Common Reasons Why Term Insurance Claims Get Rejected

Purchasing term insurance is one of the best ways to secure your family’s financial future in case of an unfortunate event. However, the policy's purpose is defeated if your claim is rejected. Recent IRDAI data reveals a high overall claim settlement ratio of 98.64% for life insurers in 2022-23. However, misrepresentation or non-disclosure, unmet policy terms, etc., could result in claim rejection. Understanding these reasons can help you take the necessary precautions. This article discusses the significant causes of claim rejection and provides tips to avoid them.

Purchasing term insurance is one of the best ways to secure your family’s...

How does Term Insurance work?

Term insurance provides a death benefit if the policyholder passes away during a specified term or period of coverage. Here's a more detailed explanation:

The policyholder purchases a term life insurance policy for a set number of years, such as 10, 20, or 30 years. This is the "term" of the policy.

They pay a monthly or annual premium to keep the policy active. Term insurance premiums are much lower than permanent life insurance premiums since term insurance only provides temporary coverage.

If the policyholder dies while the policy is active and in force, the death benefit gets paid out as a lump sum to their listed beneficiaries. This money can help cover living expenses, debt, etc.

If the policyholder outlives the term, the policy expires without paying out a death benefit. Most policies allow conversion to permanent life insurance if desired.

Term policies only pay out if death occurs during the initial term. As with some permanent life insurance products, they do not have a cash value, investment, or savings component.

5 Reasons for Term Insurance Claim Rejection

False Information

One of the top reasons for term insurance claim rejection is providing false or incomplete information when applying for the policy. The insurer determines eligibility, premium amount, and coverage based on the details you provide in the application. Here are some examples of information that needs to be disclosed correctly:

Age
Income
Lifestyle habits like smoking or alcohol consumption
Family medical history
Pre-existing health issues

If the insurer finds any mismatch between the information provided during underwriting and the claim application, it can reject the payout request.

Non-disclosure of Previous or Existing Insurance Policies

While applying for term insurance, the insurer asks explicitly whether you have any existing life insurance plans. If you hide that you already have active covers, it amounts to non-disclosure of material information.

Insurers want to evaluate the total insurance amount you are currently insured for. Concealing existing plans prevents them from accurately assessing the risk level and providing quotes accordingly. Hence, if a policy non-disclosure is detected when filing a claim after demise, they may investigate and find grounds for rejection.

Lapsing of Policy Due to Unpaid Premiums

The premium payment frequency and tenure are clearly outlined in the term insurance policy document. As a policyholder, you must pay all premiums promptly without delays or lapses. If you forget to pay the premiums, causing the policy status to lapse, and death occurs during this period, the claim can be rejected. Insurers only pay claims against active policies at the time of the insured’s demise.

Incorrect Information About Nominee

Per IRDAI guidelines, purchasing life insurance necessitates naming a nominee who receives the death benefit payout. Details provided about the nominee include:

Full legal name
Contact information
Relationship with policyholder
Address proof

Insurers require updated and accurate nominee information when processing claims. If the nominee has changed, policy records need to be updated, or contact information needs to be corrected, complications can arise. In extreme cases, declaring the wrong person as a nominee can also be grounds for rejecting claims.

Pre-existing Disease or Undisclosed Medical Condition

Before offering term insurance coverage, the insurer may ask you to undergo specific medical checkups. The intent behind collecting health reports is to rule out pre-existing illnesses. If the insured dies due to a health condition that existed before purchasing coverage but was not disclosed, the claim can be denied.

For example, suppose the policyholder had diabetes or hypertension but did not reveal it in insurance forms and died of kidney failure later. In that case, the connection between the cause of death and pre-existing disease makes the claim unacceptable.

Tips to Avoid Claim Rejection

Here are some handy tips to avoid unpleasant surprises in the form of term insurance claim rejection

When applying for the plan, provide accurate information without attempting to misrepresent it. Disclose your medical history, previous insurance coverage, and other material facts.

