Term Policy Lapse – Should You Revive It Or Seek A New One?


5 min read

Updated on Apr 24, 2023

What do you know what happens when life insurance policy lapse? Are you planning to revive a lapsed policy? Do you know about the challenges that you might encounter in policy revival? When do you think is it feasible to revive a policy?

If you are not aware of the insurance lapse meaning, or if your mind is boggling with all the above questions, you must read the blog till the end to have a better idea of the same.

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What do you mean by Term Policy Lapse?

Term policy is a life insurance policy that covers you and your family with financial protection against any mishap. Term policies are easily affordable and must be kept active to be able to avail the benefits of the policy. And the basic requirement for this is to pay the premiums on time. Because if you skip a payment, your policy might lapse.

In most cases, life insurance companies allow a 15 day grace time for policy premium payment. For monthly premium, this grace time starts from the due date till the next 15 days. For quarterly premium, this grace period is allowed for up to 30 days. Even if you are paying your premium six monthly or yearly, the grace period still remains for 30 days. So, if the insured doesn’t pay the premium before the end of the grace time, the policy gets lapsed.

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Also Read: List of 11 Best Term Insurance Plans in India 2022

What will happen when life insurance policy lapse? Do you know how to revive policy?

When life insurance policy lapse you will not be able to enjoy the coverage and remaining benefits after your grace period is over. Your nominee will also not be able to make any death claims after the lapse of the policy.

Two situation might occur when life insurance policy lapse:

Situation 1 – You will have to make all the payment of the premiums that are due on your policy along with paying the charges of penalty.

Situation 2 – You might buy a new term life plan from another insurance company.

Lets understand both the situations with examples:

For the first situation, let’s assume you bought a life cover of rupees 1 Crore ten years back at the age of 35. You paid premiums for the first seven years at 14,900 rupees per year, while you dropped premiums for next three years. Your policy tenure is 25 years and you are now 45 years old and want to revive the lapse plan.  In most cases, you are required to pay over 9.5% per annum as penalty on lapse policy. So, in this situation you will have to pay a penalty of Rupees 9,044 along with paying the premium for three years that you haven’t paid, which will come to around Rupees 44,700. Thus, if you calculate for the next 15 years, you will be paying over 2.68 lakh rupees if you revive the policy for the entire policy term, including the fine and premium arrears.

Now let us take the second situation of policy lapse and analyze:

Here, if you can ignore the previous policy and buy new term plan. But, again you must keep in mind that premiums for term plans increases with age. So, if you take the above situation and calculate, you were levied 14,900 rupees premium per year at the age of 35. However, at 45  years if you seek a new term policy, you will be levied with a premium of almost 24,650 rupees. Thus, the total payments that you will be paying till you turn 60 years will be around 3.7 lakh rupees.

So, as you can see if you compare both the situations, it is better for you to revive the policy that has lapsed rather than getting a new one.

However, you must understand that there are many things including years of lapse or tenure of the policy on which the result depends. So, don’t get confused. You must seek professional help if required as well as understand and analyze things clearly before deciding on reviving a policy or buying a new one.

Hence, do the calculations well. Further, you must also analyze other things besides low premiums. Some such things to consider are:

  • claim settlement ratio
  • brand/insurance company reputation
  • service standards of the insurer

So, make the right decision after considering all the above aspects.

Best Term Life Insurance Companies

Important things to note

Below are some important things that you must take note of regarding term insurance lapse.

  • The first thing to note is that you can revive a term plan till 5 years of premium lapse. That is, if you have not paid the premiums for 5 years or less. But for premiums that are unpaid for more than 5 years time, the insurance company might not allow you to revive the term policy. However, this decision will depend on the type of policy and the insurance company.
  • Also, if the premium of a term policy are not paid for long duration, the insurance company might ask the insured to show medical reports of the insured depending on his/her age and also the sum insured amount of the policy.
  • Further, if the insured is undergoing any medical treatment, the insurer might ask the person to submit all documents regarding the treatment of the insured. They might even ask the insured to undergo a health test.
  • The final discretion lies with the insurer if they want to accept the request of policy revival or to reject it.

To conclude

Reviving a term life insurance policy might be a tedious job. It might also be a costly affair if you have skipped many premiums. This is because you will have to pay for the missed premiums as well as the fine levied on you for those premium years. Thus, reviving a term policy that has lapsed without surrender value, depends on numerous things. So, it is advised to calculate and analyze very possible aspect before deciding on whether to renew a policy or purchase a new policy altogether.

Also Read: Best 1 Crore Term Insurance Plans In India

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FAQs on Term Policy Lapse

What does term policy lapse mean?

When a policyholder fails to pay the premium due on their term life insurance policy within the grace period stipulated in the policy, the policy is terminated or lapsed.

What happens if a term policy lapses?

When a term policy expires, the policyholder is no longer covered. The policy will be terminated by the insurance company, and the policyholder will no longer be eligible for any of the benefits that the policy would have offered, such as death benefits or cash surrender values.

Can a lapsed term policy be reinstated?

Yes, provided the policyholder pays the due premiums as well as any interest or penalties owing to the insurance provider, a lapsed term policy can be renewed. To restore the insurance, the policyholder may be asked to submit proof of insurability and pay additional expenses.

How long is the grace period for term policies?

The grace period for term insurance contracts varies based on the insurance provider and the policy. The grace period is typically between 30 and 60 days, during which the policyholder can pay the remaining payment without penalty while keeping the policy in place.

Indeed, rather than lapse, a term insurance can be surrendered. Surrendering a policy implies that the policyholder cancels it and receives a cash surrender value, which is the amount of money paid to the policyholder by the insurance company for cancelling the policy. Surrendering a policy, on the other hand, may result in a smaller payout than if the policyholder had maintained the policy in place until it matured.

Can a term policy be surrendered instead of lapsing?

Indeed, rather than lapse, a term insurance can be surrendered. Surrendering a policy implies that the policyholder cancels it and receives a cash surrender value, which is the amount of money paid to the policyholder by the insurance company for cancelling the policy. Surrendering a policy, on the other hand, may result in a smaller payout than if the policyholder had maintained the policy in place until it matured.

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Feb 22, 2022
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PayBima Team
PayBima is an Indian insurance aggregator on a mission to make insurance simple for people. PayBima is the Digital arm of the already established and trusted Mahindra Insurance Brokers Ltd., a reputed name in the insurance broking industry with 17 years of experience. PayBima promises you the easy-to-access online platform to buy insurance policies, and also extend their unrelented assistance with all your policy related queries and services.

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