Term Insurance Grace Period

If the premium is not paid after the grace period in the case of insurance, then the Term Insurance policy will lapse. This means that the policy status will no longer be in force; hence, the policyholder and the beneficiaries do not have any coverage or benefits. 

For example, when the premium for a life plan fails to reach the insurance company even after the grace period, the policy gets terminated, and no claim can be made. However, some insurers, like ACKO Term Insurance, provide a revival period. A revision period means a particular time limit within which policyholders can revive their insurance by paying the outstanding amount and interest.

This revival option is the last chance to revive a lapsed policy back into active status. It goes without saying that if no action is taken during the grace period,  the coverage becomes forfeited permanently and hurts the pocket of the policyholder and his/her beneficiaries.

The grace period is a critical component of term insurance policies because it allows policyholders to make premium payments and enforce the policy. Without a grace period, policyholders who miss paying the premium on time would have their policy lapse sooner, and the benefits provided by the policy would no longer be available to them or their beneficiaries. Therefore, a grace period ensures that the policy remains in force for some time, even after a lapse in premium payment and that policyholders have adequate uninterrupted coverage for their loved ones.

Let's understand the concept of the grace period with the help of an example. 

Mr Kumar has a TI policy for which he pays an annual premium of ₹10,000. The due date for the premium payment is 1st January every year. However, Mr Kumar forgets to pay the premium by the due date. In this case, Mr. Kumar has a grace period of 30 days, which means that he can pay the premium by 31st January without any penalty or interest. If Mr. Kumar fails to pay the premium by 31st January, his policy will lapse, and he will lose the benefits provided by the policy.

Lapse of Insurance Coverage

A lapse of insurance coverage means if a policyholder fails to pay their premium within the Term Insurance grace period, the policy will cease to exist, and the benefits provided by the policy will no longer be available to the policyholder or their beneficiaries.

This includes the coverage amount, which means that if the policyholder passes away, their beneficiaries will not receive any death benefit. Moreover, any riders, such as Accidental Death Benefit, Waiver of Premium Rider, or Critical Illness Benefit, would also be terminated along with the policy.

In addition, the policyholder would not be able to avail of any other benefits provided by the policy, such as tax benefits or loans against the policy. 

Pre-existing Illnesses are Not Covered Anymore

Insurance policies are designed to provide coverage for various risks, including pre-existing diseases. Certain insurance policies include a waiting period before the coverage for pre-existing diseases becomes active. During this period, the policyholder is not entitled to claim coverage for any pre-existing illnesses. However, once the waiting period is over, the policyholder can claim coverage for their pre-existing conditions, subject to the terms and conditions of the policy.

If a policy lapses due to non-payment of premiums within the grace period, the coverage for pre-existing diseases may become void. This means the policyholder would have to serve the waiting period outlined in the policy agreement again before being eligible for coverage for any pre-existing conditions. Depending on the insurer and the policy, this waiting period can range from a few months to a year.

 In some cases, insurers may also exclude coverage for pre-existing diseases altogether if the policy has lapsed and the waiting period has already been served. This means that the policyholder may not be eligible for any coverage related to pre-existing conditions, even if they have previously served the waiting period.

Loss of No Claim Bonus

A No-claim Bonus (NCB) is a benefit offered by the insurer to the insurer for not raising claims during the insurance policy term. The NCB increases every year, and it can accumulate up to a certain limit, which varies depending on the insurer.

If a policy lapses due to non-payment of premiums within the insurance grace period, the policyholder loses the benefits of the policy, including the accumulated NCB. When the policy is renewed, the policyholder would have to start from scratch without the NCB they had accumulated over the years. This can lead to an increase in the renewal premium, as the NCB is a factor that affects the premium amount.

For instance, if Ms Pooja has a five-year Term Insurance policy with an NCB of 10% each year and does not make any claims during the policy term, the accumulated NCB would be 50% of the premium amount. However, if the policy lapses and Ms Pooja fails to renew it within the specified period, the NCB will be lost, and she will have to pay a higher premium amount to renew the policy.

Loss of Portability

Portability is a process that enables policyholders to transfer from one insurer to another without losing the benefits of their current policy. It is a useful feature that allows policyholders to avail better coverage, higher sum assured, and other benefits offered by other insurers.

However, if the policy lapses due to non-payment of premiums, the policyholder loses the option to port the policy to another insurer. This means that the policyholder cannot avail of the benefits of their existing policy with another insurer. Instead, they would have to apply for a new policy with a different insurer, and their coverage would be subject to the terms and conditions of the new policy.

The loss of portability can be a significant disadvantage for policyholders as it restricts their ability to switch to another insurer to avail better coverage or other benefits. Moreover, policyholders who have pre-existing conditions may find it difficult to obtain coverage from a new insurer, as the new insurer may subject them to a waiting period or other restrictions.

Renewal of a Lapsed Policy Involves Higher Cost

If the policyholder wishes to reinstate the lapsed policy, they would need to renew the policy by paying the outstanding premiums along with interest and possibly providing a health certificate.

Renewing a lapsed policy can be more expensive than continuing with an existing policy without any lapses. Insurance companies charge interest on outstanding premiums to compensate for the time value of money and the cost of recovering the premium. The interest rate can vary depending on the insurer and the policy terms, but it is usually higher than the prevailing market rate.

In addition to the outstanding premium and interest, some insurers may require the policyholder to provide a medical certificate. This certificate ensures that the policyholder is still insurable and does not have any medical conditions that would make them a high-risk candidate for insurance. The cost of obtaining a health certificate can vary depending on the insurer and the type of Life Insurance policy.