Discontinuing insurance policy abruptly increases the chances of putting your life cover and other benefits at risk!
It is always better to understand what will happen to your insurance policy if you stop paying your premium on your policy.The biggest question comes to mind is that will it continue to offer insurance cover?
The reason for not paying the premium could be any like may be you were going through a financial crunch or not so happy with the cover or just forgot to pay it or probably over insured.
But without understanding the damage it will do to your investment it is unwise to stop paying the premium.Let us understand what options one has in case one wishes to discontinue a life insurance policy and how to do in the best wise way.
Few points to consider before you discontinue your policy
Before you decide to purchase the insurance policy understand the need of it and how it gets its value.
A traditional life insurance plan is usually a long term contract.
Since it is a protection cum savings plan it pays out a sum assured with bonus on maturity of the policy and offers a return of 4-6 per cent.
So if its interrupted in the middle of its term the benefits for which it was bought get lost and most of the times life cover also.
The taxes and other expenses may also not be paid back.
Before surrendering or discontinuing the policy, it is always advisable to buy a substitute cover if not otherwise provided for, to protect against any misfortune.
Surrender of a Policy :
You can surrender your policy once your policy reaches its surrender value which is usually after a period of two to three years depending upon the term of policy.
The policy holder immediately loses the life cover and is paid the surrender value.
It can also attract tax depending upon the year of surrendering the policy.
Check my post on why you should not surrender your policy http://www.indiainvestwell.com/why-you-should-not-surrender-your-policy
Paid-up Policy :
Once the payment for the premiums has been stopped after the policy has attained surrender value, it will convert to a paid-up policy with reduced life cover and maturity benefits, usually proportionate to the premiums paid.
The paid-up value is derived from number premiums paid against the total number of premiums due.
The policy holder get such paid-up value and may not be entitled for any other benefit including bonus for remaining years.
On the maturity of the policy, only the paid-up value is paid to the policy holder.
Any policy for which the premium is not paid on its due date including the grace period time, it may become a lapsed policy. The lapsed policy will not accrue any other benefit.
Revival of lapsed policies:
You can revive your lapsed policy provided that it is paid with in a time limit prescribed by the insurer.
Insurance companies may provide for a grace period beyond the due date of the policy.
However , it may attract a charge of late fee in addition to the pending premiums and may ask for an additional medical test or a fitness report.