Multiple data sources show that India's suicide rate is among the highest in the world. When a member of a family dies, it sometimes leaves the dependents financially crippled. It is an unexpected event for the family. An insurer usually gets his/her life insured to protect his/her from the difficult consequences of a loss of income. However, does the life insurance policy cover death by suicide?
Suicide is usually not an unexpected or unplanned event on part of the insurer. Whether or not that argument comes in the way of issuing the sum assured to the nominee depends on the policy terms. Generally, life insurance policies do cover suicide if the cover was purchased over 12 months before the death. These include traditional (endowment) as well as term life insurance policies and ULIPs.
Following are the usual policy norms in India, however, like any important financial document, read it carefully before signing, to as to see if there is a clause that excludes suicide coverage.
Also, note that if you have already purchased the life insurance policy, you have 15 days time to cancel the policy. As per the instructions of the Insurance Regulatory and Development Authority of India (IRDAI), all the life insurance companies in India have to provide their customers with a "free-look period" to consumers, that is generally 15 days, so that they can thoroughly read the terms and conditions in the policy papers and decide if they wish to go for it.
The terms followed earlier
On life insurance policies issued before 1 January 2014, there was a suicide clause that if the person insured (policyholder) commits suicide within a year of the commencement of the policy, whether or not the person was sane at the time, the policy will automatically be treated as void and no claim shall be paid to the nominees.
Note that such a clause can exist in policies issued now as well. Further, the time bracket maybe 2 years for certain insurance companies.
For policies issued after 1 January 2014, terms were changed to include the type of insurance policy held.
In case of market-linked life insurance policies like ULIP, the policyholder's is entitled to receive 100 percent of the policy fund value on committing suicide within 12 months from the purchase of the policy.
In case of traditional insurance, if the policyholder commits suicide before 12 months, the nominee shall be entitled to at least 80 percent of the premiums paid, provided the policy is in force.
Why is suicide only covered after one year?
Suicide is a moral hazard risk to the insurance company. To avoid insurance fraud, these are not covered in some life insurance policies. There could be chances where the policyholder is in deep debt and buys a life insurance policy to pay them off with the sum assured. It is assumed that the 12 months will be enough for such a person to be out of that mindset.
However, the suicide coverage is provided after a period of 1 year, to cover the emotional or debt distress that the dependents of the insured could face after the death of the policy holder. As the primary reason to opt for life insurance is to keep the dependents' lives financially secure after their family member dies, providing the cover will help provide them with some support.
If a loan was taken against the policy
Suppose a home loan was taken against the life insurance policy (where the sum assured is greater than the home loan), the interest to be paid on the loan to the bank (which will be third-party in the case) is covered. The policy has to be active for at least 12 months and the death has to take place within the policy term.
Suicide is a cowardly act. One can seek help from multiple options available today to deal with suicidal thoughts. Additionally, suicide insurance claims are scrutinized before paying the sum assured to the nominees. Claims made by the nominee will be rejected if the policyholder had intentionally concealed material facts (like debt) from the insurer. Further, the chances of claim rejection are high, so it is not the solution to anyone's debt problems.