Buying new policy instead of reviving old one could mean higher premium

But it means avoiding the premiums and interest for lapsed years, so do the math

The Life Insurance Corporation of India (LIC) is currently running a special campaign for reviving lapsed individual policies, which will go on till March 25. It is offering concessions on late fees on select types of policies. Should you try to benefit from such campaigns that insurers run periodically?  

All insurance policies have an expiration date. If the policyholder fails to renew the policy before that date, it lapses. Melvyn Joseph, founder and chief financial planner, Finvin Financial Planners says, “A lapsed insurance policy is equal to having no policy at all because the policy’s coverage is no longer valid.”

Utilise grace period  

Policies don’t lapse instantly. Tarun Mathur, co-founder and chief business officer (CBO), Policybazaar.com says, “If you don’t pay the premium on time for a term policy, it will become inactive but will not lapse.”

Term policies offer buyers the option to pay the premium in monthly, quarterly, or half-yearly installments, or in one lump sum annually. Insurers offer a grace period of 15 days if you pay monthly premiums and 30 days if you have opted for the quarterly, half-yearly, or yearly option.

Limited revival period  

Once the grace period has passed and the policy has lapsed, it can only be revived within a limited period. According to the Insurance Regulatory and Development Authority of India’s guidelines, the maximum revival period for term policies issued prior to December 2019 is two years. It is five years in case of policies issued after December 2019.

Pay interest on unpaid premiums

To revive a policy, the policyholder needs to submit a request. Mathur says, “The policyholder must also pay all the outstanding premiums from the date of the first unpaid premium to the revival date. He must also pay interest on outstanding premiums and any applicable taxes and levies.”  Some concessions may be offered during special campaigns, like the one LIC is running now.

Medical check-up may be required

The insurer sometimes asks the policyholder to undergo a fresh medical check-up. Naval Goel, founder & chief executive officer (CEO), PolicyX.com says, “If the policy is revived within 30 days to six months of lapsing, the insured needs to just give a good health declaration. But if the policy is being revived after two-three years, the insured could be asked to undergo a fresh medical check-up.”

According to Kayzad Hiramanek, chief-operations & customer experience, Bajaj Allianz Life, “The insurer has the right to reject a revival request if the health condition of the insured has changed substantially.”

Should you revive?   

Buying a new policy, instead of reviving the old one, has a few downsides. Hiramanek says, “Buying a new life cover will cost more, given the change in the insured’s age and health condition.”

Financial planners, however, say that in case of a term policy, it does not make sense to pay the premiums for the past years along with the penalty. Joseph says, “It is true that the premium for the new policy will be expensive. But that is better than reviving an old policy and paying premium arrears and interest for the years that have already gone by.”

Essentially, you need to do the math to see whether reviving makes more sense or buying a new policy.

In the case of traditional plans, reviving the old policy makes even less sense.  Mrin Agarwal, director, FinSafe.in says, “If you do not renew the lapsed policy and instead invest the premium amount for those years in the market, you will earn more despite the loss of premiums paid.” The returns on traditional plans tend to be low at 4-5 per cent.

Insured gets many chances to revive Ulip

. There is a grace period of 30 days to pay the premium

. After the grace period ends, the insurer sends a notice within 15 days and gives the insured another 30 days to pay the premium

. You can revive the policy within two years of discontinuation of the plan

. For revival within 6 months of lapsing, the policyholder needs to just pay the premium  

. For revival within 6-11 months, a good health declaration is needed

. After one year a medical check is required

Source: PolicyX.com