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Written by Kapil Mehta and published in Mint in December 2013
Under what circumstances can a life insurance company refuse to pay insurance proceeds?
—Namrata N.
Insurance proceeds are paid on maturity of the policy or on death of the policyholder. Most often, refusal to make a payment takes place in case of death rather than maturity. There are three situations wherein an insurer may not pay.
First, if material information was deliberately not disclosed or misrepresented. For example, serious medical conditions were hidden or age was fudged for lower premiums or that the fact of an insurance application being declined was not shared. Second, if there is insufficient proof that the life insured has died. For example, a death certificate is not available or the name in the first information report (FIR) differs from the life insured. The third instance could be if there is ambiguity on whom to pay the claim to—say, the nominee has also died.
The life insurance ecosystem consisting of insurers, ombudsmen and regulator takes a strong pro-customer view in claim matters. So, if the information withheld is not considered material or if several years have passed since the policy was issued, most insurers will make the payment.
Will my life insurance policy lapse if I miss a premium payment on the due date?
Lapsation rules vary across insurance companies and also depend on the number of years into the policy. Generally, in yearly premium policies, there is a 30-day grace period after the due date to pay the premium.
In unit-linked policies, non-payment in the first five years results in the policy lapsing, but you are allowed to withdraw funds only after five years are completed. Non-payment after five years may not result in a lapse as charges continue to get deducted from the fund value.
In traditional insurance policies, non-payment results in the policy lapsing. Customers can opt to convert the policy into a reduced paid-up policy with lower sum assured, or withdraw their cash value after paying a surrender charge.
In all kinds of insurance policies, there is a reinstatement period (usually two years) during which you can pay premiums and make a policy active.
I am 23 years old and have started working. Is this the right time for me to buy a life insurance policy or should I wait? I don’t have any liabilities now. How much cover should I take?
—Joseph John
Seize the day and buy a term insurance now when you are young and in good health. Although you do not have liabilities today, you will have some in the near future. Buy a cover that is ten times your annual income and for a 30-year term, which is the maximum available.