7 main Insurance Lapse Conditions

7 main Insurance Lapse Conditions

1. Lapse of Policies :

The insurer shall remain liable for the payment of the claim so far the assured continues to pay the premiums when they fall due. If the policyholder fails to pay any of the due premiums within the days of grace, the insurance liability ordinarily ceases under the policy and the contract comes to an end.

Thus the policy is lapsed and all the benefits related to the policy are terminated. The insurer, however, provides certain alternatives to help the insured at the time of causation.

2. Revival of Lapsed Policies :

If a policy lapses by non-payment of premium within the days of grace, it may be revived to the full policy amount at any time during the life time of the life assured, but within a period of five years from the due date of the first unpaid premium and before the date of maturity.

The revival is possible within six months from the due date of the first unpaid premium without evidence of health on payment of the premiums in arrears with interest at the rate of 7 x A per cent per annum compounded half yearly.

The revival after the first six months from the due date of the first unpaid premium but before five years from the due date of the first unpaid premium will be effective only on satisfactory production of evidence of health and habits of the life assured and no adverse change in personal or Family History or occupation.

3. Special Revival Scheme :

Many policyholders find it difficult to pay the arrears of premiums with interest to revive their policies. For them the special revival scheme is beneficial to gain the cover of insurance. Under this scheme, the date of commencement of policy will be fixed by dating back the policy.

The period for which the policy will be dated back depends upon the amount of premium paid. The plan and period of insurance will be the same as those under the original policy. The revival will be effected ordinarily by issue of a fresh policy.

The special revival is possible only when all of the following conditions are fulfilled.

1. The policy must not have acquired surrender value.

2. Period from the date of lapse must not be less than 6 months and not over two years.

3. Such a revival is not allowed more than once under the same policy.

4. Surrender Value :

When the assured is unable to revive his policy, he can surrender his policy and can get cash surrender value. With this payment, the contract comes to an end and the assured will get the cash value without any liability to pay further premiums.

In India, the Corporation has guaranteed surrender value if the premiums have been paid for at least two years or to the extent of one-tenth of the total number of premiums stipulated for in the policy provided such one-tenth exceeds one full year’s premium.

The minimum surrender value allowable under this policy is equal to 30 per cent of the total amount of the, within mentioned, premium paid excluding the premiums for the first year and all extra premium.

The percentage increases along with the increase in duration of premium payment because the amount of the surrender on any policy depends on its reserve value. Thus, on such policies which do not have any reserve, no surrender value is allowed.

Since January 1st, 1976, the provision for non-forfeiture clause has been amended.

1. If the premiums under the policy have been paid for a period of five years or 1/4 of the original premium paying period of the policy, whichever is less but subject to the condition that minimum 3 years’ premiums are paid.

2. The paid up value under the policy is not less than Rs. 250 (excluding of attached bonuses) for policies where under original sum assured is Rs. 1,000 or more and Rs. 100 exclusive of attached bonus where the original sum assured is less than Rs. 1,000.

The above non-forfeiture conditions would apply to proposals completed on and after 1-1-1976.

Since April, 1980, the above conditions have been changed. Surrender value is secured only when the policy was continued for three years.

5. Extended Term Insurance :

If a premium remains unpaid at the end of the days of grace and the policy has been in force for at least three years, the insurance will continue as paid up for the full sum assured up to a period called term.

The term depends upon the amount of premium paid. During this period, if the life assured dies payment will make up to the full amount. But, if the assured survives the period, no payment is made.

Actually, the amount of premium paid before the causation is utilised as a single premium or purchasing term insurance and the duration of the term insurance upon the amount of premium paid for meeting as single premium.

6. Automatic Premium Loan :

The assured may use the option of automatic premium loan before the maturity of the policy. In this case, if the assured is unable to pay the premiums the insurer will not allow the policy to lapse but will automatically pay the premiums out of the net surrender value.

The assured can repay the unpaid premiums with interest at any time while the policy is so kept in force without furnishing evidence of insurability. If the whole of surrender value is exhausted by advances on account of payment of premium, the policy will lapse and can be revived only after payment of all the premiums unpaid and interest thereon at the rate of 7 1/2 per cent per annum compounded half yearly. This option can be exercised only when premiums of consecutive three years have been paid.

Policy Condition:

In this case one benefit is also available that if after at least three years, premiums have been paid, the assured dies without payment of the premium within six months from the due date of the first unpaid premium, the policy amount will be paid subject to deduction of unpaid premiums with interest thereon up to the date of death.

7. Reduced Paid-up Insurance :

When the policyholder is unable to pay further premiums and does not want cash immediately he can pay up the policy. The sum assured under the policy is reduced in the same proportion as the amount of premiums paid bears to the total premiums payable.

The reduced sum assured is payable according to the original term of the policy. Where uniform premiums are payable, as in the case of endowment or whole life limited payment assurances, this proportion is easily ascertained.

The paid up value for the age when the policy was affected, and d(x + n) is the premium for the present age of the life assured when policy is surrendered.