The Lapsed Policy, the Diabetes and the 'Cleaner File'
Prakash, 45, a wholesale vegetable trader, holds a ₹10 lakh endowment policy with an annual premium of ₹27,400 due on 15 January. He has paid four years' premiums. In November he was diagnosed with type 2 diabetes and put on medication; his father had a leg amputation. In January his business was hit by a mandi payment default and he missed the premium. It is now 20 March. Prakash wants his policy back but says he will not declare the diabetes, because 'the policy was already in force and nothing has changed'. The agent, Sunil, knows the revival form asks specific health questions. Sunil is also tempted by a suggestion from a colleague: let the policy lapse, then write a fresh policy - 'cleaner file, better commission, and no medicals because the sum assured is small'.
1. Is the policy still within the grace period? Explain what happens if Prakash does not pay, and what revival actually involves.
Read the worked answer
He is well past the grace period.
- Grace period. For annual mode the grace period is 30 days from the due date - here 15 January to 14 February. A payment on 20 March does not fall within it.
- During grace. The risk cover continues, and a death during the grace period is payable after deduction of the unpaid premium, subject to policy terms. That protection is now gone.
- After grace. The policy has lapsed for non-payment. Depending on its terms, it may have acquired a surrender value (four years' premiums paid on an endowment normally means it has) and may be converted to a reduced paid-up policy, or surrendered. Prakash should be shown all three routes: revive, paid-up, surrender.
- Revival is not a right. The insurer underwrites afresh: a revival application, a declaration of current health, possibly medical tests, proof of continuing insurability, and payment of arrears with interest or a late fee, all within the revival period stated in the policy.
- Timing. Revival is treated as a new acceptance of risk. Under Section 45 the three-year contestability window runs from the date of revival (whichever is later than issuance or commencement), so the insurer's questions are not a formality - they are the basis on which it re-accepts the risk at all.
2. Prakash intends to conceal the diabetes on the revival form. What is Sunil's duty, and what happens if the concealment goes through?
Read the worked answer
Sunil must refuse to be part of it, and must say plainly why.
- His duty. An agent must disclose all material facts to the insurer, must bring to the proposer's notice the importance of accurate answers, and must not complete or influence answers falsely. Helping a client withhold a diagnosis made weeks before the premium due date is a code-of-conduct breach and, for a revival declaration, potentially a false statement in a document - exposure under the Insurance Act as well as termination of appointment, removal from the register and forfeiture of commission.
- Why diabetes is material. Type 2 diabetes affects mortality and morbidity, particularly with a family history of amputation. An underwriter may accept at standard rates, impose a loading, or postpone; that judgement belongs to the insurer.
- What happens if it goes through. The revival is vulnerable. A death within three years of revival can be resisted on the ground of misstatement or fraud under Section 45, with a written communication setting out the ground and the evidence. The family, at the worst possible moment, receives premiums back instead of ₹10 lakh.
- What Sunil should say. 'The form asks about any diagnosis or treatment since your last declaration. Your diabetes is exactly that. If we declare it, the worst case is a loading on the arrears; if we hide it, the worst case is that your family gets nothing.' Then record the advice and the client's decision.
3. Evaluate the colleague's suggestion: let the policy lapse and write a fresh one.
Read the worked answer
It is a commission-driven replacement that serves nobody but the agent.
- The 'cleaner file' does not exist. A fresh proposal asks the same health questions, including diabetes and family history. If answered honestly, the new policy is underwritten on the same facts at age 45 with no four years of acquired value; if answered dishonestly, the new policy carries the same Section 45 exposure - with the added problem that it is entirely fresh, so the full three-year window is open.
- What Prakash loses by starting over. Four years of premiums, the accrued bonuses, the older age band, the approaching maturity date, and the policy's existing guaranteed terms. A new policy also restarts the suicide exclusion period and acquisition costs.
- What the alternatives are worth. He should compare, in numbers: (a) revival cost - arrears plus interest, plus any loading; (b) reduced paid-up value with no further premiums; (c) surrender value now versus maturity benefit if revived. For a four-year-old endowment, revival is usually the best financial outcome if it is affordable.
- The conduct issue. Advising lapse-and-replace to earn a fresh first-year commission, while knowing the client has a new diagnosis, is churning and a breach of the code of conduct. Sunil should document the comparison he gave, recommend revival on full disclosure, and let Prakash decide with the numbers in front of him.