Relevance of premium payment and valid cover in Life Insurarance Policy

Relevance of Premium Payment and Valid Cover

When an insurance policy is purchased, the risk gets transferred from the insured to the insurance company. In consideration for this transfer of risk, the policyholder has to pay a premium to the insurance company. If a proposer never pays any premium, the policy will never come into force. This is because, as we saw in the first part of chapter 3, consideration is needed if a contract is to be valid. If the proposer does not pay the premium, there is no consideration and so no contract. This is why, as we saw in section G3A, the first premium receipt is the evidence that the insurance contract has begun.

As soon as the proposal is accepted and the first premium is paid, the insurance company becomes liable to pay a death claim, subject to the terms and conditions of the policy. However, if the policyholder fails to make subsequent premium payments, the policy will become lapsed and they will no longer be entitled to the benefits of the policy should the worst happen. The best they can hope for is the return of some of their premium. 

You will see from this how important the premium is if a valid insurance contract is to be in place and the proposer is to receive the protection they sought in buying insurance.

Example Case study:

Nitish Sharma has been worrying about his policy and contacts Mr Kumar one last time with some more questions. What if, he asks, he is late with a payment because he is ill and then dies before he can make it? What happens if he is killed while walking back from the post office after posting his premium cheque? Will he still be covered or will Sumedha lose all the protection he has worked so hard to give her should he die?

Mr Kumar patiently answers Nitish’s questions once more.

What happens if the insured dies and the premium has not been paid?

As long as the delay in payment falls within the days of grace given by the insurance company, then, the insurance company is liable to pay the full claim to the nominee or legal beneficiary. The insurance company will deduct the unpaid premium from the claim amount.

When is the premium deemed to be paid?

The premium is deemed to be paid only when the insurance company receives the funds. If the payment has been made by cheque, demand draft or money order, then the payment is deemed to be paid when the amount has been deposited in the insurance company account. However, in practice, the premium is deemed to be paid when any form of payment is received.

What if the insured dies while the cheque/demand draft/money order is in transit?

If the life insured dies while the cheque/demand draft/money order is in transit, i.e. the cheque/demand draft/money order has already been issued by the policyholder but the insurance company has not received it, then the insurance company will seek ‘proof of sending these instruments’. The proof can be provided for instruments such as ‘demand drafts’ and ‘money orders’. The insurance company in these cases deems that the premium has been paid on submission of the proof. However, if a cheque was sent in the post, the insurance company will require evidence of posting.

Anand Khemka
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