LIC lifeline for lapsed policies

Tardy policy-holders have time till February 28 to revive their lapsed insurance policies. The Life Insurance Corporation (LIC) has given clients who haven’t paid their premia for up to seven years the opportunity to win back their risk covers by forking out a small penalty. “This is the first time that we are offering our clients the opportunity to revive policies that lapsed seven years ago,” said D.K. Ghosh, general manager (customer relations), eastern zone, LIC. The insurance giant has offered to revive these policies by charging 20 per cent less on the penal interest rate. LIC charges 8 per cent annual interest as penalty for not paying premium within the grace period from the premium due date. The penal interest becomes applicable from the premium due date till the time the premium is paid. The insurer allows customers to revive policies that lapsed for shorter durations. “However, there is a restriction in the case of policies that lapsed seven years ago. Such policies should have acquired the surrender value, that is the premium should have been paid for the first three years after the policy commenced,” said Ghosh. It is estimated that for an insurer, a life insurance policy achieves breakeven if the premium is paid for three years. The insurer begins to make profits on premiums paid after three years. Hence, a life insurance policy acquires a paid-up value — or a surrender value — after premium is paid for three years. “Policies which have lapsed for more than five years (but up to seven years) will be revived with a fresh underwriting, which means that the policy-holder will have to submit all documents and undergo a fresh medical check-up,” Ghosh explained. In the case of lapsed policies up to five years, a medical check-up would be required only for those who are above 50 years of age. “People who are below 50 years won’t have to undergo any medical test provided their policies lapsed five years ago,” Ghosh added. “In fact, we are mailing policy-holders all the forms and documents required to revive their lapsed policies in addition to public advertisements about the campaign,” Ghosh said. The ongoing campaign offers a 20 per cent discount on penal interest. However, the discount is capped at Rs 10,000. This means that if the penal interest amounts to Rs 60,000, the policy-holder will have to pay Rs 50,000 plus the outstanding premium to revive his/her lapsed policy. “In earlier offers, the lapsed period was capped at five years and restricted to some specified life insurance plans,” he added. The current campaign, in contrast, covers almost all plans launched by the public sector insurer. When a policy lapses, the contracted benefits become non-payable to the policy-holder. Till November last year, LIC used to treat a policy as lapsed if the premium was not paid within six months from the due date. The Insurance Regulatory & Development Authority (IRDA) came up with a uniform definition of lapsed policies for all insurers. The insurance regulator capped the grace period to one month for quarterly, half-yearly and yearly and 15 days for monthly premium payments and if the premium is not paid within the grace period, a policy is considered lapsed. However, the regulator said a lapsed policy could be reinstated by paying the due premium with penal interest in two to five years. “Till now, lapsed policies for more than five years could not be revived,” said Ghosh. “However, if a policy-holder has paid the premium for the first three years and then discontinued the payment but holds on to the policy for its full term, he or she would get back the premium paid on maturity,” he added. According to data available with IRDA, the total number of lapsed policies in the industry at the end of March 2007 stood at 86.57 lakh. The aggregate sum assured of these policies was Rs 79,300 crore. As for LIC, the total number of lapsed policies as on March 31, 2007 was 77.73 lakh and the aggregate sum assured of these policies was Rs 63,206 crore. Ghosh agreed that in the last few years the lapsed policy revival campaign was not done in such a large scale. “In fact, lapsed policies entail losses for both the insurer as well as the policy-holder,” he said. The insurer loses premium income and hence profitability when policies lapse, while the insured person loses the risk coverage and the financial benefits from the policy. Courtsy:The Telegraph,Kolkata,05/02/2009