Definition of Lapsed Policy
A lapsed insurance policy means that the policy and it’s benefits that you had purchased are no longer valid due to the non-payment of the premium amount on the due date.
For instance, you bought your policy on 1st July 2019, you will have to pay the premium by 1st July 2020 for the renewal of policy.
PS - Lapsed policies are only relevant to life insurance policies and not Health insurance or general insurance.
The grace period for life insurance policy is a 30 day grace period granted by every insurance provider in India. Although this does not apply to term insurance plans, their grace period is 15 days.
If you do not pay your policy within this grace period, your policy will lapse. Although you do have another chance for the revival of lapsed policy
How long do you have for the reinstatement of lapsed life insurance policy?
After the policy has lapsed you get 90 days to reinstate your policy and continue its benefits without any health declaration and by paying interest or a penalty to your insurer.
If this amount is not paid within these 90 days, your policy will be shifted to a surrender bucket with a lapsed status. Which means that your policy will be no more valid.
What is the Surrender Value? Will I be able to receive this if my policy is lapsed?
This is the amount that every policyholder receives from their insurer once the policy is surrendered (discontinued) before maturity. Every savings related policy has a surrender value.
How do you calculate the surrender value of a policy?
Every policy document has a surrender value formula. Let's try to calculate one with an example.
For instance, your premium is Rs 1000 and you have collected Rs 3000 premium for 3 years.
Surrender value = Total premium collected - First premium
= 3000 - 1000
Surrender value = 30% of 2000
The guaranteed percentage of surrender value is 30%, which means, minimum 30% is what you will receive, although this percentage can be more too, but not less.
A lot of people in India think that once the insurance has lapsed, they will lose all the money that they have invested and will not receive any surrender benefits. But this is NOT true! Every insurance company has surrender values and every policyholder has the right to claim their surrender values.
FYI - You will be surprised to know that insurance companies in India have approximately 23,000 crores worth of surrender value. This amount is government regulated and is also shown in the parliamentary session.
The nature of surrender values is that they keep increasing with the premium you pay every year (For instance, with the example given above, 30% will become 40% and then 50%). The closer it gets to maturity, the value increases and at the time of maturity it becomes 100%
This surrender value and the bonus can be collected in the 3rd year of your policy.
How to calculate surrender value with a bonus? ( bonus = Rs 1000)
Surrender value = Total premium collected + bonus - First premium
= 3000 + 1000 - 1000
= 30% of 300
According to the guidelines provided by the IRDA, every company has to list its surrender values and unclaimed values on their website.
So if you have paid premiums for over 3 years or more, check your company's website and claim your surrender value!
What if the policyholder has died during the lapsed policy that has a surrender value?
For instance, a lapsed policy has a surrender value and the policyholder dies during this duration, a death cover can be claimed! So make sure your apply for a claim to access the reduced sum assured.
What is a reduced sum assured?
For instance, if your policy was for a lakh and the policy lapsed since you paid less premium. Suppose, you paid Rs 3000 (premium for 3 years) but your policy was for 10 years, then a reduced sum assured will be allotted to you, proportionate to the premium you have paid (Rs 3000)
Now if you go to see, A lapsed policy is an asset! It brings value and a death cover that would protect you and your family.
Pro Tip - A lot of people think that they have lost their money once their policy lapses, but that’s not true! Make sure you claim your surrender value as there are cores of policies like this with insurance companies whose surrender values have not been claimed!
PS - If you have paid a premium only for a year and you have a traditional policy, you will not receive a surrender value. Although if you have a unit-linked insurance plan and have paid a premium for a year, your surrender value can be claimed.
A lapsed Unit-linked insurance plan and their surrender values
If a ULIP plan has lapsed, according to the guidelines of IRDA, all the money that you had assembled for this plan, will be removed from the market and will be kept in a deposit fund with a 3% interest.
For instance, if the policy is for Rs 1000, the investment value is Rs 1000 too, A deposit fund will be kept at 3% for 12 years. The minimum redemption period is 5 years, that means you can access the Rs 1050 (investment value with interest) in 5 years.
PS - Before 2005, the surrender value used to commence after 3 years of the policy but since this became a problem, regulators made this from 3 years to 5 years. And are now trying to increase the minimum surrender value percentage too (30%)
Did you know?
- 65% of the people who have bought insurance policies do not continue it after 5 years. Only 25% of the policies pay the whole term until maturity.
- 5 reasons to not continue the policy
- Financial conditions don’t allow them to
- They have geographically relocated
- The policy does not match their need/requirement
- The biggest reason - No one reminds them to pay their premium on time.
3. There are no bonuses or interest on a surrender value so you better choose your plan carefully.
4. Lapsed policies are an asset!
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