Lapsing your insurance policy, especially a term insurance plan, means your loved ones are not financially protected in the event of your death
Last week, the insurance regulator instructed life insurance companies to extend the grace period for payment of renewal premium for residents of Kerala and flood affected districts of Karnataka. So policies that are due for renewal between 15 July and 30 September 2018 will get a grace period of 60 days instead of the usual 30 days for policies with annual and other premium payment mode and 15 days for monthly premium payment mode policies.
Usually you are required to pay a fixed premium periodically on the due date or within the grace period. If you don’t do so, your policy lapses.
In term plans, you forfeit insurance benefits and the premiums paid so far.
In case of unit-linked insurance plans (Ulips), if you skip paying the premium in the first five years, or during the lock-in period, the policy is considered lapsed; so you forfeit insurance benefits but the invested surplus is not given back to you. It moves to a discontinuance fund and is payable after the lock-in of five years. If you skip paying premiums after the lock-in period, you can either surrender the policy and take the investment corpus, or revive it or continue it without paying, here your policy becomes paid-up.
In case of traditional plans, in the initial years you risk losing all your premium if your policy lapses, but once it acquires a surrender value, which means it can be self-funded or is paid-up, the policy doesn’t lapse but automatically continues with a reduced sum assured like in the case of a Ulip. Keep in mind that traditional plans come with heavy penalties for surrender.