“Your life insurance policy has lapsed”. This is a common statement we hear from our life insurance company. What does a policy lapse mean? What are the available options in such a scenario? Let’s look into the various aspects of a life insurance policy lapse and also try to answer a few queries related to it.
What is a Life Insurance policy lapse?
A life insurance policy is said to have lapsed if the premium for the policy has not been paid on time. For every policy, there is a due date and a grace period. For monthly payment mode, grace period is 15 days and for others it is 30 days. If you fail to make the payment even in the grace period, the insurance company declares the policy to have lapsed.
What happens if a policy lapses?
Once policy lapses, the terms and conditions which were assigned to your policy will become void. You will no longer be able to enjoy benefits such as sum assured.
How will I know about this?
You need not worry about this. Either agents for the sake of commission or the insurance company itself will pepper you with calls, emails and posts about this policy lapse. Make sure that you intimate the insurer of change in address or mobile numbers.
Can I revive a policy which has lapsed?
Of course, you can reinstate the policy. You need to pay the remaining premiums along with some penalty for the period delayed. If your policy is in force for at least 3 years, you will have another 2 years to revive the policy. LIC gives 5 years time for revival.
It is better to revive the policy within 6 months. If you delay beyond that, you may have to pay additional interest along with premium and penalty.
Can the insurance company reject the policy reinstatement?
Yes, chances are that the insurance company might reject the policy revival even though you are ready to pay the premiums and penalties. It might even ask you to undergo another medical test and then take a call accordingly.
Will my family receive the death benefit after policy lapse?
If you stay with the policy for less than 3 years, death benefit may not be paid by the insurer. However, if you hold the policy for more than 3 years, you might get some benefit after reducing the premiums left to be paid.
What other options do I have upon a policy lapse?
You would be left with 2 options if you decide not to pay the premiums with penalties.
1) Surrender the policy – You can surrender the policy if you decide not to pay the required amount to reinstate the policy. Surrender charges will apply according to the type of policy and you will receive the remaining amount. However, you need to stay in the policy for at least 3 years to be eligible for the surrender value.
2) Make the policy Paid up – You can convert the policy to “paid up”. Sum assured will be the amount of premiums paid till then. The formula to calculate the exact paid up value is (number of paid premium X sum assured) / total number of premiums. However, this option too can be availed only if the policy is in force for at least 3 years.
Can I continue the policy with lesser premium?
There may be chances that you are short of money but want to continue with the policy. In such a case, you need to talk to the insurer and re-negotiate the terms and conditions of the policy. He may agree for a lesser premium with some reduced sum assured and/or benefits.
If policies such as term insurance lapse, it is better to look out for a fresh policy altogether as there may be fresh discounts on offer. Options such as paid up or surrender can be looked at even if you are mis-sold an insurance policy and you do not want to lose the entire benefits on the policy.