Introduction:
The idea of insurance developed and evolved from the simple idea of spreading the risk in order to mitigate the loss suffered by an individual party. This lays as a foundation for modern-day insurance, which has become interwoven into all aspects of our lives. Insurance means the transfer or lifting of risk of an individual to a group. Individuals come together to pool in their resource in order to ensure the financial security, the fund thus raised is used to reduce the loss incurred by a party in case of an event arise.
The Concept of Surrender
Surrender in the relation to the concept of insurance means when a policyholder decides to voluntarily terminate an insurance policy. And the insurance holder will be given the surrender value, that is if the policy had acquired the surrender value at that time. The concept of surrender in an insurance policy is an important area which is often neglected by most of the policyholders. The surrender value means the amount which is returned or the amount which the policyholder will get from the life insurance company if at all the insured decides to exit the policy before the date of maturity. A surrender charge will be reduced from the total sum of which has been allocated to savings. However, the policy surrender charge will be varied according to a different policy.
However, according to the Insurance and Regulatory Development Authority (IRDAI), it had been instructed recently to the life insurance companies not to levy surrender charges in the cases where the policyholder decides to terminate the cover after a period of five years. Another important thing which is to be noted is that in a regular premium policy, the policy acquires surrender value after the policyholder has paid the premium amount for a continuous instalment of three years. Once a policyholder decides to exit from the insurance cover or insurance policy all the benefits associated with it, including the protection cover, will cease to exist. The general surrender value is a loss to the policyholder and the reason to this is that life insurance are long term contracts and the insurer will suffer a loss if the surrender value is higher in the initial years given the higher cost in the first policy year.
Rules Related to Surrender Value in a Policy
When we look into some of the traditional products, the rules for surrender value are as follows:
- There is no surrender value for health, term and annuity products.
- In cases where the premium paying term is less than 10 years, the surrender value will be acquired after 2 years of premium.
- For a premium paying term which is of 10 years or more, the surrender value gets acquired after the payment of 3 years of premium.
- While we look into the minimum amount payable as guaranteed surrender value, if the policy is surrendered in the second or third policy years then 30% of the premium paid will be returned. And in the case where the policy is surrendered in the fourth year or between fourth and seventh year 50% of the amount will be returned. In other cases, 90% of surrendered in the last 2 years (for less than 7 years). Beyond a term of 7 years, to be decided in file & use document (which gives the product features including policy benefits and premiums payable) to be filed by the Life insurer with the Regulator.
In cases where the policy lapses after the acquisition of surrender value, and if it is not surrendered the policy will not lose all its benefits. Sum assured shall be reduced in the same ratio as the number of years the premiums actually paid bears to the total number of years for which premiums are payable. Subsisting bonus already declared shall attach – however, no eligibility for future bonuses. Yearly intimation of bonus accrual to Participating Policyholders.
The Concept of Claims
On the death of the life assured, the claim for death shall be raised by the Nominee with the life insurance company. There should be basic documents produced along with the raising of claim, the documents include a death certificate, attending doctor’s certificate, intimation of death, postmortem report, ID proof, address proof etc. Along with these documents the life insurance company might ask for additional documents which they might ask during the processing of the claim. There might be a period within which the policy claim should be cleared and this might vary from company to company, and also if the claim was raised before two years from the date of taking the policy it is generally seen that there will be an investigation done before the claim is completed. That is if the policy is claimed after completion of two years from the date of taking the policy the claim will be processed once all the required documents are submitted and in the other case there might be a detailed investigation conducted to ensure that there was no fraud or to ensure that the insurance holders did not disclose any of his health issues.
The claims which are raised before two years are referred to as early claim. While in some life insurance companies the period can also be three years. The life insurance company will be having a separate investigation department, wing or specialized personal to conduct the investigation, the insurance company might also hire third-party investigators or outsource them to specialized people to conduct the investigation. These investigations are important to rule out the possibilities of any moral hazard of non-disclosure of any pre-existing illness or treatments that were taken by the part of the life assured when the policy was taken. The investigation team conducts a detailed enquiry in the neighbourhood where the life assured used to live, visits the doctors that the life assured had consulted and checks the hospital records of the life assured to verify the treatment records.
