Essay: Life Insurance Policies: Maturity, Lapse and renewal

Objective of the Research:
An overview of the basic concepts of Life Insurance policies with reference to the maturity, lapse and renewal.
Scope of Research:
The paper deals only with the underlying basic concepts of maturity, lapse and renewal of life insurance policies with the help of secondary literature and few judicial precedents.
Research Questions:
• What is meant by Life insurance and why do we need one?
• What is maturity and maturity claim?
• When does a policy lapse and its effect thereafter
• Concept of renewal and revival when can one ask for renewal and revival?
Chapterization:
Chapter I deals with introduction to life insurance policies and insurance contract
Chapter II deals with Maturity and maturity claim
Chapter III deals with Renewal and effects of renewal
Chapter IV deals with Lapse and revival of policy
Chapter V deals with conclusion
Introduction:
Our Life is very precious and that is reason it is very difficult to put a price tag upon it. Money definitely cannot bring back our late loved ones or buy us the same amount of happiness and affection. But it can surely help us realize its value for survival. It is difficult for a family to survive if its sole bread earner dies unexpectedly. The demise of our loved one creates a space which is difficult to fill but the absence should not disrupt the financial future of that family. As it is, the grief of losing a family member is a lot to deal with; and upon that financial woes should not be reason behind unstableness. Therefore, it is essential to realize the cost of one’s life and opt for life insurance, which is a safeguard against financial loss resulting from insured’s death. In legal terminology, it is a contract between an insured (Policy Owner) and insurer, wherein the latter agrees to reimburse the amount on happening of the insured individual’s death or critical illness. The insured agrees to pay the same in terms of insurance premium for availing the benefits of the service.
Life insurance provides us with risk coverage and in return promises take care of financial needs of family after the death of the insured. Besides providing coverage against all kinds of risks, it provides an opportunity to grow upon investments.
Life Insurance Contract
The Expression “life insurance” as defined in section 2(11) of the Life insurance Act,1938,comprises any contract in which one party agrees to pay a given sum upon happening of a particular event contingent upon the duration of human life.
Life Insurance business defined as defined under S.2 (11) of the Insurance Act, 1938, is business of effecting contracts of insurance upon human life, including any contract whereby the payment of money is assured on death or the happening of any contingency dependant on human life, and any contract which subject to payment of premiums for a term dependent on human life including those enumerated in clauses (a) to (c) thereof. Thereby, the contract of insurance is hedged by bilateral agreements on human life upon payment of premium subject to covenants contained there under. But the insurer is not entitled to impose unconstitutional conditions including that, which denied the right of entering into the contract, limiting only to a class of persons under a particular policy. The insurer is free to evolve a policy based on business principles, and conditions before floating the policy to the general public offering on insurance of the life of the insured but as the insurance being social security measure, it should be consistent with the constitutional animation and conscience of socio economic adumbrated in the constitution.
There is statutory definition of life insurance, but it has been defined as a contract of insurance policy whereby the insured agrees to pay certain sums, called premiums, at specified times, and in consideration thereof the insurer agrees to pay certain sums of money on certain conditions and in specified way, upon happening of a particular even contingent upon the duration of human life.
The essential features of life insurance are as follows:
1) It is a contract relating to human life, which
2) Provides for payment of lump-sum amount, and
3) The amount is paid after expiry of certain period or on the death of the assured.
In Dalby v. London and Indo Life Assurance Co, it was defined as a “contract to pay a certain sum of money on the death of a person in consideration of the due payment of a certain annuity for his life calculated according to probable duration of life.”
Maturity of Life Insurance Policy
Maturity is generally considered as a good thing, whether it is food items or people. Things that are matured means that they must have grown into their inner potential. Similarly, insurance policies also attain the age of maturity over a period of time. It means that the policy has attained its designed growth, and prima facie has a large quantum of cash value. It is neither good nor bad, but one needs to understand what actually it means and what effect it has on financial plans.
Maturing
Most articles about life insurance talk about two kinds i.e. Firstly, Term insurance which covers an individual for a preset number of years, and then it ends. Secondly,Permanent insurance covers an individual for life, that is why the traditionally it was known as “whole life.” Individual can also build equity upon the policy over the period of time. In fact, one can often think of it as taking out a “mortgage” on the amount of your policies death benefit. Once your equity equals the face value, your policy is said to have “matured.”
Maturity Claim
When the insured survives on the date of the maturity, and the policy does not stand assigned, the amount is payable to the insured. Even if the policy stands nominated the nominee is not entitled to the amount.
