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Should You Revive a Lapsed Term Policy or Buy a New One?

Many people are skeptical about whether to renew their lapsed term plan or to purchase a brand new one. Here are some tips

Sunday September 27, 2020 10:26 AM, ummid.com News Network

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Many people are skeptical about whether to renew their lapsed term plan or to purchase a brand new one. No one likes to lapse the policy on purpose; it is all because of circumstances. There are times when the policyholder forgets to pay the premium on time because of different reasons due to which the policy lapses. Also, many people do not have sufficient money to pay the term insurance premium, which results in a lapse of the policy. However, these people may think of buying a term insurance plan in the future. In this case, they have two options. They can either revive the old policy or buy a new one.

Usually, every insurer provides an additional time of 15-30 days to the policyholder to clear the outstanding premium. However, if the policyholder fails to pay the premium within the grace period, the insurer can discontinue the policy.

A lapsed policy can be resuscitated within two years from the date of lapse. If the policyholder decides to renew the lapsed term policy, he/she is liable to pay the outstanding premium along with interest, a restructuring fee, and if necessary, the cost of a medical check-up.

Which is a better alternative?

Let us discuss what is more suitable; renewing an old policy or buying a new one.

Term insurance is critical, especially if the policyholder is the sole breadwinner of the family. It allows your family to live a peaceful life when you are not around. However, due to a particular situation, your term insurance policy gets lapsed. In the future, if you feel the need for such a policy, here is an illustration of what you can do.

For instance

A person in his/her early 30s purchases a term plan with a sum assured of INR 10 lakh in the year 2002 for 20 years. Assuming that he has paid a premium for 12 years (till 2013), and subsequently, due to whatsoever reason, stops making the payment due to which the policy discontinues. Here, the policyholder has two consecutive years to renew his/her policy until 2016. As of 2016, the premium for 2014 and 2015 will remain unpaid.

Assuming that the policyholder is planning to buy an insurance cover, he/she has two options:

1. To revive the lapsed policy
2. To purchase a new policy

Considering Option 1

If the person wants to revive the lapsed policy, then he/she will need to pay the two years unpaid premium and a late fee as per the terms of the insurer. Besides this, the policyholder will have to pay the total premium of the policy until its maturity.

So, the aggregate price of the reviving the policy will be two years unpaid premium + Revival or late fees + total premium until the plan’s expiry

Considering Option 2

Many people may consider paying the total amount of revival as a waste of money and instead think of purchasing a new policy. Here, the policyholder will have to compare the total cost of revival with the premium of the new term policy.

For instance

Let us assume that the policyholder had an INR 10 lakh term insurance cover and used to pay a yearly premium of INR 3,600 when he/she was 32 years old. Now, at the age of 46, the annual premium will increase. If the policyholder wants to purchase a policy with a cover of INR 10 lakh for the next six years, the yearly premium payment would be approximately INR 6,200. Here, the total premium would be INR 37,200 for six years. Now, the policyholder will have to compare the premium of the new term policy with the total revival cost to determine which option is better, revival, or buying a new plan.

Today, there are numerous online term plans available at a lower premium and offer high coverage. However, do not forget to consider the premium paid by you earlier and the cost that you will bear for the remaining years. Doing this will help you ascertain whether to buy a new policy or revive the old one.

The choice of renewing the lapsed policy or to buy a new one varies among people. Therefore, do your calculations accurately right and compare the total cost of revival with the aggregate expense of buying a new plan to make a wise decision.

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