What Happens When Your Life Insurance Lapses?

A life insurance policy is usually a long-term contract. It aims to cover the risk of premature demise for a chosen tenure, offering financial security to the nominee(s) of the life assured. You are required to pay a premium to the insurer for availing the coverage offered under the life insurance plan.

When it comes to premium payments, there are three options that are usually offered –

• Single Premium¹ – when you pay single lump sum amount at the time of buying the policy. No further premiums are required during the policy tenure.
• Limited Premium² – when you pay premiums for a limited tenure while the policy runs for a longer tenure. For instance, in a 15-year policy, if you pay a premium for 10 years, then it is an example of a limited premium payment plan.
• Regular Premium⁷ – when you pay premiums throughout the chosen policy tenure. For instance, in a 15-year policy, you will have to pay a premium for 15 years.

What if You Miss Paying the Premium Within the Due Date?

If you miss a premium payment, the life insurance company allows you a grace period which is an additional period to pay the outstanding premium. Grace period is a period of 15 days for monthly mode of premium payment and 30 days for yearly, half-yearly and quarterly modes available to the policyholder, from the date of the first unpaid premium, to pay the renewal premiums and keep the policy alive. During the grace period, the insurance coverage will be available as per the terms and conditions of the policy. However, if the premium is not paid even during the grace period, the policy lapses³.

Lapse of Life Insurance Plans – What Does It Mean?

A lapse of a life insurance policy means that the coverage benefits under the plan stops. Lapse of the policy would mean, the benefits and cover under a policy would no longer be available. Also, any feature or benefits of the policy cannot be used including right to make a claim.

What Happens After The Policy Lapses?

If your policy lapses, it can be reinstated or revived⁴. Revival means restarting the coverage and benefits in a lapsed insurance policy. Insurance companies usually allow a three to five years (depending upon the type of insurance policy)⁶ from the date of the first unpaid premium for you to revive a lapsed life insurance policy.

To revive, you would have to fulfil the following conditions⁴ –

• Pay the outstanding premium
• Pay interest on the outstanding premium, if any, as specified by the insurance company
• Submit a declaration of good health, as required by the insurer. In some cases, the insurance company might require you to undergo a medical examination before the revival is approved

A Non-Forfeiture Clause in Life Insurance Plans

The non-forfeiture clause gives you two benefits under a lapsed policy –

1. Paid-Up Value

Paid-up value6 is the reduced value that you are eligible for in a lapsed life insurance policy. This value is allowed if you have paid a minimum of two or three years’ premium under a limited or regular premium policy⁶. In ULIPs, the paid-up value is available after the lock-in period of 5 years⁶.

The paid-up value is paid either on the premature demise or on maturity. If you make your policy paid up, you don’t have to pay further premiums, and your policy runs till the chosen tenure or premature demise, whichever is earlier.

In pure-term insurance plans, where there is nothing payable on maturity, the non-forfeiture clause usually doesn’t apply.

2. Surrender Value

Surrendering means terminating the coverage before the scheduled maturity date.⁵ The surrender value is also called the cash value and is expressed as a percentage of the paid-up value⁵. Thus, the policy acquires a surrender value only after it acquires a paid-up value.

So, if you discontinue the lapsed policy and surrender it, you will get the surrender value, as per the terms & conditions of the policy and the coverage will be terminated. It is not possible to revive a surrendered policy, but you can revive a paid-up policy within the revival period.

The Bottom Line

A policy lapse may be avoided as if it lapses, you cannot enjoy the full coverage and benefits of the life insurance policy. So, paying timely premiums is essential to keep the policy active. That being said, if your policy does lapse due to unavoidable circumstances, you have the option to revive the coverage within the revival period. Revival would restore the full benefits of the policy and fulfil the goal for which you bought the policy in the first place. So, understand what lapse means and what happens after that so that you can manage your life insurance policy easily.

References

1. https://www.insuranceinstituteofindia.com/downloads/IC38/ALEnglish.pdf

2. https://economictimes.indiatimes.com/wealth/insure/advantages-of-limited-premium-payment-term-insurance-plans/articleshow/68043932.cms

3. https://economictimes.indiatimes.com/wealth/insure/life-insurance/how-to-revive-a-lapsed-life-insurance-policy/what-is-a-lapsed-policy/slideshow/83745968.cms

4. https://www.insuranceinstituteofindia.com/downloads/IC38/ALEnglish.pdf (Page 249)

5. https://www.insuranceinstituteofindia.com/downloads/IC38/ALEnglish.pdf (Page 250)

6. https://www.forbes.com/advisor/life-insurance/reinstate-lapsed-policy/ https://www.bajajallianzlife.com/life-insurance-guide/term/regular-premium-term-insurance-plan-explained.html

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