November 24, 2015

Term Insurance-Claim Settlement Ratio no more a big criteria

Whoever is planning to buy term insurance, they have the biggest concern of whether the company settle the claim or not. So ideally, they look for the Claim Settlement Ratio. However, from now onward, you no need to concentrate that much on this raw data.

Claim Settlement Ratio

Recently, IRDA amended the Section 45 of the Insurance Act. This move totally relieved many of us from worrying of Claim Settlement Ratio. However, I feel that Claim Settlement Ratio of what IRDA publishes yearly is a raw data. It does not specify what type of products insurance company accepted or reasons for rejection. That is the reason believing too much on such raw data is not worth.

For example, LIC’s major business usually comes from traditional plans. In these traditional plans, sum assured ranges from Rs.1 lakh to around Rs.10 lakh. In such a situation, how can we believe LIC’s superiority of Claim Settlement Ratio and buy term insurance with LIC? You may easily understand this by looking at the amount of claim LIC accepted to numbers of claims it accepted.

Also, I mentioned many times that there are a million reasons for one’s death. In the same way, insurance companies have a million reasons for rejection. Therefore, the only thing, which in our hand is to make sure that, all data declarations will be perfect. This reduces the probability of rejection.

Now with the recent amendment to Section 45 of Insurance act, claim settlement ratio no longer a great  criteria while choosing a term plan. So what this amendment is?

Few points of recent amendments are as below.

1) “No policy of life insurance shall be called in question on any ground whatsoever after the expiry of three years from the date of the policy, i.e. from the date of issuance of the policy or the date of commencement of risk or the date of revival of the policy or the date of the rider to the policy, whichever is later.”

It says a lot. Even if you shared wrong information or hid some material facts, then also it is purely life insurance Company’s responsibility to dig deep and find out faults WITHIN 3 YEARS ONLY. After 3 years, they cannot question. Note the period of 3 years, it is from the date of issuance of the policy, or the date of commencement of risk or the date of revival of the policy or the date of a rider to the policy, WHICHEVER IS LATER. So let us say if you took the policy today and after a few years the policy lapsed due to non-payment of premium. However, you thought to renew it again and paid all dues. In such situation, this 3-year period starts from such revival date, but not from the original policy issued date.

2) “It is regardless of whether the claim has arisen or not and when it is intimated. Once this period of 3 years is over, the policy cannot be called in question.

Let us say the death occurred within 3 years, but the nominee informed Life Insurance Company after 3 years. In such situation, whether the policy be called in question and may be rejected on the ground of misrepresentation or suppression of a material fact not amounting to fraud?

The new amendment clearly states that 3-year period applies to such policies also where the nominee intimated by late about the death of the policyholder.

3) “The 3 year period is not necessarily connected with death claims arising under the policy and is counted from the date of issuance of a policy or commencement of risk or revival or rider whichever is later. A Policy can be called into question within 3 years, even if there is no death claim.”

Means, it is purely life insurance company’s job to call for a question whether the claim arises or not.

4) “The revival of a policy is treated as a fresh contract and if the policy (revival) is called into question within 3 years of such revival, the premium collected from the date of revival of the policy to the date of repudiation is to be refunded along with all the admissible benefits accrued as on the preceding day to the date of such revival.”

Let us say your term insurance lapsed and you thought to renew. However, during policy revival Life Insurance Company found that there was suppression of material facts. In such situation, a Life Insurance company has to refund such revival premium and the policy gets cancelled (only in term insurance policies).

How these changes affect future buyers of term insurance?

1) No longer an easy process of buying-Life Insurance companies may start strict scrutiny of proposals. This may lead to rejection at an initial stage itself and buyers may find it difficult to easy ONLINE buying. Because insurance companies may ask for additional data or may request to undergo medical tests, even for small some insured proposals.

