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Term insurance is one of the most affordable ways of securing your family’s financial future in case something happens to you. But what if due to some unfortunate reasons you can no longer to pay the premiums to keep the policy active? In such cases, you can opt for the reduced paid-up option in term insurance. A reduced paid-up option in term insurance means that the policyholder has stopped paying the premiums for the policy but continues to be covered under the plan’s benefits for the entire policy term. The sum assured on death in this option will be reduced according to the accumulated cash value at that point.
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Reduced paid-up is an option available in most life insurance plans that allow customers to stop paying the premiums but continue the life cover for their policies. The sum assured in these policies is reduced, hence the title reduced paid-up. This feature is usually available in term return of premium and whole-life insurance variants. The availability of this feature may vary across different plans and you should always go through the policy details before purchasing the most suitable term plan.
Term Plans
The reduced paid-up option is applicable only once the policy has acquired a surrender value. Once the policy has acquired surrender value, if you accidentally miss a premium payment, the policy will automatically convert into a reduced paid-up. The new sum assured payable in case of death is reduced as per the reduced basis defined by Reduced Paid-up Criteria (RPU).
The reduced paid-up sum assured applicable in case of the death of the policyholder during the policy term will be calculated using the formula mentioned below:
RPU Sum Assured = (Number of premiums already paid / Number of premiums to be paid) X Sum Assured
The benefits of opting for the reduced paid-up option in term insurance are as follows:
It can help the policyholder to eliminate the premium payments from their expenses especially if they are going through a rough patch financially but still want to stay covered under the policy benefits.
The premium amount saved from paying premiums can be used to fulfill other financial goals like paying for other important expenses or investing in a new life insurance policy with better benefits.
A reduced paid-up option provides policyholders with the peace of mind that their family will be financially secure in their absence even with the reduced sum assured.
The option is best suited for retired individuals who are trying to save their retirement budget and live a financially independent life.
Reduced paid-up can also help you avoid charges like surrender fees or charges levied by insurance companies due to the loss of future premium payments.
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There are several reasons why someone would opt for the reduced paid-up option. Some of them are:
Suffering through Financial Troubles:
People who are suffering through some financial troubles and are unable to afford regular premium payments can convert their term life insurance into a reduced paid-up policy. Converting the policy into a reduced paid-up can help the policyholder stay covered under the plan without having to risk policy termination due to missing premium payments.
Changing Life Cover Needs:
Due to changes in life stages or if the policyholder recently purchased a new term plan with better benefits, he/she might not need the previous policy’s benefits anymore. In such cases, the policyholder can convert the previous policy into a reduced paid-up and stay covered under the last plan for additional coverage.
It is recommended to opt for the reduced paid-up option over policy surrender as in paid-up the coverage continues even after you have stopped paying the premiums. In case of an eventuality, your family will receive the reduced sum assured on death which can help them pay for their financial obligations in your absence. In term insurance, the reduced paid-up option is available in the term return of premium variant and is considered beneficial since the policy cover continues even after the end of premium payments.
On the other hand, the surrendering of the policy would mean that all the premiums paid up until the point of policy surrender are forfeited and in case of your unfortunate death, no benefit will be paid to your family.
Various insurance companies also offer the Special Exit Option (also known as Term insurance with 100% refund of premium at NO COST) in the base term plans (without Return of Premium), which allows policyholders to exit the plan, mid-policy term, and receive their premiums paid at the surrender of the policy. The term insurance with 100% refund of premium at NO COST feature is available at no extra cost and the premiums for these plans are almost 49% more affordable than the Term Return of premium option.
A reduced paid-up option is preferred over the surrender option in term insurance since the life coverage continues even after the end of premium payments. People who are looking to secure the lives of their loved ones but are struggling with paying the term insurance premiums can convert their plan into a reduced paid term plan and continue to enjoy the benefits of being covered under the policy benefits.
06 Dec 2023
HDFC Income Replacement Insurance Plan, offered by HDFC LifeInsurance
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+All savings provided by insurers as per IRDAI approved insurance plan. Standard T&C apply.
