An excellent news for life insurance policy holders. No insurance company can deny your claim three years after issuance of life insurance policy. It does not matter if you hid any material information or committed fraud. The insurance company must pay. They have no recourse. The onus is on the insurance company find out any irregularity in the information shared within the first three years.
The path for this ground breaking move was laid in the amendment to Insurance Act early this year. IRDA recently issued a further clarification in a notice to all the insurance companies. Please note this is applicable for only life insurance policies.
Let’s first look at what the Insurance Act states.
Insurance Amendment Act, 2015
Section 45 of the Insurance Act clearly states:
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.
This law is without ambiguity. It does not matter if the insured or his agent suppressed material information or even indulged in fraud. The life insurance company only has three years to find irregularity. If it cannot, there is no recourse available to the insurance company.
The insurance company has three years to find out if the any material information was suppressed or a fraud committed at the time of issuance of policy.
As I understand, this clause is applicable for both existing policies and the policies that have come into force since the passage of this Act.
What if the Insurer calls/withdraws the policy or repudiates a claim within 3 years?
If the insurance company is able to establish fraud within 3 years, then it can cancel/withdraw the policy. Moreover, in such a case, they can deny a death claim and also deny refund of premium.
In case insurance policy is called into question due on ground of misrepresentation or suppression of a material fact (not amounting to fraud) within 3 years, the insurance company shall refund the entire premiums paid till date of withdrawal. In this case too, they can deny/repudiate a death claim.
This is applicable for all types of life insurance plans such as term insurance, traditional plans and unit linked insurance plans.
IRDA, in its latest notification, clarified a few points about unit linked insurance plans (in case the ULIP is called into question after 3 years).
In case of Unit Linked Insurance Plans (ULIPs), the premiums collected under the policy up to the date of repudiation/withdrawal of policy shall be refunded. Please note the amount refunded shall have no relevance to the fund value.
In case you have revived the ULIP and the policy is called into question within three years of revival, the insurance company will pay: Fund Value as on date of policy revival + Entire premium paid for revival and thereafter.
The treatment is same for traditional life insurance plans. In case of revival, the insurer has further 3 years to call the policy in question or repudiate a claim (in cases apart from fraud). In the insurer does so, you will be refunded: Accrued/admissible benefits before revival + Premium paid for policy revival and thereafter
However, you shouldn’t be buying traditional insurance plans in the first place. To find out why, please read this post.
What happens after three years?
The insurance company only had three years to establish fraud or suppression of material information. After three years, they cannot do anything.
They have to honor the death claim. They cannot even withdraw the policy on their own. So, you just have to keep paying the premium.
Looking at the various scenarios, it is extremely important to establish what constitutes a fraud under a life insurance contract.
What is a Fraud?
As per Section 45 of the Insurance Act, fraud means:
the expression “fraud” means any of the following acts committed by the insured or by his agent, with intent to deceive the insurer or to induce the insurer to issue a life insurance policy:—
(a) the suggestion, as a fact of that which is not true and which the insured does not believe to be true;
(b) the active concealment of a fact by the insured having knowledge or belief of the fact;
(c) any other act fitted to deceive; and
(d) any such act or omission as the law specially declares to be fraudulent.
This should not be much of a concern to honest policy holders.
Section 45 provides further protection to the customers by stating that:
No insurer shall repudiate a life insurance policy on the ground of fraud if the insured can prove that the misstatement of or suppression of a material fact was true to the best of his knowledge and belief or that there was no deliberate intention to suppress the fact or that such misstatement of or suppression of a material fact are within the knowledge of the insurer.
So, if you have been honest and provided information to the best of your knowledge, your family should be safe.
Another reason (apart from fraud) for calling the policy in question is suppression of material information. For example, suppose X has cancer (and is aware of it) and manages to get a life policy issued. Even in such case, the insurance company has only three years to find out and cancel the policy. After three years, it must settle the claim, even if X dies of cancer.
What if death happens within 3 years and claim is made after 3 years
I am copying the response from IRDA.
The Insurer has only 3 years window for calling a policy in question on the ground of misrepresentation or suppression of a material fact not amounting to fraud, from the date of issuance of Policy or date of commencement of risk or date of revival of policy or date of rider of the policy, whichever is later. It is regardless of whether 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.
The IRDA response is very objective. Insurers have only three years to call a policy in question. After that, there is no recourse.
Additional point to note is that the insurer has three years from the date of policy issuance, date of policy revival and date of rider, whichever is later. So, in case you skipped premium payments and had to revive the policy, the insurer gets another three years from the date of revival of policy (and not the issuance). Hence, make regular premium payments if you do not want to leave insurance companies with any chance.
What this might lead to?
Let’s first look at the way insurance companies used to work. They will issue the policies based on self declaration. Only a few minor medical tests would be conducted before policy issuance. In fact, for very young people and for low sum assured policies, medical tests would be skipped altogether.
Insurance companies used to dig deeper at the time of claims only (or so I have read) or tried to find faults. The insurers could reject insurance claim (after any number of years) in case of material suppression of information or in case of fraud. Therefore, in the example discussed above of Mr. X, the insurance company would have rejected the claim even if the claim was made after 10 years.
With the amended Act, the above is not possible.
- The insurance companies are likely to conduct much rigorous medical tests before issuing the policy. So, the entire policy purchase process may get a bit longer and tougher. New buyers may have to shell out more money.
- The insurance premium for the new life insurance plans is likely to go up. Even though the probability of policy holder’s demise does not change with this change in Act, insurance companies could have earlier challenged a claim (even after 3 years) on some ground. Now, that option has been taken away. This will also reflect in their underwriting of risk.
- Claims process for the older policies is likely to be faster. Since there are no grounds to challenge a claim after 3 years, you can expect insurance companies to pay up quickly.
What is customer friendly is certainly not insurer friendly. In some cases, you might feel it is unfair to insurance companies like in the case of Mr. X and cancer. Insurance companies are not going to sit quietly. As I have read, they have already sent representation to IRDA.
PersonalFinancePlan Take
This is an extremely customer friendly move from IRDA, the insurance regulator and the Government of India.
Any policyholder will be delighted with this move. However, do not think of it as an opportunity to conceal any information from the insurer at the time of issuance of policy. If you hide material information, the insurance company may offer them the policy at a lower premium. With the new rules in place, at least a few people might be tempted to hide medical information since the insurance company cannot do anything after 3 years. Such behavior is strictly not advisable. Insurance is a contract and you must keep your end of the bargain.
Moreover, the insurance company can always question if the death of policy holder happens within 3 years of purchase of the policy.
Do not suppress any information at the time of purchase of insurance. Make regular premium payments. Do not let the policy lapse. You do not want to give insurance company another chance.
Nobody parts with money easily. And the insurance companies are not different. However, with life insurance, the insured event i.e. death is an objective event. There is not much insurance company can do beyond a point. But yes, you can expect the claims process to be a lot faster.
Do share this information with your friends and family.
Additional Read: You can read IRDA notice to all the insurers on IRDA website. In case, you want to read about changes to Section 45 of the Insurance Act, you can read download the Insurance Amendment Act, 2015 here. The relevant clauses are on Page no. 25. There are certain scenarios that I have not covered in this post. You will do well to read those cases on your own.
Deepesh is a SEBI registered Investment Adviser and Founder, PersonalFinancePlan.in