What Does Reduced Paid-Up in LIC Mean?

Meaning of Reduced Paid-Up in LIC

When the policyholder cannot further pay premiums for the life insurance policy for any reason, the sum assured for the policy is reduced by the insurer (LIC in this case). After 3 years of premium payments, a policy has a guaranteed surrender value. It can be paid up if the future premiums are not paid by the policyholder.

In simple words:

A policyholder who has paid premiums for at least 3 years may tell LIC, "I can't pay the policy premiums anymore, so are the premiums I have paid so far and the current cash value of my policy any good?"

LIC in return reduces the coverage amount in proportion to the premiums the policyholder has paid. This means there are no more premiums due. 

1. Merits

   • Dividends are still credited to your cash value.
   • You can still use your cash component to take a loan.

2. Demerit

   • Once switched to paid up, a policyholder cannot increase the coverage or start paying premiums again.

3. Things to note:

   • The death cover is reduced in proportion to the time when the policy got activated and the performance history of the policy. 
   • A longer premium policy paid-up translates to less deduction in death benefit. A recent paid-up process leads to more deduction in death cover. 

   However, one may think to surrender a policy rather than opting for reduced paid-up. Here we are discussing a comparative study between these two and which one should a LIC policyholder opt for.

Policy Surrender or Reduced Paid-Up: Which is Better?

Both the options are beneficial in specific situations. Let us look at them one by one. 

1. When policy surrender is beneficial

   Surrendering the policy is profitable in terms of the time value of money. If the surrender value is invested elsewhere, it may earn compounded interest and can exceed the paid-up value payable at maturity.

2. When a paid-up option is beneficial

   Paid-up is more advantageous because your life coverage continues even after you stop paying premiums. If the age increases, the premium amount for a new policy will be greater than your previous one. If you want to continue coverage, it may be a good idea to keep your existing policy in force.

Need for Reduced Paid-up in LIC Policy

There can be two main reasons a person may have to opt for a LIC reduced paid-up policy in his/her LIC plan.

1. Change in the Financial Situation

   Life is unpredictable. A person's loved one may meet with an accident, and they run out of cash to pay premiums for the upcoming several months. He/she can also lose an asset (like a stolen car) and need to buy a new one to maintain his/her lifestyle. Such financial changes may force a person to opt for a reduced paid-up LIC policy.

2. The coverage needs have changed

   It may be possible that a person has bought a new insurance plan with better benefits. In that case, he/she may not want to continue with the existing premium payment of the LIC policy and opt for a reduced paid-up option.

How to Convert a LIC Policy to a Paid-Up Policy?

Suppose your policy tenure is more than 10 years and you have paid premiums for more than 3 years. In that case, your policy becomes paid-up automatically if you stop paying the premiums. However, if your policy tenure is less than 10 years and you have fully paid the premiums for more than 2 years, the same paid-up rule will apply. 

When Not to Choose a Reduced Paid-Up?

Reduced paid-up insurance might not be the best option if you are currently dependent on policy riders. Any riders on your old life insurance policy would usually be removed when you convert to this type of policy. This is an important consideration, as your policy riders could provide you with vital benefits that will benefit your life.

For example, you may have taken an income benefit rider that gives your family an additional income yearly for five to ten years with the sum assured. So, if you make it a reduced paid-up sum assured, you will lose this rider and the benefits associated with it.

Wrapping Up

After buying LIC's life insurance policy, you may come across situations where you have to stop paying premiums. In that case, making sure your policy switches to a reduced paid-up sum assured type will allow you to avail of the adjusted coverage and not incur a substantial financial loss.

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