Reviving a Lapsed Life Insurance Policy
Meaning of Lapsed Life Insurance Policy – When you fail to pay the premium of your life insurance policy within the given timeframe (including the grace period), your life insurance policy lapses. When your policy lapses the benefits attached to it turn null and void. This means that the financial benefits that the policy was intended to provide to the dependants would not be given in the event of sudden and sad demise of the policy holder.
However, if you do not want to miss on the benefits that your life insurance policy offers and wish to revive your life insurance policy then you have to do so within the stipulated period given to you by the insurance company before the maturity of your contract. The revival procedure of the policy varies from policy to policy and company to company. The duration of its lapse also plays a vital role during the revival process of the policy.
For example, if you own a policy of LIC in your name and you default in paying your premiums towards your policy then LIC would charge an interest of approximately 7.8 percent on your premium. Your risk cover also gets extended for six months. However, this applies to only those of you who have been paying premiums regularly up to a period of three years. Others will have to produce a personal health statement if they wish to take up revival of their policy in the seventh month or thereafter.
How to Revive a Lapsed Life Insurance Policy?
The primary reason for you to buy a life insurance cover is to provide your family financial support even after you are not there. But the whole effort gets futile when your policy lapses due to non-payment of premiums on time.
Grace Period - The very first attempt that you can make in the direction of reviving your policy is during the grace period. Generally 15 days period in case of monthly premium payment polices and 30 days period in case of yearly, half-yearly and quarterly premium payment policies is provided to you after the original due date of premium payment. When your policy is within the grace period all the benefits of the policy including the riders taken remain intact and applicable. Once the grace period passes, your policy is said to have lapsed.
Re-Instatement Period – Now, if you have even missed the grace period and have not acted in direction of reviving your policy, your policy might have entered the ‘re-instatement period.’ The benefits that have been accrued from your policy are, however, not valid in this period but insurance companies provide you an opportunity to revive your policy during this period. You will be required to clear all your premium dues with interest in order to revive your lapsed life insurance policy in the re-instatement period.
As previously highlighted, this process and documentation varies from company to company. Some insurers may revive your policy after obtaining a health certificate from you and others may ask you to go through the entire KYC process wherein you will be required to provide all documents including your identity proof, address proof, age proof etc.
It is also noteworthy that while you go in for the re-instatement of your policy you may not be provided the same rate of premium that was earlier defined to you. Recalculation of the premium is generally done. This period may vary from a span of 3-5 years depending upon policy to policy and company to company.
Paid-Up Period - Your policy will not lapse if you have paid your premiums for a period of more than 3 years. Even if you have not applied for a re-instatement of policy your policy would stay intact but the value of the same would get reduced. This process is termed as paid-up policy. Your benefits that get accrued from the policy are given to you on pro-rata basis when your policy gets into the paid-up phase.
Traditional policies like endowment plans, term insurance and whole life insurance can be revived but the conditions may vary from insurer to insurer. Going by the insurance laws, if you have been paying for your policy for three years then you are entitled to get two years for revival. However, insurers like LIC give you an opportunity to revive your lapsed policy in five years under special schemes.
In case you own a Unit Linked Insurance Policy then the revival process at your disposal is of 45 days. You are required to act within 45 days of your original due date of premium or else the policy deemed to have been surrendered and the benefits of risk cover are withdrawn.
It is advisable that you may opt of reviving your policy within six months of its lapse as the process is easy and convenient. As the time passes the process becomes more cumbersome and you have to pay overdue premiums along with interest that may vary from 12-18 percent of the premium paid. High penalty fees may also get imposed on you.
Surrender/Discontinuance of Policy
You can also surrender your traditional policies if you wish to do so after your policy completes three years. The surrendered value of the same would be a percentage of the premiums that you have already paid which would not include the premium of fist year. If the company has already paid any survival benefit to you then that would be deducted from the surrender value accrued to you. Rider premiums are also deducted from the surrender value.
Unit Linked Insurance Policies (ULIPs) can also be surrendered but you have to continue these policies for a minimum of five years. If you do not pay your premiums for a minimum of five years then the sum paid by you is moved to a fund called the ‘discontinuance fund’ but the amount is paid back to you only after five years and surrender charges are also deducted from the same.
Things to Remember
- When you opt for revival of your policy please note that it is again a fresh contract between you and your insurance company. The insurer reserves the right of imposing new terms and conditions in this process.
- If you fail to revive your policy during the allotted period then the surrender value of the same is paid to you but surrender charges are deducted from the same. These charges vary from company to company and policy to policy.
Tips to Avoid Lapse of Life Insurance Policy – You are well versed with the fact that life insurance policy forms a vital part of your financial planning and we all need it. If you are already having one in your name and are satisfied with it and wish to avoid yourself from being caught in a situation wherein you have to revive your life insurance policy you may follow the following tips –
- You may opt for Electronic Clearing Service (ECS) wherein you may provide standing orders to your bank to deduct “x” amount on “x” date every month or half-yearly or yearly towards the life insurance policy that you have opted for. In this way you will not have to even remember the due date of your premiums and your policy would remain intact.
- A number of insurance companies have now tied-up with various banks. These banks provide you with an option to pay your premiums through their ATMs. Generally these are banks with wide ATM network across the country.
- You may also opt for auto-pay service through your credit card. Your premiums get automatically paid through your credit card and the amount gets reflected in the billing cycle of your credit card.
- Weight your resources before you opt for a life insurance policy and do not opt for a lump sum payment of your policy if you find that this would burn a hole in your pocket and it would become difficult for you to make up for the same in coming months.
- Always opt for the option of email-alerts and SMS-alerts for premium from your insurance company while you opt for your life insurance policy.
- Most companies prefer to send premium reminders on postal address. Make sure that you keep updating you postal address (if need be) from time to time in order to receive the letters of premium reminders from you insurer.
Contributed By: Megha Sharma
Megha Sharma works as a guest lecturer in Delhi. She holds an MBA & Doctorate from the UPTU. With extensive knowledge and experience in various financial products, she also works as a consultant in banking & finance domains wherein she offers advice to her clients in managing personal finance.