As we all know, there are three categories in insurance, namely, life insurance, medical insurance and general insurance. Though medical insurance is a part of general insurance, it is mentioned distinctly because many aggrieved policyholders seek guidance on life as well as medical insurance.
The present version of Insurance Act, 1938 incorporates all amendments including the amendments by the Insurance (Amendment) Act, 2021. Its pdf is available on the website of Insurance Regulatory & Development Authority of India—IRDAI—on the following link: https://irdai.gov.in/document-detail?documentId=977536
The Act basically speaks about various legal requirements and compliances. It also covers some Sections in the interest of policyholders. We will discuss these in this article.
Section 2 covers various definitions and sub-section 2 defines a policyholder. “A policy-holder includes a person to whom the whole of the interest of the policy-holder in the policy is assigned once and for all, but does not include an assignee thereof whose interest in the policy is defeasible or is for the time being subject to any condition.”
So, a policyholder is the true beneficiary of the policy; but an assignee is not a policyholder since he has a limited interest in the policy for, say, loan given.
Section 2CB does not allow insurance of properties in India with foreign insurers, except with the permission of Authority. (The word ‘authority’ wherever it appears in this Act means the Insurance Regulatory & Development Authority of India—IRDAI. We will use the word IRDAI in this article.)
Accordingly, any property in India cannot be insured by an insurer whose principal business place is outside India. However, if any situation warrants such insurance, it will be only with the specific permission obtained from IRDAI.
Section 4 provides for annuities and other benefits secured by policies of life insurance. The insurer shall pay or undertake to pay a minimum annuity and other benefits on any policy of life insurance or a group policy issued. Such an annuity and other benefits may be determined by regulations excluding any profit or bonus, provided that this shall not prevent an insurer from converting any policy into a paid-up policy of any value or payment of surrender value of any amount.
Paid-up policy is a policy where the insured pays the premium for a specific period as per the terms of the policy. The policy thereafter remains in force till the maturity of the policy or till the death of the policyholder whichever is earlier. For example, if a policy is issued for 20 years and the premium is to be paid only up to 15 years, it is a paid-up policy. The term ‘surrender value’ is discussed separately under Section 113 below.
Section 32B makes it mandatory to spread the insurance business in rural and social sectors. The percentage of life and general insurance in these two sectors should be as per the guidelines laid down by IRDAI from time to time.
Section 32C makes it more widely obligatory to provide insurance to the unorganised sector, backward classes, economically backward classes and even insurance for crops. Such categories will be as specified by IRDAI.
It is really interesting to note that these two Sections of the Act ensure inclusion of various segments of the society to have proper insurance cover by underwriting certain minimum percentage of business as advised by IRDAI.
Section 32D deals with obligation of insurer in respect of insurance business in third-party risks of motor vehicles. Here also, IRDAI defines certain minimum percentage of business to be underwritten by insurance companies.
For better clarification, this Section should be read with The Motor Vehicles Act, 1988, according to which it is mandatory to have an insurance against third-party risk. Sections 145 to 164 in Chapter XI of the Act explain various provisions and definitions. Readers may download the pdf or e-book from the following link on the website of the ministry of road transport and highways -
At times, we may have to pledge our insurance policy as a security for loan or for some other purpose. This is called assignment / transfer of insurance policy. Section 38 of the Insurance Act specifies guidelines for these.
This Section in all contains 11 sub-sections which explain the procedure of transfer or assignment, its acceptance or decline by the insurer on valid grounds, rights and obligations of the parties to such assignment or transfer, disputes redressal mechanism, etc.
Section 39 deals with nomination by policyholder. Sub-sections 1 to 12 explain the procedures related to registration of nomination, status and rights of the nominee in certain cases, claim procedure, rights of legal heirs, rights of the assignee, rights of the wife of the policyholder in terms of Married Women’s Property Act, 1874, etc.
Section 40B caps expenses of management in life insurance business, whereas Section 40C makes it mandatory for insurers, in general, and health insurers, in particular, to file the details of expenses of management with IRDAI. In both the above-mentioned cases, IRDAI sets parameters for such expenses.
Section 41 prohibits offering any rebates. It is a known fact that sometimes policyholders ask the agents about how much premium the agent would pay as an incentive to purchase a specific policy. This Section does not allow any direct or indirect inducement to anyone for purchasing, renewing or continuing any insurance policy. The Section also prohibits any rebate out of the commission to such purchase, renewal or continuation of a policy.
