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What if your insurance policy lapses?

December 08, 2003 13:25 IST

If you have failed to pay the premium for your insurance policy and it eventually lapses, don't panic and surrender your policy. There are ways to get around this problem.

Most people consider life insurance, to be just a tax saving device. As a result, they either forget to pay their premiums or face a problem in maintaining the policy. Not surprisingly, a number of policies are discontinued.

When one takes a life insurance policy, he is expected to pay periodic premiums, which can be either paid monthly, quarterly, half-yearly or annually. If this premium is not paid within one month of the due date, the policy is considered to have lapsed.

In case of a lapsed policy, the following conditions would apply:

  • A lapsed policy can be revived within 5 years from the date of the last premium paid by paying up the outstanding premiums along with interest charges.
  • A lapsed policy if revived within 6 months, can be reinstated without fresh medical reports by paying the outstanding premiums along with the interest charges.
  • If the policy has been in force continuously for over 3 years, then it acquires a paid up value. Please note a surrender value on a policy is available only if the plan has been in force for continuous 3 years.
  • No surrender and paid up values for policies that have not been in force for a continuous period of 3 years.

Observation reveals that most people, who are not in a position to revive the policy, either back out or surrender it out of ignorance. They realise only later what this ignorance costs them.

Surrender value

For example consider an endowment policy taken for 20 years where the annual premium payable is Rs 5,000 for a sum assured of Rs 100,000 and an assured bonus of Rs 70 per thousand each year.

If this policy is surrendered after the premium has been paid for 5 years, the surrender value is likely to be calculated as follows:

  • Surrender value = Paid-up value + Accrued bonus x Surrender value factor (in this case - 23.45) / 100
  • Paid up value = (Sum assured x  Number of years premium paid) / Total number of premiums  =  1,00,000 x 5/20 = 25,000
  • Accrued bonus = Bonus payable each year x Number of years premium paid = 7,000 x 5 = 35,000.
  • Surrender Value = (25,000 + 35,000) x 23.45/ 100 = 14,070

Thus the total amount receivable in case of surrender would be = Rs 14,070.

Paid up value

Consider the case in which the contributions paid over a period of 5 years was left till the end of maturity i.e. 20 years.

                 = Premiums paid for 5 years + Bonus accrued for 5 years.

                 = 25,000 + (7,000 * 5)    [Bonus per year = 7,000]

                 = 25,000 + 35,000

                 = 60,000

What the insured could do is

  • If possible he should try and revive the policy, or else
  • He should get it paid up.

The paid up value is much more than the surrender value and is payable on the death of the insured or at maturity. This amount is proportional to the number of years the premium has been paid.

As is apparent from the example, if the policy is made paid up, the amount receivable would be much more than the surrender value.

Not only that, no further premiums would be payable to the insurer. However, as opposed to the surrender value, this amount would not be paid immediately. It would be paid only when the policy matures or the insured dies during the term of the policy.

In other words, when the policy is made paid up, the sum assured for the policy becomes smaller. Also, the policy- holder is not required to make further premiums.

The difference:

The total amount receivable in case of paid up value far exceeds the total amount receivable in case of the surrender value. In the above example, the difference between the paid up value and surrender value is Rs 45,930.

In other words, the paid up value of the above policy would exceed its surrender value by Rs 45,930. (Of course, this amount is made available only after the term) (i.e. 20 years of the policy).

Conclusion:

The life insurance policies are assets, which if planned properly can take care of the monetary needs of our family in any eventualities.

Not only that, the survival benefits can take care of our post retirement needs. Policies can even be planned to fetch us periodic returns to take care of short- term needs like education and marriage.

Having evaluated both the options, it is up to the policy-holder to take a decision.




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