Benefits payable – when and to whom (Annuities)

In my post dated 18^th August 2013 I have discussed this aspect in a policy bond pertaining to a conventional policy. Here the topic is discussed as it applies to an annuity policy. The policy bond gives the above in a tabular form:

Type of annuity                     To whom payable               Event on the happening of which                                                                                                      annuity ceases or determines

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Annuity for life                                  To the annuitant                      On death of the annuitant

Annuity with ROC*

Annuity for life, which is

Increasing @3% p.a.

*Return of capital

Annuity guaranteed for                To the annuitant, in case            On death of the annuitant or

5,10,15,20 years and for             of death of annuitant during         expiry of the guaranteed period

Life thereafter                             guaranteed period, to the            whichever is later

                                                Nominee

Annuity for life with a                  To the annuitant and on              On death of last survivor

provision for 50% / 100%            death of the annuitant, to

of the annuity to the spouse        the surviving named spouse

on death of the annuitant

Annuity for life with a provision

For 100% of the annuity to the

Spouse on death of the annuitant

With return of purchase price

on death of last survivor

Type of annuity given above is the result of an option to be exercised by the policyholder before annuity payments commence. We shall see the options under annuities in the coming posts.

Address of GRO & Insurance Ombudsman

All policy bonds shall invariably contain addresses of the Grievance Redressal Officer of the life insurance company as well as the address of the Insurance Ombudsman. These are as per regulations of the IRDA. The insurer tells the customer ‘in case you have any complaint / grievance, you may approach the Grievance Redressal Officer / Ombudsman, whose address is as under’. The IRDA (Protection of Policyholder’s Interests) Regulations, 2002 stipulates (as per Reg.5) that every insurer shall have in place proper grievance redressal machinery. Insurance Ombudsman is a public official entrusted with the duty of hearing complaints and deciding on them. A Government of India notification of 1998 gives powers to the Insurance Ombudsman to hear and decide on disputes pertaining to six items given there. Insurance Ombudsman is appointed by the governing body of the Insurance Council. Since the I.O. is appointed by the industry insurers are bound by I.O’s decision and do not go against his decision on appeal. Generally every State has an I.O.

Examine the policy bond

In every policy bond dispatched to the customer there will be a notice prominently printed on the policy, “You are requested to examine this policy, and if any mistake be found therein, to return it immediately for correction”. To err is human. For many reasons such as wrong entries in the proposal or other documents or at the stage of data entry or due to simple clerical mistakes of omission / commission there may appear mistakes in the policy bond. There can be cases where wrong policy forms are used while printing the policy – a proposer who submitted a proposal for cash-back policy may receive policy bond for an annuity plan. This is also a case of mistake. A mistake in a document does not confer any right on the policy holder.

Blank space in the policy bond

We have, in the Post dealing with a conventional policy bond, discussed that the policy has four parts, viz. the acceptance and promise part, the schedule, the conditions and privileges and the blank space in the policy bond. Now we come to the ‘blank space’. The ultimate objective of purchasing a policy is to get a claim when the time arises. Thus while proposal is the beginning of a policy, claim is the end of it. Between the proposal and claim there may be a long period of several years during which several transactions may have to be made on the policy. Such transactions are in the nature of fresh nomination or change of nomination, assignment and re-assignment, corrections in the various items given in the schedule or conditions and privileges, variations in the items given in the schedule or conditions and privileges etc. These are to be effected on the policy through endorsements on the policy. The blank space is for this purpose. Some transactions like assignment or reassignment calls for payment of stamp duty, if done through a separate deed and are free from stamp duty if done on the policy bond itself. Some examples of endorsements to be done in the blank spaces are given below:

i. Fresh nomination ii. Change of nomination iii. Assignment iv. Reassignment v. Correction or change of name vi.  Correction in age and date of birth vii. Reduction in term viii. Conversion of without profit policy into with-profit policy ix. Waiver of future premium x. Removal of extra premium for occupational xi. Withdrawal of rider benefits, extra

