Practice of Life Insurance
What this domain tests
IC-02 examines the operational life of an Indian life insurance policy: proposal and underwriting, the policy document and its clauses, premium and reserves, nomination and assignment, servicing (loans, lapsation, revival, surrender), and claims settlement. Questions test procedure and terminology - which section applies, which document a claimant must produce, and what a given clause actually pays out.
Contract formation and the policy document
A proposal is an offer, not the contract; acceptance, evidenced by dispatch of the policy document, completes the bargain. Proposal answers are material and form the basis of the contract. Under Section 45 of the Insurance Act, 1938 as amended in 2015, a policy cannot be called in question on the ground of fraud or misstatement after three years from issuance, revival or rider addition.
Nomination and assignment
A Section 39 nomination directs the death benefit to a nominee but does not transfer ownership; the policyholder retains every right. A Section 38 assignment transfers rights in the policy and may be absolute or conditional. Assignment cancels an existing nomination; a nomination does not affect an assignment.
Worked example
A ₹5,00,000, 20-year endowment policy is issued at age 30 on an annual premium of ₹25,000. After six years the policyholder stops paying. The policy becomes paid-up: sum assured × premiums paid ÷ premiums payable = 5,00,000 × 6 ÷ 20 = ₹1,50,000, payable at maturity or on death, with no further premium due. Surrendering instead would produce a surrender value, which may be nil in the first two years.
Traps that cost marks
- Treating the nominee as owner of the policy during the policyholder's lifetime.
- Confusing paid-up value with surrender value.
- Assuming a lapse destroys all benefit - revival on arrears with interest and fresh health evidence is normally available.
- Quoting the old two-year contestability window instead of the current three-year rule.