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Reinstatement Period in Term Insurance

TeamAckoMay 13, 2024

A Term Plan is the most reasonable form of financial protection for a definite period of time 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.

Contents

What is Reinstatement in Insurance?
How Does Reinstatement Work?
When does a Term Plan lapse?
Death Benefits During the Grace Period
2 Types of Reinstatement of Term Policy
Advantages of Reinstatement of a Term Policy
Steps to Avoid a Lapse in Policy
How to Get Reinstatement in Term Plan?
Key Takeaways:
Wrapping Up
Frequently Asked Questions

What is Reinstatement in Insurance?

Restoring something or someone to their 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. This can vary according to the terms and conditions of the insurer.

Rahul's Rs. 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, Rs. 12,000 in premium plus Rs. 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 called the revival 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.

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.

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.

Advantages of Reinstatement of a Term Policy

Policyholders usually have two options to choose from. One can be reviving a lapsed policy, and the other can be buying a new plan. Comparatively, the first option has advantages. Here are some advantages of reviving a lapsed policy.

Existing terms and conditions: With the reinstatement of the existing policy during the revival period, the old terms and conditions stated by the insurer are applicable. If a new Term Plan is purchased, it might have new terms and conditions as stated by the insurer.

Premium payment: The payment of premiums towards a new Term Plan will usually cost more than clearing the outstanding payments for a lapsed policy. This will have a much greater impact if the health of the policyholder changes over time. In that case, a new plan may require a medical test, and in the case of any pre-existing illnesses, it might affect the sum assured or the cost of premiums.
Incontestability period: This is a time period usually in most life insurance policies or in some Term plans where the insurer can question the payout of the policy within the first two or three years of purchase. The time period may vary from one insurer to another.

In case of reinstatement, the incontestability period will be counted from the original purchase date and not the revival date. On the other hand, when purchasing a new plan, the incontestability period starts from the conception of the 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.

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.

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 or health insurance.
Reinstatement of the Policy: The policy is returned to its initial terms and conditions if the insurer grants the reinstatement.

Key Takeaways:

Some points to remember regarding the Reinstatement Period in Term Insurance are as follows.

An application to reinstate is to be given to the insurer. A standard revival form needs to be filled out, and some additional formalities may be included according to the insurer's terms and conditions.
A medical checkup may be required as proof of the policyholder's good health. This may depend on the requirements of an insurer. Most insurance companies facilitate medical checkups at home or in designated clinics.
It is important to note the revival period of the Term Plan. There is a specific period after the grace period in which a policy can be revived. This period should be noted, and the revival application should be sent during this period. Please read the policy document for detailed information.
Reinstatement is a more economical option than buying a new policy.
There might be some changes in the terms and conditions of the policy document. These can be clearly understood and read in the policy document before the reinstatement.
A policy can be protected from lapsing by opting for automatic payments and choosing the premium amount wisely. This is a crucial step and should be undertaken carefully.
The terms and conditions for reinstating a policy will depend on the terms and conditions of the insurer. These should be carefully understood at the time of the purchase.

Wrapping Up

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 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.

Why should I reinstate a lapsed Term Plan?

A Term Plan is one of the best financial cushions that one can provide to his family in his absence. In case of any unforeseen events, Term Plan can help the policyholder’s family survive without compromising on the current standard of living and meeting any other financial obligations. Reinstating such a policy will be more affordable than seeking a new policy.

How long can you reinstate a life insurance policy?

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

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.