Insurance claims involve lump sum amounts, which often get used up for various needs. This defeats the purpose of buying insurance. Many buy insurance policies to get a regular income in case something untoward happens. Insurance Regulatory Development Authority of India (IRDAI) has announced guidelines that will pave the way for the option of the settlement of claims in installments spread over a maximum five years. This is with respect to personal accident policies issued by general and health insurers, and benefit-based health insurance policies issued by all insurers. This would offer an income in the hands of the claimants for a reasonable period of time on the happening of the contingent event insured under an underlying policy, says IRDAI.
An installment payment option for claims may enable the policyholders of benefit-based health insurance policies to get a stream of income over a pre-determined period of time post-triggering of a claim.
The just-announced norms mean that the installment claim option will be applicable to all insurers in respect of personal accident and benefit-based health insurance products. It will also be applicable for fixed benefit components of indemnity products/fixed benefit riders/add-ons attached to indemnity policies of both individual and group products.
Installment or lump sum
The insurance company will have to provide the policyholder an option of choosing either settlement of a claim in lump sum or in equated installments or both in parts as specified.
The claim payment period of the product shall be maximum of five years which shall be subject to product design. The claim installments will have to be spread during the claim payment period.
The periodicity of the installment can be on a monthly or quarterly or bi-annual or annual basis, subject to the product design. Where the product provides multiple periodicities of the installments (Monthly, Quarterly or Half Yearly or Yearly) the option to choose will have to be made available to the policyholder.
Installment payment route
The mode of installment payments will be fixed as RTGS/NEFT or any other RBI approved online transfer mechanism. The insurer has to ensure capturing all relevant information concerning the bank accounts of the policyholder/claimants/nominee, before considering the option request exercised by the policyholder.
Do remember that the payment of claim amount in installments will not be a default option. It will only be in addition to the lump-sum option and will be allowed based on the option exercised by the policyholder. This means the option will co-exist with lump sum claim settlement.
Same premium, but more money
The premium rate shall be the same for both the options i.e. choosing installment or lump sum claim options will have no bearing on the premium cost.
The total claim amount payable in installment option will always be higher than the lump sum option. This is because the insurers will not have to pay the claim money at one go. So, they will have to pass on the benefits to claimants.
Insurers have been directed to have procedures put in place to capture the option exercised by the policyholder at the point of sale and at various stages of the policy.
A combination of both the options i.e. a percentage of the sum assured as a lump-sum payment at the time of claim and the balance sum insured in installments for a definite period of not exceeding the time limits may also be offered as a part of product design, IRDAI says.
Benefits offered would have to be clearly demarcated in respect of both the options at the time of product design itself. These will have to be disclosed in the policy document under terms and conditions of the policy
Do note that the IRDAI has said that the installment option “may be offered only beyond a certain threshold limit of the base sum insured, subject to the design of the product.” The certain threshold limit may be fixed by insurers.
When policyholder chooses the option of the settlement of a claim in installments, the benefit under the underlying product will have to be designed in such a way that the actual claim will fall due only on the specified date on the happening of the contingent event covered under the underlying policy.
Interestingly, the policyholder will have to be given an option of altering the mode of receipt of payment of a claim from lump-sum to installments and vice versa. This can be done during the policy duration any number of times until the point of claim, which would be effected in the policy document by placing suitable endorsements.
Subsequent to the commencement of payment of claims in installments, an option will be made available to the policyholder to withdraw this option and seek the future installment amounts in a lump sum. This is a good move by IRDAI, since the policyholder may want to change their option later.