What is it?
A policy lapse means that your contract with the insurer is over and you are left with no insurance cover. Also, if this happens before three years of the policy term, you would lose all the premiums you’ve paid till then.
When does it happen?
Your policy would lapse if you fail to pay the premium in the second or third year. Typically, after three years, a policy becomes paid-up, which means it acquires a value that can be measured in terms of money. Even after three years, this value is a fraction of the premiums paid. The insurer will keep deducting charges from the value and the policy will lapse when the insurer can no longer meet the costs.
Single-premium policies do not suffer from the fear of lapsation since you pay a one-time lump sum for the entire life of the policy.
Why policies lapse?
Hard sell by agents and banks is responsible for lapsation. Encouraged by up to 40% commissions on first-year premiums, agents push hard for the sale, but often lose interest once it is bought. With no agent to follow up, people usually forget. Some may even realize that they do not have enough money to fund the second- or third-year premiums or they don’t really need the policy. Result: lapse. In 2008-09, India saw lapsed traditional policies worth Rs1 trillion. Given that unit-linked insurance policies constitute about 70% of the market, the actual number of lapsed policies would be much more.