Policy Conditions in Life Insurance

Life Insurance Policy Conditions are studied in five forms:

  1. Conditions relating to commencement of risk
  2. Conditions of Premium
  3. Conditions relating to continuation of policies
  4. Lapse-conditions
  5. Claims Conditions

Conditions relating to commencement of risk

1. Commencement of Risk

The letter of acceptance is not a cover note, it only intimates that the risk will commence when the first premium is offered to and accepted by the insurer.

If premium was paid along with the proposal form, the date of letter of acceptance will be the date of commencement of risk. After acceptance of risk, policy was issued. The policy contains terms and conditions of the insurance and is a document which can be used as a proof of insurance.

2. Proof of Age

The proof of age must be produced at the time of proposal or immediately after the proposal because the rate of premium depends upon the age of the life assured.

The insurer does not withhold the issue of the policy, for want of proof of age, but does not admit any claim unless the age is proved to the satisfaction of the issuer.

However, if it is subsequently found that the age at entry was mentioned lower than the correct age, the assured sum is reduced to such amount as would have been purchased at the true age.

If the actual age comes out to be lower than the stated age, the difference is either refunded or adjusted towards future premium or policy amount.

The proof of age is very essential at the time of proposal in the term policies.

Conditions of Premium

1. Payment of Premiums

The premium rate is calculated annually, but for theĀ  convenience of the assured, it can be paid half-yearly, quarterly or even monthly.

It should be remembered that these premiums are not just the portion of yearly premium because the insurer losses interest on the unpaid premium of a year and expenses are involved for frequent calculation of premium.

When premiums are not annual but factional and if death takes place before all the premiums have fallen due for the current policy year, the corporation deducts the unpaid instalments form policy year, the corporation deducts the unpaid installments from the assured sum at the time of settling the claim.

2. Days of Grace

Premium is paid at or before the due date. But for convenience of the policyholders, certain additional period called days of grace, is allowed to pay, the premium.

The insured can pay the premium within the days of grace and the policy would not lapse up to the days of grace. However, the policy will lapse if the due premium is not paid even within the days of grace.

One calendar month but not less than 30 days of grace is allowed for payment of yearly, half-yearly and quarterly premiums, and fifteen days for payment of monthly premiums.

The days of grace are to be counted excluding the due date of the premium. When the days of grace expire on a Sunday or a holiday observed by the office of the insurer where premiums are payable, the premium must be paid on the following working day to keep the policy in force.

The insurer is not responsible for any delay in remittance caused through the post office or otherwise.

3. Premium Notice

In order that the policyholder may not forfeit the benefit of his policy, notice of premiums falling due will be regularly sent to him except in the case of policies under which the mode of payment of premium is monthly where no such notice is required, the insurer is not bound to give any such notice and the want of it cannot be admitted as an excuse for not paying the due premium in time.

Conditions relating to continuation of policies

1. Indisputable Clause

In order to protect the interests of the assured, indisputable clause is added which provides that the policies shall be indisputable after a state period, viz., two years from the date of issue except for non-payment of premiums or for fraud.

Section 45 of the insurance Act has provided that the policy will not be disputed on ground of unintentional misstatement, misrepresentation or non-disclosure of a material fact after two years of the issue of the policy.

However, on grounds of fraud it can be disputed at any time during the currency of the policy.

2. Alterations in Policies

The insurer permits certain alterations in terms and conditions of the policies at the request of the policyholders. The insurer reserves the right to decline such requests without assigning any reason.

Alteration may be change : in class or term, reduction in sum assured, increase in sum assured, change in mode of premium payment, splitting up of a policy into two or more policies and so on.

The insurer, generally, does not permit alterations which increase the amount of risk to the insurer.

3. Exclusion

Ordinarily, the insurer does not assure the hazardous occupation. If any insured person has taken up or intends to take up hazardous occupation, he has to pay extra-premium

The policies issued at standard rates are free from all restrictions to change in occupation. However, the policies issued to students are on the term of hazardous occupation because a student’s occupation is not determined till the competes this education and hence the degree of risk is not known.

Standard premium rates are not sufficient to cover the risk of war mortality, therefore, war clause is included in such policies where it is mentioned that if the death will occur due to war the liability of the insurer is limited to the premium paid or surrender value whichever is higher. The total sum assured will not be paid in this case.

4. Lost Policy

The insured must inform the insurer whenever the policy is lost or destroyed.

On the satisfactory evidence of loss or destruction, the insurer will issue a duplicate copy after advertising the fact and will charge the assured the free for issuing the duplicate copy.

5. Loans

The insurer may grant loan on the security of the surrender value of the policies.

In India, loans are granted on unencumbered policies up to 90 per cent of the surrender value in case of policies which are in force for full sum assured and 85 per cent of the surrender value in the case of policies which are paid up being in force for reduced sum assured.

