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Reinstatement Period in Term Insurance

TeamAckoDec 20, 2024

Life is unpredictable, and there may be times when circumstances prevent timely payments, leading to a temporary loss of insurance protection. The reinstatement period allows individuals to reactivate their Term Insurance within a specified time frame, ensuring they don’t miss out on the benefits their policy offers. By understanding the reinstatement process, its conditions, and time limits, policyholders can avoid gaps in coverage and continue to enjoy the financial security that Term Insurance provides.

A Term Plan is the most reasonable form of financial protection for a definite period when it comes to Life Insurance. It guarantees a payout to the nominee in the event of the demise of the policyholder during the policy term. Affordability is one of the most distinctive features of such a plan, along with several features, including the Reinstatement Period. This article gives an overview of the Reinstatement Period in Term Insurance. Read on to know more!

Reinstatement

Contents

What is Reinstatement in Insurance?
How Does Reinstatement Work?
Advantages of a Reinstatement Policy
- Retention of Original Terms and Premiums
- Avoidance of New Underwriting Requirements
- Preservation of Accumulated Benefits
- Cost-Effectiveness
- Continuation of Coverage without Gaps
2 Types of Reinstatement of Term Policy
What is a Policy Revival?
Why Policy Revival Matters
Eligibility and Time Limits: Policy Revival
Requirements for Policy Revival
Types of Policy Revival Schemes
Policy Revival Procedure and Documentation
Limitations and Considerations: Policy Revival
What is a Policy Lapse?
How a Policy Lapse Happens?
When Does a Term Plan Lapse?
Death Benefits During the Grace Period
Consequences of a Policy Lapse
Options After a Policy Lapse
Steps to Avoid a Lapse in Policy
- Timely premium payment:
- Auto-debit payment feature:
- Choose payment frequency according to income:
- Choose a calculated death benefit:
- No-lapse policy:
- Choose a plan per your budget:
- Avoid adding riders/add-ons:
How to Get Reinstatement in Term Plan?
- Request Submission
- Overdue Premium Payment
- Evaluation of Insurability
- Reinstatement of the Policy
Conclusion
Frequently Asked Questions

What is Reinstatement in Insurance?

Restoring something to its previous status is known as reinstatement. Reinstatement of a policy means restoration of an insurance plan that had been previously cancelled or terminated. The reinstatement of a lapsed Term Plan may come with additional charges, interest, and outstanding premium amounts, which can vary according to the insurer's terms and conditions.

Reinstatement requests are often subject to time limitations. For instance, some insurers only allow reinstatement within a specified period, like 30 days to two years after the policy lapses. Beyond this period, reinstatement may no longer be an option, and the individual may need to apply for a new policy. Thus, policyholders should check with their insurer for specific terms and deadlines to ensure that reinstatement is feasible if they face a lapse in coverage.

Let’s explore the concept of reinstatement in insurance with an example.

Rahul's ₹1 crore term Life Insurance coverage may lapse in India if he fails to pay the premiums by the due date. Nonetheless, reinstatement is often possible under many policies, usually after two years. Rahul has to apply for reinstatement, pay any unpaid premiums plus interest (for example, ₹12,000 in premium plus ₹1,000 in interest), and be checked out medically.

If accepted, his coverage picks up where it left off, although claims made during that time may not be covered. Insurance companies in India may have different reinstatement conditions, including time frames, interest rates, and medical examinations.

How Does Reinstatement Work?

Reinstatement of a lapsed Term Plan can take place within the revival period as stated in the policy document.

This is after the grace period given by the insurer. The Term Plan remains active during the grace period, but the policy becomes inactive after the grace period is over. This means no claim will be paid to the beneficiary if the policyholder dies. During this period, the policyholder can contact the insurer and fill out the revival form.

After this, the outstanding amount towards the premiums plus the additional fee and applicable charges will have to be paid to reinstate the policy. The policy document contains all the information needed for the process. The insurance company can also be directly contacted for more information.

Advantages of a Reinstatement Policy

Reinstating a lapsed insurance policy offers several advantages for policyholders, especially when compared to purchasing a new policy. Here are the main benefits of policy reinstatement:

Retention of Original Terms and Premiums

When a policy is reinstated, the original terms, conditions, and premium rates generally remain intact. This can be especially beneficial for long-term policies like Life Insurance, where premium rates were initially based on the age and health of the policyholder at the time of purchase. A new policy might have higher premiums, especially if the policyholder's age or health status has changed.

