What happens when you fail to pay your insurance premiums?
Khalil Gibran once said, “Forgetfulness is a form of freedom.” He might be right in most circumstances but, in the insurance world, forgetfulness can work the other way around. Having insurance cover can give you freedom from worries and forgetting to pay insurance premiums could be a source of worries!
So, what really happens when you fail to pay your insurance premiums at the time of renewal? Well, it actually depends on many factors and the most important being the type of insurance policy you own. This article focusses on the implications of forgetting to renew life insurance policies but the point I am trying to drive home is that it makes a lot of sense to continue to pay insurance premiums on time regardless of the type of policy i.e. life, health or general insurance.
Most life insurance policies allow you a grace period of one month during which you can pay the premium without any charge and renew the policy. Once the grace period is over the treatment depends on whether the policy has a cash surrender value. To refresh, the policies with maturity benefit typically are the ones with cash surrender value and include endowment and insurance linked policies. Term insurance, as you would have rightly guessed, has no cash surrender value. Health and general insurance policies would rarely have cash surrender values. Let’s now delve a bit deeper into the treatment for these two types of policies i.e. with cash surrender value and without cash surrender value.
Treatment of policies with cash surrender value: The insurance companies continues to pay the premium on your behalf but only after taking a loan against the cash surrender value. This loan, called Automatic Premium Loan (APL), ensures that your policy remains in-force but comes at a high cost of interest on loans. The interest rates, currently, could be upwards of 6% p.a. The loan continues till the time the cash surrender value is higher than the outstanding loan and interest or until you clear all the dues. In case the dues are not cleared, the policy lapses and the insurance cover cease to exist.
On a related note, if you haven’t forgotten to pay the insurance premium but unable to afford it, there are better choices available apart from surrendering the contract. If you wish to continue the cover, you can avail the reduced paid-up option in which case you won’t have to pay future premiums but the sum assured would be reduced. However, in case you wish to discontinue the contract, you can always sell it off on fidentiaX Marketplace to get a better deal when compared to surrender value offered by the insurer.
Treatment of policies without cash surrender values: Such policies (especially the ones that come under life and health insurance) would lapse in case you fail to pay premiums within the grace period.
For general insurance policies, which rarely have surrender values, the policies would typically get lapsed. However, car insurance policies can continue to remain in-force but you would be charged for financing the premium along with additional charges and fees!
The lapse is not the end of the story though: We now understand that it is not wise to let your policy lapse. Luckily, you can always revive it. Most insurers let you reinstate your policy within 2 years of the lapse. Clearly, insurers would require you to pay the past unpaid premiums and may levy certain charges. Additionally, you would be required to provide evidence of good health and the chances are the terms of the contract might change based on the condition of health.
Prevention is better than cure: Clearly, forgetting to pay insurance premiums at the time of renewal would mean inviting a lot of trouble and complications. The good news is you could take help of ISLEY, your insurance buddy, to notify you at the time policy renewals! This is one of the many features that ISLEY offers. For the details of other features check out the ISLEY page!
In a nutshell: In case you forget to pay the insurance premiums at the time of renewal, premiums can be paid during the grace period without any charges after which the policy will get lapsed or be funded by an expensive loan. Post which you get an opportunity to revive the policy but the revived contract may not be reinstated at original terms and/or premiums. Hence, it is in your best interest to pay the premiums on time and that’s where ISLEY could come handy!
Hope this article gives you sufficient reasons to pay the insurance premiums on time and possibly raises a few questions. I would be more than happy to answer any queries regarding this article or any life insurance query. Feel free to reach out to us at hello@fidentiaX.com. Just a reminder, I will be live on Twitter to answer any life insurance related queries at 8 PM Singapore time on 12-November-2018 i.e. this Monday!
PS: The info version of ISLEY is already available for Android phones and should be in App Store shortly!
Disclaimer: The article has been written with an aim to broadly explain an otherwise complicated and technical topic for readers with little or no insurance background. Hence, it doesn’t have finer details but is still broadly correct. The readers are recommended to take advise from their respective financial advisers before taking any financial decision.
About the writer: Mr Sumit Ramani is the Chief Actuary of fidentiaX. He is a qualified Life actuary and a computer science engineer with over a decade of experience in (re)insurance business with focus on modelling of life and health products, peer review and business analysis.