2) The premium will raise-Yes, because of this, buyers friendly initiative life insurance companies may increase their premiums. Because life insurance companies must compensate any such loss from all other insured. Therefore, they may raise the premium. (However, no need to worry for those who already bought).

3) Fraud may increase-As the insurance companies must not question the policy after 3 years, someone with minor health issues may suppress data.

4) No one will dare to lapse his or her term insurance-Because of this amendment, you notice that effective 3 years in case of a lapsed policy will again start from the revival date, but not from the date of issuance of the policy or the date of commencement of risk. Hence, there may be a decrease in lapsation.

5) Claim intimation may be intentionally delayed-Just to take advantage of this new amendment, someone may delay claim intimation. Let us say death occurred within 3 years, then to make sure that policy completes 3 years, nominees may delay claim intimation. This makes the insurance company not to question or reject.

The complete amendment can be viewed at “Applicability of provisions of Sec 45 of Insurance Act 1938 in various scenarios“.

You may also like our posts on claim settlement ratio and term insurance-

46 Comments

  1. Hi Basavaraj,
    This was a wonderful article i must say… i have a question
    I noticed few companies provide Term insurance without medical test based on age, income and cibil score.
    Are there chances that they can call for medical test later after policy creation but before 3 years?

    Reply
    • Dear Adithya,
      Once the policy is issued, then they can’t request for medical examination again.

      Reply
  2. Hi Basavraj,

    Highly appreciated your intention to spread such a vast knowledge in simple language. I have a question, that while choosing policy if I supress smoking habit and if death occurs after 3 years, will insurance company still reject the claim in case 1) if reason of death found smoking, 2) if reason is something else but not smoking. My second question regarding some of the comments in comment box. That is if a person dies in second or first year and intentionally declaration done after 3 years would still insuarnce company accept the claim? or they will go for investigation for reason of death.

    Reply
    • Dear SCS,
      1) Yes, they reject the claim.
      2) NO. They can’t reject the claim as death occurred due to some other reasons.

      Reply
  3. Hi Basu. Its a very good post. I a question. Suppose I took term insurance from any insurer. And after some time i died because of drunk drive. Can insurance company reject my claim?

    Reply
    • Dear Hitendra,
      In this condition as per me, they will not reject the claim. However, it all again depends on the respective insurance company decision. Because you broke the law of the land by drink and drive.

      Reply
  4. NICE ARTICLES YOU ARE GIVING. THANK YOU

    Reply
  5. Hi Basavaraj, you are doing a fantastic job educating people. I read your blog regularly to clear my doubts regarding Taxation and to find better ways of investments. Thanks a ton for your blog.

    I have bought a Max Life term plan in Jan 2015. Now I feel to increase my insurance coverage. Which option would be better in your view:
    1) Increase coverage with same Insurer i.e. Max Life
    2) Purchase a second Term plan with a different Insurer (to diversify risk)

    Reply
    • Mahesh-First one is better. Because in case of your absence, your family can handle the claim at ease.

      Reply
      • Dont you think having two different insurers would limit the risk? At least one of the two would accept the claim.

        Reply
        • Mahesh-HOW? What is the guarantee that if one rejects then another accept?? Any guarantee?

          Reply
  6. Hi – Does this amendment also mean that 100% of the sum assured will be paid after the expiry if 3 years, in case of death? Or, there is a provision for partial settlement

    Reply
  7. Hello Sir,

    I have a 2 wheeler which is not registered in my name. Both RC book and bike insurance is my friends name. Now the bike is 10 years old. I have term insurance from Aviva. Somewhere I read my dependents won’t to able to claim insurance if I met with bike accident. Can you please tell if there is problem in my case?

    Reply
      • Somewhere in facebook sir but its not clear. Thats why asking for clarity.

        Reply
          • I just want to be clear that there won’t be any problem in insurance claim even the bike is registered in someone else name.