Avoidance of New Underwriting Requirements

Many insurers may require updated medical or financial evaluations only if a significant amount of time has passed since the policy lapsed. However, if the policy has been lapsed for a long time (e.g., a year or more), insurers may ask for updated medical exams or financial assessments.

Preservation of Accumulated Benefits

In certain policies, particularly permanent Life Insurance, benefits like cash value and dividends accrue over time. When a policy is reinstated, these benefits are usually retained, whereas starting a new policy may mean forfeiting years of accrued benefits. Additionally, policies that offer long-term rewards or bonuses, such as no-claim bonuses, would continue without interruption after reinstatement.

Cost-Effectiveness

Paying any overdue premiums with interest may be more cost-effective than taking out a new policy with potentially higher rates. This can be especially advantageous for older policyholders, who may face much steeper premiums on new policies due to age.

Continuation of Coverage without Gaps

Reinstating a policy minimizes coverage gaps, ensuring the policyholder continues to receive protection. This is critical in policies where gaps could mean financial vulnerability, such as in health, auto, or Life Insurance.

Hence, reinstating a policy helps policyholders maintain favourable terms, benefits, and coverage continuity, often at a lower cost than securing a new policy.

An example to understand the overall importance of reinstatement of policy is as follows.

Suppose Shiven bought a Term Plan in 2015 with a sum assured of Rs. 50 lakhs for a policy term of 15 years. He was asked to undergo a medical test at the time of the policy purchase. Based on all factors, his premium was calculated to be Rs 7,000 annually. He paid the premiums regularly until 2019.

He has been unable to pay premiums from 2019 to 2023. The policy has lapsed and offers no payout at the moment. He wants to revive the policy and is asked to pay the outstanding amount of four premiums, which is Rs. 28,000, and an additional fee of Rs. 15,000. He might have to undergo a medical examination again to prove that he is in good health after the lapsed period. Here, the key point to note is that the cost to buy a new policy will still be higher than the cost to reinstate a lapsed policy.

2 Types of Reinstatement of Term Policy

The two ways to reinstate a lapsed policy are as follows.

Within the grace period
Beyond the grace period

Within the grace period: This is the extra period the insurance company provides in case of non-payment of premium. During this period, the policyholder can pay the outstanding amount without any extra charges and enjoy the benefits of a Term Plan.

Beyond the grace period: Beyond the grace period, the policy becomes inactive. During this time, the piled-up premiums are to be paid with additional interest and any late fees according to the conditions of the insurer.

What is a Policy Revival?

Policy revival is a process through which a lapsed insurance policy is reactivated, allowing the policyholder to restore the coverage and benefits that were initially in place. This option is particularly useful for long-term policies where missing premium payments can lead to a lapse in coverage. Revival is typically available within a specific time frame after the lapse and requires meeting certain conditions set by the insurer. Here’s an in-depth look at how policy revival works, its requirements, benefits, and types of revival schemes.

Why Policy Revival Matters

When an insurance policy lapses, it no longer provides financial protection, leaving the policyholder and their beneficiaries exposed to risks. Starting a new policy might involve higher premiums or less favourable terms, particularly if the policyholder’s age or health has changed. Revival enables policyholders to avoid this disruption by reinstating the original policy, preserving both coverage and any accrued benefits.

Eligibility and Time Limits: Policy Revival

Insurers typically allow a grace period after the premium due date, during which the policyholder can pay the overdue amount without any lapse in coverage. If the premium remains unpaid beyond this period, the policy lapses. However, many insurers offer a revival period during which the lapsed policy can still be revived, usually within a timeframe ranging from a few months to a few years, depending on the insurer's policies. If the policyholder does not revive the policy within this time, they may need to apply for a new policy entirely.

Requirements for Policy Revival

Policy Revival usually requires:

Payment of Overdue Premiums: The policyholder must pay all missed premiums, often with an added interest or penalty based on how long the policy has been inactive.
Medical Underwriting: If the policy has lapsed for an extended period, the insurer may require a new medical assessment. This helps the insurer assess if the policyholder's health has changed and determine any associated risks.
Updated Financial Information: Some policies, particularly high-value Life Insurance policies, might require the policyholder to update financial records to verify continued eligibility for the insurance coverage.

