The Insurance Laws (Amendment) Bill, 2008 recently came in the limelight after the cabinet cleared it, paving the way for its introduction in Parliament. The insurance industry has welcomed the move but will it benefit the policyholders? Here are the key changes that will largely benefit the customers.
Nominees as beneficiaries, not just trustees
Currently, the position of a nominee under an insurance policy is that of a trustee for legal heirs for the claim amounts received on the death of a policyholder. While the insurer can get a valid discharge by paying the claim amount to the nominee, the nominee is accountable to the legal heirs. The Bill proposes that two types of nominees be recognized—a beneficiary nominee and a collector nominee. A beneficiary nominee will have absolute rights under the policy to receive the policy benefits to the exclusion of the legal heirs. Only parents, spouse and children can be beneficiary nominees. On the other hand, a collector nominee will act as a trustee and made responsible for handing over the proceeds to the beneficiary nominee or legal heirs of the policyholder.
The Insurance Regulatory and Development Authority has been empowered to prescribe on the manner in which the collector nominee will have to make payment to the beneficiary nominee or legal heirs of the deceased policyholder. These provisions would enable a policyholder to give unfettered rights to immediate family member(s) to receive the claim amounts to the exclusion of other legal heirs.
Nomination during transfer of policy
As per the current provisions, the transfer of a policy (assignment) automatically cancels a nomination as once the rights are transferred, only the transferee (assignee) can get the claim amount. However, the Bill proposes to delete this provision and restrict the assignee’s right on the death of policyholder (assignor) only to the extent of the assignee’s interest and the balance, if any, would vest with the nominee. This would be of relevance to policies assigned as collateral security for loans, where the assignee is the lender. In such cases, the lender’s interest is restricted only to the outstanding loan and interest and the balance accrues to the nominee upon the death of the borrower (life assured).
Assignment of policies
Currently, only total transfers (assignments) of insurance policies are recognized for loans. For example, if the borrower has taken a loan of Rs.5 lakh, but has a policy with a sum assured of Rs.20 lakh, the borrower currently has to assign the policy of Rs.20 lakh in total. The Bill proposes to recognize partial assignments, whereby the policy can be partially assigned to the extent of Rs.5 lakh with rights over the remaining Rs.15 lakh retained with the borrower. This would avoid taking multiple policies for such purposes.
The present provisions do not give the right to insurers to reject assignments. The Bill proposes to vest the power of rejecting assignments which are not in the interests of policyholders or against public interest. This would put an end to trading in insurance policies. The standing committee has suggested that the Act must prohibit speculative assignments instead of leaving it to the insurers to decide.
Limitation for rejection of claim
As per the current provisions, if the insurers are able to prove mala fide intention on the part of the policyholder—that the policyholder was aware about a fact concerning his health, income or family and did not disclose or mis-stated a material fact in the proposal form—they are empowered to reject claims without any limitation of time. The Bill sought to limit the rights of insurers to repudiate to five years from the date of commencement of risk or reinstatement of the policy. The standing committee has brought down the limitation period to three years, which has been approved by the Cabinet.
Therefore, as per the amendments approved by the Cabinet, no insurer would be able to reject a claim on the basis of misstatements or concealment of facts in the proposal for life insurance beyond a period of three years from the date of taking an insurance policy.
From the distributor’s perspective, it is important to note that accurate disclosures by the policyholders in the proposal form is very important as it would not only affect the policyholders’ family if the claim happens within three years but also disable the right of the insurers to repudiate if the claims happen after three years. Insurers will also be compelled to review the impact of such a limitation on the pricing of their products. Further, insurers will also have to enhance their due diligence at the time of underwriting to protect themselves against such fraudulent claims.
C.L. Baradhwaj is vice-president, Bharti AXA Life Insurance Co. Ltd.