Documents in support of claim

 Matters to be stated in a life insurance policy are given in Regulation 6 of the IRDA (Protection of Policyholders’ Interests) Regulations, 2002. Most of those items are covered by the earlier Posts under the label ‘policy’. Regulation 6(1) (m) and (n) speak about ‘the address of the insurer to which all communications in respect of the policy shall be sent’ and ‘the documents that are normally required to be submitted by a claimant in support of a claim under the policy’. The claim may be a survival benefit claim, maturity claim, accident claim or death claim. This sub-regulation is to be read along with Reg.8 (1) of the same set of Regulations. Reg.8 (1) says that ‘a life insurance policy shall state the primary documents which are normally required to be submitted by a claimant in support of a claim’. These stipulations by the Regulator are intended for the rendering of best services to the customer. When a claim arises, even without going to the insurer’s office, the claimant knows what are the documents to be submitted in support of the claim. This helps in the speedy settlement of claim.

Salary Savings Scheme

The insurer allows a mode of premium payment by way of deduction from monthly salary of the policyholder. This mode is known as SSS. It is not treated at par with monthly mode. In monthly mode of premium payment the insurer may charge an extra premium @5% to meet the extra cost of sending notices etc. But in SSS there is no extra premium charged. The installment premium given in the schedule of the policy is applicable as long as the policyholder is an employee of his present employer and the employer recovers the premium every month from the salary of the policyholder and remits it to the life insurer without any charges. If the policyholder leaves employment or SSS is withdrawn from the employer the policyholder will be required to pay 5% extra on monthly premium or he can alter the mode of payment of premium to some other mode, viz. yearly, half-yearly or quarterly. During the period in which the premium is remitted to the insurer through the employer, the installment premium will be deemed to fall due on the 20^th day of each month instead of the due date given in the schedule. These are given in the conditions and privileges of the policy.

Key words:

Conditions and privileges of policy

Mode of premium payment

Salary Savings Scheme

Extra premium

Accident Benefit

Accident benefit is an item appearing under the title ‘Conditions and privileges’ of a life insurance policy. If the proposer has opted not to seek accident benefit this will be excluded by showing it under the heading ‘Conditions and privileges not applicable’.

The accident benefit is available only if the policy is kept in-force by payment of all premiums and the accident should occur during premium paying period or before the policy anniversary on which the age nearer birthday of the life assured is 70, whichever is earlier. As a result of accident either death or permanent disability of the life assured shall occur.

(a) Benefits payable on disability of the assured:

(i)                  To pay in monthly installments spread over ten years an additional sum equal to the sum assured under the policy; if the policy becomes a claim before the expiry of the said period of ten years the disability benefit installments which have not fallen due will be paid along with the claim

(ii)                 To waive the payment of future premiums.

The maximum aggregate of sum assured under all policies on the same life to which benefits (i) and (ii) above apply shall not exceed Rupees 50, 00, 000 (including assurance from all insurers and group insurance cover). These figures vary from insurer to insurer.

The waiver of premiums will extinguish all options under the policy as also benefits covered under para (b) of this clause except as to such assurances , if any, as exceeds the maximum aggregate limit of Rupees 50, 00, 000 and which have been kept in force by continued payment of premium.

Benefits payable on death of the life assured:

To pay an additional sum equal to the sum assured under this policy.

Death or bodily injury or disability shall be caused solely and directly from an accident caused by external, violent   and visible means and such injury shall within 180 days of its occurrence solely, directly and independently of all other causes result in the death or permanent disability of the life assured.

Exclusions:

The insurer shall not be liable to pay the additional sum referred in (a) and (b) above if the death or disability of the life assured shall:

(i)                  be caused by intentional self injury, attempted suicide, insanity or immorality or whilst the life assured is under the influence of intoxicating liquor, drug or narcotic; or

(ii)                take place as a result of accident while the life assured is engaged in aviation or aeronautics in any capacity other than that of a fare paying, part paying or non paying passenger in any aircraft which is authorized by the relevant regulations to carry such passengers and flying between established aerodromes, the life assured having at that time no duties on board the aircraft or requiring descant there from; or

(iii)                be caused by injuries resulting from riots, civil commotion, rebellion, war (whether war be declared or not) invasion, hunting, mountaineering, steeple chasing or racing of any kind; or

(iv)              Result from the life assured committing any breach of law; or

(v)                Arise from the employment of the life assured in the armed forces or military service of any country at war (whether war be declared or not) or from being engaged in police duty in any military, naval or police organization.

