Chapter 7

Policy Conditions

 The policy states the rights and obligations of the insurer 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 mentioned in the policy. The policy document also states the terms and conditions of the policy. The terms and conditions of the policy could differ between insurers and also between plans of the same insurer. This chapter deals with some of the terms and conditions which would apply to all life insurance policies.

Introduction to Policy conditions

Age
Proof of age is required to be submitted with the proposal for insurance. This is because Calculation of premium depends upon age at entry of the life assured. Underwriting of risk depends upon age at entry of the life assured. Therefore, life assured has to submit proof of his age to the satisfaction of the insurer. If false proof of age is given by the life assured, the insurer can declare the policy ab initio (from the beginning itself) void on the ground of suppression of material facts.

Age - continued
If age of the life assured proves to be higher than the stated age in the proposal form on subsequent production 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 the policyholder exceeds the maximum permissible age at entry, in non-medical cases. Written consent to be obtained from the policyholder for acceptance of modified terms of the policy, if required and pass endorsement both for modified terms and age admission.

Age - continued
If age proves to be lower than the stated age in the proposal form on subsequent production of age proof then
If found minor at the time of proposal but major now, Life assured has to ratify the statements made by him in proposal and/or Personal statement form. Excess of premium already paid is to be refunded and necessary endorsement is to be passed. If minor even at the time of production of age proof, the policy will have to be cancelled.

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 Catholic Church. In absence of above, horoscopes, self-declaration by way of affidavit, elders declaration, or certificate by village panchayat, may be accepted as proof of age.

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, debit card. Insurer allows payment of premium by monthly, quarterly, half-yearly and yearly modes. In case of Salary Saving Scheme (SSS), the premiums are deducted by the employer from the salary of the policyholder 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. Such collecting branches send a cheque for the consolidated amount collected, alongwith the list of policies to the insurer at specified intervals. Insurer has the option to decide whether the collection charges should be collected from the policyholder.

 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 mentioned in the policy for payment of the premium. Payment made within the grace period is considered to be payment on time. The grace period is one month, but not less than 30 days 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 is considered 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 be admitted in full and the premium for the current year will be deducted from the claim amount.

Days of Grace

 Premium is deemed to be paid when the cheque or demand draft is received by the insurer. Renewal premium receipt is issued subject to clearance. In case of Salary Saving Scheme (SSS), if there is delay in remitting the premium amount by the employer to the insurer, the delay is usually condoned. If the delay happens frequently, the Salary saving scheme arrangement may be terminated. In case of arrangements made with banks for collection of premium, date of collection by the collecting bank is considered the actual date of payment of premium.

Receipt of premium

Receipt of premium - continued

In case of death claims where the death has occurred before the premium is received by the insurer, it may consider that the premium has been paid, if there is proof that the policyholder had sent the 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.

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 the policyholder. The insurer is entitled to say that the policy comes to an end. Such termination is called a Lapse. No claims arise on the policy after a lapse, and all premiums are forfeited.

Lapse - continued
In practice, however, insurers do not forfeit all 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.

Non-Forfeiture options
The policy conditions provide various safeguards to policyholders, when there is a premium default. These provisions are called Non-forfeiture provisions. The options are as under: Payment of Surrender Value or Cash Value. Making the policy Paid-up. Keeping policy in force through premiums advanced from the surrender value. Providing term insurance cover from the surrender value. Life Insurance Corporation of India allows only the paid up value option. The policy becomes automatically paid up, unless the policyholder surrenders the policy.

1. 2. 3. 4.

 It is the payment of an amount that represents the reserve 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 at least 3 years premiums have been paid. This is the minimum that has to be paid to the policyholder. Insurers actually pay more than the guaranteed amount. Surrender value is payable when the policy has been 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.

Surrender Value

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

Only the Sum Assured is reduced proportionately. Bonus vested already is unaffected. Paid Up policy will not participate in bonuses and will also not be entitled to any interim bonus. Premiums are not paid on a policy which has become paid up.

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 sum assured for the entire policy period. If the paid up value is less than the minimum amount provided for by the insurer, then this non-forfeiture benefit would not apply.

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 the original Rs.10,000/- with effect from the date the 26th premium instalment was due. If Rs.6,000/- had vested as bonus before the policy lapsed, the paid up value, including bonus, will be Rs.11,000/-.

Keeping policy in force

Premium due under the policy is notionally advanced as a loan from the surrender value. This can continue as long as the total premiums advanced, is not more than the surrender value. Insurance cover is fully safeguarded and not reduced. Policyholder can pay the premium whenever he is in a position to do so and policy will continue to be in force. The interim failure to pay the premium will have no effect.

