Policy lapse

A life insurance contract only stays alive as long as the premiums keep coming. Miss a premium, and even the grace period the insurer allows runs out, the policy lapses — and the workbook's rule is blunt: no claim is payable on a lapsed policy.

That is not always the end of the story, though. A lapsed policy is not automatically a worthless one — what happens next depends on how long it had already run and what kind of policy it is.

Revival. A lapsed policy can be revived or reinstated within the timeframe the insurer allows, by paying the pending premiums along with a penalty. A lapsed ULIP specifically can be revived within 3 years from the date of lapsation.

Surrender value, for a traditional investment-cum-insurance policy. If the policy has run for at least 3 years (or 2 years, if the policy term itself is under 10 years) and full premiums have been paid, it may acquire a surrender or cash value. The minimum guaranteed surrender value is 30% of all premiums paid, rising to as much as 90% in the last two years of the term. For a single-premium policy the guaranteed surrender value starts higher — 70% if surrendered in the first three years — rising to the same 90% in the last two years.

ULIPs specifically. A ULIP can be surrendered before its 5-year lock-in ends, but a discontinuation charge, capped at Rs 6,000, is deducted, and the remaining fund value moves into a discontinuation policy fund until the lock-in period is over.

Paid-up option. Instead of surrendering, the policyholder can make the policy paid-up: the sum assured is reduced in the same proportion that the premiums actually paid bear to the total premiums due over the policy's life.

Illustrative figures, built on the workbook's own paid-up mechanism. Surinder took a 25-year investment-cum-insurance policy with a sum assured of Rs 10,00,000, paying premiums half-yearly. He pays for 10 years (20 half-yearly premiums out of a total of 50 due) and then stops.

Instead of losing the policy, he opts for paid-up:

Paid-up sum assured = 10,00,000 x (20 premiums paid / 50 premiums due)
                     = Rs 4,00,000

His cover falls from Rs 10,00,000 to Rs 4,00,000, but the policy stays in force for its full term without any further premium — instead of lapsing to nothing had he simply stopped paying and let the grace period run out.

Chapter 2 (Features of Life Insurance Products), section 2.1, sets out policy lapse, revival, surrender value and the paid-up option as core policy mechanics. Expect a question on the minimum guaranteed surrender value percentages, the ULIP revival window, or a computation of the paid-up sum assured from premiums paid versus premiums due.

• No claim is payable on a lapsed policy — full stop. Revival, surrender and paid-up are all things done to a lapsed policy, not automatic entitlements of it.
• The 3-year ULIP revival window and the 5-year ULIP lock-in are different clocks — a ULIP can be surrendered during the lock-in (with a discontinuation charge), and separately can be revived for up to 3 years after it lapses.
• Surrender value minimums differ for single-premium policies (starting at 70%) versus regular-premium policies (starting at 30%) — do not apply one figure to both.
• The discontinuation charge on a ULIP is capped at Rs 6,000, not a percentage of the fund.
• Paid-up reduces the sum assured; it does not return any money to the policyholder immediately. The reduced cover simply continues without further premiums.