A life insurance is a contract, between you and your insurer, under which you will pay the premiums regularly for a certain period of time and in return, the insurer will provide financial security throughout this period. But, what if you fail to pay the premium in time? Your insurer will allow you to clear the due premium within the grace period. A grace period ranges from 15 to 30 days, depending on the payment mode of your policy. If you do not pay the unpaid premiums even during this period, your policy will lapse.
If your policy lapses, you will not be able to claim the benefits of the plan. So, when you buy a life insurance plan, and pay the regular premiums for quite some time, a lapsed policy is the last thing you would ever want. Unfortunately, policy lapses are very common. Many people, whose policies got lapsed, realize the need for a life insurance later in life. For them, reviving an already existing policy seems to be the better option than buying a fresh new plan.
Let’s discuss three scenarios under which you must revive your lapsed policy.
1. When you have a term plan and you paid the premium for over 10 years
Say in 2002, you bought a term plan for 20 years for a cover of Rs. 10 lakh. At the time of the purchase, you were 30 years old. You paid the annual premiums for 12 consecutive years. After 2013, you stopped paying the premiums. Now, in 2016 you want to revive the policy again.
So, you have two years (2014 and 2015) of due premiums to be paid. For instance, if the yearly premium was around Rs. 3,000, you will have to pay the two years’ unpaid premium at one go, which will be Rs. 6,000 plus the interests (late fee or the penalty), and the policy will be revived.
If you think of buying a new term plan, keep in mind that, the premium amount increases with age. So, the same term plan may cost you almost double every year now. Therefore, under this circumstance, when you have already paid the premiums for 12 years, reviving an existing policy will be more cost-effective than buying a fresh new term plan.
2. When You have a lapsed ULIP and the lock-in period is not over
You purchased a unit linked insurance plan in 2013, but you could not afford the payment of premiums after two years and this led your policy to lapse. However, in ULIPs, there is a lock-in period of 5 years. If your policy lapses during the lock-in period, your invested money goes into the Discontinued Policy Fund, where it earns an interest of around 4% p.a. Within a lock-in period, you get an outer limit of two years to revive your lapsed policy without any penalty.
Now that you are in the fourth year (2016) of the policy, you have one year to revive your existing ULIP. Now, if you think that you are financially capable of starting your investments again, you must revive your existing ULIP immediately.
However, IRDA has recently come up with a new regulation, which allows investors to revive their lapsed ULIP within two years from the date of discontinuation of the premium payments, no matter when the lock-in period ends.
3. When the insurer is running a Special Policy Revival Campaign
You have a term plan, but premium default during the grace period resulted in your policy to lapse. Now that you want your lapsed policy to revive, you must keep in mind that reviving a policy means paying all the unpaid premiums along with interests and the penalties. Additionally, you will have to re-submit all the relevant documents and undergo medical examinations as well. Though apparently, it seems a lot of hassle, but in reality reviving an existing plan saves a lot of money than buying a new plan.
The insurers often come with campaigns in which they allow you to revive your lapsed policy without any penalty or medical tests. Therefore, if you find that your insurer has introduced such a temporary scheme, it will be the best time to grab the opportunity to revive your lapsed policy at low cost and without re-submitting the documents.
The policy revival process may vary from insurer to insurer. It is always better to be careful so that you never fail to pay your premiums in time. But, if you have a lapsed policy, it is always better to revive the existing policy than buying a new one.
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The author is Santosh Agarwal, Head of Life Insurance, PolicyBazaar.com