Many have suffered because of the policy lapse. We will cover what is a lapse in the term insurance policy and how you can prevent it.
A term insurance policy is where you pay a very lower premium over a very long period of the term, and the policy, in return, guarantees your beneficiary a substantial amount of money if you die during the time covered by the term insurance policy.
What Do You Mean By Any Policy Lapse?
Policy lapse means when the policy becomes invalid or dysfunctional. In that case, you are no more eligible to enjoy the benefits of the covers that the policy provides. Moreover, if your policy lapses, you can no longer make a claim against it legally.
What Leads To a Policy Lapse?
Your policy will lapse if you fail to pay the premium for the policy in time. However, in case you missed the exact date of payment, your policy will not become invalid immediately. You might miss a date once or might not have the money exactly at that point.
This is why Term insurance companies give a grace period that lasts around 30 days from the original due date. Therefore, if you can make the payment in this way, your insurance will continue normally. If not, your policy lapses because the insurance company cancels your policy.
Is It Possible To Avoid a Term Insurance Policy Lapse?
You can absolutely avoid a policy lapse if you follow certain measures that are listed below.
Timely Payments of The Premium:
The best way to avoid a term insurance policy lapse is by paying the premium value way ahead of the due date. Why should you take a risk? However, if you fail to, make sure you do not exceed the grace period. Set your calendar, and give yourself reminders if you have a habit of forgetting. Since term insurance premiums are extremely low, a situation will not arise where you are not able to pay that much. Even if that arises, utilise the grace period.
Having a Proper Idea About Your Finances:
Since term insurance does not ask you to give a lump sum of money, not having enough money might not be a possibility. Yet, if you choose a plan beyond your current financial status, it will be pressurising. So, the process of selecting the correct policy is extremely crucial. Therefore, analyse your financial goals and liabilities before investing in any policy.
Setting Up an Automatic Billing System:
If you have a tendency to forget and miss out on dates that might lapse your policy, but you pay online via credit cards, etc., you can set up an automatic billing system. When you set this up, the money will automatically be deducted on the due date, and the policy will continue to be live. For this, you have to give the information about your term insurance premium billing dates to your bank. The bank automatically deducts the money from your account and transfers it to the insurance provider. There is absolutely no way you can miss the due date now.
Consider Insurance In Your Budget:
Once you are aware of your financial goals and liabilities, plan the budget properly. It is crucial to remember that term insurance is a very long-time affair. You will not have your current income at every point of your life. It can increase or decrease, and so can your liabilities. For this, there are different kinds of term insurance plans. Choose accordingly. A salaried employee and an entrepreneur, a childless person, and one with a large family will go for different plans. To sum up, at any point, you must not be paying more than 5% of your income for insurance.
Reinstating the Policy:
Even after all of this, if your policy lapses, you still can generally reinstate the claim after 2 to 5 years of the lapse. You have to repay all the premiums and submit declarations of health, occupational stability, etc. Many insurance providers will also charge a penalty which will be a certain amount of interest on the missed premiums. But it is finally to the discretion of the company whether they would allow you to reinstate the policy.
Hence, you can easily avoid a policy lapse by being careful or setting up an auto-billing system. However, the crucial thing is budgeting beforehand so that you do not face any unexpected financial situations.
Also Read: Importance of Insurance And Term Life Insurance FAQs You Need To Know