How to Avoid Policy Lapse in Term Insurance

When you buy term insurance, it is important to ensure that you pay premiums periodically. Your insurance company covers you only when premiums are paid and your policy is active. A lapsed policy means you are no longer protected, and in case of your unfortunate death during such period, your dependents remain unprotected, leaving your financial future in serious jeopardy.

As someone who wishes financial freedom and security, you must understand how to protect yourself against policy lapses and avoid the hassles of reinstatement or purchasing a new plan.

What is the Lapse of Policy in Term Insurance?

Suppose you fail to pay the renewal premium of your policy on the due date and miss out on making the payment during the grace period. In that case, the policy can lapse after the expiry of the aforesaid grace period. Once lapsed, the insurance coverage ceases, meaning the insured’s family will not receive any financial benefits in case of an unfortunate event.

There are multiple risks of policy lapse, starting with an immediate loss of coverage. If the policyholder unfortunately passes out during such period, the family is not entitled to any death benefits, thereby leaving them stranded without any financial protection.

You might think about reinstating the policy, but the entire process is long, so you might need to pay a higher premium, and your coverage can be considerably reduced. You also might need to go through various medical examinations, and there can be

What are Common Reasons for Policy Lapse?

Here are some of the most common reasons for term insurance policy lapse:

1. Financial Constraints: If you face financial constraints (such as job loss, medical emergencies, or rising expenses), it becomes difficult for policyholders to pay premiums on time. You might prioritize immediate expenses over insurance payments, which could lead to a policy lapse.

2. Negligence: Some people are lazy or simply forget their premium due dates to keep track of their payment schedules. This is quite common among people without automated payments or reminders.

3. Miscommunication: In case you change your personal details (such as phone number, email or address without updating the insurer), you can miss out on reminders and it can result in eventual policy lapse.

How to Prevent Policy Lapse?

Here are a few strategies that you can follow to prevent policy lapse:

1. Timely Payments: There is no substitute for making timely payments and having a good payment history. This can be done through activating automatic payments. India has one of the most robust banking systems, and you can activate auto payments through a credit card or UPI. Further, consider aligning premium payments with your income flow (such as salary credit cycle). This helps in better financial planning and ensures the premium is paid when funds are readily available.

2. Regular Policy Monitoring and Reviews: You must know your policy details, such as the grace period, reinstatement period, and the process to be followed. You should also carry out personal finance planning to ensure you have enough funds or explore alternative payment processes.

3. Maintain Updated Contact Information: In case you have changed your contact details, always remember to update it with the insurance company. Your reminders and acknowledgement shall be sent to the updated addresses.

4. Use Grace Periods: A grace period is generally 15-30 days allowed after your due date, where you can pay your premium without getting the policy lapsed. You are covered adequately during the grace period, and it can be used effectively.

How to Reinstate a Lapsed Policy?

You must consult your insurer to determine whether reinstatement is permissible in your policy. Typically, reinstating a policy is possible after following the rules laid out by the insurers. Here is what you will need to do typically to reinstate the policy:

• Pay overdue premiums along with possible late fees or interest.
• Submit a health declaration or undergo a medical check-up.
• Provide additional documentation if required.

Summing up

Term insurance is one of the most cost-effective and simple forms of extending a financial security blanket to your family. However, your coverage can be interrupted if you fail to pay the premium as per the scheduled dates. You should be vigilant about your due dates and must align payments with your income streams. Keeping contact details updated and utilizing the grace period when needed further safeguards against disruptions in coverage.

FAQs

What is a policy lapse in term insurance?

A policy lapse occurs when you fail to pay your term insurance premium within the designated grace period, resulting in the termination of your coverage.

How can I prevent my term insurance policy from lapsing?

To avoid a lapse, ensure timely premium payments by setting up automatic deductions, aligning payment schedules with your income flow, and keeping your contact information updated with your insurer.

What should I do if my term insurance policy has lapsed?

Contact your insurer promptly to inquire about reinstatement options, which may involve paying overdue premiums with interest and possibly undergoing a medical examination.

What are the consequences of a lapsed-term insurance policy?

A lapsed policy results in the loss of financial protection for your beneficiaries, and reinstating it can be challenging, potentially requiring higher premiums or reduced coverage.