Term Insurance Claim Rejection Reasons in India

Term insurance is one of the simplest and most affordable forms of life insurance. It provides financial security to your loved ones in the unfortunate event of your demise. However, having a term insurance plan isn't enough if the claim gets rejected when your family needs it the most.

Claim rejections can lead to financial distress, which is the very thing term insurance aims to avoid. Understanding the reasons behind claim rejections and how to prevent them is crucial for ensuring your family receives the benefits you intended for them.

This article will explain the most common rejection and provide practical tips to avoid these issues.

Claim rejections are mainly caused due to incorrect data and information. Insurance providers set some conditions under which a claim gets rejected. These errors make them unable to compensate for your bill, and they reject such claims. This rejected claim will be returned to the biller for rectification. 

Generally, a rejected claim may be caused by a mismatched process, ICD code(s), or a clerical error. These errors can be simple, like a transposed digit from the insurance ID or a misspelt name. This rejected claim can be resubmitted as soon as the errors are rectified. However, beyond that, there can be different reasons that can cause the rejection of your claim.

1. Incomplete or Incorrect Information in the Application

Policyholders hope that the insurance company will compensate their claim whenever needed. The company trusts that all information provided about the insured person is truthful. However, in some cases, one may hide some personal information to lessen their premium amount.

If any information is hidden, incomplete, or false, the insurance company can reject your claim and disallow you from receiving the policy benefits.

Examples of Incorrect or Incomplete Information:

• Misstating your age
• Incorrect disclosure of income or occupation
• Failure to provide complete personal details like name, address or contact information

How to Avoid it?

• Fill out the application form yourself instead of relying on someone else
• Double-check all the information before submitting the form
• Provide accurate and complete details, even if they seem minor

2. Non-Disclosure of Medical History

Insurance companies require you to disclose your medical history honestly. Hiding pre-existing medical conditions, previous surgeries, or chronic illness can lead to claim rejection. Insurance companies take the principle of "utmost good faith" very seriously.

Examples of Non-Disclosure:

• Medical history and pre-existing conditions
• Filling to disclose diabetes or hypertension
• Not informing the insurer about past surgeries or treatments.

How to Avoid it?

• Be transparent about your health history, even if it might increase your premium.
• Undergo medical tests as recommended by the insurer
• Keep copies of medical records submitted to the insurer for future reference

3. Lifestyle-Related Misrepresentation

Lifestyle habits like smoking, drinking or engaging in risky activities significantly impact insurance premiums and claims. If you misrepresent your lifestyle habits, it could result in claim rejection.

Example of Misrepresentation:

• Claiming to be a non-smoker while being a smoker
• Hiding details about alcohol consumption or dangerous hobbies like skydiving

How to Avoid it?

• Be honest about your lifestyle choices.
• Understand that disclosing these habits may lead to higher premiums but ensures claim approval.

Note: If someone states they are a non-smoker but actually smokes regularly, this misrepresentation could lead to claim rejection even if the cause of death is unrelated to smoking.

4. Failure to Pay Premiums on Time

One of the leading reasons for term insurance rejection, which is when an insurance policy lapses and your claim can be rejected, is the non-payment or late payment of premiums. When you buy an insurance plan, you must clear all premiums within the stipulated time to keep the policy active. 

If you fail to pay a premium by mistake, the insurance company will inform you via call, send you notifications, SMS, etc., and give you a grace period of 30 days to pay the amount. If you fail to respond within that period, your insurance policy will lapse, and subsequent claims on that policy will be rejected.

Common Premium Payment Issues

• Forgotten due dates
• Insufficient funds in auto-debit accounts
• Changed bank account without updating policy details
• Deliberate non-payment, thinking the policy isn't needed

How to Avoid it?

• Opt for auto-debit or standing instructions to ensure timely payments
• Set reminders for premium due dates
• Choose a premium payment frequency (monthly, quarterly, yearly) that suits your financial situation.

5. Suicide Clause

Most term insurance policies come with a suicide clause, which states that claims arising from suicide within the first year of the policy will not be entertained.

How to Avoid it?

• Understand the terms and conditions of your policy, including exclusions.
• After the initial period, claims due to suicide are generally covered, so ensure your family is aware of the policy details.

6. Death Due to Exclusions

Insurance policies have certain exclusions where claims are not payable. Common exclusions include:

• Death due to participation in hazardous activities (e.g., extreme sports)
• Death caused by involvement in criminal activities
• Death due to intoxication or substance abuse

How to Avoid it?

