A life insurance policy is a contract between the policyholder and the insurance company where it is the policyholder’s obligation to pay premiums for the duration of the policy. In return the insurance company covers the policyholder against the risk of death. In some forms of life insurance products, the insurer also agrees to pay a lump-sum amount on the completion of the term of the policy i.e. a survival benefit for the insured.
Both benefits, i.e. death benefit and survival benefit are payable upon timely and complete payments of due premiums by the policyholder.
An insurance policy is said to lapse if and when the policyholder does not pay a premium that is due any time during the tenure of the policy.
When does a life insurance policy lapse?
A life insurance policy continues to be active even if the premium is not paid before or on the premium due date. Typically all life insurance products have a ‘grace period’ after the premium due date during which policyholders can pay the premium that is due. The regulatory framework defines ‘grace period’ as the time granted by the insurer for the payment of premium from the due date of the premium without any interest or penalty during which the policy is considered to be in-force. This grace period is 15 days in case the premium payment frequency is monthly and is 30 days in all other cases.
If the premium is still not paid after the completion of the grace period, then the policy stands lapsed as of the date on which the grace period expires.
What does it mean?
Simply put, when a life insurance policy lapses, the insurance coverage under the contract ceases to exist. Therefore, if anything were to happen to the insured, the insurer is not obliged to pay any benefits to the nominees/beneficiaries of the insured.
What are my options?
- Policy revival: In all forms of life insurance products, whether protection oriented or savings oriented, the policyholder is entitled to have the insurance company revive his policy upon receipt of all unpaid premiums and upon being satisfied as to the continued insurability of the policyholder. In case of traditional products like Term Insurance, Endowments or money back plans, the revival of policy may be allowed up to 2 years from the date of lapsation of the policy. The requirements that will need to be fulfilled for the policy to be revived will depend on the time that has elapsed since the policy lapsed.
If the policy revival is being done fairly soon (say within 6 months or so) the requirements will typically be the filling up of a ‘Reinstatement/Revival form’ and payment of all due premiums. If, however, the time period is beyond 6 months, the insurance company may charge an interest on the unpaid premiums and also require you to undergo medical tests to ascertain if the policyholder has acquired any adverse medical condition in the period during which the policy was lapsed. In such cases, the insurance company can decline the revival of the policy.
In case of Unit Linked Plans, recent guidelines issued by IRDA stipulate that a lapsed policy can only be revived within a maximum of 45 days from the date of lapse. If the policyholder does not exercise the option to revive the policy within this period, he would be deemed to have exercised a complete withdrawal from the policy without any risk cover.
- No Policy revival / Withdrawal from the policy: You could decide not to revive your policy at all. What this would mean is that your risk cover ceases to exist or is reduced. In case of traditional savings plans, if the policy has been in-force for less than 3 years, it will lapse without acquiring any value and no death or survival benefits will be payable. If the policy has been in-force for more than 3 years, the policy will acquire a ‘paid-up’ value. This value will be a factor of Sum Assured times premiums paid divided by total number of premiums that were payable for the policy. The paid up value will be payable in case of death or survival on maturity of a lapsed policy. In case you wish to withdraw completely (surrender), the paid up value together with any accrued bonuses will be paid out post deduction of surrender charges.
In case of Unit Linked Plans, not reviving your policy within 45 days would result in withdrawal from the policy completely. What happens from thereon will depend on whether or not your policy has completed 5 years (the minimum lock-in period for ULIPs). If the policy had completed 5 years, then the fund value would be paid out to the policyholder less any applicable surrender charges. If the policy has not complete 5 years, then the fund value would be transferred to a ‘discontinued policy fund’ and refunded to the policyholder upon completion of the lock-in period post deduction of applicable surrender charges.
One should note that letting a policy lapse and not reviving it leaves one without a risk cover and can result in financial loss. Premiums paid till the policy lapsed end up with limited value, especially post deduction of charges in case of ULIPs and reduced ‘paid-up’ values in case of traditional plans.
If your policy lapsation happened on account of missing out on premium payments inadvertently or due to any temporary financial hardships, you should try and revive the policy at the earliest. At the same time, if you feel you are not in a position to afford the insurance premiums anymore, you could always try and find out if the insurance company will let you change your coverage amount so as to reduce your premiums and still keep the policy in-force.