In case, policies are due to mature within three years a large percentage may be granted.

The minimum amount for which a loan can be granted is Rs.150 and the rate of interest is 71/2 per cent annum payable half-yearly. Loans are not granted on certain types of policies where surrender values are not accumulated.

6. Nomination

According to Section 39 of the Insurance Act, 1938, the holder of a policy of life insurance on his own life may, when effecting the policy or at any time before the policy matures for payment, nominate a person or persons to whom the policy money secured by the policy shall be paid in the event of his death.

Nominee is the person named by the policyholder to whom the policy amount may be paid if the policy amount is payable on death and the nominee is alive when the life assured expires.

In the absence of any of these, the nominee does not acquire a right in the policy. If policy matures by expiry of time, the policy amount is payable to the insured himself and not to the nominee

Notice of Nomination

When such nomination is made for the first time, the corporation will register it even if no notice is served, provided the nomination is in order.

But for all cancellation, changes and for all nominations subsequent to the first, the Corporation insists on a notice of nomination in the light of Sec.39 of the Insurance Act, 1938, otherwise it will not be liable for any payment.

7. Assignment

A transfer or assignment of a policy of life insurance, whether with or without consideration, may be made only by an endorsement upon the policy itself or by a separate instrument, signed in either case by the transferor or by the assignor or has duly authorised agent and attested at least by one witness, specifically setting forth the fact of transfer or assignment.

The transfer or assignment shall be complete and effectual upon the execution of such endorsement or instrument only attested until a notice in writing of the transfer or assignment and either the said endorsement or instrument itself or a copy thereof have been delivered to the insurer.

The priority of claims will go by the date on which the notice of assignment is served on the Corporation.

The insurer has to record the fact of the transfer or assignment and has to give a written acknowledgement of receipt of such notice.

As a result of the assignment, all the rights and liabilities under the policy will be transferred to the assignee subject to any condition contained in the assignment.

The assignment can be of two kinds:

(i) Absolute
(ii) Conditional

An absolute assignment is an assignment where all rights, title and interest of assignor in the policy pass to assignee without reversion to the former or his estate in any event.

Under such an assignment, the policy rests absolutely in the assignee and forms part of his estate on his death.

A conditional assignment provides that on the happening of a specified event which does not depend on the will of the owner, the assignment shall be either wholly or partially inoperative.

An example of the conditional assignment is one which reverts to the assured in the event of his surviving the date of maturity or in the event of his being alive on the death of the assignee.

8. Suicide

In the event of suicide committed by the assured within one year from the date of commencement, whether insured or not, at the time, the liability of the Corporation shall be limited to the extent of the beneficial interest which any person shall prove to his satisfaction of the Corporation to have been acquired in the policy bona fide and for valuable considerations, of which notice in writing shall, at least one calendar months previous to death, have been given to the , within mentioned divisional office of the Corporation and save and except to that extent, this policy shall be void and all claims to any benefit, advantage or interest in the funds of the Corporation by virtue of this policy shall cease.

9. Double Accident Benefit

This provides for payment of double of the sum assured on death by accident. If the life assured sustain any bodily injury resulting solely and directly from accident caused by outward violent and visible means and if such injury within 90 days of its occurrence, solely directly and independently of all other intervening causes results in the death of the life assured, double of the sum assured will become payable.

The benefit is available only to limited proposals. The aggregate limit of assurance under this policy is Rs.1,00,000.

10. Disability Benefit

This benefit will be granted to all lives assured under all plans except pure endowment, term assurances, children’s Differed Endowment, Deferred and Retirement Annuities.

Life assured disabled by accident form earning his livelihood, will be exempted from paying premiums on his policy, falling due after the date of disablement.

This benefit is granted on the first Rs.20,000 of assurance.

The example of permanent disablement are loss of sight of both eyes or amputation of both hands at or above the writs of amputation of both feet and hands.

11. Extended Disability Benefit

It provides for waiver of premiums and also for payment of an amount equal to the sum assured on permanent total disability as a result of an accident.

The example of permanent total disability is given above.

This benefit is available by paying extra premium of Rs.2/- per thousand of sum assured.

Lapse-conditions

1. Lapse of Policies

The insurer shall remain liable for the payment of the claim so far the assured continues to pay the premiums when they fall due.

If the policyholder fails to pay any of the due premiums within the days of grace, the insurance liability ordinarily ceases under the policy and the contract comes to an end.

Thus the policy is lapsed and all the benefits related to the policy are terminated.

The insurer, however, provides certain alternatives to help the insured at the time of lapsation.