Section 42 speaks about appointment of insurance agents and their eligibility. Sub-section 3 says that a minor, a person of unsound mind and a person found to be guilty of any criminal act cannot be appointed as an insurance agent. There are also some other conditions and some of them under 3 (d) and 3 (g) are that the person seeking an insurance agency should have requisite qualification, practical training and should have passed such examination as may be specified by the regulators, that is, IRDAI.
Sub-section 2 has an important provision. According to this, a person cannot act as an insurance agent for more than one life insurer, one general insurer and one health insurer.
Sub-section 5 holds responsible an agent who violates the code of conduct as may be specified by IRDAI.
So, while purchasing any insurance policy, it becomes our duty also to check whether the agent approaching us is qualified to be an agent.
Section 42 (A) prohibits any insurance business through MLM, that is, multi-level marketing. It explains MLM as “any scheme or programme or arrangement or plan (by whatever name called) for the purpose of soliciting and procuring insurance business through persons not authorised for the said purpose with or without consideration of whole or part of commission or remuneration earned through such solicitation and procurement and includes enrolment of persons into a multilevel chain for the said purpose either directly or indirectly.” In the past, many of us have become victims (and the story continues today also) of such type of marketing; hence, this clause is important.
Section 45 pertains to a very important aspect about when a policy is to be called ‘in question’. Various sub-sections under this Section state the relevant circumstances:
- Hiding a fact by the insured having knowledge or belief of the fact.
- Suppression of a material fact.
- Intention to deceive.
- Any fraudulent act or omission.
- Any misstatement.
Sub-section 1 specifically states that the policy cannot be called in question by the insurer after three years from the date of issuance of the policy or from the date of commencement of risk or from the date of revival of the policy or from the date of rider of the policy, whichever is later.
Sub-section 2, in other words, states when a policy can be called in question on various grounds, but within three years from the date of issuance of the policy or from the date of commencement of risk or from the date of revival of the policy or from the date of rider of the policy, whichever is later. There are in all five sub-sections which give further explanation and conditions.
Section 50 mandates the insurer to give notice of the options available to the assured on the lapsing of a policy. This notice will be before the expiry of three months from the date on which the premium was payable but not paid.
Section 51 provides for supply of copies of proposals and medical reports to the insured by the insurer. Accordingly, every insurer shall, on application by a policyholder and on payment of a fee not exceeding one rupee, supply to the policyholder certified copies of the question put to him and his answers thereto contained in his proposal for insurance and in the medical report supplied in connection therewith.
Section 111 speaks about servicing of two types of notices. As per sub-section 1, a notice to the insurer is deemed to be sufficiently served when sent by registered post to a person authorised by the insurer to receive such notice and the address is the one registered with IRDAI. Sub-section 2 says that any notice to the policyholder is deemed to be sent to the holder to whom generally the notices in respect of the policy are sent. (Surprisingly, this Section does not make a mention of present way of authorised communication like e-mail, SMS, etc.)
Section 112 gives certain liberty to the insurer carrying life insurance business for declaration of interim bonuses. An insurer may declare an interim bonus or bonuses to policyholders whose policies mature for payment by reason of death or otherwise when the policy is in force. This may be on the recommendation of the investigating of actuary. (Actuary is explained at the end of the article.)
Every life insurance policy contains a printed clause that describes calculation of surrender value (SV) of that policy for which. Section 113 lays down the guidelines. As per sub-section 1, a life insurance policy will acquire SV as per the norms specified by IRDAI. Sub-section 2 says that every life insurance policy will contain a formula for calculation of guaranteed SV. This formula will be as approved by IRDAI.
An actuary plays a very vital role in insurance business. There is a special Actuaries Act, 2006. He is defined as “a person skilled in determining the present effects of future contingent events or in finance modelling and risk analysis in different areas of insurance, or calculating the value of life interests and insurance risks, or designing and pricing of policies, working out the benefits, recommending rates relating to insurance business, annuities, insurance and pension rates on the basis of empirically based tables and includes a statistician engaged in such technology, taxation, employees' benefits and such other risk management and investments and who is a fellow member of the Institute.”
Well, there are Acts, there are regulations and there are regulators. We should be alert while purchasing any policy and should not act hurriedly under the pressure of the agent or any marketing person. You may write to Moneylife
at [email protected]
for seeking our free advice before purchasing a policy or can have one-to-one counselling at its Mumbai office. It is always better to take an informed decision rather than running from pillar to post for grievance redressal.