What is paid-up status in a life insurance policy? Know all about it

An insurance policy attains a ‘paid-up’ status after the policyholder has stopped paying premium towards it after a certain time period, say 2 to 3 years. The tenure of premium payment for a policy to qualify as ‘paid-up’ usually depends on the terms and conditions of the policy.

In a paid-up insurance policy, the insured does not lose complete benefits, instead the policy remains active and continues to offer reduced benefits and lower sum assured value. Thus a partial insurance coverage still remains in place even after you stop paying the regular premiums against the insurance policy.

Suppose Mr. X bought life insurance with a sum assured value of ₹10 lakh and a premium payment term of 15 years. He paid premiums for some 5 years but later his financial condition did not allow future premium payments and thus he stopped paying them. So, now as he has paid premiums for quite a while his policy will not lapse altogether and instead will convert to a paid-up policy.

Paid-up insurance policy status frees you of the liability to pay future premiums towards the same. Also, the sum assured value gets reduced in proportion to the premiums paid.

Say in the above example, Mr X paid premiums for 5 years as against the total term of 15 years then his new sum assured value will be

= Number of premium paid (5 in this case)/ Total number of premiums payable (15) * original sum assured value

So, the new coverage after the paid-up status will get reduced to ₹3.33 lakhs.

Note: The policy paid-up status can be attained for traditional life insurance schemes such as endowment, term and ULIP plans. Also, the policy acquires this status if you choose paid-up over surrendering your policy.

In conclusion, during a financial crisis when it gets hard to make premium payments, it is better to attain a paid-up status on the policy as against surrendering the same. This is as the policy will continue to still offer benefits, though reduced in proportion to the premiums paid. Remember, even bonuses (if any) will be reduced proportionately to paid-up value.