Renewal of Life Insurance Policy
Renewal of the policy once the fixed period of insurance has expired is an option open to the parties, either by issue of a renewal receipt following payment of a renewal premium, or through a new policy altogether.
The policy may incorporate special conditions and stipulations as to renewal. Renewal is made by following ways:
• By Mutual Consent: The offer can be may made by either the insured or the insurer. If it is made by the insured then the insurer retain the freedom to accept or refuse the offer of renewal which was made at the time of renewal premium. Insurer cannot be compelled to accept the renewal premium. Whereas in case the offer of renewal is made by the insurer by sending a renewal notice to the insured then payment of renewal premium following the receipt of a renewal notice must be accepted by the insurer.
• Preference of the insured: If an insured is entitled under the policy to renew it then such a right may be not be restricted, wherein the policy has to be renewed if he wished. The stipulation in the policy may however provide that such a right is liable to be defeated if, before it is expired, the insurers have given notice of their intention to determine the policy at the expiration of the current period.
• Renewed unless otherwise intimated: The stipulation may be in such terms as to provide for it operation for a further period unless notice has been given by either party to determine it before the expiration of the original period. Non-issue of such a notice implies that the policy continues as a matter of course. Consequently, the insured is automatically under the obligation to pay the renewal premium, as also the insurers are under an obligation to compensate for the risk occurred during the renewed period.
Usually, there is no binding obligation to do so; the common practice followed by insurers is to send the insured a renewal notice notifying him that the premium is to fall due shortly. This constitutes an offer to renew the policy, and may be so on the terms of the original policy or with the insertion of any modification. The insured, on his part, signifies his acceptance by tendering the premium for the renewed period, and unless he does so the terms of the original policy or with the insertion of any modifications. The insured, on his part, implies his acceptance by tendering the premium for the renewed period, and unless he does so the premium does not take effect. Payment made to an agent of the insurer is effective depending in the agent’s authority to receive such premium payments but the insurers cannot disclaim liability on mere technical grounds of any formality in form of receipt actually handed over by the agent.
In order to signify renewal of the premium payment after due payment of the second premium, a receipt is issued by the insurer.
Effect of Renewal,
The common question raised upon renewal is whether it amounts to a mere extension of operation of the original contract or whether it is the creation of a new contract.
In ascertaining the renewal the consequences, the manner and method by which the renewal has been brought about by the policy must be considered.
The following circumstances are to be mentioned:
• Provisions for renewal unless ascertained specified even occurs
In this situation, where the policy mentions its continued operation by renewal unless the specified event occurs, the renewal is a continuation of the original contract of policy. The termination is signified by the happening of the specified event.
These circumstances imply that the duty of disclosure is exhausted once in for all, and accordingly, those facts which were immaterial at the time of making of insurance policy needn’t be disclosed even if they become material. The insurers cannot thus refuse to renew the policy claiming an increase in the risk undertaking.
However, a breach of duty during the original negotiations as also that of the condition subsequent renders the policy liable to be invalidated, irrespective of the number of times it has been renewed.
• Renewal by mutual consent is necessary to allow for continuation of the policy
Such a provision as contained in the original contact of policy would imply that the renewal is equivalent to making a new contact
The insurers are thus free to refuse the renewal premium either absolutely or on a condition that a further stipulation is complied with.
The duty of disclosure necessarily reattches.All representations made at the time of entering into the original contract are deemed to be repeated on the renewal unless corrected. Further, in addition to disclosing those facts material at the time of ordinal negotiations, which have become material during the current period of policy, must also be disclosed.
It must however be noted that in this situation any invalidity or infirmity of the original contract cannot have any effect on the enforceability of the renewed policy.
• Where the policy makes no mention of renewal
In this circumstances lack of any mention of renewal in the original; contract implies that renewal is probably a new contract.
• Presence of express provisions as to whether renewal is a fresh contract
A controversy has been observed over whether renewal by mutual consent amounts to a new contract or whether it remains a continuation of the original contract. In view of this, express terms have been introduced to confer the same rights on insurers on renewal that they enjoy on the creation of the new contract. However, the incorporation of these terms is rendered wholly redundant if the view that renew by mutual consent amounts to a new contract is allowed prevail.
Further there is usually a provision either in the policy itself or in the renewal notice to the assured providing for extension of the renewal period by allowing the assured to make payment during a further period termed the “days of grace”. Its importance arises only when a loss occurs during this period, prior to payment of the premium. Liability of the insurers then becomes a key question to be addressed, and the policy might contain stipulations as to whether the insurer is liable in these kinds of situations.
