Better late than never

If you’ve forgotten to pay the insurance premium on time and your policy has outlived the revival period, don’t fret. There are various ways to choose from to revive a lapsed insurance policy

Sunil Kumar Singh

Buying a life insurance policy is one of the most vital financial products you buy. However, unless you keep the policy active by paying regular premiums, the policy would cease to exist or lapse, and the whole purpose of life insurance would be defeated.

Let’s first consider what a lapsed policy means. According to the Insurance Regulatory and Development Authority (Irda), lapse means discontinuation of premium payment by the policyholder during the period of operation of the policy due to any reason other than the death of the policyholder. If the policy has lapsed due to non-payment of premium, the terms and conditions of the policy contract are rendered void, till the policy is revived.

Revival within grace period

Remember to pay your premium on time, i.e., on or before the due date mentioned in the policy document. It’s not that insurance companies would immediately terminate your insurance policy in case you haven’t paid the premium within the due date. The company still gives time to you to make the payment without of interest on the premium. This is called the grace period.

Irda has clearly laid down regulation with regard to the lapse of insurance policy and revival. As per Irda (Standardization of terms & conditions of Ulip Products and treatment of lapsed policies) Regulations, 2010, “grace period is the additional period of time given/allowed by the insurer from the date of premium falling due to insured to make payment of premium without any interest or penalty. The risk will be covered without interruption in case payment is effected by the insured during the grace period.” The grace period for payment of the premium for all types of unit-linked products has also been laid down by Irda. For policies where the premium payment mode is monthly, companies have to give a grace period of 15 days, while it is 30 days for policies where the premium payment mode is quarterly, half-yearly or yearly.

However, if the policy is not revived within the grace period, the policyholder loses all the benefits of the policy.

“All insurance companies have a specified revival policy which defines a time span within which the policyholder can revive his policy by paying all outstanding premiums and a discontinuance charge. If the policyholder fails to revive the policy in time, he stands to lose out on all benefits gained under the policy,” says Akshay Mehrotra, Chief Marketing Officer, Policybazaar.com.

When policies lapse

Broadly, the procedure for revival of lapsed insurance policy depends on three factors—the type of policy, the duration of its lapse and the number of years for which the premium has been paid. However, the process to revive/reinstate an insurance plan differs in case of a ulip and non-ulip or conventional insurance plan.

As Mehrotra says, “The procedures and charges have been largely standardized by the regulator. It is just the time frame or the revival period which is different from insurer to insurer and sometimes even with the various policies that the insurer is selling.” For instance, in case of non-ulip products like money-back and endowment plans, if you don’t pay the premium within the grace period of 30 days, the insurance company gives you a maximum period of two to five years after the first unpaid premium to revive the policy after paying all arrear premium along with interest charges and, in some cases, medical test as well.

In the case of a unit-linked policy, insurance companies generally send a notice to you within 15-20 after the expiry of the grace period if you don’t pay premium, asking you to exercise either of the two following options within 30 days of the receipt of such notice: (a) pay all due regular premiums and revive the policy OR (b) discontinue the policy without any risk cover. Another aspect is that most companies impose a premium discontinuance charge when a ulip policy is revived. This charge, however, depends on the year of discontinuation. If the ulip policy is discontinued within the first and the fifth year and you want to revive it, you’ll have to pay the premium discontinuance charge. However, policies discontinued from the fifth year onwards will not carry discontinuation charges.

Another advantage of ulips is that many of them generally do not get scrapped until the end of the policy term, even if you stop paying premium, although you lose all the benefits accruing from them. There are many other options that ulips give to you even when you stop paying premium. Some of them are discussed in the following paragraphs.

Settlement after lapse

There are many ways a ulip policy is settled after it is lapsed. As Deepak Yohannan, CEO, MyInsurance Club.com, an insurance price and feature comparison website, says, “Some plans acquire a paid-up value once three years premiums have been paid. Ulips anyway have the fund value which can always be claimed. Policies are not scrapped till the term of the policy ends.” Typically, a ulip policy provides you with a choice of funds in which you may invest. You also have the flexibility to switch between different funds during the life of the policy. The value of a ulip is linked to the prevailing value of units you have invested in the fund, which in turn depends on the fund’s performance.

Therefore, if you discontinue a ulip policy or convert it into a paid-up policy, the units generally move to the discontinued fund and earn an interest rate of around 4 per cent, he adds. However, the company charges 0.5 per cent as fund management charge which is applied by cancelling units.

Let’s see how it works. Suppose you have a ulip plan that you bought five years ago and paid all five years’ premiums. If you decide to stop paying premium after five years, some companies would allow your policy to continue but not beyond the maturity date of the policy. Your policy would remain in force with sum assured intact. However, the rider benefits, if any, will cease immediately. Moreover, the mortality and administration charges will be deducted from you by cancellation of units of your policy and you will continue to participate in the performance of the unit funds chosen by you.

Some insurance companies follow another process in order to revive a lapsed ulip policy due to the discontinued premium payment. The process can be broadly divided into two segments—when policy discontinued within three years of commencement and when discontinued after three years of commencement.

In case of the former, i.e., when all the premiums have not been paid for at least three consecutive years from inception, the insurance cover would cease immediately. The insurance company may give an opportunity for revival within the period allowed, but if the policy is not revived within that period, the policy stands terminated and you pay surrender charges at the end of third policy anniversary or at the end of the period allowed for revival, whichever is later. On the other hand, if the premium payment has been discontinued after three years of policy inception, some companies give you a revival period.

If the policy is not revived during this time span, the insurance contract is terminated by paying the surrender value. Some insurers can also give you the option to continue the insurance cover, if you wish to. In this case, the company would impose the appropriate charge (like mortality and administration charges) until the fund value does not fall below an amount equivalent to one full year’s premium. When the fund value reaches an amount equivalent to one full year’s premium, the contract would be terminated.

So next time you forget to pay premium on time, just remember to revive the insurance policy within the revival period.