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Lapsed Term Policy - Should You Renew It or Buy a New Plan?
Mumbai, October 28, 2020
Many people have to get their term plan lapsed on purpose due to various circumstances. Out of this, many feel the need to have a term policy again in the future. Therefore, many people become skeptical about renewing their old term plan or buying an altogether new one.
First, let us understand the reason for the lapse of the policy. Non-payment of the premium is the only reason behind the term plan being lapsed. Many times, due to financial problems, a policyholder cannot pay the premium towards the policy that lapses the policy. Many insurers provide a grace period of at least a month so that the policyholder can clear the outstanding premium and continue enjoying the term policy’s benefits. However, if the policyholder still does not pay the overdue premium within the additional grace period, the policy will lapse.
Many insurers provide the facility of policy revival if the policyholder pays the outstanding premium and revival fees and interests within two years from the date of lapse. In some cases, the insurer may even ask the policyholder to undergo medical check-ups. However, the policyholder has to bear the costs of these check-ups.
Let us understand whether it is a good idea to revive the old policy or buy a new one.
A term insurance plan should be the first thing in your financial portfolio, as it is a crucial investment instrument that can safeguard your family's financial future. However, if you have a lapsed policy and feel the need to have a term plan in the future, then here are the options that you can follow.
Reviving the old term policy
A 30-year-old person had a term insurance plan in the year 2000 for 25 years and with a sum assured of INR 20 lakh. Let us assume that the policyholder has paid the term insurance premium of the policy for 15 years, which is until 2015. Due to whatsoever reason, the policyholder cannot pay the premium, and the policy gets lapsed. In such a case, if the policyholder wants to revive the policy in the future, then he/she has two years to restore it from the date of lapse. Here, the policyholder can revive the policy by paying the outstanding premium before the end of 2017.
In such a case, the policyholder will have the pay the unpaid premium along with interest, revival fee, and the cost of the medical check-up. Besides this, the policyholder will have to pay the premium until its expiration in 2025.
Buying a new term plan
If you think that purchasing a new term plan is a better option than reviving the lapsed policy, then it is advisable to compare the revival cost with the total premium of the new term plan.
Let us assume that the same policyholder (mentioned above) used to pay INR 7,200 as an annual premium for a term plan with a sum assured of INR 20 lakh. The premium was low as the policyholder’s age was 30. Now when he/she has turned 45 years, the policy's premium will also increase. If the policyholder wants a term plan for five years with the same sum assured, then the policyholder should compare the cost of revival and the premium payable for five years to ascertain which one of the two is an ideal option.
The bottom line
The scenario of reviving the policy versus buying a new one will differ from case to case. A ccomparison of the current cost with the term insurance premium of the original plan is the only option to determine which one of the two alternatives can be beneficial. You can use the term insurance calculator to do thorough comparisons.
(Disclaimer: This is branded content. Readers are advised to exercise due diligence and discretion before entering into any correspondence, investment, purchase, business dealings or any other decision on the basis of this content.)