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What If You Can't Pay Your Life Insurance Premium?

17 June 2022, 11:30 AM

We know that in some cases ignorance is bliss. But, in the case of Life insurance premiums, ignorance about the premium date/time could be absolutely blasphemous! Life Insurance is a contract between the insurer and the insured to cover the life/health risks of a person for a stipulated period of time in lieu of a pre-determined sum of money paid to the company within a certain period of time. Hence, failing to pay that money to the insurance company at the stipulated time, may cause the lapse in policy for the insured person. If you are unable to pay all the premiums on time, the insurer is unable to provide all the policy benefits to your nominee/ claimant, when the need arises. 

When does Your Policy Lapse?

As per the rules of Insurance Regulatory Development Authority of India (IRDA), every life insurance company allows a grace period of a maximum of 30 days (one month) for the payment of insurance premium. If the insurance premium is paid within the grace period, then the policy does not lapse. This is in keeping with the understanding of the insurers, that it might not always be possible for the policyholders to make payment of the premium amount before the due date, thus, allowing a few days extra for the payment of the premium amount. However, standard premium payments are, in most cases, lesser than the grace period payment of insurance premiums.

Two Important Things you Need to Keep in Mind Regarding this Issue are:

  1. Each company has its own set of guidelines mentioning the exact grace period for that particular policy. The policyholder must take note of this buffer time allowed by the insurance company and other related rules with the policy.
  2. The Insurance policy covers your family and remains to be a valid one, even during the grace period, in case something happens to the policyholder at that time.

If, for some unforeseen reason, you are unable to pay the insurance premium even within the grace period provided by the company, the policy lapses.

The lapsation of the policy also depends upon the type of policy that you have taken. In case of a term life policy, if the premium amounts are not paid before the due dates, the policy is considered to have lapsed and all its benefits and premiums paid thus far are forfeited. In case of Unit Linked Insurance policies (ULIPs) if the insurance premium is not paid for the first five years of the policy which is considered to be the lock-in period, then the policy is considered to have lapsed. All benefits of the policy are, in such cases, moved to a discontinuance fund and is payable only after the lock-in period is over.

How To Revive/ Reinstate A Lapsed Insurance Policy?

By now, you know that if the premium amount remains unpaid by the due date or within the stipulated grace period, then the policy automatically lapses. Almost all insurers typically offer a window of 2 consecutive years for the lapsed policy to be revived by the policyholder. Usually, the insurers allow you to revive your life policies once the premium dues are settled and the penalty interest, which is charged by the insurers as a late fee (from the due date) is cleared along with the due premium amount. It is important to remember that the penalty interest is different with each insurer. For example, both LIC and HDFC Life charge penalty interest at the rate of 9.5% per annum on an outstanding interest which may go up to 12% - 18% of the total premium due in other insurance companies offering life insurance policies. 

Policy revival terms may vary depending upon the type of policy taken by the policyholder.

For Term life insurance policies, if the premium is not paid even within the grace period, the policy is considered lapsed and you may have to forego the benefits of the policy along with the premiums paid till then. The policy can still be reinstated within a period of three months with a good health declaration form. If the policyholder goes beyond a period of six months, then he may be required to undertake the medical tests again. The medical tests may also vary depending on the updated rules of the policy at the given point in time.

ULIPs can be revived up to a tenure of 2 years from the exact date that you had first missed the payment of premium. However, if you have missed paying the due premiums in the initial 5 policy years within the lock-in tenure, then the policy is considered to lapse after a tenure of 90 consecutive days. In such cases, the insurance company transfers the policyholder’s investment to the discontinuance fund and thereby charge a discontinuance charge for the same. The option of revival or reinstatement of the policy comes only after the due premiums have not been paid even after the locked-in tenure. 

In the case of Traditional life insurance policies, if the premiums are unpaid before the plan acquires a paid-up value or a surrender value, then the policy would lapse completely and all premiums paid till date would be forfeited. However, kif the life insurance plan acquires a surrender value and then the premiums are not paid, i.e. the policy lapses, then all benefits are not forfeited; the policy continues with a lower sum assured value. Usually, traditional life insurance policies acquire a paid-up or a surrender value after the initial tenure or 2 to 3 policy years. 

New Rules For Revival

According to the new revival campaign launched by LIC, the policyholders got some respite as the campaign ensured that the benefits of their lapsed policies could continue in certain cases. 

  • Insurers allow you to revive your policies within a period of five years on condition of payment of the total due premium along with the penalty amount charged by the insurer.
  • The policy, whether eligible for revival, if lapsed, will be mentioned in the policy document itself.
  • The policy revival, beyond five years, maybe considered on a case to case basis.

However, it is not applicable to certain high-risk policies which involve double/triple sum assured on maturity. It is the discretion of the insurer to accept or reject the application for revival/reinstation of a lapsed policy (though rejection is extremely rare). The benefits of a policy are reinstated as soon as it is revived. 

The revival process can be completed by getting in touch with the insurance agents, calling the customer care of the insurer or visiting a branch office of the insurance company. 

Insurance companies never fail to do their bit by sending you reminder emails and messages or both for timely payment of your premiums. It is always prudent on your part to pay the premiums on time and keep your policies active.

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