignee becomes the title holder and can

deal with the policy in any manner he likes. If the assignee dies before the life assured, the

right transfers upon his/her heirs.

2. ConditionalThe interest in the policy automatically reverts to

the life assured on the occurrence of the specifiedcondition mentioned in the assignment. Example. A conditional assignment can provide for reversionwhen the assignee predeceases the policyholder or the policyholder survives till the date of maturity.


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Assignment continued If the assignee dies after the life assured

and before settlement, the policy moneyswould be payable to the heirs of the

assignee. Creditors of the life assured cannot attach

the policy moneys unless the assignment

is done with an intention to cheat thecreditors.


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Nomination It is a facility given to policyholder so that the claim under

the policy can be settled quickly in the event of death of the life assured during the term of the policy.

The holder of a policy on his own life alone, maynominate the person or persons to whom the moneysecured by the policy shall be paid in the event of hisdeath.

It can be made at the time of proposal or at any time during the currency of the policy by an

endorsement on the policy. It can be altered by the life assured during the currency

of the policy and have to be intimated to the insurer to beeffective.

A person having a policy on the life of another, cannoteffect a nomination.


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Nomination - continued Appointee should be appointed when a nominee

is a minor. Appointee loses his status when thenominee becomes a major. When nominee is a minor and there is no

appointee, claim under the policy can be paidonly to legal heirs of the deceased life assured.

Life assured retains full control and can dealwith the policy without the consent of thenominee.

Nominee has only the right to receive thepolicy moneys in the event of death of the lifeassured.

Creditors of the life assured can attach thepolicy moneys.


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Nomination continued An assignment automatically cancels a nomination,

but, an assignment made in favour of the insurer, inconsideration for a loan granted against the securityof the policy,

does not cancel nomination.

Nomination does not become inoperative on thematurity of the policy, in respect of policies where thematurity amount is payable in installments after thedate of maturity. example Educational annuity policies.

When the nominees are more than one, the policymoneys are payable to them jointly or to the survivor or survivors of them. No specific share for each nominee can be made.


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Nomination continued Nominee has no right to sue under the policy. If the nominee dies after the death of the life

assured, but before the payment of the deathclaim, the policy moneys would form part of the estate of the life assured.

In respect of a policy issued on the lives of two persons, nomination can be effected

jointly by both the lives assured, to receivethe policy moneys in case both the lives assured die simultaneously

in a common calamity and there is no proof to establish who died first.


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Surrenders It is a voluntary termination of the insurance

contract by the policyholder with the insurer. Policyholder can surrender the life insurance

policy at any time before it becomes a claim. The amount payable on surrender is called the

surrender value or cash value. Insurers generally state the guaranteedsurrender value in the policy.

The actual surrender value will be higher than

the guaranteed surrender value. The surrender value is usually a percentage of the premiums paid or a percentage of the paid up value.


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Surrenders - continued Surrender value increases with the

increase in the number of premiums paidunder the policy.

Surrender value will be less on a policywith a longer term as compared to a policywith a shorter term,

sum assured and the number of years for which thepolicies have been in force

being the same.


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Loans In most of the life insurance policies, insurers

provide the facility of loans. Loans are given upto 80% or 90% of the

surrender value of the policy. Interest is charged on the loans. Loans may be repaid,

in full or in part, during the currency of thepolicy or

may remain as a debt on the policy moniesuntil the claim arises.


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Loans - continued

Payment of interest is also not compulsory. The period between the date of loan and either The policy anniversary following or Six months prior to policy anniversary, if the

anniversary is more than six months away,is called the broken period.

Interest is charged separately for the brokenperiod.

Interest on loan is payable at half-yearly intervalsto coincide with the due dates of premium.


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Loans - continued Policy must be assigned absolutely to the

insurer. Policies which do not acquire adequate

surrender value (temporary term insurance,annuity policies) and policies where there isprovision for payment of Sum Assured atperiodical intervals (Money back policies)are not usually eligible for loan facility.

No loan is granted during the defermentperiod in Children s Deferred Assurancepolicies.


