By Sunil Dhawan
Many people are faced with the dilemma of whether to revive a lapsed term insurance policy or buy a new one. It often happens that a person either forgets or does not have the money to pay the premium for his/her insurance plan at a particular point in time and as a consequence, the policy lapses. At a later stage in life the person may again feel the need for term insurance. However, the decision to revive a lapsed term plan may not necessarily hinge only upon the payment of unpaid premiums and the penalty but other factors may play a role as well.
Normally every policy has a grace period - varying from 15 to 30 days - within which premium can be paid even after the due date. However, if the premium is not paid even within the grace period the policy lapses.
Related: Here is how buying term insurance online helps in achieving goals
One may revive any traditional life insurance plan including term plan, endowment, money back or Ulip subject to the terms and conditions of revival. These terms and conditions mainly relate to medical tests required to be cleared for revival of policy.
Typically, a lapsed policy may be revived within 2 consecutive years of it lapsing. Once revived, the policyholder is entitled to all contractual benefits of the policy. To revive the policy, one has to not only pay the unpaid premium amount but may also have to pay a revival fee, interest charges (not applicable in Ulips), penalty and medical costs, if any. At times, particularly during premium collection drives or campaigns to revive lapsed policies, insurers may waive such charges or reduce them considerably for the policyholders.
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Here, we look at how to decide whether to revive a term insurance policy or buy a new one.
First things first: For all those having financial dependants, term insurance plan is a must. It acts as an income replacement tool in the absence of the bread earner. Also, if there are huge financial liabilities such as a home loan, buying a term plan helps as they are low-cost, high-cover protection covers. Therefore, if for any reason, you had let the term plan lapse and feel that you need insurance now, here's what to do.
Example: Say, a 33 year old person had bought a term plan for 20-years for a sum assured of Rs 10 lakh in 2002. Assume further that he paid 12 yearly premiums of Rs 3,637 (till and including 2013) and then let the policy lapse. As in 2016, there would be two unpaid premiums: one each for 2014 and 2015.
Assuming, he needs insurance coverage now, there are two options:
a) To revive existing policy. b) To buy a new policy.
a) Total policy cost if lapsed policy is revived
The person would have to pay:
(i) One-time payment comprising unpaid premiums for 2 years and late fee equalling Rs 7,799 (ii) Total amount of next 6 premiums till policy matures: Rs 21,822 (Rs 3637*6)
Total cost of reviving policy and holding till maturity equals (i) plus (ii): Rs 29,621 ( including late fee).
b) Total cost of fresh policy
Understandably, insurance coverage for the two previous years for which premium was not paid is immaterial now. One may look at paying premium arrears plus penalty as money down the drain and therefore consider buying a fresh policy.
For a cover of Rs 10 lakh for next 6 years, the annual premium is Rs 6,290 from same insurer. This is because at current age of 47, premium would be higher as compared to when he was 33. Buying at an early age helps. Therefore, total premium payable for fresh policy for 6 years would be Rs 37,740.
Under option b) wherein policyholder is looking to buy a new policy, the person may evaluate other insurers online plans as well. For example, AEGON Life's online term plan could be an option in which on same parameters of age, term, sum assured, the annual premium comes to Rs 3,637 as compared to Rs 6,290 mentioned above.
Related: Term Insurance for Dummies
In the above comparison of reviving lapsed policy with buying a new policy from same insurer, it appears that reviving the policy is the better option. If the person buys a new policy from the same insurer he actually ends up paying an extra amount of Rs Rs 8,019 (Rs 37,740 minus Rs 29,621) which is more than 100 percent of unpaid premium plus late fee. In policies with high sum assured, the difference could be more.
However, the situation may change:
- If an online term is opted for. In 2002, online term plans were not available. But, nowadays online term plan is available at about 25 percent lower premium than their offline version.
- Also, the minimum sum assured in online term plans is usually higher. Therefore, the total cost of a new term plan bought online may work out less than the cost of reviving an old policy which was bought offline particularly in case of high sum assured policies.
- The number of years of premium paid and the remaining number of years will also play an important role in deciding whether to revive or buy afresh. The approach however will be the same as above.
? Conclusion: The decision about whether to revive a lapsed term policy or buy a new one will vary from case to case. However, it is advisable not to base your decision merely on premium amount but choose the life insurer of whom you are confident and the policy that suits your needs.
Source: Economic Times
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