The team procures copies of medical reports, scan report and as an end result of the detailed investigation, an official report of the investigation is submitted to the life insurance company. And the report submitted is reviewed by the company for further processing the claim. The life insurance company has a time limit of 90 days for completing the investigation. Once the investigation report is received by the life insurance company, the claim should be decided within 30 days from the date of receiving the investigation report.
Special Instances
In cases were under the investigation conducted by the life insurer it is proven that or if it is established that a material fact which was critical for the assessment of the risk was not disclosed at the time of application in the Proposal Form, then the life insurance company has the right to re-assess the underwriting keeping in mind the facts revealed by the investigation report. For example, if the investigation report reveals that the Life assured had taken treatment for say, 3 years prior to taking the Policy, for some ailment in a Hospital, the Life insurance company shall re-assess the underwriting keeping in mind this fact. Had this fact been revealed to the insurance company at the time of submitting the Proposal form -what would have been the impact of underwriting (decision to accept the risk and issue a Policy) where fraud or misrepresentation is established, surrender value shall be paid.
Further, if the death of the life assured happens due to suicide committed by the life assured within 12 months from the date of commencement of the policy, then sum assured shall not be paid. However, 80% of the premiums paid payable (for reinstated cases, higher of 80% or surrender value whichever is higher; for ULIPs fund value) to the Nominee in such cases.
Conclusion
The idea of insurance has evolved, developed and changed drastically over the long period of time from where it has been developed. It has evolved in a manner that people can take insurance online too and more importantly insurance market has diversified to a huge extend for example there is insurance offered to specs and other products of daily use. While ensuring the growth of insurance industries, the Insurance Regulatory and Development Authority (IRDA) at the same time ensures the interests of the policyholders. IRDA has taken huge steps to ensure that awareness is increased amongst all the people regarding the benefits of insurance. And for the same purpose, there is even a separate website of the Insurance Regulatory and Development Authority (IRDA) for educating and to spread awareness about insurance.
In cases where the nominee is not traceable, the claim cannot be written back. All the claims which cannot be paid for any reason such as a dispute between legal heirs, proper title etc. will have to be moved to a separate account called “Unclaimed account” which will be invested as per IRDAI’s guidelines for the benefit of the Claimant. And even after 10 years from the date of claim intimation, if the claim amount is not settled, the proceeds shall be transferred to Senior Citizens Welfare Scheme. After 25 years from the date from which it was transferred, the proceeds shall be forfeited to Central Government.
References:
- Albizzati, Marie-Odile, and Hélyette Geman. “Interest Rate Risk Management and Valuation of the Surrender Option in Life Insurance Policies.” The Journal of Risk and Insurance, vol. 61, no. 4, 1994, pp. 616–637. JSTOR, www.jstor.org/stable/253641. Accessed 19 Jan. 2021.
- “Contracts. Mutual Mistake. Surrender of Insurance Policy in Ignorance of Prior Disability of Insured.” Columbia Law Review, vol. 42, no. 3, 1942, pp. 482–487. JSTOR, www.jstor.org/stable/1117523. Accessed 19 Jan. 2021.
- Feinman, Jay M. “THE LAW OF INSURANCE CLAIM PRACTICES: BEYOND BAD FAITH.” Tort Trial & Insurance Practice Law Journal, vol. 47, no. 2, 2012, pp. 693–740. JSTOR, www.jstor.org/stable/24374297. Accessed 19 Jan. 2021.
- https://economictimes.indiatimes.com/definition/surrender-value#:~:text=Definition%3A%20It%20is%20the%20amount,exit%20the%20policy%20before%20maturity.&text=Once%20you%20decide%20to%20exit,cover%2C%20will%20cease%20to%20exist.
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