The disability referred above must be disability which is the result of an accident   and must be total and permanent and such that there is neither then nor at any time thereafter any work, occupation or profession that the life assured can ever sufficiently do or follow to earn or obtain any wages, compensation or profit. Accidental injuries, which independently of all other causes and within 180 days from the happening of such accident, result in the irrecoverable loss of the entire sight    of both eyes or in the amputation of booth hands at or above the wrists, or in the amputation of both feet at or above ankles, or in the amputation of one hand at or above the wrist and one foot at or above the ankle, shall also be deemed to constitute such disability.

Immediately on the happening of the disability the same shall be reported to the insurer. Evidence of disability and accident to the satisfaction of the insurer must be provided.

In the event of it being discovered at any time that the claim under this clause was admitted wrongly all the benefits received must be returned to the insurer along with premium that was waived, with interest, in one lump sum. Otherwise the benefits available under the policy shall stand reduced as if the policy has been discontinued as on the date from which premiums have been waived or from payment of first installment of additional sum assured, whichever is earlier and installments of additional sum assured paid shall be treated as debt on the policy    and shall be deducted with interest from proceeds of the policy.

Key words:

Conditions and privileges of policy

Accident benefit

Permanent disability benefit

Waiver of premiums

Disability benefit

Disability benefit is also an item appearing under “Conditions and privileges’. This item may not be available in many insurers’ policies. I reproduce the privilege as appearing in a policy issued by the Life Insurance Corporation of India: If, while this policy is in force for the full sum assured, the life assured, prior to the policy anniversary on which the age nearer birthday of the life assured is 70, becomes subject to a disability as hereinafter defined, and proves the same to the satisfaction of the Corporation as hereinafter provided, the Corporation agrees to waive the payment of future premiums up to an assurance of Rupees 20, 000 on the following conditions:

(a) The maximum aggregate limit of assurance under all policies issued by the Corporation up on the same life to which the benefit of the waiver will apply shall not in any event exceed Rupees 20, 000. If there are more policies than one   and if the total assurance exceeds Rupees 20, 000 the waiver shall apply to the first Rupees 20, 000 assured in order of date of policies issued. The premiums payable, after satisfactory proof of such disability is furnished to the Corporation shall be only for the assurance, if any, exceeding the maximum aggregate limit of Rupees 20, 000.

(b) The waiver of premiums shall extinguish all options under the policy, except as to such assurance, if any, exceeds the maximum aggregate  limit of Rupees 20, 000 and which may have been kept in force by continued payment of premiums.

In the event of it being discovered at any time that a claim under this clause has been wrongly admitted all premiums falling due after the Corporation’s waiver decision shall be paid in one lump sum with interest at such rate as may be prevailing at the time of payment. Otherwise the policy shall remain a one with reduced sum or as a discontinued policy.

Key words:

Conditions and privileges of policy

Disability benefit

Waiver of premium

Assignments and Nominations

‘Conditions and privileges’ of a policy also refer to assignments and nominations.   Assignment u/s 38 and nomination u/s 39 of The Insurance Act, 1938 are rights of the policyholder and holder of the policy on his own life respectively. Assignment deals with transfer of property from assignor to assignee. Assignment may be absolute or conditional. Assignment shall be informed to the insurer through a notice of assignment failing which the insurer will not be liable for any payment made to some one without taking cognizance of the assignment. Nomination allows the holder of a policy on his own life to nominate a person or persons to receive the policy money in the event of the death of the life assured during the term of the policy and to give a valid discharge to the insurer. After the issue of the policy in case of fresh nomination or change of nomination notice is to be given to the insurer informing him the fact of nomination. Notice of assignment or nomination shall be given to the insurer’s office where the policy is being serviced. In registering an assignment or nomination the insurer does not accept any responsibility or express any opinion as to its validity or legal effect.

