Claim settlement ratio does not matter if your life insurance policy is at least 3-years old!

Claim settlement ratio does not matter anymore from 2015 if your life insurance policy is at least 3-years old because IRDA has amended the section 45 of insurance act  such that any life insurance policy which is at least 3-years old cannot be denied claim  “on the ground of misrepresentation or suppression of a material fact not amounting to fraud“. Source: Applicability of provisions of Sec 45 of Insurance Act 1938 in various scenarios (thanks to Ramesh Mangal for the link).

Claim settlement ratio does not matter regardless of the age of policy simply because life insurance is an individual product. As long the applicant has been honest while applying, there is no chance of claim denial.  I had recently showed that as LIC starts to process high sum insured policies, its claim settlement ratio can only come down: How to Buy a Term Life Insurance Policy. I had also shown that for private companies which have been in existence for a while, the claim settlement ratio is quite high: How to choose a term life insurance provider in 30 minutes!

In the absence of detailed claim settlement data based on the type of policy rejected and the reason for rejection, it is difficult to write a convincing article on why claim settlement ratio does not matter.

The amended section 45 act is a game changer. It effectively sends a message to a potential term life insurance buyer: Claim settlement ratio does not matter if your life insurance policy is at least 3-years old!

It is fairly obvious to everyone that withholding information could lead to claim rejection. The fear while buying was that claim could be rejected citing frivolous reasons. Both LIC and private life insurers are quite capable of this. See: The Games Life Insurers play! and why no insurer will hand life insurance claim amount on a platter!

With this amendment, IRDA has attempted to do away with this fear.

The amendment occurred in the winter session of parliament last year, but I came to know about it when there were 3 threads on this subjected yesterday at Facebook group, Asan Ideas for Wealth: One by Ramesh citing the above IRDA link and two citing a Value Research article on the subject.

Amended Section 45 of the Life Insurance Act

Section 45 (1) No policy of life insurance shall be called in question on any ground whatsoever after the expiry of three years from the date of the policy, i.e. from the date of issuance of the policy or the date of commencement of risk or the date of revival of the policy or the date of the rider to the policy, whichever is later.

Read the rest of the new Section 45: Incontestability

The flip side to ‘claim settlement ratio does not matter’

The amendment may only be outwardly buyer-friendly.

1. Fraud will increase. It is not insurer-friendly and they have made representations against this amendment.

Will this not encourage  a person with high blood pressure or a smoker to not disclose these facts while applying in the hope that they will not die within the next 3 years so that their claim is not loaded?

2. Application procedure would become tougher:

Since they cannot investigate policies  and to claim fraud, insurers will do their best to ascertain crucial information from term life insurance buyers at the time of buying. This means medical tests could be made mandatory to all and from a lower sum insured limit (don’t know if this gradually been implemented).

3. Policies will become  expensive: My view is that this ruling could mean policies would become more expensive.

Before this ruling, insurers could use reject claims if material evidence is found to be suppressed regardless of policy age’. Thus, they had the ability to distinguish a ‘good’ policy (for which they do not have to pay up!) from a ‘bad’ policy(for which they have to pay up).

This distinction is no longer possible and therefore to cut losses (claims paid out from the premium pool), insurers could hike premium uniformly.

When IRDA said health insurers could not load policies based on claim history, they hike the premium right from the start. I believe the same can happen here and is fair from their point of view.

What should you do?

Now that claim settlement ratio does not matter,

(I) choose a term life insurance provider in 30 minutes! Get one from any company you are comfortable with.

(II) Consider these things to do AFTER you take a term insurance policy!