A life insurance can lapse when you cannot pay the premium within the stipulated timeframe which includes the grace period. When a policy lapses the benefits attached to it will become ineffective. Lets take an ex: Sumit Malhotra recently was working with a private bank and recently he lost his job. This gave rise to financial constraints and he was no longer regular in paying his insurance premiums. He did not pay the premium even within the grace period and his policy lapsed. As per the IRDA recommendations a uniform grace period of 30 days is extended for quarterly, half-yearly and annual renewals and a 15 days grace period for monthly renewals. A life insurance policy can also lapse when the cash surrender value is exhausted.
Once an insurance policy lapses, the protection which comes with it ends. This indicates that thebeneficiaries will not receive payment in case of your sudden death. The money which was paid as premium is forfeited. If you do not want to forego the benefits which the insurance policy offers you can consider reviving the life insurance policy within the stipulated time period laid down by the insurance company before your contract matures.
It is important to note that the revival procedure will vary across policies and companies. If you have not paid the premium for six months, LIC will charge an 8% interest on the premium (this depends on the nature and duration of the policy) for the deferred payment and the risk cover will extend up to six months. This means that as a policy holder if you have defaulted on the premium payments for six months, the life cover is still available. You can avail this benefit if you have paid the premium for atleast a minimum of three years. If you want to revive the policy in the seventh or the eighth month, you will have to produce a personal health statement.
The primary reason behind buying a life insurance cover is to provide financial support to your family when you are not present. But, the efforts can go futile when the policy lapses. If you want to revive the policy there are certain points which you need to consider:
Understanding reinstatement: Reinstatement of the policy or the documents required for revival will depend on the time between the date of lapse and the date on which you request the revival.
Paying the right premium: To revive the policy which has lapsed you need to pay the unpaid premium along with the interest rate which is specified by the insurer. In some cases you may have to pay a penalty.
Processing of the policy: In most cases a certificate of insurability or a health certificate needs to be given to the insurance company. This statement needs to be supported by address proof documents.
Fresh terms and conditions can be imposed: As revival of the policy is a fresh contract between you and the insured company, the insurer may impose new terms and conditions.
Find out ways in which you avoid the lapse of an insurance policy:
Opt for an ECS or an Electronic Clearing Service: Here you can give a standing order to the bank to deduct a particular amount towards the life insurance policy.
Pay through ATMs: Certain insurance companies have tie-ups with banks where the banks provide you the option to pay the premiums through their ATMs.*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
Choose auto-pay service through your ATM card: If you opt for this, your premiums will be pad automatically through your credit card and this will reflect in the billing cycle of your card.
Weigh your resources: Before you opt for a policy ensure that it does not burn a hole in your pocket.
In case your insurance policy lapses. It is advised that you initiate an open discussion with the insurance agent to ascertain the best course of action.