Monday, March 3, 2014
Lapsed insurance policy could cost you dear
Amit Kumar Roy
After long deliberations, exhaustive comparisons and spending so many man-hours while deciding to buy the policy what suddenly goes wrong that one decides to discontinue the policy?
I have come across enough reasons for a lapsed policy and interestingly all reasons sound genuine — or at least they are communicated in a manner that the policyholders’ decision to discontinue the policy sounds convincing.
However, it is never advisable to discontinue a policy overnight and let all the premiums paid go in vain. These premiums are your hard-earned money. Unfortunately, when people are in a financial muddle, the life insurance premiums are the first ‘expense’ that is stopped without realising that this was a ‘compulsive saving’. While there is enough data on lapses that can be shared, the intent here is not to bombard you with the same but focus on the impacts and consequences of a life insurance policy lapsing.
The policyholders are supposed to pay the premiums by a defined date which is agreed and documented in the policy document. If the premiums are not paid even in the grace period then the policy is treated as lapsed. Generally, after the due date, there is a grace period of up to 30 days to pay the premium. In case of unit-linked insurance plans (ULIPs), if the policy lapses the accumulated amount goes in the ‘discontinuance fund’. Once the accumulated amount goes into the ‘discontinuance fund’, it does not participate in the market and is treated like ‘money in any savings account’. As per the regulations, it earns a nominal interest.
As per the terms and conditions defined for revival of policies by the regulator and the respective life insurance company, the policies can be revived. However, if a lapsed policy if not reinstated within the reinstatement period, it gets terminated without any benefits. The ‘first’ and the ‘biggest’ loss is ‘the life insurance cover’. As soon as the policy lapses, as per the contract, the life insured loses the ‘sum assured’ cover and in case the death happens in this stage of the policy, the life insurance company is not liable to pay the promised sum assured. The loss next in line is the ‘loss of the premiums paid’. If the policy is lapsed and the life insured wants a refund, the refund, subject to the terms and conditions defined by the regulator and the company, is paid.
Over a period of time if the life insured plans to revive the policy, he/she may have to undergo a health checkup again subject to the plan and the sum assured. In case the health has deteriorated, the life insurance company can ask for an increased premium or can even reject the application for revival.
Even if the life insured is healthy and plans to buy a new plan, he/she should realise that due to higher age the mortality charges (cost of life cover) will also be high leading to an increased premium.
Hence, to avoid going through this rut, make sure you buy a policy that you can afford and suits your needs too. If the policy has a long-term premium-paying term, make provisions for it instead of allowing it to lapse which would turn out to be more expensive and loss-making proposition.
There can be times when your expenses are more than your earning and you have to take a decision to prioritise the expenses. As you take that tough decision, do remember that life insurance is for living and not for dying. It is for those who would continue to live after you are gone.
The author is Chief Agency Officer, AEGON Religare Life Insurance. The views expressed in this article are his own