Should You Revive A Lapsed Policy?

Year after year, does your insurance cover renewal date pass you by? Jay Sampat advises you on what to do in the event of a policy lapse

Insurance policies bought in March just as the financial year winds up pose a problem for many of us. Individuals who buy insurance just to save tax or under obligation often end up not paying the subsequent premiums. The policyholder may also not pay further premiums in the event that he/she is not satisfied with the terms and conditions of the policy. In such a scenario, the most important question one should ask is: Should you pay the premium when the policy lapses or comes up for renewal in the following year?

There is no standard definition or time period within which the insurance policy lapses. This varies from company to company and from policy to policy. If a policy has a grace period of 30 days, you would still be covered for up to 30 days provided you pay the premium within that period. After the grace period, you can still pay the premium but will not be covered by the policy anymore unless you request for revival. The maximum time period within which you can revive the policy can extend up to one year, within which you have to pay penalty interest and other fees to give new life to that policy.

A policyholder can revive his/her lapsed policy by paying all arrears on the premium with interest within five years from the date of the first unpaid premium. The insurer may ask the policyholder to submit his/her health status in a prescribed form or may ask the policyholder to undergo the required medical tests to assess the risk. Many insurance companies organise policy revival campaigns on a periodic basis, whereby policyholders can revive their policies during the period of the campaign without paying the revival fees.

As for the question of whether one should revive a lapsed policy, experts advise working out a cost-benefit analysis doing so. It does not make sense to revive term insurance cover as it is not investment-oriented. On the other hand, in most investment-based policies, it is better to revive/renew the policy than buy a new one as the pricing is based on the age factor. If you are buying an insurance policy now, the premiums would be higher. Also, you have to wait for a longer time to enjoy the benefits of the policy. In case of a ULIP, for instance, you have to pay premiums for another five years and then wait for five years more to be able to enjoy the benefits. Similarly, in endowment plans you will realise the benefits much later than in your earlier policy. Hence, it always makes sense to pay the penalty and renew the old policy. There are also some fixed return products which offer tax-free returns over a period of time to the policyholder. You should continue paying the premium on such products too.

The cost structure of a ULIP is such that it adds to your gains only from the ninth year. After paying a hefty premium for five years, it does not make sense to quit. Even after nine years, you can stop paying the premium and let the ULIP slip into auto-recover mode if the policy does not generate good returns. A ULIP has two components, viz. risk and investment. Once you stop paying the premium, the insurer shifts the money from the investment component to risk. This transfer of funds keeps happening till the investment component is siphoned off. But if you have another five years to go for the expiry of the policy, it is better to stay invested. Essentially, your policy will be growing well at this stage after factoring in all the costs and other deductions. If you discontinue your policy at that point, you will not be able to generate returns and make up for the losses by investing the balance premiums elsewhere.

Typically, agents will follow up till you hand out the first premium cheque. Once you have signed the dotted line and the agents have secured their fees, the reason for their absence is not hard to guess. Beyond that, it is your lookout to keep track of the dates and pay the premiums on time to keep your policy alive.

If you exit from your policy within three years from the effective date, you will have to pay off the tax benefits that you enjoyed on previous premium payments. So, before giving up a policy, make sure you calculate the downside as there is no recourse available after the initial period spanning 15-30 days. Quitting after you have bought a policy can indeed prove expensive.