Unfortunately, none of these options are available to those who buy life insurance policies that don't fit their needs. A customer does get a window of 15 days within which he can return the policy, but this option is rarely used. Most of the time, the unsuitability of the plan comes to light when the customer reads the fine print or when it's time to pay the next premium. The disenchanted policyholder doesn't pay the premium and the policy lapses.
According to the Insurance Regulatory and Development Authority (Irda), nearly 91 lakh policies with a combined risk cover of over Rs 1,00,000 crore lapsed in 2008-9. This was the highest lapse ratio recorded by the sector. These included traditional endowment and money-back insurance plans, term plans and health policies. If Ulips are also taken into account, the number of lapsed policies will be higher.
While lapsed policies are a cause for concern for the insurance industry, it is the customer who suffers the most. If the policy is less than three years old, the premiums are forfeited, resulting in a total loss for the policyholder.
Why policies lapse
The huge number of policy lapses in 2008-9 was one of the several unhappy fallouts of the financial crisis that gripped the country in 2008. Hit by job losses and shrinking incomes, many policyholders didn't have the money to pay the premiums.
There are other reasons too. Mis-selling of unsuitable insurance policies by agents and the buyers' failure to understand the policy's features are common reasons for their ending up in trash. "People usually expect something in return for the premium they pay. There are cases where an agent has convinced a policyholder who has a term plan to dump it in favour of a Ulip, saying it would provide him the same benefits and also make his money grow. So the term plan is allowed to lapse," says Jawahar Karthikeyan, a certified financial planner and director, Finerva Financial Solutions.
Several policies also lapse because the agent, who pockets a handsome commission in the first year, leaves the client in search of new ones. Insurers must share the blame for this as they tend to focus more on generating new business than retaining the existing customers.
Four ways to avoid lapsation
In case of delayed premiums
In this age of connectivity, you have to work really hard to miss your premium. Insurance companies send out SMS alerts, e-mails and even snail mail to inform customers that their premium is due. Still, thousands of policyholders get so caught up in the day-to-day work that they forget about their insurance premiums every year. Often, this is also because changes in contact details have not been updated. As Anita Pai, executive vice-president, ICICI Prudential Life Insurance, says, "Sadly, insurance is somewhere lower down in our orbit of more pressing matters." Adds R. Thyagarajan, chairman of the Shriram Group: "There is always a feeling of pain to part with money, particularly to buy risk covers."
Customers are even given a grace period of up to 30 days for paying the premium. However, the grace period comes with conditions. Insurers happily accept the premium for money-back and endowment policies if you are late by one or two months. They won't mind too much even if you are delayed by six or eight months. Some insurance firms also agree to settle a death claim by paying the sum assured after deducting the unpaid premium.
However, if it is a term insurance policy, the insurance company may dictate its own terms. Anukul Ramesh Bhavsar, 34, had bought a term insurance plan for Rs 25 lakh from LIC in 2006. Last month, six months after he missed one of the half-yearly premiums, he was informed by LIC that the policy had lapsed. To revive the policy, Bhavsar had to undergo a health test and pay a late fee of Rs 512.
If the premium has not been paid even during the grace period, the policy lapses, though it can be revived. For the past few years, LIC has been conducting a policy revival campaign each February to get disgruntled customers back to its fold. Late payment penalties and revival fees are waived during the 2-week campaign. Baljeet Singh, a Delhibased businessman, was luckier than Bhavsar. He paid his Bima Karan policy premium in February, 10 months after it was due, without any late charge.
In the case of general insurance policies (health, house or motor insurance), even a day's delay in payment renders the policy null and void. B. Gopalakrishnan, a 67-year-old retiree had a health insurance plan from National Insurance. He was out of town when the premium was due. When he contacted the company 15 days later, he was refused renewal. Given his age, no other company was willing to insure him. Finally, he had to take a fresh policy after clearing a health check (at his own expense), where the premium more than doubled from Rs 4,000 to Rs 10,500 a year.
Another problem is that the new policy will not cover any illness that might have developed in the past 2-3 years. These are categorised as pre-existing diseases and their treatment is excluded.
Use the paid-up option
If a traditional insurance policy has been in force for over three years, it attains a paid-up value. In such a case, even if the policyholder stops paying the premium, the policy does not lapse, though some of the benefits are curtailed. The policyholder then has two options. He either gets the same risk cover as under the policy, with the insurer deducting the mortality charge from the corpus, and the policy terminates after the corpus is depleted. Ulips, which are often hawked by agents on the promise that the policyholder needs to pay premiums for only three years, use this option.
The second option is that the risk cover or sum assured offered under the policy is proportionately reduced, but the policy continues for the full term.
If you have to surrender
A customer can surrender a policy if he is not satisfied with it, but he stands to lose heavily in such cases. The surrender value is only 30-50 per cent of the premium paid, depending on the number of years the policy has been in force. The Irda has now made it mandatory for Ulips to not levy a surrender charge if the policy is relinquished after five years.
Surrendering is an option that should be resorted to only in case of an emergency. It is better to study the policy features in detail before signing up. Also, when you buy a policy, avail of the 15-day free-look period to find out whether the policy suits you. As they say, prevention is better than cure.