            Reply
            • Sanjay-But better to check with insurer for clarity of doubt and better sleep 🙂

              Reply
  8. Hi,

    If a person who is having a term insurance, die within the 3 years of issuance of the policy, and the death occurs not related to some medical reason that the person has hided from the insurance company. In that case also is it possible that the insurance company may reject the claim?

    Thanks,
    Koushik

    Reply
    • Koushik-YES.Because hiding facts means breaching of insurance contract.

      Reply
  9. Dear Basu,

    I truly appreciate the good work you are doing through this portal. Knowledge and understanding of financial nuances is really hard to attain as it is not taught in schools, which I feel is the most important aspect in today’s modern ways of life. You are showing light to alot of souls, including me. Congratulations to you.

    I need to know which is the better option in your opinion between ICICI and SBI policies considering all other parameters same? i did see that SBI was your final option and ICICI was your second choice, but i felt all that both the policies have given similar responses to all your listed indicators.

    Regards

    Reply
    • Arka-I am not specific about any particular company. Hence, you can choose anyone of your comfort. There is nothing special about pointing any particular company from my end.

      Reply
  10. does it apply to critical illness cover policy as well?

    Reply
  11. Hi, I had purchased Bajaj Allianz Max Advantage Insurance Plan (Equity Index Fund II) in January 2011. Annual premium was R25,000 and the sum assured was R2.5 Lakh. I paid first three premiums but could not pay the last two premium. I also availed tax deduction u/s 80C for the three premiums paid. After the non payment of premium, fund was transferred to discontinued fund. As of now, the ULIP is out of lock in period of five years and the discontinued fund value is R90,800. What is the tax implication if I surrender and get the proceeds? Is it taxable or tax-free? If it is taxable, then what will happen If I revive (It is still revival able) it now and surrender it after six months?

    Reply
  12. Hi Basavaraj, you a doing a great job spreading your knowledge. I found your blog an excellent resource on insurance questions. I have a couple of questions I was hoping you could answer.

    In a less than 3 year old ULIP, for death claims, do insurance cos pay back fund value (NAV) even if if medical information was incorrect? (in this case, I think the agent filled the form instead of the person who passed away)

    Secondly, what is the maximum time allowed before one can inform the insurance co of death of the insured person?

    Reply
    • Raghav-It is hard to say whether they pay the fund value of or not. Whether the agent filled or you, for insurance companies, it is only YOU but not agent. So they not accept such points. There is no such time limit. But it must be as soon as possible. Otherwise they may suspicious on such delayed information and reject the claim or do further investigation.

      Reply
  13. which is best insurance comany for eterm policy

    HDFClife/Aviva or anyothers

    Reply
  14. Good for policy holders, bad for insurers (It is regardless of whether the claim has arisen or not and when it is intimated. Once this period of 3 years is over, the policy cannot be called in question) and blessing for frauds. (The new amendment clearly states that 3-year period applies to such policies also where the nominee intimated by late about the death of the policyholder.)

    Reply
  15. What will happen to the existing term insurance policies? Can the insurance company cancel claim in case of death and claim after 3 years?

    Reply
    • Basudev-In my view this changes applies to existing policies too. They can’t cancel now and accept the same claim later.

      Reply
  16. is sec 45 of insurance act amendment 2015 applicable to policies which are issued before this amendment?

    Reply
  17. is sec 45 amendment act 2015 applicable to policies issued before this amendment?

    Reply
  18. Very good interpretation, i like to read your blogs regularly .

    Really good work, keep it up.

    Reply
  19. Very good interpretation.
    I appreciate it.

    Reply
  20. Hi,

    Does these changes will be there for existing policies also. Or only for new policies.

    Regards
    Avinash

    Reply
    • Avinash-Good question. It applies to all old and new policies.

      Reply
  21. Hi Basu,

    I have one LIC policy e.i. jeevan mitra triple benifit policy. it is due from 2011.
    Now can i pay all dues and continue the policy?
    Please clear my doubt.

    Reply

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