Term insurance forms an extremely important part of one’s financial planning strategy, especially in case someone wants to ensure his family’s financial security in case of an early death. A term insurance policy amounting to ₹1 crore provides huge coverage and has been a hot favourite among the policyholders. However, it is equally important to know what happens if you stop paying the premiums on your term insurance while making the right decisions about your policy.
Nature of Term Insurance
Term insurance is a pure protection policy that provides life coverage for any amount required for a given period against a premium. Term insurance is not a savings or investment cum life insurance policy, unlike other types of life insurance products. This saves you money, and the coverage is higher in term insurance compared to an equivalent whole-life policy. For instance, a ₹1 crore term insurance can be much cheaper than a comparable whole-life policy.
What happens to your term insurance if you stop paying premiums?
“If you miss any of the payments of your term insurance, depending upon your respective policy terms and conditions. In general, the following holds true:
Grace Period: Most insurers provide a grace period, usually 15 to 30 days, in which the premium amount can be paid after the due date. The policy is still active during this time, and no loss of coverage occurs. If the policyholder dies during this grace period, generally, the insurer pays the death benefit to the nominee after deducting the unpaid premium.
Policy Lapse: In case the premium is not paid in the grace period, then your policy latches. Because of this reason, it renders your policy to go null and void. Hence, further death benefits paid by the insurer would not arise. A lapsed policy brings an economic burden on the family member as, after all, having a term insurance plan wasn’t to accomplish this objective to begin with.
Reinstatement Option: Most insurers, after the lapse of a policy, offer reinstatement within a stipulated time, which may vary between two years. You will have to pay for:
- All overdue premiums along with charges or penalties.
- Declare good health or undergo a medical examination.
Reinstatement of a lapsed policy is costly and hassle. Insurers are likely to increase the premium rate or apply strict underwriting criteria. Financial
Consequences of a Lapsed Policy
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Loss of Premiums Paid: Unlike endowment or investment-linked policies, there is no surrender value. The term insurance has no surrender value. Then there will be no refund of the premium paid if the policy lapses.
- New policies will cost you more: You may have to pay more in case you have to buy another term insurance plan after your earlier one expires. The premium paid for term insurance is directly related to age and health. In case you become older, getting a new term insurance policy worth ₹1 crore will cost much more.
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Loss of Financial Security: The chance of a monetary loss in security for family members. If term insurance coverage is lapsed, your family members will face hardships in continuing the expenses, which include loan repayment as well as educational and marriage requirements.
Alternatives before Premium Lapses
If you are unable to afford the premium amount, then review the following option before the premium lapse:
- Downgrade Your Policy: Most insurance companies give a provision to decrease the sum assured or extend the policy term to such an extent that the amount of premium may be decreased. For example, if you think the term insurance for ₹1 crore is too costly, then you may think about decreasing the coverage to ₹50 lakhs.
- Premium payment flexibility: Some insurance companies will offer flexibility in premium payment through options like limited pay or single pay plans. These will reduce the cost burden in the long run, but higher upfront costs have to be paid.
- Utilize a Term Insurance Calculator: make use of the term insurance calculator to source your guide while reviewing several premium payments and coverage limits to see what best suits you. Different simulations of varied terms will make for an informed judgment without any compromise on needed coverage.
Avoid Policy Lapse
- Remind yourself of the due payments: You can always turn on applications, emails, and SMS, ensuring that you do not miss a premium payment date in time.
- Auto-debit option: Connect your bank account or credit card to your policy premium for automatic debits. This way, policy premiums automatically get paid on due dates without the need for reminders.
- Review Your Budget: One of your fixed incomes should be devoted to the payment of insurance premiums. This is just like your rent or utility bills and is non-negotiable.
Innovations in Term Insurance
Modern term insurance is equipped with features that can be helpful for better management of commitments as provided below:
- Return of Premium (ROP) Plans: In ROP plans, the insurance company has a policy of paying back the amount of premium received if the insured survives the term. These are more costly policies, but such plans might prove to be of value to individuals looking for some monetary gain upon completion of the policy term.
- Convertible Policies: A few term life insurance policies allow the insured to convert into other kinds of life insurance policies within a certain time, including endowment and whole-life plans. This particular feature is very helpful if your personal goals change with time.
- Critical Illness Riders: Critical illness riders combine the offered additional financial support if the policyholder faces any serious illnesses. It decreases the financial burden and leaves more ease to pay the premium of the term life insurance.
Importance of Periodical Policy Reviews
Your requirements and monetary scenario are continuously changing with time. It is therefore advisable to regularly scrutinise your policy and get it corrected based on the need. Using a term insurance calculator, decide if your term insurance policy worth ₹1 crore is sufficient or needs a change.
Conclusion
Premium payments on a term insurance policy will stop with disastrous consequences for you and your loved ones. Unforeseen circumstances may not be able to allow you to pay premiums anymore, but knowledge of options and proper planning will minimize risks.
A ₹1 crore term insurance plan is not just a financial product but the promise of security to your family. But before arriving at a decision, take a financial advisor’s suggestion to find alternatives and see that the breaks in coverage have not suffered. And the cost of your lost financial protection usually outweighs the short-term savings from unpaid premiums.