How splitting life insurance policy helps

Life insurance is a long-term contract and situations may arise during this period where the customer desires changes in policy conditions to suit new realities.

To cite a simple example, a female policyholder might desire a change of her name in policy records after her marriage. Or, one might desire to alter the mode of premium payment from salary savings scheme to ordinary mode (yearly/half-yearly/quarterly/monthly) when one leaves employment on super-annuation.

Merger not allowed

Mr A has 10 life policies purchased at different points of time and under different plans of life insurance. Mr A is now financially sound and thinks it would be better if all these small policies were merged into a single policy for a sum insured equal to that of the total of all policies. It would be very convenient to pay the premiums. But the life insurer does not allow this. All these policies were granted on his life at different points of time when he submitted proposals for life insurance and underwriting was done on the basis of his health and other conditions prevailing at those points of time. By allowing the merger of these policies, sum assured and maturity date would change, the age under each policy being different. The calculation of age (under the merged policy) would create problems and the premium would vary . The result would be confusion and risk enhancement. So, any change in policy condition that enhances risk under the policy is not allowed.

Split is allowed

Most customers are not aware of this facility provided by insurers such as the LIC. A life insurance policy can be split into any number of policies so that the sum assured under any piece is not less than the minimum sum assured prescribed by the company.

A policy with Rs 10 lakh as sum assured, for example, can be split into two policies of Rs 5 lakh each or three policies – one of Rs 4 lakh and two policies of Rs 3 lakh each and so on. One policy will bear the original policy number and others will be allotted new policy numbers and given new policy bonds. Suitable endorsements will be placed on the original policy bond.

How does this facility help us? Suppose a policyholder holding a single policy wants to give the proceeds of the policy equally to his two children. He can very well split the policy into two equal units by applying to the insurer. Once separate policies are issued he can then assign the policies to each of the children.

Another policyholder, while working abroad, may have purchased a life insurance policy for a very heavy sum assured, where the premium too was high. After his return, when his income has come down, he finds it difficult to pay such a high premium at a time.

Well, he can split the policy into different units and seek different modes of premium payment for each of the units. So, one policy may be on yearly mode, another one on half-yearly mode and yet another on quarterly mode. He can thus spread his premium-payment-burden. Take the case of a policyholder who has to assign his policy of Rs 25 lakh sum assured to a bank against grant of an education loan of Rs 5 lakh to his son. Actually, he is expected to assign a policy of equal value as the loan (Rs 5 lakh). By this assignment, he is blocking all his transactions on the policy for the period till the repayment of the loan. And he suffers a cancellation of nomination too on account of assignment. A right option, here, would have been splitting the policy into two policies of Rs 5 lakh and Rs 20 lakh sums assured and then assigning the Rs 5 lakh-sum-assured policy to the bank.Such situations happen in the case of housing loans also. Policies of high sum assured and maturity value are assigned by policyholders to institutions that grant housing loans of lower amount.

(The writer is President, Society for Promotion of Legal and Insurance Awareness.)

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