An insurance policy works effectively if there is trust between the two parties involved in it– The insurer and the Insured. The fundamental principle of 'Utmost good faith' governs an insurance contract.
According to this principle,
“…both the parties involved in an insurance contract, Insurer and the Insured, must be fully transparent with each other while disclosing their material facts”
The principle applies both before and after the issuance of the life insurance policy. While the insurance company is bound and regulated by IRDAI into disclosing all details of the policy to the public, the individual investor must abide by it at their discretion.
The consequences of suppression of the information by the policyholder are explained in Section 45 of the Insurance Act 1938.
Section 45 of the Insurance Act 1938 states the conditions when an insurance policy shall not be held suspicious.
A life insurance policy shall not be called in question on any grounds after it completes 3 years from–
1. The date of issuance of policy
2. The date of commencement of risk
3. The date of revival of the policy, or
4. The date adding a rider to the policy whichever of them is later.
These conditions are subject to amendment from time to time.
However, in case of fraud, the Life Insurance Policy may be called in question within 3 years from any of the above-mentioned events, whichever of them is later.
In this case, the insurer has to give written notice to the insured or his legal representative, or his nominees. The notice has to mention the grounds on which the questions are raised.
The Insurance Company has 3 years to call an insurance policy into question on the grounds of misstatement or concealment of material facts. This questioning can be done only if the misstatement or concealment does not amount to fraud.
Hence, if a policyholder has died within 3 policy years, the policy will come into question according to Section 45 of the Insurance Act. This is irrespective of whether the death benefit claim has arisen or not.
However, once the period of 3 years is over, the policy can’t be brought into question.
If an individual has a ULIP and has non-disclosure issues within three years from the date of commencement:
a) The insurer will return the premiums collected in the policy up to the date of cancellation
b) The fund value of the policy will not have any relevance
If the policy suffers from the concealment of material facts within three years from the date of the previous statement of the revival:
In this case, the time of 3 years from the date of issuance of the policy has already passed. Hence, there shall be no scope of calling the policy into question per the amended section 45 of the Insurance Act.
The statement of the revival of a policy shall be considered as a new contract between the insurer and the policyholder. So, if the policy revival is called into question within 3 years of that revival, the insurer will refund the following:
In case of a money back plan such as the Canara HSBC Oriental Bank of Commerce Life Insurance Company's Money Back Advantage Plan, if one of the Survival Benefits are paid to the policyholder:
a) Now, if one of the Survival Benefits are paid to the policyholder;
b) And the policy results in a claim within 3 years from the date of the last revival, with no misstatement of facts during issuance.
In this case, the survival benefit paid shall not be recovered.
This is because the period of 3 years from the date of issuance of the policy is over. Hence, there will be no scope of calling such policy into question.
An insurance policy cancelled due to the misstatement or concealment of facts during the issuance of the policy cannot be reinstated.
However, section 45 of the Insurance Act clearly states that a surrendered policy can be revived only if there was any misstatement or concealment of facts during the revival of the surrendered policy, and not while issuing the policy.
Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.