Tuesday, 11 September 2012

Lapsed Policy Definition

When the insurance premium is not paid on time, all benefits of the policy stops and the policy becomes a Lapsed Policy. The insurance premium needs to be paid on the due date or within the grace period at max. If the premium is further delayed, then the policy becomes “dead” which means Lapsed in the insurance language!
The policy conditions state that if insurance premiums are not made during the grace period, the policy lapses and all rights and demands of the policyholder simultaneously ceases. However, the entire money of the policyholder is not forfeited. There are certain clauses which state that the policyholder still has certain benefits but extremely limited ones.
In some cases, even death claim would be payable for a Lapsed Policy but for a reduced Sum Assured.
Lapsed Policy can however be brought back into life, i.e. revived or reinstated in the insurance language if certain terms and conditions are fulfilled.
Lapsed Policy can also be surrendered and certain amount of the premiums paid by the policyholder can be given back to him. Also the extra money that is deposited with the insurance company would be returned to the policyholder.

There are no charges that are deducted from a Lapsed Policy because the policy is not in force. However, if death benefit is still payable, then Mortality Charge would still be deducted and not otherwise.
The non-forfeiture clauses of a Lapsed Policy is provided to the customer because in the initial years of a policy, the policyholder pays a premium higher than what is required for covering the desired risk. This excess is to be held on the policyholder’s account for the future and cannot be forfeited. This is also because the premium has a savings component in it, which is accumulated for the payment of survival benefit. This is a liability and cannot be extinguished totally, even if the policy does not continue to be in force.
Thus, when a policy lapses all the 3 parties (customer, insurer, agent) are at a loss. Hence all insurers facilitate the revival of lapsed policies. On revival of a lapsed policy, the risk cover under that policy is being increased hence underwriting is done at par with a new proposal. The amount of increased cover is considered for underwriting.

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