Lapse of Policy
A lapse is the cessation of a privilege, right or policy due to time or inaction. A lapse of a privilege due to inaction occurs when the party that is to receive the benefit does not fulfill the conditions or requirements set forth by a contract or agreement.
It refers to a “lapse in coverage”, meaning the contract of life insurance will no longer pay the benefit or provide any insurance coverage for the insured person. The policy for which all benefits to the policy holder cease and is terminated due to nonpayment of premium amount on the due date or even after the grace period is called a lapsed policy. A policy will only lapse after a grace period has passed, and most companies will allow their clients to reinstate their policies for a short period after the policy has lapsed without further underwriting.
“Alsatian” is not directly defined in the Insurance Act 1938. The Life Insurance Corporation of India (LIC) states that a policy is treated as lapsed if the premium is not paid within 6 months from the due date.
In case the premium amount of policy is not paid within the due date then there is still time for you to make the payments without payment of interest on the premium. This period is called the grace period. It is for policy, where the premium payment mode is monthly is 15 days from the due date. The grace period for policies where the premium payment mode is quarterly, half-yearly or yearly is one month but not less than30 days.
In Surrender Kaur v LIC of India, grace period of 30 days was allowed for payment of yearly, half-yearly or quarterly premium and 15 days for monthly premium. It had also contemplated that if the death occurs within the period of grace and before the payment of due premium then the policy will still be valid and the benefit of sum assured paid after deduction of the said premium as also the unpaid premium, falling due before the date of the policy. If the policy is lapsed on account of nonpayment of premium then, even the subsequent premiums will not save the said policy from being lapsed, unless it is revived as provided in the revival condition. If the insured fails to do so then the insurer shall not be liable under the policy on death of the assured.
In Sipra Chatterjee v Union of India, the insured had met with an accident and was in coma with permanent disability, which lasted till his death. In this situation there was no question of policy being lapsed on account default in payment of premium. As a clause in the policy stated that the liability of the insured for future premiums stands waived during the continuance of disability and the insurer was held liable to pay the disability installments.
Effect of Lapsation
The issue of lapsation of life insurance policies are very vital as it not only affects the policyholder, but also the insurer, intermediaries, the Government, economy and society as a whole.
Insured
If an insurance policy is taken to cover the risk of life of an individual then with the lapsation of the said policy the coverage of such risk also ceases to exists. With such an effect the immediate members become insecure and are at a loss.
Further, apart from losing the insured benefits, the insured also loses a part of his savings which were accumulated with considerable and continuance effort over a period of time. The underlying idea in level premium plan is that the insurance provider can accept the same premium each year, with a condition that such premiums are collected at the mathematical equivalent of the corresponding single premium Thus, level premiums paid in the early years of the contract will be more than sufficient to pay current death claims, but will be less than adequate to meet death claims that occur in later years. Life insurance is, thus far, one of the first products marketed on the installment plan.
Also, even if the policy is surrendered, the policyholder will lose a significant amount in the way of surrender charges.
Insurer
Lapsation of policies is not only a curse for the insurance company but also a serious disease within the company which, if not cured, could even lead to the company’s bankruptcy. These companies function through a concept of risk pooling and risk sharing, which basically means that the loss of the few is spread over a large group and average loss is often substituted for actual loss.
Further, this system proving benefits or risk coverage functions successfully like a parasite on the concept of “the law of large numbers”, which states that the greater the number of exposures, the more likely the actual results will approach the expected results. The law of large numbers permits an insurer to estimate future losses with some accuracy.
Policy lapsation makes it difficult for insurer to construct exact accuration. Lapsed policies also have a detrimental effect on risk pooling and sharing. Therefore, if policies start lapsing then it is sure that business will also start to deteriorate. Also, it has an impact on customer retention, product performance; pricing factors, public image and workforce planning, and is ultimately detrimental to the insurer’s business.
Revival of Lapsed Policy
Most of us, due to some or the other reason are unable to continue paying premiums towards our life insurance policy, which results in lapse of the policy. Lapsation can be dangerous as the insured or any of his dependants may not get the assured benefit, which was the underlying reason for buying the said policy
One needs to know the reasons behind the policy lapsation and how one can revive it, if need be, at a later date. An insurance policy may cease to exist due to various reasons. It could be because of carelessness or because one doesn’t see value in continuing with the policy, or because of a financial crisis and can’t afford it any longer.
