Documents required at the time of a claim of Inssurance Policy

Documents required at the time of a claim

When an insured loss happens and it is necessary to make a claim the insurance company will require a number of documents from the claimant. For example, for life insurance the insurance company will require proof that the death has actually happened and so will need to see the death certificate. We will look at the documents required at the time of a claim in chapter 11, when we look at the topic of claims.

The key documents associated with insurance will contain many terms that have a particular meaning in insurance. To understand how an insurance policy works it is necessary to understand what these terms mean and so we will look at some of the key terms in the next section.

Key insurance terms

We have already used some of the specialist insurance terms in the previous section and in this section we will explain these and others. We will divide the key terms into categories to help you understand them. These categories are:

• terms associated with the continued existence of the policy: terms such as lapse, paid up value and surrender value. We will also look at revival and renewal in this context;
• terms associated with who receives the policy monies: nomination and assignment; and
• terms associated with borrowing against a policy: loan and foreclosure.

Lapse, paid up value and surrender value

These three terms describe what can happen should the insured find that they are unable to continue to make the premium payments. How they will operate for any particular policy will be described in the terms and conditions of that policy.

A policyholder has three choices if they cannot afford to continue making the premium payments. These are:

Lapse

The policyholder is required to pay the regular premiums on the due dates agreed with the insurance company. Insurance companies do allow some days of grace beyond the due date during which the policyholder can pay the premium and still be considered timely. However, if they do not pay the premium within the ‘days of grace’ it is considered to be a default.

In the event of a default in the payment of the premium, the insurance company is entitled to terminate the contract. This termination is known as a ‘lapse’. No claims can be made on the policy after a lapse, and all premiums are forfeited.

In practice, the Insurance Act does not allow the insurance company to keep all the premiums paid when a policy lapses. The reason is that every policy acquires a reserve for the following two reasons:

• premiums in the early years of the policy are more than are justified (level premiums); and
• the savings element in the premium.

It would not be fair to the policyholder if they were to forfeit this reserve. The policy conditions provide various safeguards to policyholders when there is premium default. These provisions are called non forfeiture provisions. A policy can be made paid up if sufficient premiums have been paid and there is a savings element to the policy. Whilst the policyholder usually requests this, by the nature of the contract it will be made paid up automatically, based on the number of premiums already paid.

Paid up value

If a policyholder fails to pay a premium on a policy that is capable of having a value (e.g. an endowment or savings plan) and the policy lapses, then the insurance company is not liable to pay the full sum insured. Such a lapsed policy can be made a paid up policy. In a paid up policy the sum insured is reduced to an amount based on the amount of premiums already paid.

Insurance companies insist on a minimum amount that must be acquired as a paid up value. If the paid up value works out to be lower than this minimum amount, this non-forfeiture benefit would not apply and the policy would lapse. The policyholder may be able to collect the surrender value (which we will discuss in section H1C).

Normally insurance companies will offer the policyholder the right to convert a normal policy into a paid up policy if they have already paid premiums for a minimum of three years. After this period, if the policyholder is unable to pay the remaining premiums then under the paid up option the policy is not cancelled. Instead, the sum insured is reduced in proportion to the number of premiums paid. If other benefits related to the sum insured are payable, the benefits will now be related to the reduced sum insured, which is the paid up value.

What happens to bonuses if a with-profit policy is made paid up?

When calculating the paid up value of a with-profit policy, there is no change in the bonus already vested or granted. Only the sum insured is reduced in proportion to the premiums paid. The accrued bonus is added to the reduced sum insured to arrive at the paid up value. However, a paid up policy is not entitled to receive further bonuses.

Surrender value

As we have already mentioned, if the policyholder finds that they can no longer meet the premium payments they can cancel the policy by surrendering the policy before it becomes a claim or before it reaches maturity, and have the surrender value paid to them immediately. The policy must be capable of having a value attached to it, e.g. an endowment or savings plan. Policy surrender is the voluntary termination of the contract. Insurance companies stipulate a minimum term of three to seven years before a policy can be surrendered. The ‘surrender value’ or ‘cash value’ is the amount that the insurance company is liable to pay once a policy is surrendered. The surrender value is usually a percentage of the premiums paid or a percentage of the paid up value.

The duration of the policy is the difference between the date of surrender of the policy and date of commencement of the policy.

The law requires insurance companies to mention in the prospectus or policy document, the minimum guaranteed surrender value, which may be described as a percentage of the premiums paid. However, the actual surrender value paid by insurance companies is more than the guaranteed surrender value.

Revival

When a policy lapses it benefits neither the insurer nor the insured. The insured loses the insurance risk cover for the full amount and is exposed to possible adverse circumstances should a claim arise. The insurer also loses. The level premium is based on the assumption that, barring death claims, the policies will run for the full term. The initial expenses incurred on setting up the policy in the first place are high and the insurer can recover them only if the policies remain in force. Generally it is people with bad health who are more likely to keep their policies in force, while some others with good health may lapse or surrender their policies. This will result in adverse selection. This means the insurer’s liability is likely to be greater than it assumed that it would be when fixing the cost of insurance.

Because lapsation affects both parties adversely, insurance companies make it possible for lapsed policies to be brought back into full force. This process is called ‘revival’. Insurance companies provide the policyholder with the option of reviving a lapsed policy. Different insurers have different schemes for revival; all with a view to help policyholders revive lapsed policies on easy terms, including instalment revival and loan-cum-revival schemes etc.

To revive a policy, the following will normally be necessary:

Some insurers do not allow a policy revival if it has remained in a lapsed condition for more than five years. For a policy to be revived the requirement of proof of good health varies according to the duration of the lapse and also according to the sum insured.

Renewal

We looked briefly at what renewal is in section F7. At the time of maturity of the policy, the insurance company will send a notice to their policyholder inviting them to renew their policy.

When issuing the notice to renew, the insurance company may take a fresh look at the risk brought to the pool by that policyholder. Consequently, it may choose to offer renewal on different terms or for a higher premium. It will also remind the policyholder that they will need to tell the insurance company of any material fact that has changed since they first took out the policy. The notice will then explain to the policyholder what they need to do to renew the policy.

It is up to the policyholder to then accept or reject this offer. If they accept the offer, they will follow the instructions and a new policy will start. If they reject the offer then the cover will cease.

Anand Khemka
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