How to revive lapsed insurance policies

A primer on the nuances of reviving an insurance policy instead of buying a new one.

Did you miss the last date for premium payment on your insurance policy? Watch out, if the grace period has expired, then, any claims you make are not going to be entertained by the insurer.

A new policy too will come at a higher cost given your higher age and default on the previous policy. If it is a unit linked insurance policy taken before September 2010 that has lapsed, the surrender charges too are going to take a big bite out of the money that you saved. Surrender charges here can be as high as 40 per cent of the first year premium!

That's why we tell you how you can revive lapsed policies and explain the ‘ifs' and ‘buts' involved in doing this.

When does a policy lapse?

Quarterly, half-yearly and annual premium policies generally have a grace period of one month for investors to shell out their premium after the original due date. During this grace period the policyholder is entitled to all the benefits under a policy including the riders taken on the policy. After the grace period, the policy is said to lapse.

A lapsed policy is not entitled to any benefits. Some insurers however offer death cover on a term policy even if the policy had lapsed provided premium on the policy was paid for a certain number of years. Life Insurance Corporation for instance, allows death claims under a lapsed policy if the policyholder had paid premiums for three full years and the claim has come in within six months of the due date of the first unpaid premium. The insurer however deducts the unpaid premium sum from the sum assured and also an interest charge.

Now, what if a policyholder misses the grace period too? After the grace period policyholders enter the ‘re-instatement period'. Policy benefits do not accrue in this period. But insurers allow customers to renew a policy in the re-instatement period if they pay all the un-paid premium along with interest. Some insurers ask for a health certificate and require the policyholder to go through the KYC process again. And remember that you may not be entitled to the same rate of premium when you go for re-instatement of the policy; the premium will be recalculated! The re-instatement period varies between three and five years among insurers. Post this period however nothing could be done to revive the policy.

When it does not lapse fully?

In cases where premium has been paid for three or more years and then discontinued, the insurer will not treat the policy as lapsed even if the policyholder doesn't apply for a re-instatement of the policy after due dates for premium expire. The policy will continue to be in force but for a reduced value. This is called a paid-up policy. In a paid-up policy the insured gets the benefit on the policy in pro-rata terms.

Do you want to discontinue?

In endowment policies surrender is allowed after completion of 36 months. “The minimum guaranteed surrender value of a traditional endowment policy is a percentage of the premium paid (of total premium paid excluding the first year premium) less rider premiums and survival benefit, if any, already paid. For traditional policies, insurers pay the higher of Special Surrender Value or Guaranteed Surrender Value.” says Mr Rituraj Bhattacharya, Head-Market Management, Bajaj Allianz Life Insurance. Special surrender value depends on the insurer's special surrender value factors, which is declared periodically by the insurer.

ULIP holders can also surrender their policy, if they do not wish to carry on. But when premium payment is stopped before five years here, the insurer moves the accumulated sum in the policyholder's account to a fund called- ‘discontinuance fund' after charging for surrender charges and the fund value is payable to the policyholder only after five years. Unit linked insurance plans taken after September 2010 have a lower surrender charge compared to similar policies taken before this period. However, there will be no surrender charges if the policy is discontinued after five years.

What you can do?

How can you make sure you don't get into a bind in keeping up your insurance policy? Here are some suggestions:

Do not opt for a yearly lump-sum payment if you cannot cough up that amount. Take a monthly or quarterly premium payment term.

Give out an ECS debit for the premium from your bank account (can give a standing instruction to your credit card company also to pay the premium).

Insurance companies normally send a reminder for premium to your postal address. To receive this however you need to keep updating your change of address with the insurer; do so without fail.

Opt for SMS and e-mail alerts for premium from the insurer.

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