Fine print in life insurance

BS TUTORIAL

Life insurance is regarded as an important component in the financial planning matrix. 'Insure your self before undertaking other investments' is the advice given by all advisors. However, it is important to know all the relevant clauses that could impact you before signing on the dotted line.

Here are a few important ones.

1) In investment oriented policies, a policy gets converted into a fully paid-up policy, only after the premiums for the first three years are paid. Otherwise the policy lapses, and the policy holder does not receive any proceeds at the end of the tenure.

2) In a term insurance policy, there is no concept of "fully-paid up" as there are no maturity benefits payable. Hence the policy lapses if the premium is not paid every year.

3) A grace period (usually 30 days), is given to the policy holder whereby the insurance policy remains valid from the due date of the premium, to allow the insured to pay the premium during the said period. Should the insured die during the grace period, the insurer is liable to pay the death benefits to the beneficiaries less any amount outstanding (including the unpaid premium).This provision helps the insurer to minimise the risk of policy lapse unintentionally.

4) A lapsed policy can be reinstated if it is carried out within a certain period. However, this can happen of the insurance company is convinced that the erstwhile policy holder is still an insurable risk that is, the health or financial condition of the person has not changed for the worse. In addition, for reinstatement, all overdue premium and interest must be paid.

5) A suicide clause provides that during a period (usually one year from the inception of the policy), if the insured commits suicide, the insurer will not be liable to honour any death claim. However, the onus to prove that the death was due to suicide lies with the insurance company.

6) An incontestable period (usually two years and beyond after the policy is in force) is imposed. Once this period is in force, the insurance company cannot nullify or void a policy on the basis that the policy holder has made any misrepresentation or omission at the time of entering into the insurance contract. This usually pertains to non-disclosure of health related conditions prevalent at the time of application. However this clause will not affect the rights of the company, in case there is any fraud involved. But, the onus of proving fraud lies on the insurance company.

7) A misstatement of age clause is inserted by the company to protect itself against the insured wrongly stating his/her age. The redeeming part is that in case this happens, the policy will not turn void. It shall be valid, except that in the event of the insured's death, the death benefit shall be adjusted in accordance with the actual age of the insured.

8) An assignment clause is also usually present. Assignment refers to a transaction where a person's rights and benefits under a contract are transferred by him to someone else. The policy owner can assign the policy to whoever he wishes. He can make an absolute assignment, in which event the benefits of the policy is irrevocably transferred to the assignee or it can be by way of a collateral assignment, where the policy is a collateral for a debt and the it will be reassigned once the debt has been paid off. These are few clauses that you need to know so that you and your beneficiaries are not subjected to financial strain after the policy holder's death.

The writer is a certified financial planner.