Keeping policy in force - continued

It the policy is With profits, it will be entitled to bonus additions. If the surrender value is not sufficient to advance a full instalment of premium, the policy is finally determined and any surrender value left over is paid to the policyholder. Insurers prefer to offer the paid up option as the sense of loss to the insured is much more, if the arrears are not paid and the surrender value is exhausted.

Extended Term Insurance

Insurer converts the policy into a single premium term insurance for the full Sum Assured of the policy for such a period as the net surrender value will purchase, at the insureds age at the time of lapse of the policy. Premium advanced from the Surrender value is the premium necessary to provide a term insurance cover, equal to the Sum Assured. Policy remains in full force for the full sum assured for a limited period. Surrender value would not increase as the savings element 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 the sum assured.

Revival
It is a decision to underwrite a risk, the risk being equal to the original Sum Assured under the policy less the paid up value (not including vested bonus) on the date of lapse. Insurer allows revival of policy because lapsation affects both the insurer and the insured. Insured loses the insurance risk cover for the full amount and exposes himself to possible adverse circumstances. It also suggests that the agent had not fully convinced the policyholder about the usefulness of the insurance plan.

Revival - continued
If the policy lapses and is not revived, insurer may not be able to recover the heavy initial expenses like medical fees, stamp duty, agents commission incurred on proposals. Insurer charges level premium on the assumption that, barring death claims, the policy will run for the full term. People enjoying good health may not continue the policy for the full term as compared to people enjoying bad health who are more likely to keep the policies in force. In such a case, there is a risk of selection against the insurer. The insurers liability will be greater than what was assumed while fixing the cost of insurance.

Revival - continued
Insurer allows revival of lapsed policy because lapsation affects both the insurer and the insured adversely. lapsation may occur due to just neglect to pay or because of temporary financial difficulties of the policyholder. Requirements for revival payment of outstanding premiums with interest. Proof of continued good health. Life Insurance Corporation of India does not allow revival if the policy has remained in lapsed condition for 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.

Revival - continued
Requirement of proof of good health varies according to the duration of lapse and also according to the Sum Assured. Upto six months from the date of lapse, no proof is necessary. This period is extended upto 12 months, if the policy has been in force for 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 simple declaration or an elaborate medical examination with special reports.

Revival - continued
The underwriter may agree to revive the policy as per the original policy terms or on modified terms or even decline to revive. Decision is made after examining the risk factors at the time of revival, which may have changed since the original policy was taken.

Revival schemes
If the policy can be revived, following alternatives are offered by 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.

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 outstanding for the entire period of lapse are not paid.

Special revival scheme - continued

On revival, there will be a new policy with the same plan and term as the original policy but with the following changes The date of commencement will be advanced by a period equal to the duration of the lapse, but not more than 2 years. Premium will be recalculated for the age corresponding to the date of commencement after revival. The difference between the old premium and new premium with interest thereon and the endorsement fee will have to be paid by the policyholder.

Example showing Calculation of new date of commencement under special revival scheme
Original date of commencement 1.10.1999 Policy 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 and 1. Policy revived 1.7.2002 Period of lapse 1 year and 6 months New date of 3 months New date of commencement 1.10.2001, only 2 years forward from the original date of commencement and not 1.1.2002.

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 full arrears of premium in one lump sum.

Instalment revival scheme - continued

Requirements for revival Policy cannot be revived under the special revival scheme Premium is outstanding for more than 1 year No loan is outstanding under the policy at the time of revival. Policy should have acquired surrender value as on date of revival.

Loan-cum-revival scheme
It covers granting of loan and considering revival of the policy simultaneously when the policyholder desires to avail loan for the purpose of revival of the policy. Allowed to policies which have acquired the requisite surrender value or Paid up value as on the date of loan-cum-revival, premium position being taken as upto date. Loan available under the policy is calculated assuming that the premiums are paid upto date. Arrears of premium required for revival are advanced out of the surrender value of the policy, as a loan under the policy. If the loan available under the policy is more than the amount required for revival, the excess may be paid to the policyholder, on request. If the loan available under the policy is less than the amount required for revival, the shortfall is called for from the policyholder.

Assignment
It is the transfer of rights, title and interest of the assignor to the assignee. The person who transfers such rights is called the Assignor and the person to whom the property is transferred 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 Childrens Deferred Assurance plans, the life assured can assign the policy after the vesting date.

