Your insurer is responsible to pay you as per your insurance policy but only until when you have paid your insurance premiums. If you stop paying premium for your insurance policy, the insurance company’s obligation to pay you at the time of your needs will end along with it.
First of all, let’s understand what life insurance is. Basically, life insurance is a contract between you and your insurance company claiming that the insurance company will pay a lump sum to your beneficiary upon the unfortunate incident of your death. So, life insurance ensures that your loved ones and family will not suffer financially after you pass away. This clearly indicates that when you stop paying your life insurance premiums, you put your family at risk.
When does your Life Insurance Policy Lapse?
When you buy any type of insurance policy, you have to pay the premium amount till the term of the insurance ends. In return, the insurance companies provide you with the coverage for the losses as per the terms and conditions of the insurance policy. So, when you stop paying insurance premiums or when you are unable to, your insurance policy can get terminated.
Now, this also depends on the type of insurance, the insurance company, as well as the terms and conditions of the policy. For a term life insurance policy, when you are unable to pay before the due date, your insurance policy will lapse. This will result in forfeit of all the insurance benefits as well as the sum that you have paid till now, which will eventually be moved to a discontinuance fund and can only be paid to you after the lock-in period.
As per the guidelines of the IRDAI (Insurance Regulatory and Development Authority of India), the insurance companies are legally liable to offer a grace period, typically up to 30 days. In the grace period, your insurance policy is in force and the beneficiary can claim the insurance sum in the event of your death during the grace period.
Can I Reinstate the Life Insurance Policy?
You wouldn’t be wrong if you think that you can reinstate your life insurance policy after it is terminated in an event where you were unable to pay your insurance premiums on time. However, this may depend from one insurance company to another and also on the terms and conditions of the policy. While most of the companies understand that their users might not be able to pay the premiums alway, they still allow them to reinstate their insurance policy after the termination.
You will have to bear the penalties, renewal fees, late fees, etc. depending on how late you are reinstating your insurance policy. The insurance companies may also ask you to go under medical examination as well as to submit proof of continued insurability.
What should I do when I can’t Pay my Life Insurance Premium?
Here are a few things you can try to do if you find yourself in a situation where you will not be able to pay your insurance premiums and continue the insurance policy.
Try to cash out the policy
Check with your insurance company and the terms and conditions of your insurance policy whether or not you can cash out the premiums that you have paid till now. In this case, your insurance company will no longer provide you with the life insurance benefits and you may also have to pay some tax depending upon the amount that you cash out.
Some insurance companies offer what is called a ‘reduced paid-up’ option to the ones who are unable to continue their insurance policy. Here, you can stop paying the premiums without having your policy terminated but your benefits will be reduced depending upon the premiums you have paid till that time.
Reinstate the policy
In case you didn’t opt for the two options mentioned above, your policy will be terminated after the grace period. However, insurance companies allow their users to reinstate their policy but with some late fees, renewal fees or penalties.
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Buy a new policy or Reinstate the previous one?
If you are worried about the late fees, renewal fees or the penalties that will come with reinstating the terminated life insurance policy and think that buying a new insurance policy could be a better idea, here are a few things you should consider.
If you buy a new policy, then you will lose all the premiums you paid for the previous policy
Premium amount increases with the increase in the age of insurance holders. This implies that the premium that you will have to pay for a new insurance policy can be higher than that of your previous policy; which, in the long run, can make it much more expensive than just reinstating the previous policy
So as a general rule, it is better to reinstate the previous policy as compared to buying a new policy. However, you should compare both and think thoroughly before you finally decide on whether you want to buy a new life insurance policy or just go with reinstating the older one.
An insurance company is responsible to pay for the losses of the insurance holder as per the insurance policy. However, when the insurance holder fails to pay their insurance premiums on due time and then in the grace period, their insurance policy will terminate. Now, they can reinstate the insurance policy but can come with late fees, renewal fees, penalties, etc. or they can buy a new insurance policy.