There’s a famous quote by Khalil Gibran — “Forgetfulness is a form of freedom.” This quote might be a good fit in most circumstances but, when it comes to insurance, forgetfulness can work the other way around.
When you buy a life insurance policy, the insurance company’s obligation to pay out is contingent upon whether you have paid your premiums or not.
When does a policy lapse?
After you buy any kind of insurance, you have to pay a certain amount of premium every year till the term of the insurance ends. For some reason, if you are unable to pay the premium due even within the grace period provided by the insurer, your policy will be terminated.
It also depends on many factors, the most important being the type of insurance policy you own. In term insurance, failure to pay the premium before the due date results in the policy lapsing, which forfeits your insurance benefits and the premiums paid so far. In case of ULIP (unit-linked insurance plan), if you skip paying the premium in the first five years or during the lock-in period, the policy is considered lapsed. Your benefits move to a discontinuance fund and is payable only after the lock-in period.
In India, as per the guidelines set forth by the Insurance Regulatory and Development Authority of India (IRDAI), all life insurance policies are legally required to honour a grace period, typically 30 days from the due date of payment. Insurance companies understand that the insured might not always be able to pay the premium every time before the due date. This is the reason that almost every insurance policy offers a grace period.
The policy is still in force during the grace period, and if anything happens to the insured, the nominee would still be eligible for the benefits. However, once the grace period is over, the policy is considered lapsed and the death benefit will not be paid. Grace period payments are almost always higher than standard premium payments.
Reinstating policy
If your life insurance cover lapses due to some unavoidable circumstances, it doesn’t have to be the end of the world. Many companies provide an option of reviving the lapsed policy within a specific time frame.
However, the process could be more expensive and involve another medical check-up and/or a penalty amount. Though the reinstatement of a lapsed policy could be different for different insurers and depends on the elapsed time, the product type and the insurance cost etc. a policyholder can apply for it.
Firstly, the insured will have to submit proof of continued insurability. These documents vary from insurer to insurer and also depend on the time elapsed. Secondly, revival can happen any time but the condition for revival might depend upon how long your policy has remained lapsed. As per insurance laws, if your policy has been in force for at least three years, insurers give you a window of two years to revive your policy by paying the due premiums and penalty interest that could be 12-18% of the total premium. But the more you delay reviving your policy, the more difficult it may get. However, if you revive within six months of its lapse, the restoration process is simple.
Lastly, if the insurance company sees fit, the insured might have to undergo a medical examination. Post the successful accomplishment of these conditions, the insurer decides if your policy is eligible to get reinstated or not.
New policy versus old
The premiums for term plan increase with age. For instance, Karan had bought term insurance at age 26, which covers him till 70, with an annual premium of ₹8,000. Due to financial problems, he paid the premium for only two years and let the policy lapse. He paid a total premium of ₹16,000 for the two years. Now, he has got only two options viz. either to buy a new policy or reinstate the current one. Let’s assume that he wants to review the policy after two years of the last premium paid. The insurer will charge him a renewal fee, late fee plus interest charges for the premiums due for the last two years. The total cost might add up to a total of ₹22,000-25,000.
Alternatively, if Karan, at the age of 30, plans to buy a new policy, it will cost him around ₹10,000 annually. If we calculate, by buying a new policy he is not only losing out on the premium he paid for the two years but also adding the cost to a new policy which is almost ₹2,000. This add-up cost will make a difference in the long run.
So, it’s always better to first try reinstating your policy if your insurer allows it. However, if you can’t reinstate, consider replacing the policy with a new one. The important thing is to ensure that you and your loved ones remain protected in case something bad happens to you.
Not having a life insurance plan, especially a term insurance plan, means your loved ones are not financially protected in the event of your death.
(The author is Chief Business Officer, Life Insurance, Policybazaar.com)