Key words:

Conditions and privileges of policy

Assignment

Notice of assignment

Nomination

Notice of nomination

Loans

Among the ‘Conditions and privileges’ of a policy an important item pertains to ‘Loans’. Loans are generally granted as a percentage of surrender value. For example, policy loan on an in-force policy may be stipulated as 90% of surrender value and on a paid up policy it may be fixed as 85% of the surrender value. Policy loan is a privilege to the policyholder whereas it is an investment for the insurer under The Insurance Act, 1938. The rate of interest payable on a policy loan is fixed by the insurer from time to time. Loan is granted on the security of the policy, i.e. on the absolute assignment of the policy in favour of the insurer. If as per conditions of the Plan no loan is available on the policy that will be shown in the Conditions and privileges as “No loan will be granted under this policy”. Policy loan interest is generally compounding half-yearly.

Key words:

Conditions and privileges of policy

Loans

Surrender value

Absolute assignment

Guaranteed Surrender Value

Life insurance companies provide for giving surrender value of the policies if a certain number of premiums have been paid by the customer. If payment of subsequent premiums is stopped the insurer pays the customer the paid-up value of the policy on the date of maturity. We have seen this in the Post on non-forfeiture regulations. The present value of the paid up value is called surrender value. It is a discounted value. The surrender value paid by insurance companies is known as special surrender value. Generally this is a very small percent of what is paid by the customer. There is a statutory requirement [Section 113 of The Insurance Act, 1938]  that the insurer shall pay the higher of special surrender value or guaranteed surrender value. With this background information let us read the privilege of guaranteed surrender value in ‘Conditions and privileges’. ‘This policy can be surrendered for cash if premiums have been paid for at least three years. The minimum surrender value allowable under this policy is equal to 30% of the total amount of the within mentioned premiums paid excluding the premiums for the first year and all extra premiums and or additional premiums for accident benefit that may have been paid provided that if a portion of the sum assured had become payable or has been paid on the life assured surviving to the stipulated date prior to such survival or surrender will be excluded for calculating the surrender value. The cash value of any existing vested bonus additions will also be allowed.’

Key words:

Conditions and privileges of policy

Guaranteed surrender value

Special surrender value

Section 113, The Insurance Act, 1938.

Suicide

Under the title ‘Conditions and privileges’ is given an important subtitle ‘suicide’ that is intended to protect the interests of the insurer. It states that the policy shall be void if the life assured commits suicide (whether sane or insane at that time) on or after the date on which risk commenced but before the expiry of one year from the date of the policy. As a consequence no death claim will be admitted under the policy. You will recall that we have in one of our earlier Posts referred about date of commencement, date of risk and date of the policy. Some companies admit third party interests created through absolute assignment even in the case of suicide. For example if a policyholder assigned absolutely his policy in favour of a bank against a loan granted by the bank and then commits suicide (within a year of date of the policy) the insurer will admit the death claim from the absolute assignee (to the extent of the loan amount). For this the insurer must have received notice of assignment at least one month prior to date of death.

Key words:

Conditions and privileges of policy

Suicide

Void policy

Assignment

Forfeiture in certain events

After stating the non-forfeiture regulations in the policy the insurer goes on to state the forfeiture conditions in certain events under the 'conditions and privileges’. In case premiums are not paid or any of the conditions or endorsements are contravened this policy shall be void. If it is found that any untrue or incorrect statement is given in the proposal, personal statement, declaration and connected statements or any material information is withheld, then and in every such case the policy shall be void. In consequence of these all the moneys paid to the insurer shall be forfeited and all claims to benefits under the policy shall cease. All these are subject to provisions of Section 45 of the Insurance Act, 1938 and the relief provided by the non-forfeiture regulations given in the policy. Forfeiture and non-forfeiture conditions and regulations vary from insurer to insurer. Therefore it is always advisable to read your life insurance policy to find out what are the specific conditions and privileges of your policy.