Assignment - continued
Assured loses control over the policy. An assignment involving a part of the policy moneys is considered to be bad in law. An assignment once made cannot be cancelled or even altered in form, by the assignor unless the 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.

Assignment continued
It can be done by an endorsement on the 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.

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. Conditional The interest in the policy automatically reverts to the life assured on the occurrence of the specified condition mentioned in the assignment. Example. A conditional assignment can provide for reversion when the assignee predeceases the policyholder or the policyholder survives till the date of maturity.

Assignment continued
If the assignee dies after the life assured and before settlement, the policy moneys would 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 the creditors.

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, may nominate the person or persons to whom the money secured by the policy shall be paid in the event of his death. 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 be effective. A person having a policy on the life of another, cannot effect a nomination.

Nomination - continued
Appointee should be appointed when a nominee is a minor. Appointee loses his status when the nominee becomes a major. When nominee is a minor and there is no appointee, claim under the policy can be paid only to legal heirs of the deceased life assured.

Life assured retains full control and can deal with the policy without the consent of the nominee. Nominee has only the right to receive the policy moneys in the event of death of the life assured. Creditors of the life assured can attach the policy moneys.

Nomination continued
An assignment automatically cancels a nomination, but, an assignment made in favour of the insurer, in consideration for a loan granted against the security of the policy, does not cancel nomination. Nomination does not become inoperative on the maturity of the policy, in respect of policies where the maturity amount is payable in installments after the date of maturity. example Educational annuity policies. When the nominees are more than one, the policy moneys are payable to them jointly or to the survivor or survivors of them. No specific share for each nominee can be made.

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 death claim, 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 receive the policy moneys in case both the lives assured die simultaneously in a common calamity and there is no proof to establish who died first.

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 guaranteed surrender 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.

Surrenders - continued
Surrender value increases with the increase in the number of premiums paid under the policy. Surrender value will be less on a policy with a longer term as compared to a policy with a shorter term, sum assured and the number of years for which the policies have been in force being the same.

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 the policy or may remain as a debt on the policy monies until the claim arises.

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 broken period. Interest on loan is payable at half-yearly intervals to coincide with the due dates of premium.

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 is provision for payment of Sum Assured at periodical intervals (Money back policies) are not usually eligible for loan facility. No loan is granted during the deferment period in Childrens Deferred Assurance policies.

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 the interest or allow it to accumulate and remain as a debt on the policy monies to be adjusted against the claim. Foreclosure becomes necessary if the principal loan and accumulated interest become more than the surrender value.

Foreclosure - continued
This may happen if the premiums are not paid regularly and the policy lapses. In case of paid-up policies, the surrender value will not grow as fast as the accumulated interest. Notice may be issued to the policyholder calling for the payment of arrears of loan interest.

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 outstanding loan interest, is paid to the policyholder, after obtaining the discharge voucher. A foreclosed policy can be reinstated before the policyholder has returned the discharge voucher and collected the balance surrender value.

Foreclosure - continued
Procedure for reinstatement of a foreclosed policy 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, becomes inoperative. If life assured dies before payment of the balance surrender value, the amount is payable only to the legal heirs of the deceased assured.

 Alterations are changes desired by a policyholder in the terms of the policy contract to suit his changed circumstances. While considering the request for alteration, the insurer tries to ensure that there is no adverse 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 that increase risk.

Alterations

 It may be for change in address/mode of payment of premium/nomination/participating to non-participating, break one policy into two or more policies of smaller sum assured. These may affect the premiums due, but do not affect the risk of the insurer. Change in term or plan or both, change in Sum Assured, etc. may be allowed in existing policies if the risk does not increase. If the risk is likely to increase, a proposal for a fresh policy of insurance will have to be made for the consideration of the underwriter.

Alterations - continued

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 the proposal 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 the date of acceptance of risk, the burden of proof rests with the insurer.

Married Women Property Act Policies

As per Section 6 of the Married Women Property Act, 1874 a married man, which includes a widower or a divorced man, can make a financial arrangement for The benefit of his wife and children, which includes his sons and daughters, both natural and 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 Act Policies - continued

To effect assurance under Married Women Property Act, addendum is to be completed stating 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 different beneficiaries should be stated.

Married Women Property Act 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 policy becomes a claim, his share would go to his legal representatives.

Married Women Property Act Policies continued

The life assured does not have any right to 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.

Restrictions
Changes, if any, in the factors affecting risk after the acceptance of risk by the insurer, do not affect the insurance contract, unless there are specific exclusion clauses. However, certain benefits are conditional and are affected 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 suicide will affect the accident benefit.

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