Keeping track of the financial products in one's portfolio is a tedious task, especially when it comes to paying premiums. This is especially true of long-term instruments like insurance, where the premium is often required to be paid for several years. If one or more premiums is not paid on time, the policy lapses. The reason for defaulting could be as simple as change of address—the policy notice informing you about the due date for paying premium would not reach you—or change of name, which is mostly true for women after they get married.
HOW TO PREVENT A LAPSE |
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| These simple tips will ensure that your policy doesn't expire: |
| Pay your premium on time or within the grace period. |
| Don't take a policy that you feel will be difficult to service at a later date. |
| In case of Ulips, use top-ups to increase the scope of cover rather than buy a new plan. |
| If your policy lapses and you want to revive it, don't opt for a loan. The interest cost erodes your effective rate of return. |
Whatever the cause of default, the consequences can be serious as reviving a lapsed policy could be expensive. So, should a policyholder pay the penalty and renew the policy or surrender it? You should revive a policy that has not exceeded five years; if it has, give it up. Remember, that you can only renew money-back and endowment policies, not a term plan.
Reviving a policy comes with its fair share of costs, and if you have missed several premiums, it could prove expensive as the interest begins to compound. In the simplest of cases, you have to pay all the premiums that you missed with an 8% interest, which is the rate stipulated by LIC. Sometimes, insurers offer special revival schemes, though this does not happen too frequently. The most recent revival scheme by LIC ended in February 2009, wherein it accepted policies that had lapsed more than five years ago.
In case of Ulips, the policy remains in force if your corpus is adequate and covers your premiums and other expenses. However, you need to ensure that your investments generate enough money to retain the cover. If a policy lapses close to maturity, check on the surrender value and decide if reviving the policy will ensure better maturity proceeds. If the premium outgo is high, you can go in for a loan-cum-revival option, but check that the interest rate fits your budget. Usually, this is an expensive recourse and works only if the loan cost is less than the accruing benefits.
If you surrender the policy, you could lose out. Find out the surrender rate from your insurer as your returns are likely to be in line with the surrender value, which is often less than the total premium paid by you. Also, don't surrender an existing policy for a new one. While the surrender values are low, it takes time for a new policy to pay off. Besides, if you want to take a fresh policy later, the premium would increase and you may have to undergo tedious medical tests.
