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If a Policyholder Becomes Insolvent, Is There Any Way He Can Protect the Life Insurance Policy?

Published On Apr 09, 2021 12:00 AM By InsuranceDekho

A life insurance policy is a legal contract between the insurer and the individual. In this contract, the insurer promises to pay the sum assured to the nominee/s of the policy, upon the death of the insured, provided the premiums are paid regularly. What happens if the policyholder becomes insolvent owing to unexpected financial strains and is not able to pay the premiums? Will his policy lapse? There are still ways to revive it, to help the individual to protect his life insurance policy. 

Also Read:- Comparison: Life Insurance vs Term Insurance

Protecting Life Insurance Policy

All types of insurances require the insured to pay a certain amount of premium until the term of the policy. If in case the policyholder fails to pay the premium within the deadline, they can still pay during the grace period offered by the company without any penalties. This grace period is between 15 and 30 days. 

In term insurance, if the premium is not paid within the grace period, the policy will be terminated, and insured cannot avail any benefits. Whereas in a unit-linked plan, if premiums are stopped within the lock-in period, then the policy is considered lapsed, but the benefits will be paid after the lock-in period. 

Reviving Life Insurance Policy

Even if the life insurance policy lapses under unavoidable circumstances, there are still options to revive the lapsed policy, within a specific period. Reviving a lapsed policy depends on the policy and the company. The process also changes based on the elapsed time and the insurance cost. The process of recovering the policy is as follows:

  • The insured has to submit proof of continued insurability to pay the life insurance policy premiums, in the prescribed form as described by the insurer. 
  • The insured should revive the policy by paying the premium dues and also by paying a penalty interest as applicable. 
  • The conditions for reviving depends on how long the policy has remained dormant. For instance, if the policy was active for at least three years, the insurer will give a window of about 2 years to revive the policy. The policy restoration process will be very simple if it is revived within six months of its lapse.
  • The insured might have to undergo a medical examination before reviving the policy before the insurer decides if the policy is eligible for reinstatement. 

Reviving Whole Life Insurance Plans

There are two choices to protect a whole life insurance plan or endowment plans. The insured can stop paying the premiums and collect the available cash savings. Though there will be not benefits, they can withdraw the savings, after paying taxes. 

The other option is to go for a reduced paid-up option, where they can stop paying premiums and avail a reduced death benefit, with no cash savings. 

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Bottom Line

At instances of Insolvency of insured, reviving a lapsed policy, or taking alternative steps to avail the maximum benefits from it, depends on the policy, the insurance company and the time of its dormancy. 

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