What happens if payment of Insurance premium is discontinued?
Every Insurance policy is a contract between the insured and the insurer. Be it a Life Insurance, Health Insurance or a Car Insurance, It’s the obligation of the client (the insured in insurance language) to pay the premiums on a timely basis. The claim settlement is an obligation of the Insurance company subject to the pre-agreed conditions. Keeping aside whether if it is right insurance or not, we all buy some insurance. But for various reasons we fail to fulfill our obligation of paying premiums on regular intervals. The reason may vary from retaliation of non-fitment of the product to financial crisis resulting in inability to pay premiums. So what happens if payment of premium is discontinued? Let us see this in case of a ULIP – Unit Linked Insurance Plans. The non payment of ULIP premiums can broadly be classified into three types.
Discontinuation before 3 years of policy initiation – For any reason, if all the premiums haven’t been paid for at least three consecutive years from initiation, the insurance cover shall terminate immediately.In such cases Insurance firms may provide an opportunity for revival of the insurance policy within a specified time. If the policy is not revived within that time then surrender value shall be paid at the end of the third policy anniversary or at the end of the period allowed for revival, whichever is later.
Discontinuation after 3 years of initiation – If the insurance policy if discontinued, then at the end of the period allowed for revival, the contract shall be terminated by paying the surrender value. The insurer may offer to continue the insurance cover, if so opted for by the policyholder by levying appropriate charges until the fund value is not less than one full year’s premium. When the fund value reaches an amount that is equal to one full year’s premium, the insurance contract shall be terminated by paying the fund value.
Policies having five year lock-in-period: Lock in period has been increased to 5 years for policies bought on or after 01-09-2010. Upon discontinuation of the payment of premium, the policyholder has two options.
(i) Reviving the policy or
(ii) Complete withdrawal without any risk cover.
A notice shall be sent by the insurance company giving these choices, within 15 days from the date of expiry of grace period. If no option or option (ii) is exercised before 30 days of such notice, the proceeds of discontinued policy shall be refunded. But not before the completion of the lock-in period. If such discontinuation is within lock in period, the policyholder shall have the right to revive the policy within a period of two years from the date of discontinuation. But not later than the expiry of the lock-in period.
Takeaways: It is advised to do a proper due diligence before purchasing an insurance policy. If by any chance if you feel that the product is not good or doesn’t fit your purpose, then explore options like free look period and lock in period. If it is any other reason resulting in non payment, then compare all the possible options that are available and choose the best one. It is always recommended to take a professional advice like that of a financial planner or an Insurance expert to decide on such options.
Note: Some parts of text are extracted from regulatory guidelines for the general awareness of readers.
General FAQ
What is Insurance?
Insurance is a financial tool specially created to reduce the financial impact of unforeseen events and create financial security.
Why buy Insurance?
Life is full of uncertainties. We face various risks in our day to day life including risks to our life, health, property and so on.We don’t know whether something unfortunate will happen to us or when, but it is certainly possible for us to take measures to reduce the financial impact of these risks and protect ourselves financially through Insurance.
How does Insurance work?
Insurance works on the law of large numbers where contributions by many in the form of premium pay for the losses of a few. By paying a premium for protecting against a certain type of loss, you will be protected for a certain sum of money that you will receive if you face that loss.
What insurance to buy?
Insurance is available for unpredictable events such as death, accidents, sickness, loss or damage to property. These are simple you should protect yourself against and what you should buy are life insurance, accident insurance, health insurance and insurance for whatever property we are looking to protect – motor vehicle, house and so on.
How to buy insurance and whom to buy it from?
You can buy your insurance policy through an individual agent, a corporate agent, a broker or any other registered Insurance Intermediary. List of all registered intermediaries is available on IRDAI website.
What is Free Look Period in Insurance?
If you have bought a policy and realize you don’t want it, you can return it and get a refund. This facility is termed as Free look period in Insurance.