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Foreclosure It means closure or writing off the policy

before its actual maturity. When a loan is granted under a policy, the

life assured has a choice to pay theinterest or allow it to accumulate andremain as a debt on the policy monies tobe adjusted against the claim.

Foreclosure becomes necessary if theprincipal loan and accumulated interestbecome more than the surrender value.


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Foreclosure - continued This may happen if

the premiums are not paid regularly andthe policy lapses.

In case of paid-up policies, thesurrender value will not grow as fast asthe accumulated interest.

Notice may be issued to the policyholder calling for the payment of arrears of loaninterest.


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Foreclosure - continued If interest is not paid, the policy is foreclosed,

which means surrendered to loan. The balance surrender value, if any, after

adjusting the principal loan and outstandingloan interest, is paid to the policyholder, after obtaining the discharge voucher.

A foreclosed policy can be reinstated beforethe policyholder has returned the dischargevoucher and collected the balance surrender value.


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Foreclosure - continued Procedure for reinstatement of a foreclosedpolicy is similar to revival. Life Assured has

to submit evidence of good health and pay the arrears of loan interest.

On foreclosure, nomination if any, becomesinoperative.

If life assured dies before payment of thebalance surrender value, the amount ispayable only to the legal heirs of thedeceased assured.


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Alterations Alterations are changes desired by a

policyholder in the terms of the policycontract to suit his changed circumstances.

While considering the request for alteration,

the insurer tries to ensure that there is noadverse selection against the insurer. That is, the risk should not increase after

alteration. Increase in Sum Assured, increasing the

term of the policy are alterations thatincrease risk.


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Alterations - continued It may be for change in address/mode of

payment of premium/nomination/participatingto non-participating, break one policy into twoor more policies of smaller sum assured.

These may affect the premiums due, but donot affect the risk of the insurer. Change in term or plan or both, change in

Sum Assured, etc. may be allowed in existingpolicies if the risk does not increase.

If the risk is likely to increase, a proposal for afresh policy of insurance will have to be madefor the consideration of the underwriter.


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Indisputabilty of the policy As per Section 45 of the Insurance Act, 1938,

a policy which has been in force for two years cannot be disputed on the ground of

incorrect or false statements in theproposal and other documents, unless it is shown to be on a material matter and was fraudulently made.

After expiry of a period of two years from thedate of acceptance of risk, the burden of proof rests with the insurer.


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Married Women Property Act Policies

As per Section 6 of the Married Women Property Act, 1874 a married man, which includes awidower or a divorced man, can make afinancial arrangement for The benefit of his wife and children, which

includes his sons and daughters, both naturaland adopted.

The policy must be on his own life. A trust is created for -

the benefit of his wife, his wife and children, or any of them,according to the interests expressed.

Married Women Property


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Married Women PropertyAct Policies - continued

To effect assurance under Married WomenProperty Act, addendum is to be completedstating the beneficiaries and trustees.

Mohammedan proposers cannot take out policies for the benefit of the wife

and children as a class. The beneficiaries must be existing on the

date of the policy and must be named. If two or more beneficiaries are named, the

respective shares of the differentbeneficiaries should be stated.

Married Women Property


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Married Women PropertyAct Policies - continued

Non-Mohammedan proposers can specify the beneficiaries as a class and provide that the benefit should go to

them jointly or to the survivors or survivor of them.

He can also specify equal shares or

specify unequal shares for them. If any beneficiary dies before the policybecomes a claim, his share would go tohis legal representatives.

M i d W P t A t P li i


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Married Women Property Act Policies continued

The life assured does not have any rightto deal with the policy. Alterations cannot be made. It cannot be surrendered. No loan is granted.

Claim is paid to the trustees. Claim cannot form part of his estate,

nor, can it be attached by his creditors.


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Restrictions

Changes, if any, in the factors affecting risk after the acceptance of risk by the insurer, do notaffect the insurance contract, unless there arespecific exclusion clauses.

However, certain benefits are conditional and areaffected by life styles and hobbies. Examples Accident benefit will be denied if an accident

can be traced to intoxication. Death by suicide will not affect the claim,

unless it happens within one year. But suicidewill affect the accident benefit.


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