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KEY TAKEAWAYS

  • Insurance is also known as an indemnity contract, in which the insurer indemnifies the loss experienced as a result of the occurrence or non-occurrence of any event, depending on the contingency.
  • In India, IRDAI is legally bound to provide a grace period typically 30 days from the due date of payment.
  • In insurance, forfeiture occurs when a policyholder fails to pay their premiums, which is also known as an insurance policy lapse.
  • Grace period is the extra days provided by the insurer after the expiry of the stipulated period of insurance during which the insured can pay the premium to continue with the policy.
  • When a policy is forfeited, the insurer is no longer liable under the terms of the policy.
  • A non-forfeiture clause stipulates that after a lapse due to non-payment, an insured party can obtain whole or partial benefits or partial reimbursement of premiums.
  • When a whole life insurance policyholder surrenders the policy, the non-forfeiture provision may become available.
  • Policyholders of Life Insurance can opt for one of the four non-forfeiture benefit options

Introduction

Insurance is a type of risk management that is primarily used to protect against the risk of a speculative and unpredictable loss. To compensate for any loss, an insurance contract is quite useful. Since Insurance is a contract, certain sections of the Contract Act are applicable. It is also known as an indemnity contract, in which the insurer indemnifies the loss experienced as a result of the occurrence or non-occurrence of any event, depending on the contingency.

In India, insurance law is governed by the Insurance Act, 1938 and Insurance Regulatory and Development Authority (IRDA) Act, 1999.

An insurer is a company providing the insurance and an insured or policyholder is the person or entity purchasing the insurance. The insured is given a document, known as an insurance policy, that outlines the terms and conditions under which he or she would be financially reimbursed. The premium is the amount of money charged by the insurer to the insured for the coverage specified in the insurance policy.

Grace Period

Grace period is the extra days provided by the insurer after the expiry of the stipulated period of insurance during which the insured can pay the premium to continue with the policy. In India, IRDAI is legally bound to provide a grace period typically 30 days from the due date of payment. The policy is in force during the grace period. The nominee would be eligible for the benefits if something happens to the insured. Policy lapses once the grace period is over.

Forfeiture

The term “forfeiture” refers to the loss of property, money, or assets for which there is no consideration or compensation. It occurs when a party fails to meet its contractual payment obligations.

In insurance, forfeiture occurs when a policyholder fails to pay their premiums, which is also known as an insurance policy lapse. As a result, the policy is no longer in effect, and the insurer forfeits any premiums already paid.

When a policy is forfeited, the insurer is no longer liable under the terms of the policy. The premiums that have already been paid need not be reimbursed. The sum already deposited by the insured could be forfeited by the insurance company according to the terms and circumstances of the policy.

For example, before entering into a life insurance contract, the insured must tell the truth about his past and current health issues. If the insured is proven to have lied about a substantial fact, the insurance company may enact a forfeiture of the policy. If the insurance contract contains a non-forfeiture clause, the insured may still be eligible for benefits, at a reduced or limited level, or the insurer may offer a partial return of premiums paid.

Forfeiture means the insurer is not liable under the policy. The insurer is not required to refund the premiums.

Reserve Bank of India Vs Peerless General Finance and Investment Co. Ltd and others

In the above case, Supreme Court has observed that the forfeiture of the amount of poor persons by the Life Insurance Corporation is arbitrary. It stated that the forfeiture clause was in violation of Articles 14 and 21 of the Indian constitution and it also opposes the directive principle of state policy.

Under section 50 of the Insurance Act, 1938, the insurer shall give notice of options available within 3 months to the insured in case of the policy lapsing. If it is added to the insurance clause then no notice is required.

Reviving of Policy

Several insurance companies provide an option of reviving the lapsed policy. Proof of continued insurability will have to be submitted. The revival of the policy depends on the period for which the policy has remained lapsed. Also, the insured might have to undergo a medical examination.

Reviving a policy is similar to purchasing a new insurance policy. The insurance company may impose new terms and conditions after the revival of the policy.

Non- Forfeiture Clause

A non-forfeiture clause stipulates that after a lapse due to non-payment, an insured party can obtain whole or partial benefits or partial reimbursement of premiums. It is an element included in standard life insurance.

When a whole life insurance policyholder surrenders the policy, the non-forfeiture provision may become available. The clause may involve returning some portion of the total premiums paid, the cash surrender value of the policy, or a reduced benefit based upon premiums paid before the policy lapsed.

Working of Non- Forfeiture Clause

Non-forfeiture options become available When the owner of a whole life insurance policy chooses to surrender the policy. The insurer guarantees a minimum cash value after a specific period.Policyholders of Life Insurance can opt for one of the four non-forfeiture benefit options: the cash surrender value (CSV), extended term insurance, loan value, and paid-up insurance.

In cases of permanent life insurance policies, if one fails to pay the premiums, he won't lose his life insurance. The cash value can be provided with the following options:

  • Terminate the policy and get the cash surrender value.
  • Reduced coverage for the remaining term
  • Use of accumulated cash value to pay the premiums
  • Purchase an extended-term insurance policy with the remaining CSV.

I. Payout Options

The death benefit is no longer available after a whole-life insurance policy is surrendered. Outstanding loan amounts are satisfied with the cash value before issuing payment to the policy owner. Some companies offer an annuity option.

II. Cash Surrender Value

Cash surrender value is the accumulated portion of a permanent life insurance policy's cash value which is only available upon surrender of the policy.

The policyholder receives the cash value within six months under the cash value option. It applies to the savings element payable before death.

III. Extended-Term Insurance

The non-forfeiture clause allows the policy owner to utilize the cash value to buy a term insurance policy with a death benefit. It is calculated from the insured’s age.

In this, a policyholder can quit paying the premiums but cannot forfeit the equity of their policy. Extended-term insurance ends after a specific number of years.

IV. Loan Value

A policy loan is not required to be paid back. Any money borrowed is deducted from the death benefits. Interest ranging from 5% to 9% is charged on the loan. Unpaid interest is added to the loan amount which would be subject to compounding.

CONCLUSION

Forfeiture is an unjust remedy that should no longer be used under insurance law, whether regularly or not. In the insurance sector, forfeiture as a punishment does not correspond to the crime. Traditional contractual remedies, particularly the idea of substantial performance, can be used to eliminate severe forfeitures. When a policyholder pays his premiums on time, the insurance policy is considered substantially completed, and the insurance company's recovery for noncompliance with a policy term should be restricted to damages or recoupment for the harm suffered.


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