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What Is A Policy Lapse and How Do You Fix It?

Dec 27, 2019 | 7 months ago | Read Time: 3 minutes | By iKnowledge Team

In the insurance sector policy lapses are not a new phenomenon. Perhaps you remember the economic slowdown of 2010 where according to figures supplied by the Insurance Regulatory and Development Authority of India (IRDAI) around 9.1 million policies lapsed with some insurers having a lapse ratio as high as 50% [1]. Although lapsation figures vary year to year because of the number of policies sold in the year, a policy lapse is not a good thing for an individual.

A policy lapses when a policyholder is unable to pay premiums by the due date or even after a grace period. This grace period is typically a period of 30-31 days allotted by the insurer whereby you have coverage and benefits despite non-payment of premiums. However, after the grace period, if you have not paid your premium at the end of the grace period the policy is terminated and the benefits of the same are ceased from the policy holder. 

Your policy has lapsed, now what?

Fortunately, despite the ending of the grace period, several/most insurance companies have an additional time whereby you can reinstate your policy, and your policy will be reactivated. However, as this is not a legal requirement not all companies provide this facility. The rule of thumb is to try and reinstate your policy as soon as you can and speak to your company about the regulations of doing the same, however, given how much time has passed since the grace period, your options will vary.

You are in luck if you can reinstate your policy within 30 days of the grace period as most companies will not ask you to undertake the underwriting process again and will not change your premiums. The process gets a little complicated if it has been from 31 days-6 months since your grace period ended. Apart from the usual reinstatement documents, some companies will require you to answer some questions about your health conditions to ensure they haven’t changed significantly since you bought the policy. Do not be tempted to lie during such a scenario if your health conditions have changed as it could lead to denied access to your death benefit.

Finally, if it has been 6 months since your grace period it is incredibly difficult to have your policy reinstated unless your insurer has specific arrangements for the same. In such a situation the best outcome is to reach out to your insurer and see what can be done. If you pass the 5-year mark, it is safe to say that you will be unable to reinstate your policy, and even if you do you will have to submit new medical exams and pay a higher premium.

I am a beneficiary of a lapsed policy, what do I do?

Sadly, if the policy lapses, even though you as a beneficiary are not at fault for premium non-payment, you will not be able to do anything about this if the individual has passed away. However, if you learn about the lapsation while the individual is still alive, you can add on a waiver of premium to the policy, whereby, the policy will be alive till the policy owner is unable to make payments due to serious illness or disability. Alternatively, you can use the cash value of a policy to pay premiums.

As it has been made clear, dealing with a policy lapse is incredibly time-consuming and frustrating and your ability to do the same varies a lot from insurer to insurer. Hence, there are certain things to keep in mind to help avoid a policy lapse. Firstly, and most obviously, make sure that you make your payments on time. Most companies offer you the option of auto-paying your premium at the beginning of every month, so you don’t have to worry about the same. Alternatively, consider policies with reasonable premium rates which you can afford to pay for despite any financial hardships. Financial pressure and stress of high premiums is the number one reason policies lapse and you can avoid the same by opting for term insurance policy plans.

It is fairly to understand what is a term plan: it is essentially a time bound insurance plan whereby you pay premiums at regular intervals and in the event of your demise the entire sum if paid off to your nominee. Term insurance benefits you as it provides you high coverage with low rates of premium.

To know about Aegon Life’s life insurance products like term insurance and other products, visit our home page.

Citations

[1] https://www.livemint.com/Home-Page/uejP9l8Zn6bn6HwIx3TEDL/Life-policies-worth-Rs1-trillion-lapse.html


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