How To Avoid Lapse of Term Insurance Policies?

Amongst all life insurance products, Term plan is the simplest product to understand. One buys a term policy to provide financial security for dependents in case of unfortunate untimely demise. It continues to be the cheapest way to protect your future income and allow your dependents to continue having financial security in your absence. In situations where you are the only bread-winner, or where you have taken loans/liabilities (e.g. housing loan), this becomes extremely critical to ensure that your dependents do not face adversities.

However, in case one misses on premium payment, it will result in policy getting lapsed and that defeats the entire purpose of buying a term policy. With policy lapsation all benefits under the policy cease. After repeated failure to pay premium, the policy will get terminated (zero benefits and all premium payments paid till date wasted). Thus to continue enjoying the benefits of term insurance, it is extremely critical not to allow the policy to lapse.

Another reason why you should not lapse a policy is that premium amounts increase with age and hence if you try to buy a new term plan subsequently, it is likely to cost you more – the era of reducing pricing is currently behind us. Also, with age there could be a change in our medical condition which can impact the issuance of a new policy – the old policy should not be impacted as long as the medical condition has arisen after purchase of the policy.

Make payments on time

Make payments on or before the due date to avoid your policy from getting lapsed. If the policyholder does not pay premium on the due date, the insurance company provides a grace period (usually 30 days for annual/semi-annual/quarterly mode of premium payment and 15 days for monthly mode of premium payment), during which he/she has the option to pay their pending premiums.

If there are temporary cash flow/liquidity issues, you can utilise the grace period as the policy remains in force without any reduction or termination of policy benefits. A policy will become a lapsed policy, only when the policyholder does not pay the due premiums during the grace period as well. All the benefits are intact during the grace period.

Set up automatic payment

To avoid the hassle of remembering to make payment – although insurance companies will remind you – it is always advisable to place standing instructions which ensure that the premium will be auto debited on the due date from your account. This can be setup when you purchase the term policy, or you can do it at a later date if you so desire – in both instances, your insurance company will assist you. The process of getting this done is quite simple, and many companies also offer digital/online solutions for the same.

Auto-debit facilities also allow you the flexibility to select the date on which the debit will happen. You can also choose automatic payment through the credit card instead of your bank account, although the RBI guidelines in this regard have made the process a little more cumbersome than earlier.

As long as you have adequate balance in your account, you will never need to remember to pay the premium and continue enjoying benefits of the term plan. Even when you have setup a standing instruction for auto-debit, the insurance company will remind you to ensure that you are keeping your account funded.

Keep your communication details updated

To receive all communication from the insurance company, do ensure that your latest contact details (mobile, email, address) are available with the company. This will enable you receive premium reminders – and most companies will use multiple modes to remind you through SMS, email, letter. In case of any change in contact details subsequent to the policy purchase, it is strongly recommended to update the changes with the insurance company immediately.

Adjust the payment frequency

Premium amounts will be highest for Annual mode of payment. In case there is a temporary set-back and you are finding the annual premium amount difficult to pay, most term plans will have an option for changing the payment frequency to monthly (do check whether the product you have purchased has this option). This change can help you reduce the burden and still continue to avail the policy benefits.

Prioritise your spends

In case of financial difficulty, evaluate your financial situation and prioritise your spends – term plan, which is a genuine need, should find itself high on the list of priorities. Today, the market also has options where you can get some funding (credit card payment through EMI, converting annual premium payment to EMI etc.) to tide over the situation temporarily.

Revival of lapsed policy

In the worst case scenario, where you are not able to continue paying premiums and the policy lapses, you still have the option to revive the policy when your situation improves. A lapsed policy can usually be reinstated within 2 years from the last unpaid premium payment date.

To revive the policy, the policyholder needs to pay the unpaid outstanding premiums along with interest on account of delayed premium payment. Depending on the amount of delay, policyholder may also be asked to submit a declaration of good health or may have to undergo medicals for the insurance company to re-assess the risk. The final decision to reinstate the policy rests with the insurance company.

In summary, a term plan ensures financial protection for your loved ones in case of untimely death. Disciplined and regular payment of premium will ensure that you have a risk mitigation tool. Any missed premium payment will lead to the policy lapse where the benefits and/or coverage available is no longer available as per the policy terms and conditions.

About the the author: Nilesh Parmar is Chief Operating Officer(COO) at Future Generali India Life Insurance.