Key words:

Conditions and privileges of policy

Forfeiture of policy benefits

Section 45, The Insurance Act, 1938

Non-forfeiture regulations

Non-forfeiture regulations

Non-forfeiture regulations are important privileges provided under ‘Conditions and privileges’ of a policy. In the usual reading of a contract if one of the parties fail to play his part the contract becomes void; i.e. if the premiums are not paid by the policyholder he cannot expect the insurer to perform his promise. Whatever he has paid to the insurer is forfeited. The non-forfeiture regulations provide that even if premiums are not paid after a certain number of premiums are paid the policy will not be wholly void. The non-forfeiture regulations quoted here is from a policy of the Life Insurance Corporation of India. Other insurers may have their own definition of lapse and non-forfeiture.

If, after at least three full year’s premiums have been paid in respect of this policy, any subsequent premium be not duly paid, this policy shall not be wholly void but shall subsist as a paid up policy for a reduced sum payable on the date of maturity or at the life assured’s prior death provided that the paid up sum assured is not less than Rupees 250. The amount of paid up assurance per integral number of years premiums paid will be calculated as per table given below. The policy so reduced shall be free from the liability of payment of future premium. It shall not be entitled to participate in future profits. The existing bonus additions, if any, shall remain attached to the paid up policy.

If at least three full year’s premiums are paid and subsequent premiums are unpaid and if death of the life assured takes place within six months of the first unpaid premium the death claim will be honoured  and premium + interest till date of death will be recovered from the claim. Also unpaid premiums till next policy anniversary will be recovered.

If at least five full year’s premiums are paid and subsequent premiums be not paid and the life assured dies within twelve months from the first unpaid premium the death claim will be honoured and the unpaid premium till date of death will be recovered with interest and the premium till next policy anniversary will be recovered without interest.

Key words:

Conditions and privileges

Non-forfeiture regulations

Paid up policy

Revival of discontinued policies

Revival of lapsed policies is one of the items referred to in the ‘Conditions and privileges’ of a policy. A lapsed policy may be allowed to be revived during the life time of the life assured and before the date of maturity if the period of lapse is within five years. This five year period varies from company to company. For considering the revival the insurer may call for proof of continued good health of the life assured. It may be in the form of a Declaration of Good Health [DGH] or medical reports or both and arrears of premium with interest thereon. Revival shall take effect only after it is approved by the insurer and the same is communicated to the policyholder. Revival in effect is novation of a contract. The papers submitted for consideration of revival by the insurer comes under the definition of ‘Proposal’. Life insurance companies apply Sec.45 of the Insurance Act, 1938 [Policy not to be called in question on grounds of mis-statement after two years] from date of revival also.

Key words:

Conditions and privileges

Lapse

Revival

Proposal

Grace period

Grace period of premium payment is given under the title ‘Payment of premium’, which is also part of conditions and privileges referred in the preamble of the policy. Premium is to be paid on the due date – this is the contractual position.  However many insurers, as part of their customer oriented attitude, allow some more period for payment of premium. During this period the policy does not lose any benefit. It does not lapse. Premium paid during the grace period does not attract late fee. Generally grace period of one month but not less than 30 days is allowed for payment of yearly, half-yearly and quarterly premiums     and 15 days for monthly premiums. If death occurs within this period and before the payment of premium then due, the policy is  valid and sum assured is paid after deduction of the said unpaid premium and also unpaid premium falling due before the next policy anniversary [you will recall that premiums are payable yearly and all other modes allowed are convenience given to the policyholder]. If the premium is not paid before the expiry of grace period, the policy lapses. Please remember that grace period may not be available on all Plans of insurers. There are Plans where grace period is not provided. In such cases if premium is not paid on due date the policy lapses. Grace period is to be calculated from the next day of due date [please refer LIC's Manual on Premium payment and Lapse procedure (Manual No.1 of Policy Services)].