2. Revival of Lapsed Policies

If a policy lapses by non-payment of premium within the days of grace, it may be revived to the full policy amount at any time during the life time of the life assured, but within a period of five years from the due date of the first unpaid premium and before the date of maturity.

The revival is possible within six months from the due date of the first unpaid premium without evidence of health on payment of the premiums in arrears with interest at the rate of 71/2 per cent annum compounded half yearly.

The revival after the first six months from the due date of the first unpaid premium but before five years from the due date of the first unpaid premium will be effective only on satisfactory production of evidence of health and habits of the life assured and no adverse change in personal or Family History or occupation.

3. Special Revival Scheme.

Many policyholders find it difficult to pay the arrears of premiums with interest to revive their policies.

For them the special revival scheme is beneficial to gain the cover of insurance.

Under this scheme, the date of commencement of policy will be fixed by dating back the policy. The period for which the policy will be dated back depends upon the amount of premium paid.

The plan and period of insurance will be the same as those under the original policy. The revival will be effected ordinarily by issue of a fresh policy.

The special revival is possible only when all of the following conditions are fulfilled:

(i) The policy must not have acquired surrender value.
(ii) Period from the date of lapse must not be less than 6 months and not over two years.
(iii) Such a revival is not allowed more than once under the same policy.

4. Surrender Value

When the assured is unable to revive his policy, he can surrender his policy and can get cash surrender value.

With this payment, the contract comes to an end and the assured will get the cash value without any liability to pay further premiums.

In Indian, the Corporation has guaranteed surrender value if the premiums have been paid for at least last two years or to the extent of one-tenth of the total number of premiums stipulated for in the policy provided such one-tenth exceeds one full year’s premium.

The percentage increases along with the increase in duration of premium payment because the amount of the surrender on any policy depends on its reserve value.

Thus, on such policies which do not have any reserve, no surrender value is allowed.

5. Extended Term Insurance

If a premium remains unpaid at the end of the days of grace and the policy has been in force for at least three years, the insurance will continue as paid up for the full sum assured up to a period called term.

The term depends upon the amount of premium paid. During this period, if the life assured dies payment will be made up to the full amount. But, if the assured survives the period, no payment is made.

Actually, the amount of premium paid before the lapsation is utilized as a single premium or purchasing the term insurance and the duration of the term insurance upon the amount of premium paid for meeting as single premium.

6. Automatic Premium Loan

The assured may use the option of automatic premium loan before the maturity of the policy.

In this case, if the assured is unable to pay the premiums the insurer will not allow the policy to lapse but will automatically pay the premiums out of the net surrender value.

The assured can repay the unpaid premiums with interest at any time while the policy is so kept in force without furnishing evidence of insurability.

If the whole of surrender value is exhausted by advances on account of payment of premium, the policy will lapse and can be revived only after payment of all the premiums unpaid and interest thereon at the rate of 71/2 per cent annum compounded half yearly.

This option can be exercised only when premiums of consecutive three years have been paid.

In this case one benefit is also available that if after at least three years, premiums have been paid, the assured dies without payment of the premium within six months from the due date of the first unpaid premium, the policy amount will be paid subject to deduction of unpaid premiums with interest thereon up to the date of death.

7. Reduced Paid-up Insurance

When the policyholder in unable to pay further premiums and does not want cash immediately he can pay up the policy.

The sum assured under the policy is reduced in the same proportion as the amount of premiums paid bears to the total premiums payable.

The reduced sum assured is payable according to the original term of the policy.

Where uniform premiums are payable, as in the case of endowment or whole life limited payment assurances, this proportion is easily ascertained.

the paid up value of whole life policy is calculated as per the formula: sum assured, where dx is the premium for the age when the policy was affected, and d(x+n) is the premium for the present age of the life assured when policy is surrendered.

Claims Conditions

1. Settlement of Claims

The policy amount becomes payable either on the assured’s death during the term of insurance on his surviving till the end of the term, i.e. on maturity.

In case of death claims proof of death, proof of title and age proof are essential. In case of maturity proof of title and age proof are required.

The age proof is required only when the age was not admitted before the claims. In maturity claim, the policyholder is generally advised well before the actual date of maturity in order who attended the deceased in his last illness, or certificate of Registration of the Death by the Official Registrar of Deaths, or Certificate from employer identifying the deceased or if the deceased was not in service a certificate of identity from a responsible person acquainted with the deceased.

In case of assignment and nomination, or assured having the policy right, no proof of title is required. In other cases, proof of title is essential, the probate of Will or succession certificate or Administration General’s Certificate may be used as a proof of title.

2. Settlement Options

The claim amount may be paid in cash or in instalment. The instalment payment may be of different types payment of interest annually for a particular period or up to survived and the sum assured at a time may be paid.

Annuity may be purchased for life or for a particular period and life thereafter.