Claim Settlement under Life Insurance

An overview

Death is certain; the timing of death is uncertain. Insurance covers the financial loss due to death and pays the promised death benefit to the nominee. However, there can be cases when insurance companies can deny or delay the claim. As a policyholder, one needs to be aware of various provisions of insurance under which a claim can be denied.

The guiding principle of claim settlement is defined as per Section 45 of The Insurance Laws (Amendment) Act, 2015:

1. No policy of life insurance shall be called into 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.
2. A policy of life insurance may be called into question at any time within three years 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, on the ground of fraud.
3. Provided that the insurer shall have to communicate in writing to the insured or the legal representatives of nominees or assignees of the insured the grounds and materials on which such a decision is based.

Explanation I — For the purposes of this subsection, the expression “fraud” means any of the following acts committed by the insured or by his agent, with the intent to deceive the insurer or to induce the insurer to issue a life insurance policy:

• The suggestion, as a fact, of that which is not true and which the insured does not believe to be true.
• The active concealment of a fact by the insured having knowledge or belief of the fact.
• Any other act fitted to deceive.
• Any such act or omission as the law specially declares to be fraudulent.

Meaning of Act to the General Public

1. Insurance companies would investigate all cases where death happens within three years of the policy commencement date or reinstatement. This is done to restrict adverse selection.
   
2. In such cases, insurance companies look for misrepresentation or nondisclosure of material facts that may affect adverse selection. These material facts relate to health, habits like smoking, occupation, income, travel history, age declaration, and previous insurance history.
   
3. Proposals need to include all details about health, such as any existing diseases, hospitalizations, diagnostic tests like X-rays, scans, etc. Such nondisclosure may harm the chances of claim settlement.
   
4. All habits like smoking, tobacco, alcohol, gutka, etc., must be declared. Please note that these habits relate to existing habits at the time of filling out the proposal form. Any habit started after the policy commencement is not material. In the same way, the habit of adventure sports, if any, needs to be declared.
   
5. Occupations that increase the chance of death need to be declared, such as ONGC, Defense Force, Firefighting, Chemical Factory, etc.
   
6. Income is an important factor for moral hazard to ensure that no one takes advantage of insurance. There is a concept of Human Life Value, and no one should take insurance more than their Human Life Value.
   
7. There are many banned countries due to internal strife, and insurance companies do not provide insurance if you are visiting such countries.
   
8. Previous insurance is critical for Human Life Value. Insurers also ask if you have applied for insurance and the same has been denied or postponed. These facts are also important for a fair assessment.

So, all policyholders need to be aware that insurance companies can reject claims on the grounds of the above factors if death happens within 36 months of policy commencement or reinstatement. However, a claim cannot be denied after 36 months on account of nondisclosure.

After 36 months, a claim can be denied under the following circumstances:

• Death due to involvement in criminal activity.
• Incomplete documentation or wrong representation.
• Claims can be delayed or postponed until the decision of the legal heir in case of disputes over nomination.

Bottom Line

Honesty is the best policy. This proverb is very critical when applying for insurance. Declaration may increase the premium, but it will be in your interest. Remember, insurance is taken for loved ones, and there is no better gift than insurance. Emotional loss cannot be compensated, but financial loss can.

Please contact Insurance Samadhan in case of any claim-related problem. We have a team of experts to guide you.

By Shailesh Kumar – Insurance Head & Co-founder

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