Risk Management in Banking and Insurance · Life Insurance

Life Insurance Policy Conditions, Premium and Policy Documents

Updated 11 October 2026 · Fact-checked

This topic covers how a life policy is created and kept alive: proposal form, policy document, premium payment, lapse and revival, surrender value, paid-up value, nomination (Section 39) and assignment (Section 38). To solve questions, identify the event, apply the exact rule, and state the legal effect on the policy or the claim.

Understand Policy Conditions, Premium and Policy Documents

A life insurance contract starts with a proposal form. You, the proposer, answer questions about health, age, income and habits. The insurer uses these answers to decide whether to accept the risk and at what price. The answers must be truthful, because life insurance is a contract of utmost good faith. The policy document is the written evidence of the contract. It records the terms, the sum assured, the premium, the benefits and the formula for guaranteed surrender value.

The premium is the price of cover. It depends mainly on the age of the life assured, the sum assured, the policy term, the plan type, health and lifestyle, and the insurer's assumptions about mortality, interest earned, expenses and bonuses. Higher risk or a larger benefit means a higher premium. You may pay yearly, half-yearly, quarterly or monthly, and the policy stays in force only while premiums are paid on time, usually within a grace period.

If premiums stop, the policy lapses. Under Section 113, a non-linked life policy that has acquired a surrender value does not lapse for non-payment. It is kept in force for the paid-up sum insured, calculated by a formula approved by the Authority and contained in the policy, plus reversionary bonuses already attached. The surrender value is what you get if you end the policy early. A policy acquires it as per the norms in the regulations, and the policy must contain the approved formula for guaranteed surrender value. Revival means restoring a lapsed policy, normally by paying arrears of premium with interest and, where required, giving evidence of good health.

Section 113(3) does not apply in two cases. First, where the paid-up sum insured including attached bonuses is less than the amount specified by the Authority, or takes the form of an annuity below the specified amount. Second, where the parties agree in writing, after the default, to another arrangement. For a linked plan, the way the policy is kept in force is as the regulations specify.

Nomination and assignment deal with who gets the money. A nomination under Section 39 names a person to receive the policy money on your death. An assignment under Section 38 transfers your rights in the policy to another person, wholly or in part.

Key rules to remember

Surrender value rule (Sec 113(1)-(2)): Policy acquires surrender value as per regulations; policy must contain the Authority-approved formula for guaranteed surrender value; The exact number comes from the formula in the policy. Do not invent a general percentage.
Paid-up rule for non-linked plans (Sec 113(3)): Policy with surrender value does not lapse; kept in force for paid-up sum insured + reversionary bonuses already attached; The paid-up sum is calculated by the approved formula in the policy. Exceptions: small paid-up amount, or written agreement after default (Sec 113(4)).
Nomination (Sec 39(1)-(2)): Made when effecting the policy or any time before maturity; effective if in the policy text or by endorsement communicated to and registered by the insurer; Can be cancelled or changed by endorsement or will. Insurer is protected for bona fide payment until written notice of change is delivered.
Effect of nomination (Sec 39(6)-(7)): Surviving nominee(s) receive the amount; parents, spouse, children or any of them are beneficially entitled; Beneficial title fails only if proved the policyholder could not have conferred it. Creditors' rights are not destroyed (Sec 39(9)).
Assignment formalities (Sec 38(1), (5)): Endorsement on policy or separate instrument, signed by assignor, attested by at least one witness; written notice to insurer needed to bind it; Assignee cannot sue the insurer until notice and the endorsement or certified copy are delivered. Exception: assignment in favour of the insurer.
Priority of assignments (Sec 38(6)): Priority follows the date on which notice is delivered to the insurer; It is the date of notice, not the date of the instrument. Disputes between assignees go to the Authority.

How to solve Policy Conditions, Premium and Policy Documents questions

Use this sequence for any scenario question on policy conditions, lapse, nomination or assignment.

1Identify the topic: document, premium, lapse or revival, surrender or paid-up, nomination or assignment.
2Note the plan type: non-linked or linked, and whether the policy has acquired surrender value.
3List the facts: dates, who nominated or assigned, whether notice reached the insurer, whether the nominee is a minor or a close relative.
4State the rule in plain words with its condition, and give the exact section number: Section 38 for assignment, Section 39 for nomination, Section 113 for surrender value and paid-up cover.
5Apply the rule to the facts and check each exception, such as the small paid-up amount or a written agreement after default.
6State the result: who is paid, whether the policy is in force, or whether the assignment binds the insurer.
7Close with one line of advice or recommendation, for example to register the nomination or give notice of assignment.

Quickest way: Two-question test for policy status and payee

When to use it: Use this for MCQs and short case questions where you must decide quickly whether a policy is alive or who gets the money.

Status question: non-linked and surrender value acquired? If yes, the policy is paid-up, not lapsed, unless an exception applies.
Payee question: was there an assignment with notice delivered? If yes, the assignee is recognised; otherwise look at the nomination.
If a nomination stands, the surviving nominee is paid; a nominee who is parent, spouse or child is beneficially entitled.
If there is no nominee alive, the money goes to the policyholder, heirs, legal representatives or succession certificate holder.

