Insurance Premiums Paid, Policy Not Issued

Recently, we at Apnapaisa received a query mentioning the case of Mr. Rakesh who had paid premium to a life insurance company to buy a cover of Rs. 50 lakhs. Unfortunately, Rakesh died in a fatal accident within 15 days of paying the premium to the insurance company. On finding premium receipt in Rakesh’s papers, his wife approached the insurance company for the claim. But the claim was denied. It was only then that she realized that life insurance policy was not in existence as the premium was received only as a deposit (in fact the receipt issued by the Insurance company clearly indicated that the money was received as a deposit and that the risk cover had not yet started) and her husband had yet to undergo some specific medical tests required by the insurance company.

All that the wife got back was the premium amount paid by her husband. So all the careful planning by Rakesh to take an adequate life insurance for the safety of his family had come to naught simply because of his dilly-dallying approach towards completing the formalities for the life insurance policy.

Let’s try to understand why the claim was rejected

Insurance is a contract and a contract will be considered complete only when both parties agree to the terms and conditions of the contract. A contract always involves mutual agreement between the two parties. In case of insurance, the first party is the person who is willing to be insured and the second party is the insurance company who will insure the person. When a person is paying premium to the insurance company, then it simply means that the person is proposing the insurance company to cover him. Or to put in simple words, the person is willing to be covered by the insurance company and he shows this willingness by paying the premium. Now it depends upon the insurance company to agree to cover him or not.

The insurance company after receiving the proposal will carry out its underwriting process under which it will study the person’s financial and health conditions. Once it is satisfied, then only the insurance company will cover the person and issue a cover note (also called the First Premium Receipt by some Insurance companies) or the insurance policy to the person. The insurance cover starts only from the date of such cover note or insurance policy. In case the insurance company is not satisfied with person’s health or any other condition during the underwriting process, it rejects the policy and the premium amount is paid back to the person after deducting some charges.