A policy that has lapsed by non-payment of premium within the days of grace becomes void subject to the privileges contained in the policy . Policy may be revived within 6 months from the due date of the first premium unpaid without any evidence of health but on payment of premiums in arrears with interest, or before the expiry of five years from the due date of the first unpaid premium i.e. firstly, on production of evidence of health and habits of the life assured to the satisfaction of the insurer, secondly, evidence to show that there has been no adverse change in personal or family history or occupation, and thirdly, on payment of premiums in arrears with interest.
A policy that has lapsed is thus not irretrievably dead but can be revived. Revival is a valuable contractual right and the insurer has no arbitrary or discretionary right to refuse reinstatement if the conditions laid down have been complied with. In, T.G.Ranjan v. Asiatic Govt. Security Life Assurance Co. Ltd. It was held that the death of the assured subsequent to payment of the policy amount within the grace period does not disqualify a claim.
In Hindustahn Ideal Insurance v Vijayalakshmamma, in compliance with the insurer’s letter, the insured paid the premium due and gave the declaration of good health to the insurer’s agent. On receiving these insurer admitted the insured as a policy holder; but in the meantime the insured was murdered and dies. Thereupon the insurer repudiated the claim for the sum assured on the ground that the policy remained lapsed on the day the insured died. But the court held that the policy revived at the instance of the agent who had authority received the amount due and health certificate from the insured. The insurer cannot impose new conditions or restriction which was not present in the original policy. Thus an application for revival of a lapsed policy is an exercise of the existing contractual right and is different from an application for an altogether new policy.
Further, when the insurance policy lapsed for failure to pay the premium, the policy holder will be required to fulfill three conditions as laid down by section 45 of Insurance Act 1938 for its revival. It is the burden of the insurer LIC to show that the requirement of the section was not satisfied before it can successfully repudiate the contract of insurance.
Therefore, at the time of revival, usually, full benefits that you or your beneficiaries are eligible for will be reinstated. However, if after revival, the insured commits suicide within one year, the insurer can deny the claim. Similarly, if the insured passes away within two years of the revival, the insurer has the option of conducting an inquiry before they decide to pay the claims to the beneficiaries.
If a policy is less than three years old but lapses, and if something happens to you after the policy lapses and a claim is filed, the insurer will not pay you anything. At best, the insurer might be willing to give you or your dependants the premium payments that you have made. But, this is also totally at the insurer’s discretion.
If a policy is more than three years old, but lapses, and if something were to happen to you, under the existing insurance rules, your dependants can still get some benefit. However, the insurer will pay only a reduced sum assured based on a pre-set formula.
Conclusion:
After analyzing the various concepts of life insurance policies i.e. Maturity, lapse and renewal, an inference can be drawn that Life Insurance Corporation Act 1956, is a beneficial piece of legislation. It was enacted to ensure absolute security to the policy holder in the matter of his life insurance protection.
The life insurance policy states that the sum assured is payable upon the happening of the event, namely, “on the stipulation date of maturity if the life assured is then alive or, at his death if earlier”. Thus the risk covered is ‘death’ which may occur in any manner before the stipulated date, that is including suicide sane or insane.
In case of renewal there is no rule that an insurer must give notice of renewal to the insured, though such notices are always sent by the insurance companies in order to maintain their reputation in the market. However, if the insured does not receive any such notice for renewal the insured will not be liable in any case.
Also, failure to renew the policy at or before the expiry of the agreed period of insurance or during the days of grace allowed results in the lapse of the policy, and the insured cannot enforce any claim arising afterwards. However, an option of revival is available to the parties which may be availed by the consent of both at any time and following this, the insurer cannot escape liability by reason of the lapse Therefore, a revival is not a continuation of the old contract but amounts to the making of a new contract.
Bibliography:
• Books
MN Srinivasan’s “Principles of Insurance Law” 9th Edition 2009
Dr. Avatr Singh “Law of Insurance” 2nd Edition 2010
K.S.N Murthy & K.V.S Sarma “ Modern law of Insurance in India” 5th Edition 2013
• Journals
IRDA Journal
Life Insurance Today, Monthly journal on Life Insurance
Insurance Institute of India “Life insurance issues in the millennial decade” July-December 2010
• Online & Print sources
http://www.theinternationaljournal.org/ojs/index.php?journal=tij&page=article&op=view&path%5B%5D=728
http://www.sashipublications.com/magazines/life-insurance-today.html
http://www.licindia.in/individual_plans.htm
http://www.licindia.in/policy_guidelines.htm
http://economictimes.indiatimes.com/wealth/insure/things-to-know-about-reviving-a-lapsed-insurance-policy/articleshow/30210812.cm