by In life insurance accounting, claims, premiums, and profit are the three most important elements used to determine the financial performance of a life insurance company. Premiums constitute the major source of income, while claims represent the principal liability of the insurer. The difference between income and expenditure, after considering actuarial adjustments and reserves, determines the profit or surplus of the life insurance company.
Claims in Life Insurance Companies
Claims are one of the most important aspects of life insurance business. The primary objective of life insurance is to provide financial protection to the insured and their family against uncertainties such as death, disability, or survival up to a specified age. A claim arises when the insurer becomes liable to pay the policy benefits according to the terms and conditions of the insurance contract. The settlement of claims represents the fulfillment of the promise made by the insurance company to the policyholder.
Meaning of Claims
Claim is a demand made by the policyholder, nominee, or legal representative to receive the amount payable under a life insurance policy upon the occurrence of the insured event.
Definition
Claim in life insurance refers to the amount payable by the insurance company to the insured or beneficiary according to the terms of the policy when the insured event occurs.
Objectives of Claim Settlement in Life Insurance Companies
- To Provide Financial Security to Beneficiaries
The primary objective of claim settlement is to provide financial security to the policyholder or the nominee after the occurrence of the insured event. In the case of death, disability, or maturity, the claim amount helps the beneficiaries meet their financial needs and maintain their standard of living. Life insurance serves as a protective mechanism against financial uncertainties, and timely claim settlement ensures that the policyholder’s family receives the promised financial support. Therefore, providing financial security and stability to beneficiaries is one of the most important objectives of claim settlement.
- To Fulfill the Contractual Obligation of the Insurer
An insurance policy is a legal contract between the insurer and the insured. Under this contract, the insurance company promises to compensate the policyholder or nominee upon the occurrence of specified events. The settlement of claims fulfills this contractual commitment and demonstrates the insurer’s responsibility toward its customers. Failure to settle claims may amount to a breach of contract and damage the company’s reputation. Therefore, one of the major objectives of claim settlement is to fulfill the contractual obligations arising from the insurance agreement.
- To Maintain Public Confidence in Insurance
The success of the insurance industry depends largely on public trust and confidence. Prompt and fair settlement of claims strengthens the faith of policyholders and encourages more people to purchase insurance policies. On the other hand, delays or unjustified rejection of claims can reduce confidence in the insurance sector. Efficient claim settlement demonstrates the reliability and credibility of the insurer. Therefore, one of the important objectives of claim settlement is to maintain and enhance public confidence in insurance companies.
- To Ensure Fair and Equitable Treatment of Policyholders
Insurance companies have a responsibility to treat all policyholders fairly and impartially. The claim settlement process ensures that genuine claims are settled according to the terms and conditions of the policy without discrimination or bias. Fair treatment increases customer satisfaction and strengthens long-term relationships between insurers and policyholders. It also reflects the ethical standards and professionalism of the insurance company. Therefore, one of the significant objectives of claim settlement is to ensure fairness and equity in dealing with policyholders.
- To Comply with Legal and Regulatory Requirements
Insurance companies are required to settle claims in accordance with the provisions of the Insurance Act, IRDAI regulations, and other applicable laws. Regulatory authorities prescribe guidelines regarding claim processing, documentation, and settlement periods to protect the interests of policyholders. Compliance with these regulations helps avoid legal disputes and penalties. Therefore, one of the important objectives of claim settlement is to ensure adherence to legal and regulatory requirements governing the insurance industry.
- To Improve Customer Satisfaction and Goodwill
Timely and efficient settlement of claims plays a vital role in improving customer satisfaction. Policyholders expect insurance companies to provide prompt financial assistance during difficult times. When claims are settled quickly and fairly, customers develop confidence and loyalty toward the insurer. Satisfied customers also recommend the company to others, thereby enhancing its goodwill and reputation. Therefore, one of the major objectives of claim settlement is to improve customer satisfaction and strengthen the goodwill of the insurance company.
- To Prevent Fraudulent Claims
Another important objective of claim settlement is to identify and prevent fraudulent claims. Insurance companies carefully verify documents and investigate claims to ensure that only genuine claims are paid. Effective claim management protects the financial resources of the insurer and prevents misuse of policyholders’ funds. Preventing fraud also contributes to maintaining lower premium rates and the overall stability of the insurance industry. Therefore, one of the significant objectives of claim settlement is to detect and prevent fraudulent claims.
- To Enhance the Financial Stability of the Insurance Company
Proper claim settlement helps insurance companies manage their financial resources efficiently and maintain adequate reserves. By accurately assessing and settling claims, insurers can control their liabilities and ensure long-term financial stability. Effective claim management also facilitates proper financial planning and risk management. Therefore, one of the important objectives of claim settlement is to promote the financial soundness and sustainable growth of the insurance company.
Features of Claims in Life Insurance
- Arise on the Occurrence of an Insured Event
Claims in life insurance arise only when a specified event covered under the insurance policy occurs. Such events may include the death of the insured, maturity of the policy, survival benefits, disability, or surrender of the policy. The insurance company becomes liable to pay the claim only after the occurrence of the insured event and fulfillment of policy conditions. Therefore, one of the fundamental features of life insurance claims is that they arise only upon the happening of events specified in the insurance contract.
- Represent a Major Liability of the Insurance Company
Claims constitute one of the largest liabilities and expenses of life insurance companies. A significant portion of the premium income collected by insurers is utilized for the settlement of claims. The amount of claims directly affects the profitability and financial position of the company. Therefore, one of the important features of claims in life insurance is that they represent a major financial obligation of the insurer and require careful management and adequate reserves.
- Governed by the Terms and Conditions of the Policy
Every life insurance claim is settled according to the terms and conditions specified in the insurance policy. The insurer examines whether the claim falls within the scope of coverage and whether all policy requirements have been fulfilled. Claims may be rejected if there is fraud, non-disclosure of material facts, or violation of policy conditions. Therefore, one of the significant features of life insurance claims is that they are governed by contractual terms and policy provisions.
- Require Verification and Documentation
Before settling a claim, the insurance company verifies the authenticity of the claim and examines the necessary documents. Documents such as the original policy document, death certificate, medical reports, identity proof, and claim forms are usually required. Proper verification helps prevent fraudulent claims and ensures that only genuine claims are settled. Therefore, one of the important features of claims in life insurance is that they involve a detailed process of verification and documentation.
- May Arise in Different Forms
Life insurance claims may arise in several forms, such as death claims, maturity claims, survival benefit claims, surrender claims, and annuity claims. Each type of claim has its own procedures and conditions for settlement. The variety of claims reflects the diverse nature of life insurance products and the different needs of policyholders. Therefore, one of the distinctive features of life insurance claims is that they can arise in multiple forms depending on the policy and circumstances.
- Settlement of Claims Builds Public Confidence
The prompt and fair settlement of claims increases the confidence of policyholders and the general public in insurance companies. Efficient claim settlement demonstrates the reliability and financial strength of the insurer and encourages more people to purchase life insurance policies. Delays or disputes in settlement may adversely affect the reputation of the company. Therefore, one of the major features of life insurance claims is that their settlement significantly influences public trust and confidence in the insurance industry.
- Directly Affect the Financial Performance of the Company
The amount and frequency of claims have a direct impact on the profitability and financial performance of life insurance companies. A large number of claims may reduce the surplus of the insurer, while lower claims may improve profitability. Consequently, insurance companies continuously monitor claims experience and maintain adequate actuarial reserves to meet future liabilities. Therefore, one of the important features of life insurance claims is that they directly affect the financial results and stability of the insurer.
- Recorded as Expenses in the Revenue Account
Claims settled or incurred during an accounting period are treated as expenses and recorded in the Revenue Account of the life insurance company. Proper accounting treatment of claims is essential for determining the surplus or deficit of the insurer and presenting a true and fair view of its financial performance. Therefore, one of the significant features of life insurance claims is that they form an important item of expenditure in the financial statements of life insurance companies.
Types of Claims in Life Insurance Companies
1. Death Claims
A death claim arises when the insured person dies during the term of the life insurance policy. The insurance company becomes liable to pay the sum assured along with any accrued bonus or additional benefits to the nominee, legal heir, or beneficiary named in the policy. Death claims are the most common type of claims in life insurance and represent the primary purpose of life insurance, which is to provide financial protection to the family of the insured after their death.
To settle a death claim, the nominee must submit a claim form, the original policy document, a death certificate, identity proof, and other documents required by the insurer. After verification of the claim and policy conditions, the insurance company releases the payment.
Death claims are significant because they provide financial support to the dependents of the deceased and help them meet future expenses, repay debts, and maintain their standard of living.
Example: Mr. A purchased a life insurance policy with a sum assured of ₹15,00,000 and nominated his wife as the beneficiary. Unfortunately, Mr. A died during the policy period. After verifying the documents, the insurance company paid ₹15,00,000 along with a bonus of ₹2,00,000 to his wife. This payment is known as a death claim.
2. Maturity Claims
A maturity claim arises when the policyholder survives until the end of the policy term. In such cases, the insurance company pays the sum assured together with any accumulated bonuses or guaranteed additions to the policyholder. Maturity claims are common in endowment policies and money-back policies where the insured receives financial benefits upon completion of the policy period.
The settlement of maturity claims generally requires fewer formalities because the policyholder himself receives the payment. The insurer verifies the policy details and makes payment on the maturity date.
Maturity claims help policyholders achieve long-term financial objectives such as retirement planning, children’s education, marriage expenses, or investment goals. These claims also encourage savings and financial discipline among individuals.
Example: Mrs. B purchased a 20-year endowment policy with a sum assured of ₹10,00,000. Upon completion of the policy term, she survived and became entitled to the maturity amount. The insurance company paid ₹10,00,000 along with a bonus of ₹3,00,000. This payment is called a maturity claim.
3. Survival Benefit Claims
Survival benefit claims arise under certain life insurance policies that provide periodic payments to the policyholder if he or she survives for specified periods during the policy term. Such benefits are generally available under money-back policies and child education plans.
The purpose of survival benefits is to provide liquidity and financial assistance to policyholders at regular intervals without waiting until the maturity of the policy. These payments can be used for education expenses, business investments, or other financial needs.
The policyholder remains covered under the insurance policy even after receiving survival benefits, and the remaining benefits are paid according to the terms of the contract.
Example: Mr. C purchased a money-back policy with a sum assured of ₹5,00,000. The policy provides 20% of the sum assured every five years. After completing five years, he received ₹1,00,000 from the insurance company. This payment is known as a survival benefit claim.
4. Surrender Claims
A surrender claim arises when the policyholder voluntarily terminates the life insurance policy before its maturity date and requests payment of the surrender value. Life insurance policies generally acquire a surrender value after the payment of premiums for a specified minimum period.
The surrender value is usually lower than the total premiums paid because the insurance company deducts certain charges and expenses. Policyholders may surrender their policies due to financial difficulties, changes in investment objectives, or inability to continue paying premiums.
Although surrendering a policy provides immediate funds, it also results in the loss of future insurance protection and maturity benefits. Therefore, policyholders should carefully evaluate the consequences before surrendering a policy.
Example: Mr. D purchased a life insurance policy and paid premiums regularly for ten years. Due to financial problems, he decided to discontinue the policy and received ₹2,50,000 as surrender value from the insurer. This amount represents a surrender claim.
5. Annuity Claims
Annuity claims arise under pension and retirement insurance policies where the insurance company makes periodic payments to the policyholder after retirement or on reaching a specified age. Unlike other claims that involve a lump-sum payment, annuity claims provide a regular stream of income to the policyholder.
Annuity payments may be made monthly, quarterly, half-yearly, or annually, depending on the terms of the policy. These claims are particularly useful for retired individuals because they provide financial security and help meet daily living expenses after retirement.
Annuity policies play an important role in retirement planning and help individuals maintain financial independence during old age.
Example: Mrs. E purchased a pension policy and, upon retirement at the age of sixty, became entitled to receive an annuity of ₹25,000 every month. The insurance company pays this amount regularly according to the policy terms. These periodic payments are called annuity claims.
Procedure for Settlement of Claims in Life Insurance Companies
Step 1. Intimation of the Claim
The first step in the settlement of a life insurance claim is the intimation of the claim to the insurance company. The nominee, beneficiary, or policyholder informs the insurer about the occurrence of the insured event, such as death, maturity, or disability. The information may be given through a written application, online portal, email, or by visiting the branch office. Early intimation enables the insurance company to begin the claim process promptly and provide guidance regarding the documents required for settlement. Therefore, giving timely intimation of the claim is the first and essential step in the claim settlement procedure.
Step 2. Submission of Claim Form and Necessary Documents
After notifying the insurance company, the claimant is required to submit a duly completed claim form along with the necessary supporting documents. These documents generally include the original policy document, death certificate, medical records, identity proof, address proof, and bank details of the claimant. In certain cases, additional documents such as police reports or succession certificates may also be required. Proper submission of documents helps the insurer verify the authenticity of the claim and determine the amount payable. Therefore, the submission of claim forms and supporting documents is an important step in the claim settlement process.
Step 3. Verification and Scrutiny of Documents
Once the claim form and documents are received, the insurance company carefully examines and verifies them. The insurer checks whether the policy was in force on the date of the insured event and whether all information provided by the claimant is accurate and complete. The company also ensures that there is no fraud, misrepresentation, or non-disclosure of material facts. This verification process protects the insurer from fraudulent claims and ensures that only genuine claims are settled. Therefore, verification and scrutiny of documents constitute a vital stage in the claim settlement procedure.
Step 4. Investigation of the Claim
In certain cases, especially where the claim amount is large or the death occurs shortly after the policy is issued, the insurance company may conduct a detailed investigation. The investigation may include obtaining medical reports, interviewing witnesses, examining hospital records, and verifying the circumstances surrounding the claim. The purpose of the investigation is to establish the genuineness of the claim and ensure compliance with policy conditions. Proper investigation reduces the possibility of fraudulent claims and protects the interests of the insurer and policyholders. Therefore, investigation is an important step in the claim settlement procedure.
Step 5. Assessment of Liability
After verification and investigation, the insurance company assesses its liability under the insurance policy. The insurer determines the amount payable by considering the sum assured, bonuses, riders, policy conditions, and any deductions that may apply. In the case of maturity or survival benefit claims, the amount is calculated according to the terms of the policy. Accurate assessment of liability ensures that the claimant receives the correct amount and that the financial records of the insurer remain accurate. Therefore, assessing the insurer’s liability is an essential step in the settlement of claims.
Step 6. Approval and Sanction of the Claim
Once the insurer has determined the amount payable, the claim is submitted to the competent authority within the company for approval and sanction. The authorized officials review the claim file and ensure that all procedures and requirements have been properly completed. If the claim satisfies all conditions, it is approved for payment. In cases where the claim is rejected, the claimant is informed about the reasons for rejection. Therefore, approval and sanction of the claim are important administrative steps before the actual settlement takes place.
Step 7. Payment and Settlement of the Claim
The final step in the claim settlement process is the payment of the approved claim amount to the claimant. The payment is generally made through bank transfer, cheque, or electronic payment methods. Once the payment is made, the insurer records the transaction in its books of accounts and closes the claim file. Timely payment of claims fulfills the contractual obligations of the insurance company and strengthens public confidence in the insurance system. Therefore, payment and settlement of the claim represent the final and most important step in the claim settlement procedure of life insurance companies.
Calculation of Claims Incurred and Illustration
Claims incurred refer to the total amount of claims that an insurance company is liable to pay during an accounting period. It includes claims actually paid during the year as well as claims that remain outstanding at the end of the year, after adjusting the outstanding claims at the beginning of the year.
The calculation of claims incurred is important because it helps determine the actual expense of the insurance company and is used in preparing the Revenue Account and financial statements.
Formula for Calculation of Claims Incurred
Claims Incurred = Claims Paid during the Year + Outstanding Claims at the End of the Year − Outstanding Claims at the Beginning of the Year
If there are claims recoverable from reinsurers, the formula becomes:
Net Claims Incurred = Claims Paid + Closing Outstanding Claims − Opening Outstanding Claims − Claims Recoverable from Reinsurers
Format for Calculation of Claims Incurred
| Particulars | Amount (₹) |
|---|---|
| Claims Paid during the Year | XXX |
| Add: Outstanding Claims at the End of the Year | XXX |
| Less: Outstanding Claims at the Beginning of the Year | (XXX) |
| Claims Incurred | XXX |
Illustration 1
The following information relates to a life insurance company:
- Claims Paid during the year = ₹60,00,000
- Outstanding Claims on 1 April 2025 = ₹4,00,000
- Outstanding Claims on 31 March 2026 = ₹6,00,000
Calculation of Claims Incurred
| Particulars | Amount (₹) |
|---|---|
| Claims Paid during the Year | 60,00,000 |
| Add: Outstanding Claims at the End | 6,00,000 |
| 66,00,000 | |
| Less: Outstanding Claims at the Beginning | (4,00,000) |
| Claims Incurred | 62,00,000 |
Therefore, the claims incurred during the year amount to ₹62,00,000.
Illustration 2
The following information is available from the books of XYZ Life Insurance Company:
- Claims Paid = ₹1,20,00,000
- Outstanding Claims at the beginning = ₹8,00,000
- Outstanding Claims at the end = ₹12,00,000
- Claims Recoverable from Reinsurers = ₹5,00,000
Calculation
| Particulars | Amount (₹) |
|---|---|
| Claims Paid during the Year | 1,20,00,000 |
| Add: Outstanding Claims at the End | 12,00,000 |
| 1,32,00,000 | |
| Less: Outstanding Claims at the Beginning | (8,00,000) |
| Gross Claims Incurred | 1,24,00,000 |
| Less: Claims Recoverable from Reinsurers | (5,00,000) |
| Net Claims Incurred | 1,19,00,000 |
Therefore, the net claims incurred by the company amount to ₹1,19,00,000.