Types of Policy Revival Schemes

Insurance companies often offer multiple revival schemes, each designed to fit different circumstances:

Ordinary Revival: The policyholder simply pays all outstanding premiums with interest. This is the most straightforward and common method for reviving a lapsed policy.
Special Revival: This scheme allows the policyholder to reset the policy date and start a new term for the policy, which can avoid the need for a medical examination. The premium calculations will be based on the policyholder’s age at the time of revival, which may lead to an adjusted premium rate.
Loan-Cum-Revival: In policies with a cash value, such as whole Life Insurance, the policyholder can use the accumulated cash value to cover the outstanding premiums, effectively using the policy’s savings component to revive it.
Survival Benefit-Cum-Revival: For endowment policies with survival benefits, the policyholder may use a portion of the accumulated survival benefit to pay overdue premiums and revive the policy.

Policy Revival Procedure and Documentation

To initiate a revival, policyholders generally need to:

Contact the insurer to inquire about revival eligibility and requirements.

Complete a revival application form, which may include health declarations or additional disclosures if required.
Provide any necessary documentation, such as identification, proof of income, or medical reports if a new health assessment is needed.
Pay the accumulated overdue premiums and any interest or penalty fees.

Limitations and Considerations: Policy Revival

Higher Premiums in Some Cases: In certain revival schemes, such as special revival, the policy’s term is reset, which may adjust the premium amount based on the policyholder’s current age.
Risk of Rejection: If the policyholder's health has significantly declined, the insurer may choose not to revive the policy or might impose additional restrictions.
Possible Limitations on Benefits: Some policies might restrict certain benefits temporarily following revival, such as a waiting period for certain coverages to reduce the insurer's risk.

Thus, policy revival is a valuable option that allows policyholders to restore lapsed insurance policies with minimal disruption, preserving favorable terms, premiums, and accumulated benefits. Understanding the different revival schemes and meeting the insurer's requirements can ensure that the policyholder and their beneficiaries continue to receive the intended financial protection.

What is a Policy Lapse?

A policy lapse occurs when an insurance policy becomes inactive or terminates due to non-payment of premiums or failure to meet other contractual obligations. When a policy lapses, the policyholder loses coverage and is no longer eligible for the financial protection or benefits offered by the policy. Policy lapses are most commonly seen in life, health, auto, and other types of insurance where regular premium payments are required to maintain active status.

How a Policy Lapse Happens?

Missed Premium Payments: The primary reason for a policy lapse is the failure to pay premiums on time. Most insurers provide a grace period, usually ranging from 15 to 30 days (or longer in some cases), during which the policyholder can make the payment without losing coverage. If the premium remains unpaid beyond the grace period, the policy lapses.
Other Unmet Conditions: In some policies, specific conditions must be met to keep the policy active. For example, in health or Life Insurance, not submitting required documentation for regular medical check-ups (if mandated) could lead to a lapse.

When Does a Term Plan Lapse?

A Term Plan usually lapses due to a lack of premium payment. In an agreement between the insurer and the policyholder, the insurance company provides coverage and payout amount to the nominees in the event of the policyholder's untimely demise. For this, the policyholder needs to pay an amount towards a monthly or yearly premium as chosen at the time of the purchase of the policy.

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If the policyholder is unable to pay the premium towards the plan under any circumstances, the insurer provides a Term Insurance grace period to clear the payments. If the policyholder is unable to make the payment even during the grace period, the policy may lapse. A lapsed policy does not provide coverage.

Death Benefits During the Grace Period

Death benefits are paid to the nominee if the policyholder passes away during the grace period. Some deductions may apply as stated by the insurer at the time of the inception of the policy.

Consequences of a Policy Lapse

Loss of Coverage: Once a policy lapses, the policyholder loses all coverage benefits, meaning they no longer have financial protection against the risks covered by the policy.
Loss of Accrued Benefits: In some policies, such as whole Life Insurance, a lapse could mean losing accumulated benefits, like cash value or bonuses, depending on the policy terms.
Potentially Higher Costs for Reinstatement or New Policy: If a policy lapses, the policyholder may face additional costs if they want to reinstate it, as insurers often impose penalties, interest, or other fees on overdue premiums. If reinstatement is not possible, obtaining a new policy could result in higher premiums, especially if the policyholder’s age or health status has changed.

Options After a Policy Lapse

Reinstatement: Many insurers offer a reinstatement or revival option, allowing policyholders to reactivate a lapsed policy by paying overdue premiums, often with interest, and fulfilling other requirements (such as a health check-up).
Surrendering the Policy: In policies with cash value (e.g., whole Life Insurance), policyholders may surrender the policy for its cash value instead of reinstating it. This option may come with its own conditions and penalties.
Purchasing a New Policy: If reinstatement is not feasible, the policyholder may need to purchase a new policy to regain coverage.

