What Happens if You Stop Paying Life Insurance Premiums?

Life insurance is literally your lifeline. It promises to protect you in case of any untoward event, but only when you have paid your premium. No premium, no lifeline. This blog explains in detail the likely situation that may arise if you stop paying your life insurance premiums.

A life insurance policy is no longer a luxury; it is a necessity for every individual, young or old, man or woman. Simply because life itself is so unpredictable. A mishap awaits us any moment. In such a case, it only makes sense to protect our life from risks. Life insurance does just that. However, nothing comes for free and so there is a small condition attached to the protection provided by life insurance plans.

They come with the obligation for the insurance buyer or policyholder to pay a premium amount to the insurance company regularly, in return for the coverage services it provides. This is a simple give-and-take arrangement, meaning the insurer is obligated to cover the costs for the insured only up to the time the latter pays the premium amount. If, for any reason, the insured fails to pay premium, the insurer is no longer obligated to provide life insurance protection.

What is Life Insurance Protection?

We have been discussing the insurance company providing life insurance coverage to their policyholders. But, what is life insurance exactly? It is a policy document signed between the insurance service provider and you, claiming that the former agrees to monetarily compensate your beneficiary or nominee (generally a family member) in the unfortunate event of your death.

To assure this financial protection to your loved ones in your absence, the insurance company seeks a small favor from you in return. You would be required to pay a specific amount called premium to the insurer on a predetermined basis regularly.

Is There a Deadline to Pay the Premium?

Yes, as per the rules set by the Insurance Regulatory and Development Authority of India (IRDAI), the maximum deadline to pay your premium amount to the insurance company is 30 days after the due date. This extended time period is known as grace period and is generally allowed to the insured under all life insurance policy plans.

Note that the premium payable under the grace period is generally more than the amount to be paid as regular premium by the insured.

What Happens if You Fail to Pay the Premium by the Deadline?

The whole life insurance policy document is based on the premise that the insurer would pay a lump sum amount to your beneficiary at the time of your passing away in return for a regular payment of premium to the insurer from your side. If you fail to do your bit for life insurance meaning you are unable to or discontinue paying premium amounts to your insurance company, it simply frees the insurer from this obligation as well.

In other words, your life insurance policy gets terminated by the insurance company on account of your failure to pay the premium. However, please note here that it would also depend on the type of life insurance plan you have purchased.

For instance, in case of a term life insurance plan, the insurer would expect you to make your premium payment before the due date. Your failure in doing so would cause your term insurance policy to lapse. This would in turn mean that you no longer stand eligible to enjoy any insurance benefits resulting from the plan.

However, in case of some other life insurance plans, such as Unit-Linked Insurance Plan (ULIP), the policy would lapse if you do not pay the premium amount in the first five years of the policy period. Upon lapse, all the benefits of the policy would be transferred to a discontinuance fund.

What is Life Insurance Protection?

We have been discussing the insurance company providing life insurance coverage to their policyholders. But, what is life insurance exactly? It is a policy document signed between the insurance service provider and you, claiming that the former agrees to monetarily compensate your beneficiary or nominee (generally a family member) in the unfortunate event of your death.

To assure this financial protection to your loved ones in your absence, the insurance company seeks a small favor from you in return. You would be required to pay a specific amount called premium to the insurer on a predetermined basis regularly.

Is There a Deadline to Pay the Premium?

Yes, as per the rules set by the Insurance Regulatory and Development Authority of India (IRDAI), the maximum deadline to pay your premium amount to the insurance company is 30 days after the due date. This extended time period is known as grace period and is generally allowed to the insured under all life insurance policy plans.

Note that the premium payable under the grace period is generally more than the amount to be paid as regular premium by the insured.

What Happens if You Fail to Pay the Premium by the Deadline?

The whole life insurance policy document is based on the premise that the insurer would pay a lump sum amount to your beneficiary at the time of your passing away in return for a regular payment of premium to the insurer from your side. If you fail to do your bit for life insurance meaning you are unable to or discontinue paying premium amounts to your insurance company, it simply frees the insurer from this obligation as well.

In other words, your life insurance policy gets terminated by the insurance company on account of your failure to pay the premium. However, please note here that it would also depend on the type of life insurance plan you have purchased.

For instance, in case of a term life insurance plan, the insurer would expect you to make your premium payment before the due date. Your failure in doing so would cause your term insurance policy to lapse. This would in turn mean that you no longer stand eligible to enjoy any insurance benefits resulting from the plan.

However, in case of some other life insurance plans, such as Unit-Linked Insurance Plan (ULIP), the policy would lapse if you do not pay the premium amount in the first five years of the policy period. Upon lapse, all the benefits of the policy would be transferred to a discontinuance fund.

What Happens if My Life Insurance Policy Lapses?

Although your life insurance policy lapses on failure of premium payment, the road isn’t too dark ahead. You do stand a chance to restore or reinstate your lapsed life insurance plan. However, reinstatement of the policy plan is generally permissible only after having to bear the penalty cost along with late fee submission and renewal fee charges to your insurance company.

Besides, your insurer might also ask you to undergo some medical tests before your plan can be reinstated as well as submit the proof of continued insurability to the insurance company. Only after completing all these formalities, the insurer may agree to restore the life insurance policy for the policyholder.

What Else Can I Do if I Still Can’t Pay Insurance Premiums?

It would make sense to restore your lapsed life insurance policy only if you can continue to make regular premium payments on it. However, in case of some reason, you’re still not able to pay your insurance premiums, there are a few options you may want to consider trying out:

1. Cashing out: Some insurance companies allow policyholders to cash out the premiums paid so far. However, you may have to check with your insurer about the terms and conditions of your specific insurance plan to check for this facility. If you do decide to cash out the policy, note that you will lose all life insurance benefits covered under the policy. Besides, you may also be required to pay some tax based on the amount cashed out.
2. Reduced Paid-Up: In case you aren’t too happy about getting your life insurance policy terminated completely, you may consider a reduced paid-up feature provided by some insurance companies. Here, in case of inability to pay premium, your insurer would allow you to discontinue payment; however, your policy still remains active but with reduced life insurance benefits. The reduction in benefits offered by the insurer would be decided based on the premium amount that the insured has paid up to that time.

Should I Reinstate My Life Insurance Policy or Buy a New One?

Since restoring or reinstating your original policy does not come easy, involving late fee, penalty fee, and renewal charges, some policyholders may consider buying a new policy as a more convenient and perhaps more profitable option.

However, before you jump too soon to make a decision, do consider the pros and cons of each:

• Buying a new life insurance plan altogether would result in losing all the premiums paid for the previous policy.
• The premium amount payable on life insurance is directly proportional to the age of the policyholder. This means that as your age increases by the year, the amount of premium payable also tends to increase. If you had purchased your previous policy a few years earlier, you’d have been paying a relatively lesser premium than what you’d need to pay now in case you buy a new policy (because of the increase in your age over the years). This would make the policy much more expensive in the long run.

Hence, it appears that reinstating the previous (lapsed) policy seems to be a much better option than the idea of buying a new one. However, you may still want to do your own research and weigh out all the options.