When you buy life insurance plans, the premiums you pay each year cover you until the policy term ends. But sometimes, the policyholder would not be able to pay the premium because they are too busy, have more responsibilities than they thought, or have unexpected costs.
On the involuntary termination of a life insurance plan, you lose all the insurance benefits and the money you paid for the policy. In addition, you also lose out on life insurance tax benefits you can avail of on premiums paid for an active policy under the old tax regime.
What is the maximum deadline for paying a premium?
All life insurance policies in India must legally honour a grace period, often lasting 30 days from the payment due date, as per prevalent rules. The insured might not always be able to pay the premium by the due date, and insurance firms are aware of this. Hence, practically all insurance policies include a grace period.
During the grace period, the policy is still in effect, and the nominee would still be able to get the benefits in case something misfortunate happens to the insured. But after the grace period gets over, the policy is considered to have ended, and the benefit would not be paid. Most of the time, payments during a grace period are higher than regular payments.
What happens if you can’t pay the premium?
Here are some options you have if you might be unable to pay your life insurance premiums:
- Cash-out the policy: Check your policy’s terms and conditions and ask your insurer if you can get cash back for the premiums you have already paid. If the insurance company lets you cash out, you won’t get any more insurance benefits, and depending on how much you cash out, the money you get can be taxed.
- Non-forfeiture options: If you can’t keep up with paying for your life insurance plans, some insurance companies give you the option of a smaller paid-up. Non-forfeiture option allows you to continue the policy with reduced benefits based on your paid premiums. Your policy will not be terminated if you don’t pay the premium; the coverage can be lessened as per the amount already paid.
- Restart the Policy: Whether or not to restart a lapsed life insurance plan depends on the insurance company and the policy’s terms and conditions. Most insurance companies would let you renew a lapsed policy if you pay the penalty, late fees, or renewal fees, depending on how late you are.
In the case of ULIPs, the insurance provider would cancel your policy if you don’t pay the premium during the first five years of the “lock-in” period. The insurer would further transfer the life insurance premiums you’ve already paid into a “discontinuance fund,” from which you won’t get them back until the end of the “lock-in” period.
How to reinstate your life insurance plan?
The insurance company would charge you a fee or a penalty to get your old policy back. You might have to go through medical tests all over again. Here are the requirements for putting the policy back in force:
- Reinstatement application: An application for reinstatement needs to be sent to the insurance company. Ensure you apply for reinstatement during the renewal period, which may be between two and three years after the grace period.
- Insurability Proof: The insurance company needs proof that you can still get insurance to renew the policy.
- Medical check-ups: The insurance company would insist on medical check-ups again to evaluate your current health and know if anything has changed since you first applied.
Which is better: buy a new one or renew the old one?
Renewing a policy may be far better than buying a new one. If you decide to go for a completely new one, you will lose all your premiums. The new life insurance plan might be more expensive than the earlier one and could possibly also mean a loss of life insurance tax benefits for the period the policy was not active. Please note that tax benefit is subject to change in prevalent tax laws.
So, remember to pay your policy premiums on time; it’s essential to work closely with your insurance provider to work out solutions in case you cannot pay your premium in an emergency.
Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.