Should you revive a lapsed life insurance policy or buy a new one?

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How many people actually continue their life insurance policies for long? But aren’t life insurance plans traditionally considered long-term contracts? Then, why are they not being continued till the end? The industry reported a 61st-month persistency ratio (i.e. continuation of the plan after five years) at only 47%. So, more than 50% of the long-term life insurance plans are also not continued for long enough!

Now, persistency is a very important parameter in insurance parlance, especially for customers. Life insurance premium needs to be paid for the entire premium paying tenure, other than for single premium plans. So, if you happen to miss any premium, you have a grace period to revive or re-start the plan with continued benefits. If, however, you don’t make a payment even within the grace period, the policy lapses.

What happens if your life insurance policy lapses?

When you buy a life insurance policy at a younger age, you “lock” your premium, i.e. it doesn’t rise with age. However, if your policy lapses, you not only lose coverage and continuity benefits but also your “younger age” premium. This is especially true for term plans since the premium is very low.

Your coverage benefits are also affected. In the case of endowment plans, if you discontinue the premiums within the first two or three years, your policy doesn’t even accumulate a surrender value. However, in the case of ULIPs, though, discontinuation leads to a fund switch wherein your fund is allocated to the discontinued policy fund from where it can be withdrawn after 5 years.

When it comes to term insurance, premium discontinuance causes the worst impact. If the policy lapses and you don’t revive it, you not only lose the coverage, you lose the premiums paid to date too. There is no surrender value in pure term plans, i.e. term plans that do not offer any maturity benefit.

Lapsed policies are allowed 5 years for revival, i.e. paying the premium and restarting the policy. But is revival better or should you look for a new policy altogether?

Revival is always better. Let’s understand the ‘why’ of it –

Why is revival of life insurance plans better?

In the case of a lapse or an endowment or ULIP plan, you have two options. Either you can continue the plan on a paid-up value or you can surrender and avail of a surrender value. Both the options are unfavourable because of the following reasons — The paid-up value reduces the death or maturity benefit payable under the policy. Moreover, if you have a participating plan, no bonuses are declared on a paid-up plan.

— The surrender value is a fraction of the aggregate premiums that you have paid for the plan. So, from the investment perspective, surrendering is akin to capital erosion.

In term plans, lapse means a complete loss as there are no paid-up or surrender benefits!

When you revive the lapsed policy, the plan is restored to its full-coverage benefits with continuity benefits and you also get your premiums’ worth.

Revival vis-à-vis buying a new policy

If you are wondering whether a new policy is a better alternative, here is a little food for thought.

— Buying a new policy is buying the coverage afresh. There would be fresh underwriting and the premium amount would be higher considering your increased age. In the case of revival, however, the premium does not increase on account of age. You can restore your coverage with the same premium that was charged when you were young. This is emphasised in a term insurance plan.

For instance, you bought a 50 lakh term plan at 25 years of age, your premium for 35 years would be about INR 12,500 + taxes. So, you need to pay a total of Rs 4.375 lakh for coverage up to 60 years. However, if you wish to buy the same coverage of Rs 50 lakh at 35 years of age, your premium would approximately be about Rs 19,500 + taxes. So, you need to pay an additional amount of Rs 4.875 lakh for coverage up to 60 years. This is after Rs 1.25 lakh had already been paid for the last 10 years!

— You lose out on the premiums already paid on the last plan, especially term plans because the premium is really low. Even if you opt for the paid-up option under the traditional savings plans, the coverage is reduced and future bonuses are withheld, both of which are not favourable outcomes.

The ideal choice

If you have a lapsed policy and you have funds to make a choice between revival and a new plan, go for the former. Revive your lapsed plan first to get the maximum benefits from the policy that you already have. You can always opt for a new insurance plan but not at the cost of the existing one.

So, if you have a life insurance policy, see it through to the end. Do invest in new plans as well but after you have revived the existing plan first.

(The writer is co-founder, Turtlemint, an InsurTech company. Views expressed are personal)