Bring back the old

As is often the case, insurance payments can get a bit tedious sometimes. You may have changed your address and before long, you have missed on a sizeable chunk of payments despite the renewal notice. As life insurance is a contract between you and the insurer, it entails a regular payment of your insurance premium.

Any default violates the policy terms and conditions. For most individuals, it could become difficult to keep up with the payments, particularly in the short term due to, say, unforeseen circumstances. But, what should you do when this happens? Should you let it lapse or then pay the penalty and renew it or surrender the policy?

If you do have a lapsed insurance policy in your hands, there are two options in front of you: revive your policy if it has not exceeded five years, or surrender it. You can only renew moneyback or endowment policies.

However, if you have a pure term policy, you can’t renew or surrender it, you have to buy a fresh one instead. Renewing, of course, comes with its fair share of costs and, if you have missed the premiums for a long time, it could prove expensive.

In the most ordinary of cases, you have to pay up all the missed premiums with an interest of 8 per cent (which is the stipulated rate by Life Insurance Corporation of India).

The longer your policy has lapsed, the more expensive renewing gets, as the interest starts compounding.

Life insurers sometimes offer a special revival scheme which you can avail off, though this is rare. A special revival waives off the interest portion if premiums are not paid for up to a year, and does not insist on a medical check-up— and the reinstatement is done on an as is where is basis.

Look before you leap Insurance policies lapse if you don’t pay your premium on time. Don't take a policy that you feel will be difficult to service at a later date Make a diary of your insurance payments, and get regularly updated whenever you buy a new policy It is better to opt for more policies later if there is a need, while a ULIP policy can be topped up If your policy lapses and you wish to revive it, don't opt for a loan. The interest cost erodes your effective rate of return Check out surrender rates from your insurer or public sector banks before you surrender your policy Don't surrender an existing policy in favour of another one. Surrender values are low while it takes time for a new policy (even if it is a ULIP) to pay off. You lose time and money. Instead, opt for lower value policies whenever you need to add insurance cover

Sometimes, special revivals are also given if your policy has lapsed for less than three years, but that depends on a case-to-case basis. In short, you only pay the premium. Avail of this facility as it will keep your policy alive.

If your policy distributes proceeds after maturity and has lapsed for more than three years, you could opt for a loan-cum-revival option, if the premium outgo is too much for you. “LIC gives one to the extent of 90 per cent of surrender value,” says S. Raghuraman, an LIC agent who also runs a personal finance consultancy and distribution firm.

If your insurer doesn’t give you a loan, there are banks and private agencies which do on the basis of your policy certificate where the surrender value is endorsed by the insurer. But, check out the interest rate and see if it fits your budget. Usually, this is an expensive recourse.

And you need to calculate the paid up value (see The Cost of Surrender). You also need to factor in the surrender rate, which is provided by the insurance companies.

In general, the longer the term and the lower the number of years of premium paid up, the lower the surrender value.

Bonuses are taken into consideration after premium has been paid up for at least three years. According to the latest regulations, there is no forfeiture of bonus in this case—one will get the full bonus declared every year in the three years during which premiums have been paid. But remember, surrender value is always less than the premium paid up.

On a money-back policy, which includes survival benefits, the insurance company determines the total deficit you face by factoring guaranteed benefits, and reducing other charges that usually get deducted in the normal course.

Of course, your surrender value reduces to that extent, but you don’t have to incur interest charges if you take a loan.

When renewing, however, insurance companies might want to know the latest on your health. “On renewal, an insurance company could insist on a medical check to ensure that the revival is not done prior to a critical health problem,” says Rahul Agarwal, CEO, Optima Insurance Broking.

If you surrender instead, you could lose out—you will get the returns in line with your surrender value as worked out by the insurer. But if you want to take a fresh policy later, the premium costs will increase and you may have to undergo medical check up.

In ULIPs, if your corpus is adequate and covers your premiums and other expenses, the policy will remain in force—but ensure that your investments generate enough money to keep your cover alive. At worst, renew your policy by paying a small penalty if your policy has been in vogue for a longer period. At best, keep all your policies alive by regularly paying the premiums.