What is Suicide Clause in Life Insurance Policy?

A person buys a life insurance policy to provide financial stability to his family in an unforeseen occurrence.

The insurer makes a contract with the insured to provide a sum assured as a death benefit to the nominee in the event of an unexpected death of the insured.

Even though insurance companies are expected to honor any and every claim that arises due to the policyholder’s death, it is also essential for the companies to ensure only genuine claims are honored.

They are in the insurance business for profits and to safeguard business interests. They are allowed to form specific rules to reject the claim, called exclusions.

Suicide Clause is one of the topmost exclusion, and there are strict norms followed by the insurers when death happens due to suicide.

The suicide clause, as mentioned in the policy document, is as follows:

“If the life assured commits suicide within one year from the date of commencement of risk or date of revival if revived, whether sane or insane at that time, the policy would be void, and no claim will be payable.”

It is to be noted that certain companies keep this stated period up to a maximum of 2 years in some cases. So any claim due to suicide within this period will be rejected without any explanations.

However, if suicide happens post this period of one/two years, the death claims will be payable as per the policy terms and considered death benefits.

Reason Why is it Excluded. 

The fundamental reason for the suicide being regarded as exclusion is to eliminate the presence of Moral Hazard in the case.

A moral hazard means that the policyholder has a wrong intention to take insurance, and maybe he or she wants to make a profit out of the insurance policy.

Some customers might try to protect their families by purchasing insurance plans and committing suicide. Be aware that doing this will not help in any manner, and the losses will be catastrophic in terms of a life lost while gaining no material benefit.

Covering suicide without a waiting period would instigate people to look at life insurance policy as a lucrative way to get financial incentives for their families. Here, the loss of life is planned, defeating the entire concept of insurance.

Few Insurers do Pay Partly for Death Due to Suicide

A few insurance companies have come up with specific term plans that don’t offer death benefits but offer to pay back a part of the total premium paid until death.

• For example, Aegon Life Insurance iTerm Plan offers to pay back 80% of the premium paid even if suicide is committed within one year of the commencement of the policy or renewal of the policy provided the policy is in force.
• A few other companies like Future Generali Life etc., also offer the same terms to the policyholder’s nominee in case of death.
• On the other hand, Max Life Insurance offers to refund the total premiums paid.

There are certain exemptions to the rule, though, so that the insured’s nominee doesn’t suffer.

In the event of Third Party

The insured’s nominee suffers financial losses if suicide is committed within one/two years of the policy. Still, if a third party is involved in the policy, the insurer will take care of such obligations.

For example, if the policyholder took a home loan of Rs. Twenty lakhs against his insurance policy of Rs. 25 lakhs, then in the case of suicide, the lender also possesses the rights over the policy proceeds to recover the debt through policy assignment.

Assignment of policy means that the lender also possesses rights (to the extent of debt) in the policy proceeds in the event of the borrower’s death. This way, the financial interests of the third party are secured even if suicide is committed within the excluded period.

In the Event of Group Life Insurance

If the insured is part of a group insurance policy by the employer, the suicide clause will not be applicable. In group insurance, the life cover is that of the master policyholder, the employer/organization/legal entity instead of an individual.

Hence the death benefits will be payable to the nominee at the time of death of the individual.

Committing suicide is not an answer to any problem. The insurance companies try to propagate this message by informing the insured that their financial planning might go for a toss if they take such an extreme step.

Be aware and act smartly!