Insurance Policy Lapse Waterfall
Today most of us prefer term policies, which are pure risk covers. In such cases, if your policy has lapsed, then you get nothing out of it. At least, in the case of endowment policies, you can get back the surrender value of your policies but in pure risk covers, you get nothing. Let us first understand the grace date.
What is the grace date given to policyholders?
The grace period varies based on the type of policy and frequency of premium. Let us look at the type of policy first. Normally, health policies provide a grace period of 7 days to 15 days and if the premium is still not paid after that date then the policy lapses. Once the policy has lapsed, the benefit of health cover is no longer available to you.
What about life insurance? In the case of life insurance, the grace period will depend on the frequency of premium payment. Normally for quarterly and half-yearly premium payments, the grace period offered is 15 days. Only for annual premium policies, LIC and other insurance companies offer 1 month grace period.
What is the sanctity of this grace period? Remember, this is a special facility offered by the insurance company in case you forget to pay the premium on time. During the grace period, all the benefits of your life policy or health policy are still protected. However, the insurance company will adjust the premium amount pending with interest and penalty from the amount of claim in such cases. Please note that the policy automatically lapses on the midnight of the last day of the grace period.
How to revive a lapsed insurance policy?
First, let us look at how to revive a health policy. In the case of health insurance, the grace period is 6 months from the due date of the premium. Within 6 months, you can do an Ordinary Revival, where you pay the balance premium with interest and revive the policy. There are medical/non-medical grounds for revival of health policy, in which case the new coverage amount will be lower than the original cover offered. Also, the insurer may insist on a detailed medical examination. Normally, after 6 months the health policy lapses and you need to take a fresh policy.
What about revival of lapsed life insurance covers? We will have to look at pure risk covers and endowment policies separately. In the case of pure risk covers, once the grace period is over, then the policy automatically lapses. You then need to go for a fresh life cover. However, in case you are reviving the term policy within 2-3 years, the insurer can accept your policy without a medical test.
In the case of endowment policies, insurers normally run such revival programs when lapsed policies can be revived. For endowment policies and ULIPs, the balance premiums can be paid with interest and the policy can be restored to the previous status. However, even in this case, if the lapse is more than 3 years, fresh medical examination is mandatory.
Policy lapse and surrender value
If you have paid insurance premiums on an endowment or money-back policy for 3 years, then the policy acquires surrender value. This surrender value is based on premiums already paid and bonus accrued. This surrender value belongs to you even if the policy lapses. Such policies can either be surrendered or they can be revived by paying the balance premiums and restoring to original status. However, if the policy is being revived after 3 years then the insurer will normally insist on a medical test.
A better way is to be proactive
Once the policy lapses, then the process can be quite complicated. Also, in the interest of keeping your insurance covers active, it is always better to pay premiums on time. One way is to opt for the ECS, which is an auto debit facility wherein you give a bank mandate. In such cases, you can log into your internet banking account and set alerts a couple of days ahead of the premium due date so your account is adequately funded. After all, the last thing you want to discover at the time of making your insurance claim is that your policy has unfortunately lapsed!