Undergo all mandatory medical checkups the insurer asks for to evaluate your insurability. These tests help rule out many pre-existing conditions.

Never hide details about lifestyle habits like smoking or alcohol consumption as it impacts premiums and eligibility.

Carefully read policy terms so you know about exclusions, claim documentation needs, and limits of coverage provided.

Pay premiums on time without any lapses or grace period activations to prevent policy termination. If needed, set up auto-debit.

Please inform the insurer promptly of any change in address, nominee details, or other policy information to keep records updated.

Following these measures will reduce the likelihood of your nominee facing any disputes regarding term insurance claims.

What to Do if the Claim is Rejected?

The first step is to request the insurance provider's written reason for rejecting the claim. Then, the policy document should be checked to assess whether the grounds for denial seem reasonable or if there is scope to appeal the decision.

If claim rejection seems unjustified, you can take the following steps:

Reach out directly to the life insurance company's claim settlement department to present your side. Provide any evidence or justification needed to overturn the decision.
You can lodge an official complaint via the IRDAI Integrated Grievance Management System (IGMS). The regulator will investigate whether the insurer followed internal processes correctly.

While claim rejection rates in term plans are dropping with tighter regulations, they cannot be entirely avoided in some unfortunate situations like deliberate misstatements in application.

Regarding the claim settlement ratio, ACKO has a 94.54% claim settlement ratio. It means your nominees can expect minimum obstacles when receiving policy death benefits. Learn about ACKO Life Flexi Term Plan →

Frequently Asked Questions

Here are some Frequently asked questions related to term insurance claim rejection

What are the reasons for term insurance claim rejection?

Term insurance claim rejections can occur due to several reasons. Common causes include non-disclosure or misrepresenting critical information during application, such as medical history or pre-existing conditions. Claims may also be denied if the policyholder dies due to an excluded cause, such as suicide within the first year of the policy or involvement in hazardous activities not covered by the policy.

What should you do if a term insurance application is rejected?

If your term insurance application is rejected, the first step is to understand why. Insurers typically provide a detailed explanation for their decision. Review this information carefully and check for any misunderstandings or inaccuracies in your application.

How do you fight an insurance claim rejection?

First, thoroughly review the rejection letter and the policy documents to understand the grounds for denial. Gather all necessary documents and evidence that support your claim, including medical records, death certificates, and any communication with the insurer. Contact the insurance company to discuss the rejection and present your case.

What should I consider when choosing a term insurance policy?

When selecting a term insurance policy, consider factors such as the insurer’s claim settlement ratio, the sum assured (coverage amount) needed to be based on your financial obligations, the policy term (duration of coverage), premium affordability, and the inclusion of riders for additional protection.

What is the 3-year rule for term insurance?

The 3-year rule in term insurance refers to a provision in the Indian insurance law, specifically under Section 45 of the Insurance Act, 1938, which states that after three years from the date of the policy's commencement, no insurance claim can be denied on any ground, including fraud or misrepresentation.

Can I cancel my term insurance policy if I no longer need it?

You can cancel your term insurance policy if you no longer need it. However, it’s essential to consider the implications before making this decision. Terminating your policy means your beneficiaries will no longer receive the death benefit in case of your demise.

What factors affect the premium of a term insurance policy?

Several factors influence the premium of a term insurance policy, including the policyholder’s age, health status, lifestyle habits (e.g., smoking or drinking), occupation, and the length of the term. Younger and healthier individuals typically pay lower premiums. The sum assured and any optional riders (such as critical illness or accidental death benefits) also impact the overall premium cost.

How is the death benefit from term insurance utilised by beneficiaries?

The death benefit from term insurance can cover various expenses such as outstanding debts (like a mortgage or personal loans), daily living expenses, and educational costs for children. Beneficiaries can also invest this amount to generate future income, ensuring financial stability and support for the long term.