The Insurance Regulatory and Development Authority has asked the actuaries of domestic insurance companies to develop a new definition on lapsation of insurance policies. This is because different insurance companies had different definitions of lapsation of policies, which often cause confusion.
Actuaries should coin a thorough definition of first year premium so that there is uniformity in its definition across the sector. Life insurance is a necessary financial instrument that every person with financial dependants must have.
A customer suffers a heavy loss if his insurance policy lapses. Unfortunately, none of these options are available to those who buy life insurance policies that don’t fit their needs. A customer does get a window of 15 days within which he can return the policy, but this option is rarely used.
Most of the time, the unsuitability of the plan comes to light when the customer reads the fine print or when it’s time to pay the next premium. The disenchanted policyholder doesn’t pay the premium and the policy lapses.
As per an estimate nearly 91 lakh policies with a combined risk cover of over Rs 1,00,000 crore lapsed every year. This is the lapse ratio recorded by the Indian life insurance sector. These included traditional endowment and money back insurance plans, term plans and health policies.
If ULIPs are also taken into account, the number of lapsed policies will be higher. While lapsed policies are a cause for concern for the insurance industry, it is the customer who suffers the most.
If the policy is less than three years old, the premiums are forfeited, resulting in a total loss for the policyholder. Some insurance firms also agree to settle a death claim by paying the sum assured after deducting the unpaid premium. However, if it is a term insurance policy, the insurance company may dictate its own terms.
What is a lapsed policy?
When the insurance premium is not paid on time, all benefits of the policy stops and the policy becomes a Lapsed Policy. The insurance premium needs to be paid on the due date or within the grace period. If the premium is further delayed, then the policy becomes “dead” which means Lapsed in the insurance language.
The policy conditions state that if insurance premiums are not made during the grace period, the policy lapses and all rights and demands of the policyholder simultaneously ceases. However, the entire money of the policyholder is not forfeited. There are certain clauses which state that the policyholder still has certain benefits but extremely limited ones. In some cases, even death claim would be payable for a Lapsed Policy but for a reduced Sum Assured.
Grace period
Normally there is one month grace period for the insurance premium due. One has to pay the premium before end of the grace period to avoid the policy lapse. If the premium paid within six months, policyholder can pay the premium with 8% interest to revive the policy before six months of time.
It is applicable for those who paid the premium up to three years without fail. For the past few years, LIC has been conducting a policy revival campaign each February to get disgruntled customers back to its fold. Late payment penalties and revival fees are waived during the two-week campaign. Companies insist on a fresh health check-up even if the policyholder is young.
ICICI Prudential, for instance, gets a full medical check done if nine months have elapsed. Others are not so stringent. Sometimes they just renew a policy on a simple declaration of good health. If a person cannot come with the declaration physically, they do it with a telephonic acceptance of good health, which is recorded.
The insurer is at liberty to hike the premium after the health check or even renew the policy without interest, if it deems fit. There is always a feeling of pain to part with money, particularly to buy risk covers. To be fair, insurance companies have made premium payment fairly simple and offer several easy options to customers.
One can pay the premium online, use one’s credit card, drop a cheque at any branch or even call the company to pick it from one’s home. Customers are even given a grace period of up to 30 days for paying the premium. However, the grace period comes with conditions. Insurers happily accept the premium for money back and endowment policies if the policyholders are late by one or two months. They won’t mind too much even if delayed by six or eight months.
Non-forfeiture clause:
The non-forfeiture clauses of a Lapsed Policy is provided to the customer because in the initial years of a policy, the policyholder pays a premium higher than what is required for covering the desired risk. This excess is to be held on the policyholder’s account for the future and cannot be forfeited.
This is also because the premium has a savings component in it, which is accumulated for the payment of survival benefit. This is a liability and cannot be extinguished totally, even if the policy does not continue to be in force.
Thus, when a policy lapses all the 3 parties (customer, insurer, agent) are at a loss. Hence all insurers facilitate the revival of lapsed policies. On revival of a lapsed policy, the risk cover under that policy is being increased hence underwriting is done at par with a new proposal. The amount of increased cover is considered for underwriting.
Reasons of lapsation:
The huge number of policy lapses in 2008-09 was one of the several unhappy fallouts of the financial crisis that gripped the country in 2008. Hit by job losses and shrinking incomes, many policyholders didn’t have the money to pay the premiums. There are other reasons too.