Common mistakes in Policy Conditions, Premium and Policy Documents

Saying every policy lapses immediately when a premium is missed.
Students remember lapse but forget the paid-up protection.
Fix: For a non-linked policy that has acquired surrender value, say it continues for the paid-up sum insured plus attached reversionary bonuses.
Treating the nominee as an absolute owner in every case.
Section 39 is read in parts and the beneficial entitlement in sub-section (7) is overstated.
Fix: Say a nominee who is a parent, spouse or child is beneficially entitled, unless it is proved the policyholder could not have conferred that title. Creditors' rights remain.
Thinking an assignment binds the insurer from the date it is signed.
Students confuse completion of the transfer with its effect against the insurer.
Fix: The transfer is complete on a duly attested endorsement or instrument, but it is not operative against the insurer until written notice is delivered. Priority follows the date of notice.
Believing an assignment never affects a nomination.
The provisos on loans are half remembered.
Fix: Under Section 39(4), a transfer or assignment made under Section 38 automatically cancels a nomination. There are two exceptions. First, an assignment to the insurer who bears the risk, in consideration of a loan within the surrender value. Second, a transfer or assignment, whether wholly or in part, in consideration of a loan advanced by the transferee or assignee to the policyholder. In both cases the nomination is not cancelled, but the nominee's rights are affected only to the extent of the insurer's or the assignee's interest. A cancelled nomination revives when the policy is reassigned or retransferred to the policyholder on repayment of a loan other than one on the security of the policy to the insurer.
Quoting a fixed percentage as the surrender value.
Students try to give a number without a source.
Fix: Say the policy contains the Authority-approved formula for guaranteed surrender value and the policy acquires it as per the regulations.
Forgetting that a conditional assignee cannot take a loan or surrender.
Conditional assignment is overlooked.
Fix: Remember the proviso to Section 38(10): a conditional assignee cannot obtain a loan on the policy or surrender it.

Worked examples

Example 1

Ramesh Iyer, Chennai, holds a non-linked endowment policy that has acquired surrender value. He stops paying premiums. He has not agreed anything in writing with the insurer, and the paid-up sum insured with bonuses is above the amount specified by the Authority. Is the policy lapsed?

Show the solution

The plan is non-linked and has acquired surrender value, so Section 113(3) applies.
Such a policy does not lapse for non-payment of further premiums despite any contract to the contrary.
It is kept in force for the paid-up sum insured, calculated by the approved formula in the policy, plus the reversionary bonuses already attached.
Check the exceptions in Section 113(4): the paid-up amount is not below the specified amount, and there is no written agreement after default. So neither exception applies.

Answer: The policy does not lapse. It continues as a paid-up policy for the paid-up sum insured plus attached reversionary bonuses.

Example 2

Meera Shah nominates her husband under a life policy. Later she assigns the policy to a bank as security for a loan from the bank, by a signed and witnessed endorsement, and notice is delivered to the insurer. The insurer does not decline the assignment. She then dies before repaying. Explain the position of the nominee and the bank.

Show the solution

The assignment was made in the form required by Section 38(1): an endorsement signed by the assignor and attested by a witness. Notice was delivered to the insurer and the insurer did not decline it, so the bank is a valid assignee and the assignment is operative against the insurer under Section 38(5).
Under Section 39(4), an assignment made under Section 38 normally cancels a nomination. The first proviso, which covers an assignment to the insurer for a loan within surrender value, does not apply because the bank is not the insurer.
The second proviso to Section 39(4) applies: a transfer or assignment, wholly or in part, in consideration of a loan advanced by the transferee or assignee to the policyholder does not cancel the nomination. It affects the nominee's rights only to the extent of the assignee's interest in the policy.
So the nomination stands when Meera dies. The bank, as assignee, is paid first up to its interest, which is the outstanding loan.
The balance goes to the surviving nominee, the husband, under Section 39(6). As her spouse, he is beneficially entitled to it under Section 39(7).

Answer: The nomination continues. The bank recovers its loan interest from the proceeds, and the husband, as nominee, receives the balance.

Exam tips

Write the rule first and the facts second. Examiners reward the correct condition more than long narrative.
In case scenarios, scan for dates of notice, minors, loans and whether the plan is linked. These decide the answer.
Learn the exceptions to Section 113(3) and the provisos to Section 39(4). Distractor options usually test them.
For MCQs on premium, pick the factors that raise risk or benefit: higher age, larger sum assured and poorer health push the premium up.
Use the terms nomination, assignment, lapse, paid-up and surrender value precisely. Do not use them interchangeably.

Practice questions from Life Insurance

Policy Conditions, Premium and Policy Documents in other exams

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

CMA IntermediateAccounting for Premium: Policy as Asset (Policy A/c)

Policy Conditions, Premium and Policy Documents: frequently asked questions

What is the difference between nomination and assignment in life insurance?

Nomination names who receives the policy money if you die and can be changed any time before maturity. Assignment transfers your rights in the policy to another person, and it needs a signed, attested endorsement or instrument and notice to the insurer. An assignment normally cancels a nomination.

What happens when a life insurance policy lapses?

A non-linked policy that has acquired surrender value does not lapse for non-payment. It is kept in force for the paid-up sum insured plus attached reversionary bonuses. Exceptions apply where the paid-up amount is below the amount specified by the Authority or the parties agree in writing to another arrangement.

What is surrender value and paid-up value?

Surrender value is the amount payable if you end the policy early. It is acquired as per the regulations, and the policy must contain the approved formula for the guaranteed amount. Paid-up value is the reduced sum insured for which a policy stays in force after premiums stop.

How is life insurance premium determined?

The insurer prices the premium from the age and health of the life assured, the sum assured, the term, the plan type and its assumptions on mortality, investment return and expenses. Greater risk or a larger benefit means a higher premium.

Can a nominee be changed after the policy is issued?

Yes, before the policy matures. The change is made by an endorsement or a will, and the insurer must register it. The insurer is protected for a bona fide payment until it receives written notice of the change.