A life insurance policy is an important tool in financial planning for many of us. You should make it a habit to set reminders for premium payments on your insurance policies. They can save you from having to pay penalties as well as from lapsed or dead coverage. Lapsed life insurance policies are often a result of the policyholder failing to make payments on time.
This article will show you how to reinstate your lapsed life insurance policy and get back on track with your payments. It gives a complete guide on the steps you need to take to reinstate your lapsed life insurance policy, as well as some of the common reasons why people lapse their policies and which one to choose. Reinstate or new policy. Before diving into the topic, let’s see the basic definition of reinstatement.
What is the Reinstatement of a Life Insurance Policy?
Reinstatement of life insurance policy refers to the restoration of the previously canceled or terminated life insurance policy. In case the policyholder did not make the due premium payment even during the grace period, the insured can reinstate the policy within the grace period of the life insurance policy provided by the life insurance company.
The reinstatement of lapsed life insurance policy is a process in which the insurance company agrees to continue to pay the premiums on an insurance policy that has been canceled or not paid for by the policyholder. To reinstate a lapsed life insurance policy, an individual must contact their insurer and request that they reinstate their lapsed life insurance policy.
Can a Lapsed Life Insurance Policy be Reinstated?
Yes, lapsed life insurance policy can be reinstated. The policyholder needs to make an application for a revival period to the insurance company. First, take advice from insurance claims advisors on our website, or call our customer care number. It can be replaced at any time within 5 years from the date of the first due premium. To revive a lapsed policy, you need to pay the accumulated due premiums along with the interest. Depending on the policy and the insurer, you will be paying a penalty on unpaid premiums for a plan that will yield some returns.
Importance of Reinstating a Lapsed Policy
Mr. Daniel aged 25 has started financial planning for his future and has selected a life insurance policy as a means of saving for his future. He has taken a term insurance policy for a lifetime period and has chosen the payment mode as Yearly payment. He didn’t default on the payments on his life insurance policy till the age of 30 years.
Due to the recession, he lost his job and was unable to make ends meet. Despite receiving continuous reminders from the life insurance company, he didn’t make the payment that was due for the year. After a certain period, he received a mail stating that his policy had lapsed. Due to due premium payments, the policy gets lapsed.
Then he contacts the insurance company and asked them what he should do after the policy lapsed. Insurance companies will ask for full payment of the due premium payment along with other applicable charges and they will require the policyholder to fill out and submit the revival form. He completed all the processes and his policy get back on track.
How to Reinstate a Lapsed Life Insurance Policy
The life insurance policy lapses if the payment of premiums is not made within the grace period. In case the policy lapses, insurance companies provide a period to reinstate the policies. This period can range from 15 days to 2 years and in some cases 5 years depending on the insurance company risk taking capability.
The process of reinstatement of a lapsed policy is not simple. If you are going for reinstatement of lapsed life insurance policy then the insurance company may ask for medicals and other requirements for reinstating a lapsed insurance policy, which was not asked at the time of policy issuance. This is due to the age factor and the risk associated with it.
For reinstating the lapsed policy, you need to visit the branch and submit an application for reinstatement. Then the insurance company decides on the premium to be paid to reinstate the policy along with the other requirements to be satisfied such as medical tests etc. Insurance companies sometimes charge interest and even levy penalties to reinstate the lapsed life insurance policies. The greater the lapsed period the higher would be the penalty.
It is very important to note that once the life insurance policy lapses, you no longer have coverage. This means that the life insurance company will not pay the claim in the event of death. So sooner you reinstate the lapsed policy, the better it would be for you.
Which one should you choose - Reinstatement or New policy?
A life insurance policy is a long-term policy where the premium payments can be made till the end of the policy period or for a certain period. It might be difficult to maintain the premium payments throughout the policy period due to certain unavoidable issues. In case of non-payment of the premium within the due date, a grace period is provided to the customer to complete the payment of the premium. If the premium payment is not done during the grace period then the policy will lapse and the customer would have the option to either reinstate the lapsed or take a new policy.
Advantages of Reinstatement of the Lapsed Policy over the New Policy
- Medical Test: Every new life insurance policy requires medical tests which can be either done in person or by phone. These medical tests determine the eligibility of the customer in terms of the sum assured, period of insurance cover, etc. In case of reinstatement in most cases, insurance companies ask for a declaration of good health from the customer.
- Incontestability Clause: Almost all life insurance contracts have a clause of incontestability for a particular period. 3 years. In simple terms, it means that the insurance companies cannot deny the claim in case of a misstatement by the policyholder after a certain period except for cases of fraud. If you take a fresh policy you have to satisfy the 3-year time before this clause becomes applicable. In case of reinstatement, after reinstating the lapsed policy this clause will not be applicable if the period of 3 years has passed before the policy lapsed.
- Terms & Conditions: The terms and conditions of the lapsed policy will continue if reinstated. But there could be some policies that were withdrawn from the market and would not be offered to you even if you are ready to pay the premium. So, reinstatement helps you to get hold of the policy with the existing terms and conditions.
- Premium Payment: The reinstatement of a policy requires the payment of premiums for the lapsed period along with the penalty.
Let us understand this scenario with an example:
In 2010, Benz bought a term insurance policy when he was 30 years old. The policy was meant to cover him till the age of 60 years for a Sum Assured of Rs.1 Crore. For this sum assured he was paying a premium of Rs.20k per year till the end of the policy period. Fast forward to 2017, he is 37 years old then and has paid premiums for 7 years which was around Rs1.4 Lacs. He had not paid a premium for the past 3 years and now in 2020, he wishes to reinstate the policy and contact the insurance company. The two years premium would amount to Rs.40k and the penalty charged by the insurance company is another Rs.15k. Now would it make sense to pay Rs.55k for the time he was not covered and reinstate the contract? Or go for a new policy for the reaming period of coverage?
For New policy:
Present Age: 40 years
Policy Term: 60 years
Per year premium: Rs.35k
Total premium to be paid: Rs.35k *20 (years) = Rs.7 Lacs
Medical Tests: Compulsory
For Reinstatement:
Present Age: 40 years
Policy Term: 60 years
Per year premium: Rs.20k
Penalty & Lapsed premiums: Rs.55k
Total premium to be paid: Rs.20k *20 (years) + Rs.55k = Rs.4.55 Lacs.
Medical Tests: May not be required.
The customer will end up paying more than Rs.2.5lacs if it takes a new policy rather than reinstating the existing policy. The lapsed premium and the penalty might look a bit high but in the long run, customers will end up paying fewer premiums if reinstated.
Conclusion
In conclusion, life insurance is a necessity for any individual. It provides financial stability when the family needs it most. There are many reasons why life insurance policies can be canceled and it is also possible to reinstate them in certain cases.
To reinstate a lapsed life insurance policy, the policyholder requires to make an application for the revival of the life insurance policy to the insurance company. The insurance company will require the policyholder to fill out and submit the revival form. It is recommen