Mis-selling of unsuitable insurance policies by agents and the buyers’ failure to understand the policy’s features are common reasons for their ending up in trash. People usually expect something in return for the premium they pay. There are cases where an agent has convinced a policyholder who has a term plan to dump it in favour of a ULIP, saying it would provide him the same benefits and also make his money grow.
So the term plan is allowed to lapse. Several policies also lapse because the agent, who pockets a handsome commission in the first year, leaves the client in search of new ones. Insurers must share the blame for this as they tend to focus more on generating new business than retaining the existing customers.
How to revive the lapsed policy?
The most important question is how to revive the lapsed insurance policy in case of failed in paying the premium. It is one of the most common problems for the policyholder; they may miss the due date for several reasons and tend to revive the policy later. It involves certain procedures and penalty for reviving the insurance policy.
A Lapsed Policy can however be brought back into life, i.e. revived or reinstated in the insurance language if certain terms and conditions are fulfilled. A Lapsed Policy can also be surrendered and certain amount of the premiums paid by the policyholder can be given back to him.
Also the extra money that is deposited with the insurance company would be returned to the policyholder. There are no charges that are deducted from a Lapsed Policy because the policy is not in force. However, if death benefit is still payable, then Mortality Charge would still be deducted and not otherwise.
Payment methodology:
Many of us are often unable to continue paying premiums towards our life insurance policy, causing the policy to lapse. Insurance companies send out SMS alerts, emails and even snail mail to inform customers that their premium is due. Still, thousands of policyholders get so caught up in the day-to-day work that they forget about their insurance premiums every year.
Often, this is also because changes in contact details have not been updated. Sadly, insurance is somewhere lower down in our orbit of more pressing matters. Policy lapsation can be dangerous as you or your financial dependants/beneficiaries may not get any benefit, which was the reason for buying the insurance cover. One needs to know the reasons behind the policy lapsation and how one can revive it, if need be, at a later date.
An insurance policy may cease to exist due to various reasons. It could be because of carelessness or because one doesn’t see value in continuing with the policy, or because of a financial crisis and can’t afford it any longer. The policyholder can choose the best suitable payment mode to pay regularly. Paying premium though online is much simpler
Why to stop paying premium?
As long as you pay your premiums regularly, your policy will remain alive. If something happens to you during this period, the insurance company will honour its commitment and pay you or your beneficiaries, depending upon the type of policy you hold.
However, if you stop paying your premium, then the insurance company will no longer be obliged to continue providing an insurance cover on your life. In this situation, your policy is said to have lapsed. The insurer might not provide any monetary benefits to you or your beneficiaries if something were to happen to you.
Before your policy lapses, you still have a limited time period during which you can make good on a delayed premium payment. If you are late on your premium payment, the insurer will send you a reminder and give you a grace period within which to pay your premium. This is usually 15 days when you pay your premium monthly and 30 days in all other cases. If you fail to pay the premium even after this grace period, your policy will lapse. The insurer will send you a letter informing you about the same.
Revival option of insurers:
Most traditional policies like term, whole-life and endowment plans can be revived, subject to certain criteria that your insurer might impose on you. Revival can happen at any time, but the conditions for revival might depend upon how long the policy has been lapsed for.
Under the insurance laws, if the policy has been in force for at least three years, the insured gets up to two years to revive the policy. Some insurers like LIC have special schemes under which policies can be revived for up to five years from being lapsed.
If you revive the policy within six months from the date of lapsation, the process might be as simple as paying the overdue premium and interest to catch up on the delay on your part. If you revive the policy after six months from the date of lapsation, you might be required to pay the overdue premium, penalty fees, as well as interest payment that could be up to 12-18% of the premium payment, depending upon the type of policy and the date of purchase.
At the time of revival, the insurer might impose a lot of conditions or even decline your request for a policy revival if the company is not convinced about the integrity of your application on grounds of suspected fraud or the like.
It can be very likely that the insurer will ask you to appear for a medical test before the policy can be revived to ascertain whether you have developed a new medical condition during policy lapse that might expose the insurance company to a high risk in insuring your life.
At the time of revival, usually, full benefits that you or your beneficiaries are eligible for will be reinstated. However, if after revival, the insured commits suicide within one year, the insurer can deny the claim. Similarly, if the insured passes away within two years of the revival, the insurer has the option of conducting an inquiry before they decide to pay the claims to the beneficiaries.
The paid-up option:
If a traditional insurance policy has been in force for over three years, it attains a paid-up value. In such a case, even if the policyholder stops paying the premium, the policy does not lapse, though some of the benefits are curtailed. The policyholder then has two options.
