Term policy lapse – Should you revive it or seek a new one?

Life cover gives financial protection to family members in case of eventualities or mishaps. And term policies are the cheapest way to seek a life cover and to keep the policy in continuation; you need to pay premiums on time. If a premium is skipped, the policy lapses.

What is a policy lapse?

Life insurers, usually give a grace period of 15 days from the due date for the monthly premium payments and up to 30 days for quarterly, half-yearly and annual premium payments. If you don’t pay the premium during that grace period, the policy is said to have lapsed.

What happens when a term policy lapse occurs?

In the case of a term policy, the life cover and other benefits cease to exist after the end of the grace period. Therefore, death-related claims cannot be made by your family members after the policy has lapsed.

If your term policy has lapsed, there are two options:

Option 1 – Pay all the premiums due to date along with penalty charges.

Option 2 – Buy a new term policy from another insurer.

Let’s take the first case and assume that a 45-year old (now) male had taken a life cover for Rs 1 crore, a decade back. The policy tenure was 25 years and the insured managed to pay the premium of Rs 14,900 in the initial seven years. However, he skipped the next three annual premiums and now wants to renew the lapsed policy.

Usually, the insurers charge around 9.5% per annum as a penalty.

Thus, in this case, the penalty is Rs 9,044 while he pays another Rs 44,700 as three years’ premium.

To continue the policy, he will have to pay Rs 2.23 lakh more for a period of another 15 years. In all, he incrementally pays Rs 2.68 lakh including penalty and premium arrears.

Another option is to ignore the old policy and seek a new cover. Here, it needs to be noted that the life premiums increase with the age of the insured.

While the life premium was Rs 14,900 at the age of 35 years, at the age of 45 years his premium will increase to Rs 24,650. Total payments till he turns sixty works out to about Rs 3.7 lakh.

In this case, it is better for the individual to revive the lapsed policy rather than buying a new policy.

The result depends a lot on the number of years for which premiums have been paid and the remaining tenure. So, do your math to suit your case.

Moreover, it is not just about low premiums. Other things like that of claim settlement ratio, brand and service standards of a life insurer also matter. So, ensure you make the correct choices.

Things that matter

Term policies can be revived when premiums remain unpaid for up to 5 years. If the default is for a longer period, insurers might revive the policy on a case-to-case basis.

Moreover, they might ask for medical reports based on the age of the sum assured and the sum assured of the policy.

If you have been under medical treatment, you might be asked to submit more information about your health or take a medical test. The insurer has the discretion to accept or reject your request for policy revival.

Takeaway