Life insurance plans are undisputedly one of the most important elements of a robust financial plan. The current circumstances demand an adequate financial safety net which benefits your loved ones. You must have heard the word ‘lapse’ in life insurance quite often in recent times. Many individuals are struggling to keep up with the current lifestyle due to layoffs and an increase in inflation.
So, if you are afraid you might lose your coverage due to the insurance policy lapse, you can take the below-mentioned steps to avoid the situation.
What is a Policy Lapse?
An insurance policy lapse means the coverage provided under the life insurance policy is terminated. It occurs when the policyholder misses the premium payment. In case of policy lapse, you and your family members insured under the policy will no longer be eligible to attain death benefits.
However, policy lapse does not occur by just missing your due date. Instead, the policyholder gets a grace period of 30 days (during which the coverage stays active) to pay the premium. However, failure to pay the premium even after a grace period of 30 days may lead to a policy lapse.
For life insurance plans with a savings or investment component, such as savings insurance plans, money-back plans or ULIPs, you can get the accumulated money/corpus back (after debiting some processing or policy lapse fees). However, for pure insurance plans like a term insurance plan, if the policy lapses, the coverage ends and you might have to buy a new policy at a higher premium.
Ways to Prevent a Policy Lapse
You would always want to retain insurance coverage after investing in life insurance. A lapsed policy means that you are uninsured, which can have a negative impact on your family’s financial well-being in case of any eventualities.
To avoid an insurance policy lapse, here are a few things you can do:
- Plan your budget
Before deciding on a life insurance plan, calculate the affordable premium using an online calculator.
An online insurance premium calculator like the one offered by Tata AIA life insurance is an essential tool one should consider before buying. You can choose the plan and coverage based on the premium you can pay over the years. Also, you can select a convenient premium paying frequency based on your overall budget.
Pre-planning the budget and choosing the right plan that fits best in terms of coverage and cost can help prevent a policy lapse.
- Pay your life insurance premiums on time
The best way to prevent your life insurance plan from lapsing is to pay your premium on or before the due date. Life insurance premiums, especially for term insurance, are low, so if you forget to pay on time, it is better to put reminders on your calendar to avoid such circumstances.
- Set up an Automatic Billing System (ECS)
If reminders or calendars don’t help, you must consider paying life insurance premiums through ECS. When you opt for the ECS mode of payment, your premium is auto-debited from your bank account or credit card on the exact due date. The process to opt for ECS is quite simple and does not require you to maintain a record of premium payments due every month.
- Keep your communication details updated
When buying a life insurance plan, you must provide your communication details to the insurance company. In case of any change in your permanent address, contact number, email etc., you must ensure the same is updated with the insurer as you receive payment reminders on the details provided.
- Reinstate the policy
Even if your insurance policy lapses, all is not lost. Based on the type of life insurance plan, insurance provider, and terms and conditions of the policy, you will have a certain window within which you can revive your lapsed policy.
You can typically reinstate your policy within 2 to 5 years of its lapse by paying all the previous premiums and accumulated interest. You can get your money from a lapsed life insurance policy only after it is reinstated.
Missing your life insurance premium payments means allowing your policy to lapse. However, by taking the necessary steps and following a well-planned premium payment system, you can ensure the financial protection of your loved ones during an unfortunate event. So, chart a regular premium payment schedule and follow the above steps to avoid policy lapse and stay protected!