A policy lapse occurs when an insurance policy is no longer active due to non-payment or unmet conditions, resulting in the loss of coverage and other benefits.

Steps to Avoid a Lapse in Policy

Some steps to avoid a policy lapse are as follows.

Timely premium payment:

Investing in a Term Plan is the best way to secure one’s family from financial emergencies. But, non-payment of premiums over a long period of time may compromise this safety net. Therefore, timely payment of premiums must be prioritised under all circumstances.

Auto-debit payment feature:

Depending on the plan of premium deduction, the auto-debit feature will automatically debit the amount from the policyholder’s account. This feature saves the policyholder from setting reminders for payments and making the payments online or offline.

Choose payment frequency according to income:

In heavy premium payments, annual payments should be avoided as they may become overbearing to the policyholder. Instead, monthly premium payments are an advisable option in this case.

Choose a calculated death benefit:

Death Benefits should be chosen according to the affordability of the premiums.

No-lapse policy:

Under the no-lapse guarantee, if the premium is paid under a designated time period, the policy does not lapse.

Choose a plan per your budget:

Term Plans are one of the best financial investments one can make, but they come with a long-term commitment. Therefore, the policyholder must have an in-depth understanding of his financial commitments and liabilities. With the change in income, the amount paid towards premiums should not become overbearing.

Avoid adding riders/add-ons:

The addition of riders makes a basic plan more comprehensive. These additional services help the policyholder customise the plan to meet his individual needs. However, they come with an additional cost. Bundling of riders may increase the overall amount of the premium to be paid towards a Term Pan. Therefore, the choice to add riders must be wisely made, and the premium amount should be calculated before purchasing a policy.

Moreover, to avoid a policy lapse, policyholders should set reminders for premium due dates, explore automatic payment options, or consider adjusting premium frequencies (monthly, quarterly, or annually) to match their financial schedules.

How to Get Reinstatement in Term Plan?

The process of reinstatement in a Term Plan typically involves these steps:

Request Submission

The policyholder has to send the insurance firm a formal request in writing for reinstatement.

Overdue Premium Payment

All past-due premiums must be paid in addition to any interest or late fines.

Evaluation of Insurability

The insurance provider could need fresh proof of insurability. This might be a property inspection for homeowners' insurance or a health screening for life.

Reinstatement of the Policy

The policy is returned to its initial terms and conditions if the insurer grants the reinstatement.

Conclusion

The act of reinstatement guarantees the policyholder's return of insurance coverage. It will not, however, cover any events or claims that happened when the insurance was inactive. Furthermore, restoring insurance can occasionally be more expensive than retaining it because of potential penalties for fresh insurability proofs and late fees or interest on past-due premiums.

For policyholders who unintentionally let their coverage lapse, reinstatement might benefit them. However, the ideal course of action is to maintain the policy's active status and pay insurance payments on schedule to guarantee ongoing coverage and prevent the inconvenience and possible expenses of reinstatement.

Frequently Asked Questions

Here’s a list of common questions and answers related to the Reinstatement Period in Term Insurance.

Will the sum assured change after the reinstatement of a policy?

Some circumstances, like changes in the health condition of the policyholder during the reinstatement period, may bring about a change in the sum assured.

Will the amount of premium be the same after the reinstatement?

The premium amount may change after the reinstatement of a policy according to the terms and conditions of the insurer.

Can I reinstate my policy term any time after the grace period?

No, there is a definite time after the grace period that is valid for reinstatement. This usually depends on the clauses of the policy document.

How long can you reinstate a Life Insurance policy?

Insurers typically allow three to five years to reinstate a policy after it lapses.

Can I reinstate my Term Insurance even if it’s been a year since it lapsed?

Yes, many insurers allow reinstatement up to two years, but requirements like health checks may apply for extended lapses.

If I reinstate my Term Insurance, will my premium amount change?

Typically, the original premium remains, but if health has changed significantly, the insurer might adjust or deny reinstatement.

Does reinstating a Term Insurance policy reset the policy’s term length?

No, reinstating does not change the original policy term; it simply restores coverage from the point it lapsed.

Can my beneficiaries lose out if I don’t reinstate my lapsed Term Insurance in time?

Yes, if the policy remains lapsed, beneficiaries won’t receive any payout, even if the policyholder passes during that period.

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes.