Risk Management in Banking and Insurance · Concept and Types of Health Insurance Policies

Insurance Act 1938: Section 4 and Section 40C Explained

Updated 11 October 2026 · Fact-checked

Section 4 requires insurers to pay minimum annuity and other benefits on life and group policies, as set by regulations, excluding profit or bonus. Section 40C requires every insurer to furnish details of expenses of management to the Authority in the form the regulations specify. Answer by naming the section, the duty and who sets the detail.

Understand Insurance Act 1938: Limits on Benefits and Management Expenses

The Insurance Act, 1938 is the main law for insurance business in India. Two of its provisions deal with money limits: what a policyholder must at least receive, and how the insurer reports its running costs.

Section 4 is about minimum benefits. The insurer shall pay or undertake to pay, on any life insurance policy or group policy issued, a minimum annuity and other benefits as determined by regulations. The minimum excludes any profit or bonus. So bonus cannot be used to make up the minimum.

Section 4 has a proviso. It does not stop the insurer from converting a policy into a paid-up policy of any value, or from paying a surrender value of any amount. The minimum is therefore not a bar on paid-up or surrender treatment.

Section 40C is about management expenses. As now worded, it says every insurer transacting insurance business in India shall furnish to the Authority the details of expenses of management, in the manner and form specified by the regulations. The heading still reads general, health insurance and re-insurance business. The section was substituted by Act 5 of 2015, w.e.f. 26-12-2014. The older section 64M(1) refers to limits under a proviso to section 40C(1), but the text supplied for 40C has no such proviso. Treat the current 40C as a reporting duty, with detail in regulations.

For life business, section 40B is the parallel rule: no insurer shall spend as expenses of management in a financial year more than the amount specified by regulations. This is a spending cap. Do not confuse it with 40C.

For health insurers the point is simple. Section 40C as substituted applies to every insurer transacting insurance business in India, and its heading expressly includes health insurance, so it applies to them. Section 4 speaks of life and group policies, so apply it as worded.

Key rules to remember

Section 4 rule: Minimum annuity and other benefits (set by regulations) = payable on life or group policy, excluding profit or bonus; Proviso: the insurer may still convert a policy into a paid-up policy of any value or pay a surrender value of any amount.
Section 40C rule: Every insurer transacting insurance business in India → furnishes details of expenses of management to the Authority, in the manner and form specified by regulations; Heading: general, health insurance and re-insurance business. Substituted by Act 5 of 2015, w.e.f. 26-12-2014.
Section 40B contrast: Life insurer: expenses of management in a financial year ≤ amount specified by regulations; This is a cap for life insurance business. Section 40C, as supplied, is a furnishing duty on every insurer.
Section 64M(2) and (3): Contravention of 40C with respect to expenses of management → hearing → warning; two warnings disregarded → prescribed action; These words were framed for the older expense-limit regime. Applying them to a failure to furnish details is an application of the wording, not a settled rule. The Authority acts only after giving the insurer an opportunity of being heard.

How to solve Insurance Act 1938: Limits on Benefits and Management Expenses questions

Use this method for any question on these sections, whether theory, MCQ or a short case.

1Identify the section: minimum benefit on a life or group policy (section 4), spending cap for life business (section 40B), or the duty of every insurer to furnish expense details (section 40C).
2State the rule in the Act's own plain words: minimum benefit for section 4, furnishing of expense details for section 40C.
3Name who fixes the detail: regulations made under the Act, and the Authority that receives the information.
4Apply the rule to the facts. For section 4, check whether bonus or profit is being counted. For 40C, check whether details were furnished in the specified form.
5Check the proviso or exception: paid-up conversion and surrender value under section 4.
6State the consequence if relevant: section 64M(2) allows a warning after a hearing, and 64M(3) allows prescribed action after two ignored warnings. Note that these words refer to contravention of 40C with respect to expenses of management and were framed for the older limit regime, so present their use for a failure to furnish details as an application of the wording.
7Close with a one-line conclusion that answers the question asked.

Quickest way: Three-question check

When to use it: Use for MCQs and short case questions when you have under two minutes.

Ask: is the policy life or group (section 4), or is it a question on management expenses?
Ask: is the rule about a minimum payment (section 4), a spending cap for life business (section 40B), or a duty on every insurer to furnish expense details (section 40C)?
Ask: is there a proviso or consequence that changes the answer, such as paid-up value, surrender value or warnings?

Common mistakes in Insurance Act 1938: Limits on Benefits and Management Expenses

Saying section 40C fixes a percentage cap on expenses of management.
Older notes and section 64M refer to limits under 40C, and students carry that over.
Fix: Quote the current text: insurers furnish details of expenses to the Authority in the form specified by regulations. Mention the cap only for life business under 40B.
Including bonus or profit in the minimum benefit under section 4.
Students think of total maturity value rather than the guaranteed floor.
Fix: Write that the minimum annuity and other benefits exclude any profit or bonus.
Thinking section 4 bars paid-up or surrender payments below the minimum.
The word minimum is read as covering every payment.
Fix: Quote the proviso: the insurer may convert a policy into a paid-up policy of any value or pay a surrender value of any amount.
Writing a fixed rupee or percentage figure for the minimum benefit or expense limit.
Students want a number to write.
Fix: State that the Act leaves the figure to regulations. Do not invent one.
Mixing up sections 40B and 40C, or thinking life insurers are outside 40C.
Both deal with expenses of management, the numbers are close, and the heading of 40C names only general, health and re-insurance business.
Fix: Remember: 40B is a cap on spending for life business; 40C is a duty on every insurer to furnish details of expenses of management. The heading of 40C mentions general, health and re-insurance, but the operative text says every insurer transacting insurance business in India.
Applying section 4 directly to a health policy.
The chapter is on health insurance, so students stretch every section to it.
Fix: Section 4 speaks of life and group policies. Apply it as worded and say so if the case is on health cover.

Worked examples

Example 1

A life insurer issues a policy with a guaranteed minimum benefit set by regulations and also declares a bonus. The insurer argues that the bonus can be counted to meet the minimum. Is this correct under section 4? Can the insurer convert the policy into a paid-up policy?

Show the solution

Section 4 requires the insurer to pay or undertake to pay the minimum annuity and other benefits determined by regulations.
The section says this minimum excludes any profit or bonus.
So the bonus cannot be counted towards the minimum. The argument is not correct.
The proviso allows the insurer to convert any policy into a paid-up policy of any value, or to pay a surrender value of any amount.
So conversion to a paid-up policy is not prevented by section 4.

Answer: The insurer is wrong: the minimum benefit excludes bonus and profit. Paid-up conversion remains permitted by the proviso.

Example 2

A health insurer transacting business in India does not furnish details of its expenses of management to the Authority in the specified form. Explain the legal position under section 40C and what the Authority may do.

Show the solution

Section 40C applies to every insurer transacting insurance business in India, with a heading covering general, health insurance and re-insurance business.
It requires the insurer to furnish details of expenses of management to the Authority in the manner and form specified by regulations.
Failure to furnish the details in the specified form is non-compliance with this duty under section 40C.
Section 64M(2) speaks of contravening 40C 'with respect to the expenses of management' and was framed for the older limit regime. If it is applied to this failure, the Authority may, after giving the insurer an opportunity of being heard, administer a warning.
Under section 64M(3), if two warnings have been disregarded, the Authority may take such action against the insurer as may be prescribed. Again, this is an application of the wording, not a settled rule.

Answer: The insurer has not complied with its duty under section 40C. If section 64M is applied on its wording, the Authority may warn the insurer after a hearing, and may take prescribed action if two warnings are disregarded.

Exam tips

Quote the operative words of the section first. Marks go to correct statements of the rule, not general discussion.
For a 'which section' MCQ, link the topic to the number: minimum benefits is 4, life expense cap is 40B, furnishing details of expenses of management by every insurer is 40C.
Never give a numeric limit unless the question supplies it. The Act leaves figures to regulations.
In a case question, name the authority and mention section 64M(2) and (3) in two lines, noting that they refer to contravention of 40C regarding expenses of management.
Learn the section 4 proviso. Examiners like testing paid-up and surrender value.

Practice questions from Concept and Types of Health Insurance Policies

Insurance Act 1938: Limits on Benefits and Management Expenses in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Insurance Act 1938: Limits on Benefits and Management Expenses: frequently asked questions

What does section 40C of the Insurance Act 1938 say?

It says every insurer transacting insurance business in India shall furnish to the Authority the details of expenses of management, in the manner and form specified by regulations. Its heading covers general, health insurance and re-insurance business. It was substituted by Act 5 of 2015.

Does section 4 set the minimum benefit as a fixed amount?

No. It says the insurer shall pay a minimum annuity and other benefits as determined by regulations, excluding any profit or bonus. The figure is not in the Act.

What is the difference between section 40B and section 40C?

Section 40B stops a life insurer from spending more than the amount specified by regulations as expenses of management in a financial year. Section 40C requires every insurer to furnish details of expenses of management to the Authority. One is a cap for life business and the other is a reporting duty.

What happens if an insurer breaks section 40C?

Section 64M(2) says that where an insurer contravenes 40C with respect to expenses of management, the Authority may give a warning after hearing the insurer. If two warnings are disregarded, section 64M(3) allows such action as may be prescribed. These words were drafted for the older expense-limit regime, so applying them to a failure to furnish details is an application of the wording, not a settled rule.