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How to reinstate a lapsed policy

Letting a policy lapse and not reviving it not only leaves one without a risk cover but also does not make financial sense.

May 17, 2012 8:38 IST | India Infoline News Service
An insurance policy may cease to exist due to various reasons. It could be because of carelessness, you don’t see any value in continuing with the policy or because of a financial crisis. Swapan Khanna, co-founder, i-save, says, “Letting a policy lapse and not reviving it not only leaves one without a risk cover but also does not make financial sense.” The premiums—that have been paid before the policy is lapsed—end up not having any reasonable value associated with them especially post deduction of charges in case of ULIPs (unit-linked insurance plans) and reduced ‘paid-up’ values in case of traditional plans.

How does a life insurance policy lapse?
As long as you pay your premiums regularly, your policy remains active. If something happens to you during this period, the insurance company is obliged to pay you or your beneficiaries, depending upon the type of policy you have. However, if you stop paying premium, then your policy will lapse. The insurer may not be committed to provide you or your beneficiaries any monetary benefits (sum assured), if something happens to you. Pankaaj Maalde, head-financial planning, ApnaPaisa.com, says, “The policy will lapse immediately after premium is not paid within the grace period in regular premium paying term plans.”

What is a grace period?
Grace period is the time provided by the insurer to the policyholder for payment of the premium after the premium due date. The minimum grace period typically varies by product type and the premium frequency (like monthly, quarterly) opted by the policyholder. For monthly premium payment, the grace period is 15 days, while for quarterly, half-yearly or annual payments it is 30 days.
If you miss even this deadline, your policy is discontinued or lapsed. After this, you can either revive or surrender the policy. The insurer will send you a notice in 15 days of discontinuation and you will have 30 days to respond.
Mr Khanna, says, “There are no penalties or interest levied for payment during the grace period for life insurance plans and the policy remains in-force with full risk cover and any other associated benefits/rights of the policyholder under the insurance contract.” He adds, “In case of life insurance, death of the policyholder during the grace period will entitle the nominees to the death benefit applicable under the policy.”

Can I revive a lapsed policy?
The policyholder has the right to revive or reinstate the policy subject to certain limitations of time period during which the policy can be revived and/or any underwriting/medical requirements which may vary by product. A lapsed insurance policy can be reinstated by paying the missed premiums and the interest as penalty for late payment. Mr Maalde says, “You can renew the plan within specified time limit given in the policy document. This time limit varies from company to company. You have to pay interest for delay in paying premium and also may have to go for medical again if it is required. Some time revival is done after submitting fresh good health declaration.”
 
Traditional insurance plans
In case of traditional insurance plans (like term, whole-life, moneyback and endowment) the revival of policy may be allowed up to “two years” from the date of lapsation of the policy. The requirements that need to be fulfilled for the policy to be revived will depend on the time that has elapsed since the policy lapsed.
At the time of revival, the insurer might impose a lot of conditions or even decline your request for a policy revival if the company is not convinced about the authenticity of your application on grounds of suspected fraud. It can be likely that the insurer will ask you to appear for a medical test before the policy can be revived to ascertain whether you have developed a new medical condition during policy lapse that might expose the insurance company to a high risk in insuring your life.
If you have not been keeping good health and have developed a medical condition, the insurer may hike the premium or even decline the cover.

Will the benefits for traditional plans be the same after revival?
“In case of traditional life insurance plans, while the policy lapses if premiums are not paid within the grace period during the first three years of the policy, it usually acquires a ‘paid up’ status,” Mr Khanna explains. If premiums are not paid after the first three years of the policy issuance, the paid up policy will continue in force with a reduced sum assured which is proportional to the completed duration to the original policy term. In such cases, the policy is not entitled to any bonuses although any bonuses already declared continue to be attached with the policy and have to be paid out at the time of maturity/death along with the reduced sum assured.

ULIPs
According to IRDA guidelines, ULIPs can be revived in 45 days after lapsation. If the policyholder does not revive his ULIP within 45 days, it would be deemed that he wants to terminate the policy. If the policy has completed five years (the minimum lock-in period for ULIPs), the fund value is paid out to the policyholder after deducting the surrender charges.
If the policy has not completed five years, the fund value is put in a “discontinued policy fund” and refunded to the policyholder after the lock-in period ends post deduction of applicable surrender charges.

I am facing financial hardship and can’t pay premium
You can review your insurance contract and change the terms with the insurer. Mr Khanna elaborates, “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.” He adds, “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.”

Can one still file a claim on a lapsed policy?
If a policy is less than three years old but lapses, and if something happens to you after the policy lapses and a claim is filed, normally the insurer will not pay you anything.
If a policy is more than three years old, but lapses, and if something were to happen to you, under the existing insurance rules, your dependants can still get some benefit.
 

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