India’s largest life insurance company, Life Insurance Corp. of India (LIC), last week rolled out a campaign for policyholders to revive their lapsed policies with an aim to encourage the continuation of risk covers in the current high-risk environment. Other than launching special campaigns, insurers typically allow policyholders to revive their policies up to two years (longer in case of some products) from the date of non-payment of the last premium. Disha Sanghvi asked experts when it really makes sense for policyholders to revive a lapsed insurance policy.
Best to renew contract during a campaign by the insurer
Having a life cover, especially in these times, is inevitable. Any individual who has financial dependants and liabilities must always remain covered. Financial protection is put at risk if the cover lapses. It is prudent for an individual to check if her policy is active and should consider reviving the same if it has lapsed.
A company usually allows revival of a policy during the reinstatement period (two-five years), retaining the financial benefits. It is best to revive a policy during a revival campaign organized by the company, to save on the penalty charges or medical check-ups.
In case you plan to purchase a new cover, weigh the premium difference when compared with reviving the old policy. Buying a new cover usually costs more due to the change in the age and health conditions. Revival of a lapsed policy normally happens at the earlier premium and the bonuses accrued during the policy term get restored. In such scenarios, revival of lapsed policies always makes sense to ensure continued protection.
Revive it if you have paid premiums for several years
In case of a long-term endowment policy, if premiums have been paid for several years, it makes sense to revive a lapsed policy. After revival, one should keep the policy active by paying regular premiums till maturity. This will help accrue maturity benefits, which can increase the overall investment returns.
In the absence of revival, only the surrender value is due to the policyholder. Surrender value is a fraction of the premium paid. This leads to erosion of capital. Product guidelines specify the minimum surrender value as a proportion of premiums paid and this proportion rises with the number of years you have been in the policy. If several years of premiums have been paid, then it makes sense to pay premiums for a few more years and protect the capital.
Insurers often run campaigns for revival of lapsed policies. In such campaigns, they waive penalties on lapsed policies. So, this can be an effective opportunity for revival. Insurers may still ask for a declaration of good health before approving revival.
Continuing a policy is better than buying a new one
We actively encourage our customers to keep their policies in force to protect their families in case of any eventuality. At times policies lapse due to unpaid premiums. A lapsed policy can be reinstated only during the revival period and this period is not available indefinitely.
The revival period for each policy is as per the time defined by the regulator depending on the type of product, which is anywhere between two and five years. Unlike the grace period, during which the protection cover continues, during revival period, there is no protection and in case of an eventuality, claims are not admissible. Another aspect to know is that the longer the policy has been in a lapsed state, the more tedious is the revival process and higher the late fee.
Depending on the product, and longer the lapse period, the life insured might be asked to undergo fresh medical tests. However, since insurance premiums increase with age, it’s advisable to revive the lapsed policy as opposed to buying a new one, which can cost more.
Check if the old plan covers pre-existing conditions
The objective of life insurance is to replace the economic value of the earning member. A lapsed policy means that the sum assured has dropped. If it needs to be restored, do it immediately. See if there is a new, cheaper option, and also evaluate if a pre-existing condition can be covered in the older policy.
Term policy rates are fixed for the entire tenure. As age increases, the premium for a new policy also rises. In such a case, reviving a lapsed policy would be advantageous.
In a traditional plan (endowment), a lapsed policy, typically, acquires a surrender value after two-three annual premiums are paid. While no further premiums are payable, no future bonuses are added; and the maturity proceeds are only paid at the original maturity date—again a loss.
Finally, unit-linked plans work best if you invest for longer tenures. If you have a premium gap once the initial five-year period is over, it is best to withdraw the funds (there are no penalties for withdrawal), reinvest them elsewhere and let the policy lapse.