Embedded Value: Don’t let your life insurance policy expire

People buy long-term life insurance policies because they replace a family’s monthly income in the event of the death of the breadwinner. The contract for long-term financial protection by insurers is based on reciprocal respect for the regular payment of the premium by the insured.

Insurers offer monthly, quarterly, half-yearly and annual premium payment methods. In monthly payment mode, insurers offer a grace period of 15 days from the due date in which the premium payment must be paid. For all other modes, a grace period of 30 days is allowed. If the installment premium is not received within the grace period, the policy is deemed to have lapsed and the insurer ceases to be at risk.

No claims for expired policies

If the policyholder dies while the policy is forfeited, the insurer will be within its legal right to reject the agent’s claim. With the increase in the duration of the policy, there are certain benefits that accrue to the policy, but the total sum insured is surely not payable. A policy acquires a paid-up value over time, with the insurer paying part of the sum insured according to a standardized formula to the agent and also to the policyholder if he chooses to discontinue the policy during his lifetime for any reason. .

Policyholders tend to depend on agents or intermediaries to deposit the premium. But habitual dependence on them is a dangerous habit. There have been cases where an insured has died and when filing the claim, the insurer rejects the claim on the grounds of lapse of the policy. It was found in some of these cases that even though the insured had paid the amount well in time to the agent, the premium could not be deposited and the person died immediately after the expiry of the grace period. .

Pay the premium on time

Policyholders have dozens of channels to make premium payments sitting at home. But on average, only about 70% of policies continue beyond the first year. By the time the policies enter their seventh year, no more than 40% of them continue to exist on insurers’ books. This scenario not only affects the financial health of the company but also causes a serious setback to the financial protection of each of these families where the breadwinner intended to provide a security umbrella to his loved ones but some negligence on his part resulted. proved costly for the family later.

Paying the premium on time is necessary to claim a higher bonus under the policies with profit sharing. Generally, the valuation of an insurer’s fund is carried out on March 31 of each year. Only policies participating in profit-sharing remain in force on this date. This also affects the loan or cash value. Care must be taken to pay the premium in the year it becomes due even if the grace period extends beyond the year. On the other hand, a policyholder claiming a Section 80C benefit under the Information Technology Act must pay the premium in the year it becomes due to claim the deduction.

Lapsed policies can be reactivated, causing full benefits to be restored, but policyholders should remember that each reactivation is an ab initio contract. Therefore, if the insurer discovers the existence of serious medical conditions, the reinstatement of the policy may be refused, thus nullifying all the intrinsic value. under the policy maintained for so many years.

The author is former General Manager and CEO of Star Union Dai-ichi Life