Embedded Value: Donít let your life insurance policy lapse
Under the monthly mode of payment, the insurers offer a grace period of 15 days from the due date within which the premium installment must be paid.
People buy life insurance policies for the long term as these substitute the monthly income of a family in case of the death of the breadwinner. The contract for long-term financial protection by the insurers is based on the reciprocal fulfillment of regular payment of premium by the policyholder.
Insurers offer monthly, quarterly, half-yearly, and yearly modes of premium payment. Under the monthly mode of payment, the insurers offer a grace period of 15 days from the due date within which the premium installment must be paid. For all other modes, a grace period of 30 days is allowed. If the installment premium is not received within the grace period, the policy is treated as lapsed and the insurer ceases to be at risk.
If the policyholder dies when the policy is in the lapsed condition the insurer will be within its legal rights to repudiate the claim by the nominee. With the increasing tenure of the policy, there are certain benefits that accrue to the policy but the full sum assured is surely not payable. A policy acquires paid-up value over the years with the insurer paying a part of the sum assured under a standardized formula to the nominee and also to the policyholder if he chooses to discontinue the policy during his lifetime for some reason.
Policyholders tend to depend on the agents or the intermediaries to deposit the premium. But habitual dependence on them is a dangerous habit. There have been instances when a policyholder has died and on filing the claim, the insurer repudiates the claim on the ground of lapsation of the policy. It has been found in some such cases that even though the life assured had paid the amount well on time to the agent, the premium could not be deposited and the person died immediately after the expiry of the grace period.
The policyholders have dozens of channels to make premium payments sitting at home. But on average about only 70% of the policies continue beyond the first year. By the time the policies enter their seventh year, not more than 40% of them continue to exist in the books of the insurers. This scenario not only affects the financial health of the company but also causes a serious setback to the financial protection of each such family where the bread earner intended to provide an umbrella of security to his loved ones but some negligence on his part proved costly for the family later on.
Premium payment on time is necessary to claim a higher bonus under with-profit policies. Generally, the valuation of an insurer’s fund is carried out on March 31 every year. Only those policies participate in profit sharing which remain in force as on that date. This affects the loan or surrender value too. One should take care to pay the premium in the year in which it becomes due even if the grace period stretches beyond the year. On the other hand, a policyholder who claims Section 80C benefit under the I-T Act must pay the premium within the year when it becomes due to claim a deduction.
Lapsed policies can be revived leading to restoration of all benefits but the policyholders must remember that each revival is a contract ab initio, hence if the insurer finds the existence of some serious health issues the revival of the policy can be declined, nullifying all the embedded value under the policy maintained for so many years.
Source : Financial Express