• Read the policy document thoroughly to understand exclusions
• Avoid engaging in activities or habits excluded from the policy coverage

7. Documentation Issues

Incomplete or missing documents during the claim process can delay or result in claim rejection. 

Examples of Documentation Issues

• Missing death certificate or hospital records
• Incorrect bank details for fund transfer

How to Avoid it?

• Maintain a file with all policy-related documents
• Educate your family members about the required documents and claim process
• Verify that all documents are correct before submitting a claim

8. Miscommunication or Lack of Communication

Many claims are rejected simply because family members are unaware of the policy or its terms.

How to Avoid it?

• Inform your family about the term insurance policy, including the policy number, insurer contact details and claim process.
• Keep a copy of the policy document in a safe yet accessible place.

9. Nominee-Related Issues

The nominee or beneficiary is an important part of a term life insurance policy. As stated in the policy, the nominee will receive coverage in the event of the insured person's death. Thus, if an insurance company finds any false information about the nominee or the details are not filled out or updated correctly, it can reject those claims. 

Examples of Nominee Related Issues:

• Failure to update nominee details after marriage or divorce.
• Nominating a minor without appointing a legal guardian.
• If a young person buys a term plan and lists their parents as nominees, the insurance company will reject the claim if the nominee's information isn't updated after their death.

How to Avoid it?

• Update nominee details promptly in case of life events like marriage, divorce or childbirth.
• Appoint a legal guardian if the nominee is a minor.

10. Policy Not in Force at Time of Death

Most term insurance policies have a waiting period/grace period, usually 1-2 years from the policy start date. The claim may be rejected if the policyholder dies during the grace period due to non-accidental causes or before paying the overdue premium.

How to Avoid it?

• Renew the policy promptly within the grace period
• Opt for a long-term premium payment plan to minimise missed payments.

11. Discrepancy in Claim Form

Insurance companies provide sufficient time for filing a claim. Even though rejection of claims due to late filing rarely occurs these days, it can still arise if the delay continues for a longer period. Therefore, the policyholder’s family members should ensure they file the claim on time without errors or omitting crucial details to avoid rejection.

How to Avoid it?

• Fill out the claim form carefully and cross-check for errors
• Seek assistance from the insurer or an advisor if needed

12. Misrepresentation by Agent

In some cases, agents may provide incorrect information to close a sale, leading to claim rejection later.

How to Avoid it?

• Verify all information provided by the agent directly with the insurer.
• Insist on receiving the complete policy document and read it thoroughly.

Be Honest in Disclosure of Information

‘Concealment of information’ is a major reason for claim rejection. If you have any pre-existing health condition or disease, make sure to disclose the same in your application form. Similarly, if you have any unhealthy habits like drinking or smoking and are involved in high-risk jobs like firefighting, disaster mitigation, mining, etc., be honest in mentioning the same while applying for term insurance.

If any information relevant information regarding the extent of risk is found to have been hidden, the insurer will deny compensating your beneficiary. In such cases, an insurer investigates the reason behind it. Consequently, the claim will be rejected if you have concealed vital information determining the risk to your life. So, to be honest in disclosing everything, it's better to pay a slightly higher premium with full disclosure than risk claim rejection later.

Pay Premiums on Time

Update Nominee Information

File Insurance Claims as Early as Possible

Fill out the Form Yourself

Do not depend on anyone to fill out the application form. Remember, providing accurate information on the form is vital to get the claim passed in your absence. Based on your information, the insurer will determine the premium amount depending on the overall cover, age, underlying risk factors, etc.

Simply informing the insurance agent or a third person about your medical history and depending on them can be a major blunder. If they make a mistake in entering the correct information, claims on that policy will be rejected. So, fill up your form yourself. 

Term insurance is valuable as it provides financial security to your loved ones in your absence. However, the benefits can only be realised if the claim process is smooth and hassle-free. Understanding the common reasons for claim rejection and taking proactive steps to avoid them will ensure your family receives the intended benefits without unnecessary delays or complications.

Investing time and effort to choose the right life insurance policy, maintaining transparency and keeping your family informed can make all the difference regarding claim approval. Remember, the goal of term insurance is peace of mind for both you and your loved ones, ensuring you achieve it by being diligent and informed.