He either gets the same risk cover as under the policy, with the insurer deducting the mortality charge from the corpus, and the policy terminates after the corpus is depleted. ULIPs, which are often hawked by agents on the promise that the policyholder needs to pay premiums for only three years, use this option.
The second option is that the risk cover or sum assured offered under the policy is proportionately reduced, but the policy continues for the full term.
Surrender option:
A customer can surrender a policy if he is not satisfied with it, but he stands to lose heavily in such cases. The surrender value is only 30-50 per cent of the premium paid, depending on the number of years the policy has been in force.
The IRDA has now made it mandatory for ULIPs to not levy a surrender charge if the policy is relinquished after five years. Surrendering is an option that should be resorted to only in case of an emergency. It is better to avail of the 15-day free-look period to find out whether the policy suits you. As they say, prevention is better than cure.
A policyholder is likely to face three scenarios depending on the premiums paid through the three stages – early, middle and final years – of a policy. Many insurance agents push policies that require premium payment only for three years. You should be extremely wary of such agents.
This is because if you terminate the policy within three years, you will not get anything from the insurer. The stage of a policy determines whether you should give it up at an early stage: A policy can be surrendered only if it has been in force for three years and the premiums for this period have been paid. But this results in a heavy loss for the policyholder. Middle stage: At this point, you can either surrender the policy or convert it to a paid-up plan, the latter being a better option. You will get the accrued bonus, but only at the end of the original tenure. Late stage: If your policy is about to mature in three to five years, it may be prudent to let it run its course.
Claim on a lapsed policy:
If a policy is less than three years old but lapses, and if something happens to you after the policy lapses and a claim is filed, the insurer will not pay you anything. At best, the insurer might be willing to give you or your dependants the premium payments that you have made.
But, this is also totally at the insurer’s discretion. If a policy is more than three years old, but lapses, and if something were to happen to you, under the existing insurance rules, your dependants can still get some benefit. However, the insurer will pay only a reduced sum assured based on a pre-set formula
Tougher For Agents:
The insurance regulator has made it tougher for agents to shift loyalties. The new guidelines ensure that all agents “individuals, corporate as well as banks “continue to sell policies of the same insurance company for at least three years. In the life insurance industry, those policies where the insurance agent has quit the organization are termed as ‘orphan’ policies, as there is no intermediary to service them.
Historically, lapse ratio has been higher among orphan policies when compared with policies that are serviced by an agent. One reason why agents quit is to join rival companies. To ensure that an agent shifting loyalties does not leave behind orphan policies, IRDA has put in a number of preconditions that the agent has to fulfill before he can obtain an NOC from his principal. The guidelines are clearly aimed at reducing lapsation of life insurance policies.
It is very likely that the regulator would come out with similar guidelines asking insurers to make arrangements for agents who drop out of the profession altogether. Among other things, the life company has to ensure that there is an alternate arrangement for taking care of the policies orphaned by any agents exit.
These arrangements should go beyond a call centre facility, which is also an essential requirement. It is the banks which will find it difficult to shift loyalties.
One choice you have is to review your insurance contract and change the terms. For instance, you can reduce your sum assured and your premiums will go down accordingly, perhaps making it more affordable for you to keep the policy in force.
How you transform a lapsed life insurance policy directly into an opportunity. In case you have been quite short on hard cash recently and also were definitely not able to shell out your premium, your lapsed life insurance policy doesn’t need to end up being one of your own issues.
You have quite a few alternatives obtainable. First, investigate to determine if your policy has recently lapsed. The majority of insurers supply some sort of thirty day leeway period on premium payouts. In the event that you are inside this valuable period, get in touch with your insurer. In case you do have a lapsed insurance plan, you might have numerous options depending on how prolonged it will be lapsed and also its particular importance.
If you have simply overlooked to generate obligations needed for a couple of calendar months, and may afford to do so, a lot of insurance providers may allow you to reinstate a lapsed insurance policy, term life insurance or whole life, in case you are going to pay your forgotten insurance premiums. In the event you no longer wish to sustain your own lapsed life insurance or you prepare on incorporating life insurance coverage from a different supplier, take a look into settlement possibilities.
Therefore remember, in case you are not able to pay for your life insurance premiums, take into account all of the possibilities offered to an person having a lapsed life insurance plan.
Mr Jagendra kumar is the currently the Corporate Head (Training) at Shriram General Insurance Company. Mr Kumar is a proflic writer and has wide experience in the general insurance industry. Before joining SGI he was the CEO in Pearl Insurance brokers.
Published in Life Insurance Today, December – 2011
