An insurance policy is said to lapse when the premium is not paid within the grace period.
Losses
What are the losses that emanate from lapsing of a life policy? (i) Death / accident benefit claim will not be available (ii) Bonus (share of surplus of the insurer) will not be available (iii) If a policy lapses before it acquires paid-up value, the premiums paid to the insurer are forfeited, and (iv) If the lapse is within the first two years for a conventional life policy, the income tax rebate claimed earlier is disallowed and the said deduction is added as income of the relevant year and income tax becomes payable thereon.
Revival of policies
The insurer allows automatic revival of a lapsed policy if outstanding premiums are paid along with interest, generally within six months of the first unpaid premium.
When the nominee or heir of a life assured informs the life insurance company that the life assured is missing and his whereabouts are unknown, the life insurer advises the nominee / heir to pay the premium and keep the policy in force. In such cases revivals are automatic on payment of premium and interest thereon.
As the period of non-payment of premium grows longer, the arrears of premium may get accumulated to a larger sum, making it difficult for the policyholder to pay in one go. In such cases, insurers also allow instalment revival.
Insurers like LIC grant loan on the lapsed policy for revival of the policy. While calculating the loan they presume outstanding premiums as paid and calculate the loan so that the loan amount will be high.
If the policy lapsed in its early years when it has not yet acquired paid-up value, the insurer allows its revival by shifting of the date of commencement of the policy.
For example, let us assume you have paid six quarterly premiums on your policy and thereafter, did not pay for the next five quarters. Also assume that you are reviving the policy on January 1, 2013. From date of revival, the insurer will go backwards and adjust the six premiums already paid. That means the premiums can be adjusted from July 1, 2011, making this date the new date of commencement.
The age and fresh premium is calculated from this date onwards. This difference in premium (for six quarterly instalments) is collected at the time of revival and the policyholder is asked to pay one premium (quarterly January 2013) at the revised rate.
Requirements
Conditions of revival of a life insurance policy are determined on the basis of factors such as amount of coverage, age of the life assured, period of lapse, period already run by the policy, health and occupation of the life assured. So in cases other than automatic revival on payment of arrears of premium and interest, the insurer will insist for evidence of continued good health of the life assured. This can be accomplished through a declaration of good health and /or medical report from an authorised medical examiner.
Good faith holds
Revival of a life policy by submission of such requirements is as good as purchasing a new policy. These documents enable the insurer to decide whether to accept or decline and in the event of acceptance of risk, to determine the rates, terms and conditions of a cover to be granted’ (e.g., an increase in premium, a reduction in term, accident benefit to be disallowed, table of the policy to be changed, to decline the revival itself.) They come within the definition of ‘proposal’ in a policy. In other words, a declaration of good health must provide all honest and truthful disclosures. Insurers carry out investigations in case of early death claim after revival to rule out the possibility of deliberate suppression of material facts.
Revival of a life insurance policy gives the policyholder some very important advantages such as continuance of life cover at a lower premium, bonus for the period during which the policy was in lapse condition and tax advantages. Keep your life insurance policy in force.
(The writer is President, Society for Promotion of Legal and Insurance Awareness)