How to Claims In Life Insurance

Introduction

When making a decision on buying life insurance, clients will take a number of factors into account. These include the:

• pricing of the product;

• features of the product;

• likely returns that will be offered by the product compared to other insurance and investment products;
• flexibility offered in terms of plan term, premium payments, liquidity etc.;
• tax benefits offered by the product; and
• level of customer service provided by the company.

All these factors play an important role, but one very important aspect, which few people pay attention to, is how the insurance company handles and settles claims. What good is an insurance product during the lifetime of a policyholder, if the nominee/beneficiary/assignee is not able to receive the claim from the insurance company in a reasonable time and with ease? The real test of an insurance company and an insurance policy comes when the policy becomes a claim. People take out insurance because they worry about the possibility of misfortune. Ultimately, the ‘value’ of insurance will be judged, by most individuals, on the way in which their claim is handled.

While the IRDA has laid down broad guidelines for claims settlement, it depends on individual companies and their claims handling staff how quickly and efficiently they respond to a claim when it arises and how soon they settle it. The claims settlement ratio (how many claims are settled to every 100 claims arising) is also one of the benchmarks on which an insurance company is judged. So claims handling and settling assumes a great deal of significance.

Requirements for a valid claim

Before discussing the requirements for a valid claim let’s look at what a claim is and what the different types of claims are.

What is a claim?

A claim is a demand that the insurer redeem the promise made in the contract. The insurer then has to perform its part of the contract, i.e. settle the claim, after satisfying itself that all the conditions and requirements for the settlement of the claim have been complied with.

We will look at three main types of claim in this section – maturity claims, death claims and rider benefits.

Maturity claims

Some life insurance plans, such as endowment plans and whole life plans, promise to pay the insured a specific amount at the end of the plan, if they survive for the plan’s entire term. This amount is known as the maturity benefit amount or the maturity claim amount. The amount payable on maturity is the sum insured plus any accumulated bonuses, minus any outstanding premiums and interest thereon.

In some cases the premiums paid over the tenure of the plan are returned on maturity. These plans are termed as ‘return of premium’ (ROP) plans by some insurers.

In the case of ULIPs, the insurance company pays the fund value (or in some cases the fund value and sum insured) as the maturity claim, at the end of the plan’s term or, in the case of a money-back policy, minus the survival benefits received during the term of the policy.

Survival benefit payments:

For money-back policies the insurance company makes specific payments to the policyholder at specific times during the term of the policy. These payments are known as survival benefits.

Reduced sum insured (paid-up value):

Sometimes during the tenure of a policy the policyholder may face financial problems and may not be in a position to continue paying the premiums. During such times rather than surrendering the policy, the policyholder has the option to convert it into a paid-up policy. On the maturity of such policies, the proportionate reduced sum insured is paid out by the insurance company.

Discounted claims:

Discounted claims are those options which are exercised by the policyholder within one year of the maturity date of the policy.

Commutation of instalments:

For annuity plans, before receiving regular/periodic annuity payments, the individual can make a lump sum withdrawal. This is known as commutation. Insurance companies normally allow the individual to make withdrawals of up to a third of the accumulated fund. The remaining two thirds must be used to buy the annuity payments for the individual.

Annuity payments at the time of vesting:

In the case of annuities, on vesting, the regular annuity payments start to be made by the insurance company to the annuitant. The payments may be made to the annuitant on a monthly, quarterly, semi-annual or annual basis depending on the plan’s terms and conditions.

Death claim

A death claim is where the life insurance company pays the sum insured to the nominee/ beneficiary on the death of the insured during the term of the plan. For whole life policies, the benefit is paid on death, regardless of when this occurs, i.e. there is no fixed term. If the policy is a participating policy, the insurance company will also pay the bonuses accumulated until then. If the policyholder had taken out any loans, then the outstanding amount of the loan, the interest and any outstanding premium and interest thereon will be deducted before the final amount is paid.

There are certain policies where the benefit is not paid on death but on a specified date as chosen by the life insured when taking out the policy. For example, for a policy where the objective is to provide for a lump sum amount for a daughter’s marriage or a son’s higher education, the amount is not paid on the death of the life insured but becomes payable on the date specified, for example:

• When the son/daughter reaches the age of 18 or 21.

This is, of course, as per the terms and conditions of the policy and the option exercised by the proposer.

Rider benefit

A payment under a rider is made by the insurance company on the occurrence of a specified event according to the rider terms and conditions. For example:

• Under an accidental death benefit (ADB) rider, in the event of the death of the insured, the additional sum insured under this rider is paid;
• Under a critical illness (CI) rider in the event of diagnosis of a critical illness, a specified amount is paid as per the rider terms and conditions. The illness should be covered in the list of CIs specified by the insurance company (the list may differ among insurers);
• Under a ‘hospital care’ rider the insurance company pays the treatment costs in the event of hospitalisation of the insured, subject to the terms and conditions of the rider.

Valid claim

Once an insurance company receives notification of a claim it will want to be sure that the claim is valid before it makes a payment. It will do this by checking the following:

• Was the insurance policy in force when the event occurred? 
• Has the insured event taken place? 
• Have the original policy document, a completed claim form and the other entire required document been submitted? 
• Has the policyholder performed their part with regards to age admission and the discloser of material facts relevant to the policy? These will be investigated by the insurance company as part of its claim settlement process.
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Anand Khemka
+91-9910936925
+91-8287041341