It’s always better to keep your insurance policy going for the long term. The earlier you buy, the cheaper will be your life insurance premium. In general insurance policies, especially health insurance, benefits get added for every year in which you don’t make a claim. And if you have been one who has bought your insurance at the right time, you wouldn’t want to forego the benefits by missing your premium paying deadline because of a cash crunch or an oversight.
But here is the good news: there is a window that you can use to make up for late payment. What is better is the fact that the Insurance Regulatory and Development Authority (Irda) has already taken measures to standardize this window of opportunity. For unit-linked insurance plans (Ulips) and health insurance, the rules of reviving a lapsed policy have been standardized. Traditional plans are still awaiting their turn. A policy lapses when the premiums are not paid within the deadline or within the grace period of about a month after the main deadline.
Here are the current rules regarding the two most important insurance policies—life and health—that will come to your rescue if you remember to pay the premiums just after crossing the grace period deadline.
What happened earlier: Till last year, the rules were rather nebulous regarding revival of Ulips. Earlier, if your policy lapsed, so did the death benefit—the money the nominee gets in case of the policyholder’s death. The company gave you between six months to up to a couple of years to revive your policy on payment of a penalty and a health check-up, if necessary.
While a couple of years did look like a generous window, it violated the spirit of insurance. For a policy less than three years old (earlier, the lock-in period for Ulips was three years), lapsation meant the death benefit would cease while the funds continued to remain invested up till the revival period, making the Ulip a pure investment product. If you paid premiums for at least three years and discontinued thereafter, the death benefit continued as long as the fund value was sufficient to meet the mortality charges—the cost you pay to avail a cover.
What happens now: Irda addressed the issue of letting a Ulip like an investment product by streamlining and standardizing the process of lapsation and revival. The rules that now govern Ulips, effective 1 September, give you two options to revive a lapsed Ulip. Pay up the premiums or let go of your Ulip.
The procedure: If you are unable to pay your premium by the due date, you will get a grace period—15 days for monthly premiums and 30 days for quarterly or annual payments. If you miss even this deadline, your policy stands discontinued, the new name for lapsation.
After this, you can either revive or surrender the policy. The insurer will send you a notice to this effect within 15 days of discontinuation; you will have 30 days to respond.
Pay up the pending premiums and revive the policy. If you don’t want to do so, the insurer will deduct a discontinuance charge, which can’t exceed Rs6,000, and return you the fund value.
If you choose to discontinue before the lock-in period of five years, as mandated by Irda, you will get your discontinuance fund only after five years.
However, in the interim, the discontinuance fund will keep earning a minimum interest of 3.5% per annum. Your policy stands terminated once you get this money back.
Traditional life insurance
The rules regarding traditional plans still differ from insurer to insurer.
Typically, if you don’t pay the minimum two-three annual premiums, your policy will lapse after you cross the grace period of about 30 days. Your death benefit ceases and depending upon the surrender charge, which could be as high as 100%, you get back the remaining invested corpus.
In these policies, too, the time limit for revival and penalty varies across insurers. Says G.V. Nageswara Rao, managing director and chief executive officer, IDBI Federal Life Insurance Co. Ltd: “Insurers, typically, give up to two years to revive the policy provided all due premiums are paid. However, the policy is revived only after underwriting norms (are carried out) and a penalty.”
For policies that are more than three years old, some insurers allow you to continue the policy. Adds Rao: “After the policy has become paid-up, an insurer can offer to keep the policy in force by reducing the sum assured in proportion to the fund value.”
Term plans, however, lapse as soon as you skip the grace period deadline. Revival can typically happen till two to three years.
Read the policy document carefully to understand the revival norms as they differ across insurers.
A health insurance policy needs to be renewed every year. It is obligatory on the insurer’s part to renew your policy, irrespective of the number of claims you may have made. Yet we regularly receive readers complaints that their insurers refused to renew their policy on the grounds of late payment.
What happened earlier: Till about a couple of years back, the concept of grace period did not really exist in the health insurance space. Insurers considered any late payment as a break in the policy and refused to renew. For customers that spelt trouble. In some cases, for senior citizens, it meant not having health insurance at all, thereafter.
In March 2009, the regulator standardized this process. It made it mandatory for the insurers to clearly state the terms and conditions of renewal, including the age up to which a policy could be renewed. Insurers were also required to give indicative premiums of future renewals. Apart from these renewal norms, Irda introduced a window of a grace period of at least 15 days. So you got another 15 days after the due date to renew your policy.
What happens now: Though Irda has put in place the rules, they are still not followed to the last word.
Says Sudhir Sarnobat, founder and director, Medimanage Insurance Broking Pvt. Ltd, a health insurance consultancy: “We have faced a seven-day window by some state-run insurers. However, this is more a problem of internal communication and as a customer it means approaching the higher ups like the regional office or main office for a 15-day extension. However, once the regulator comes out with other standardization norms such as standardizing the claims form, we hope this problem will get addressed.”
The rules of the game are in your favour, so make use of them to keep your essential insurance policies up and about.