Steps to activate a lapsed life insurance policy
Ramesh Varma, a 30-year mobile app developer with a Bangalore-based start-up, lost his job as his company shut down due to poor business during COVID-19. With a family to manage, Ramesh had to dig into his savings to provide for his wife, kids, and parents, who were living with him. While looking for another job, he also had to make arrangements to finance his home loan EMI, parents’ healthcare costs, daily family expenses, etc. In this process, he couldn’t keep up with this term insurance premium payment pushing the policy to lapse.
Fortunately, he got a job offer soon enough, he contacted the insurance company about the revival of a lapsed policy, who suggested he apply for reinstatement. Since Ramesh had approached the insurer within 2 months from the date of lapse, he was asked to pay the overdue premiums for reviving the policy. Once the pending dues were cleared, his term insurance policy was reinstated, and his cover was back to active state.
Despite the increase in sales of life insurance products among Indians due to the COVID-19 pandemic, a large section of the population defaults on premium payments. According to data from private life insurance companies, approximately 29% of policies lapsed due to non-payment of insurance premiums on time. This number is expected to have grown during recent years, as many were unable to pay their life insurance premiums on account of a cash crunch due to the covid19 crisis. If your policy has lapsed, read below to understand the steps involved in reinstatement of the lapsed life insurance policy.
What is the lapse in insurance policy?
After buying any type of life Insurance policy, you need to pay a fixed amount of premium every year for the entire or limited policy term to continue reaping the benefits of the policy. If you are making regular payments, it is common for you to think about when does a life insurance policy lapses, but there are no significant reasons for it.
The Insurance Regulatory and Development Authority of India (IRDAI) has mandated all life insurance policies to provide a grace period, typically 30 days from the premium due date, so policyholders could make the payment if they forget the dates. But if the premium is not paid even within the grace period given by the insurer, the policy gets terminated.
When your life insurance policy lapses, you can no longer enjoy the insurance coverage and other benefits offered by the insurer that was available earlier. It also means, no claims will be honored during this period, even if you encounter any situation that might put your life in danger.
Possessing a lapsed policy is equivalent to having no insurance policy at all, which means that you and your family members who were initially covered by the policy are now exposed to all sorts of risks, which itself is pretty dangerous.
Reinstatement of lapsed policy
If your insurance policy has lapsed, don’t worry a lot, as lapsed life insurance policy can be reinstated by following a few steps. For this purpose, the IRDAI, the insurance regulatory authority of India, had instructed insurance companies to allow policyholders to revive their lapsed policies within two years from the time of termination. However, the procedure of revival of a lapsed policy depends on the insurer and their terms. While some insurance firms charge penalty fees at the time of revival, few others even charge interest on the period between the dates of lapse and the revival of an insurance policy. Generally, the reinstatement of an insurance policy within 6 months of its lapse is a straightforward process and wouldn’t have many complications.
Suppose the lapse period is high, and you intend to revive the same policy. In that case, you need to approach the insurance company, explain the reason for the lapse, and ask them for steps to revive the lapsed life insurance policy.
The revival of an insurance policy depends on various factors such as the sum assured, your previous payment record, benefits utilized, claims made, pending premiums, balance tenure, etc. After taking into consideration all these, the insurer will come up with a proposal for you on how to reinstate a lapsed life insurance policy. For better understanding, let us take two scenarios:
- Revival within 6 months from the date of lapse: In case of applying to revive your policy within 6 months from the date of lapse, you would need to contact the insurance company and agree to pay the pending overdue along with penalties, if any, post which the policy will get reinstated. Some insurance firms also conduct special camps for the benefit of policyholders with lapsed policies to reinstate their policies by paying the premium due without any extra charges.
- Revival after 6 months from the date of lapse: In case the period between lapse and revival is more than 6 months, your insurer would ask you to pay the overdue premiums, along with interest at a rate between 12-18% of the premium amount. Some penalty charges could also be levied based on the terms and conditions of the insurer prevailing at that time.
Apart from the penalties, in some cases, you may also be asked to undergo a new medical test with a doctor designated by the insurance company to prove that you are in good health before reinstating your lapsed life insurance policy. In addition, with the reinstated policy, there are chances for your premiums to go high or decreased sum assured, lower benefits, etc.
Hence it is always wise to remember the premium date of your life insurance policy and continue it without any lapse at any point in time. Make sure to use standing instruction or the ECS facility available with your bank to ensure the premiums are paid to the insurer on time. A slight delay in premium payment not only puts you at risk but also pushes you to pay more for revival and reinstatement of the same life insurance policy.