What Is KYC In Life Insurance?

Imagine a large concert-one in which entry is allowed only for those with tickets. Before one goes inside, there would be a security check demanding your ticket and identity proof. This is just to ensure that only those who have legitimate access get to enjoy the event. Now, imagine life insurance to be that concert and your identity to be the ticket. Verification of the one who is identified is known as KYC in short, or "Know Your Customer".

In life insurance, KYC stands at the door as the guardian, making sure that you are yourself. It's more important than ever in today's world, which is facing growing financial fraud. It is no longer a simple question of purchasing a policy but about ensuring that all your dealings with the insurer—security of premium payments, filing claims, and updating details—are safe, secure, and transparent. Without KYC, there is a greater risk of fraud, identity theft, and money laundering.

But why has KYC become binding for all insurance policies starting from January 2023?? And how does it aid the insurer as much as the policyholder? Let us plunge into the importance of KYC in life insurance and how that shapes the way you protect your family’s future.

What Is KYC In Life Insurance?

KYC, in full form, means "Know Your Customer." It is a must-do process for verifying the identity, address, and other information of the policyholder in life insurance. It ensures that insurers note correctness in their records of customer data to prevent fraudulent practices related to money laundering or identity theft.

The policyholder, in turn, has to provide his identity and address proofs and also, income proofs in some cases. These are verified by the insurance firms either through physical verification or digitally using e-KYC. IRDAI^[1] has compulsorily instructed KYC verification to help weed out fraud practices and other illicit activities. There is also a need for periodic updates to KYC information, especially in case there is a change in any personal information.

Therefore, KYC becomes a central part of buying life insurance, paying premiums, and claiming benefits. If the KYC requirements are not met, then the services provided are either delayed or rejected. Generally speaking, before January 1, 2023^[2], it was the individual’s choice to provide the required documents for KYC when purchasing insurance. Under new provisions of IRDAI, KYC has been made mandatory across all categories of insurance: life, general, and health.

Why Is KYC Important?

KYC is one of those basic practices that ensure the integrity and security of financial transactions. Here's why:

• Fraud Prevention: KYC keeps off fraudulent activities such as identity theft, money laundering, and unauthorised transactions by verifying a customer's identity.

• Regulatory Compliance: IRDAI has also made KYC compulsory to prevent money laundering and terrorism financing. Insurers must collect and periodically update KYC information to meet these regulations.

• Enhanced Security: Verification of clients' identities enhances the security of the insurance process. It ensures that policy benefits go directly to the rightful claimant, protecting the insured and their beneficiaries from financial losses due to fraud.

KYC, therefore, forms an intrinsic part of life insurance by protecting fraud, ensuring due compliance with regulatory requirements, increasing security levels, and building transparency that effectively promotes risk management.

Where Do You Need KYC?

KYC is not a one-time event when buying life insurance; it actually is an ongoing requirement at more than one touch point in the insurance life cycle:

1. Policy Purchase

To purchase a life insurance policy, KYC documents proving the policyholder's identity, income, and address must be furnished.

2. Claim Processing

If you or your nominees ever have to file a claim, the insurance company needs KYC to verify its authenticity.

3. Changes To The Policy

If you wish to change beneficiaries, addresses, or any other personal information at any stage, KYC documents will be needed to verify such changes.

4. Surrender Of Policy

KYC will be required if you decide to surrender your policy before the completion of the maturity period so that your identity is established correctly and the value of the payout amount reaches the correct person.

Documents Required For KYC In Life Insurance

Following is the list of some of the usual documents you will be asked to provide:

• Identity Proof: Aadhaar Card, Driving License, Passport, PAN Card, Voter ID

• Address Proof: Utility Bills - electricity, water, etc, Aadhaar Card, Passport, Voter ID

• Proof Of Income: Income Tax Return (ITR), Salary Slip, Bank Statement with recent transactions

• Photographs: Recent passport-sized photos as required by the insurer and medical records when required by certain policies.

• Age Proof: Birth Certificate, Passport, School Leaving Certificate, PAN Card

These documents help identify a person's identity, address, age, and income, among other things, as needed by various regulatory requirements.

Please Note: It is always better to confirm the list of documents required under KYC from the concerned insurance company. Additional KYC requirements may be introduced in addition to the minimum requirements of the above, depending upon the internal rules and norms of a company. The level of KYC may vary based on many factors: risk profile of the customer, value and geographic location of the transaction.

Benefits Of KYC In Life Insurance

Here is how KYC benefits the insured and the insurance company:

• Fraud Prevention: It checks an individual's identity to minimise false cases and transactions. In this way, insurers may prevent potential risks by identifying suspicious activities or profiles and can offer a safer environment, adding to the security and customer experience.

• Regulatory Compliance^[3]: Ensures the insurance company meets all the legal and regulatory requirements, including anti-money laundering and counter-terrorism financing.

• Smoothening The Claim Settlement Process: Proper KYC documentation organises the claim settlement process, ensuring that the rightful beneficiary receives the claim amount without unnecessary delay.

• Customer Trust: Displays transparency and responsibility as a means to instil trust between customers and the insurance company.

KYC has become a very significant process for both insurance companies and their clients. Its implementation helps protect the integrity of the insurance industry by preventing fraudulent activities.

Wrapping It Up!

In a world filled with financial fraud, KYC protects the life insurance industry from unscrupulous dealings. It checks the identity of policyholders, provides assurance in regulatory compliance, and gives an extra layer of security to the insurer and insured. Right from buying a policy to processing claims, KYC ensures that every transaction is processed transparently, securely, and efficiently.

So, the next time you are asked to produce the KYC documents, remember this will not be a mere formality but a prudent step in keeping your life insurance policy and future safe.

Sources

[1] https://irdai.gov.in/documents/37343/991172/Annexure%2BA-AMLCFT01062022.pdf/7dfe52ca-8417-c621-c74b-a74371a8980a?download=true&t=1654093197848&version=1.0

[2] https://www.livemint.com/insurance/news/kyc-mandatory-for-buying-health-auto-and-other-insurance-from-1-jan-11672540153455.html

[3] https://irdai.gov.in/antimoney-laundering#:~:text=Operationalization%20of%20Central%20KYC%20Records%20Registry&text=Thereafter%2C%20to%20comply%20with%20the,or%20after%20April%2001%2C%202021