Key words:

Payment of premium

Conditions and privileges

Grace period

Lapse

Proof of age

Under the heading ‘Conditions and privileges within referred to’ in the schedule of the policy the first item given is ‘Proof of age’. You will recall that at the preamble of the policy, which we referred under the Post titled ‘The Promise’, the promise was made subject to conditions and privileges – the exact wording of it in a policy bond is as follows: “And it is hereby declared that this policy of assurance shall be subject to the conditions and privileges printed on the back hereof and that the following schedule and every endorsement placed on the policy (by the insurer) shall be deemed part of the policy.” Under the title Proof of age it is stated that premium is calculated on the basis of age declared by the life assured in the proposal and later if it is found that actual age of the life assured is found to be higher than what was declared then premium will be revised (as applicable to the higher age) and the difference of premium will have to be paid to the insurer along with compound interest. Thereafter revised premium becomes payable on due dates of premium. In case arrears of premiums are not paid it will be treated as a debt on the policy (along with compound interest) and the same will be recovered from any claim payable on the policy. If it is found that the correct age of the life assured is such as would have made him uninsurable under the Plan and Term of assurance specified in the schedule of the policy, the Plan and Term shall stand altered to such Plan and Term granted by the insurer according to the practice in force at the commencement of the assurance.

Key words:

Schedule of policy

Conditions and privileges

Preamble of policy

Proof of age

Stamp duty on the Policy

Every life insurance policy is to be stamped with ‘Insurance stamps’ @20 paise per Rupees 1, 000 sum assured. That means on a policy with a sum assured of Rupees 1, 00, 000 insurance stamps worth Rupees 20 is to be affixed on the policy bond. Till a few years back the rate was 40 paise per Rupees 1, 000 sum assured. Stamp duty is dependent on sum assured of a policy. In group insurance policy total sum assured on all lives covered under the policy is calculated and stamp duty is paid by way of affixing insurance stamps on the policy bond. Some of the States (of India) have permitted lump sum deposit of stamp duty to the State Treasury by the life insurance Company and consequently a remark “Consolidated stamp duty paid to the government vide money receipt number….dated…” is affixed on the policy bond. When a policy is absolutely assigned to another person a transfer of property takes place requiring payment of stamp duty to the government. In such cases the assignor (and not the insurer) has to pay stamp duty. However a concession has been given that if assignment of the policy is done by writing it on the policy bond itself the assignment is exempted from stamp duty. However if assignment is done through a separate deed (and not on the policy bond) it has to be stamped as per provisions of the Stamp Act.

Key words:

Life insurance

Policy bond

Stamp duty

Exemption from stamp duty

Special conditions as per the attached clauses

The space provided in the schedule of the policy under this heading is intended to give special conditions or special provisions, if any, attached to the particular life insurance policy. I reproduce below entry from a policy bond issued for Jeevan Surabhi Plan:

“The special provisions for (Tables) 106, 107 and 108 in-force policies are given separately or attached on the back hereof.

Policy becoming paid up special provisions if any cease to apply”.

After the ‘special provisions’ the policy bond is dated and sealed and authorized signatory of the life insurance company affixes his signature thus completing the process of acceptance of the proposal. Every life insurance policy bond is to be stamped according to the Indian Stamp Act.

Key words: 
Life insurance
Schedule of policy
Policy bond
Special provisions

Conditions and Privileges not applicable

Generally conditions and privileges applicable to various Plans of insurance are already printed on the policy bond. If any of the conditions or privileges is to be made not applicable to a particular policy such cases are mentioned here in the schedule of the policy. To cite an example, the mode of premium payment of a policy is ‘yearly’. In the conditions and privileges there is a paragraph dealing with policies with ‘salary saving scheme’ as the mode of premium payment, which is obviously not applicable in this case. So this will be shown as exclusion. Similarly a policyholder has not opted for Accident Benefit under his policy. So conditions and privileges pertaining to accident benefit will be shown as exclusion.

Key words:
Life insurance
Schedule of policy
Policy bond
Conditions and privileges