Life insurance is designed to provide financial protection to a policyholder’s family or dependents if the person passes away during the policy term. In exchange for this coverage, policyholders has to pay a premium either as a one-time payment at the start of the policy, regularly throughout the policy tenure, or for a limited term, though it depends on the terms of the policy.
For the regular premium payment policies, an individual can pay the amount monthly, quarterly, semi-annually or annually, as per the insurer’s conditions.
Since, most life insurance policies are linked to regular premium payments, maintaining continuity becomes important for keeping the coverage active and preserving associated benefits. However, policyholders may sometimes miss payments due to financial constraints or oversight, which brings us to the question on how insurers treat unpaid premiums and the status of policy after several missed payments.
What happens to a life insurance policy if holder misses a premium payment?
If a policyholder misses a premium payment, the policy does not stop immediately. Insurers typically offer a grace period during which the policy continues to remain active.
“Typically, the grace period is around 15 days for monthly premium payment modes and 30 days for annual, half-yearly, or quarterly modes. In some cases, insurers may also allow renewal even after the grace period has ended, depending on their internal guidelines and the customer’s policy history,” according to Varun Agarwal, Head of Term Insurance at Policybazaar.
After how many missed premium payments does a policy lapse?
If the premium remains unpaid even after the grace period, the policy status changes depending on the policy type and the number of premiums already paid. The policy may either lapse or become paid-up, according to Rahul Mathur, CEO of Roinet Insurance Broker.
When a life insurance policy becomes ‘paid-up’ after missing payments, it means your coverage continues at a reduced sum assured in proportion to the premiums you have already paid. If premiums are not paid and eligibility for paid-up is not met, the policy can lapse, meaning it ends.
Can you revive a lapsed life insurance policy?
Yes, in most cases, a lapsed life insurance policy can be revived within 2 to 5 years from first premium unpaid date, according to the insurance expert.
Policyholders are generally required to pay the pending premiums to reinstate the policy. Though revival terms vary between insurers and products, many insurance companies do not levy a direct penalty apart from the overdue premium amount and applicable interest, if any, he added.
“Some cases may also require updated health declarations or medical checks, depending on the duration of the lapse and policy conditions,” Agarwal said.
What are the options if you are temporarily unable to pay premiums ?
If you are temporarily unable to pay life insurance premiums due to situations such as , financial stress, or health-related expenses, there are still a few options available to help maintain coverage.
According Agarwal, some insurance companies offer plans with a premium holiday feature, allowing customers to skip premiums for a limited period without immediately losing benefits. This allows the policyholder to maintain their life insurance coverage and associated benefits while recovering from above mentioned situations, if applicable.
Tax benefits on life insurance premium payments
The premium that a taxpayer pays for a life insurance plan qualifies for a tax deduction benefit under Section 80C of the Income Tax Act, subject to certain terms and conditions.
Under Section 80C, taxpayers can claim a deduction up to ₹1.5 lakh against life insurance premium paid. However, this deduction is available only under the and not allowed under the new tax regime.
It is important to note that the premium paid for a life insurance policy from any insurance agency recognised by the IRDAI (Insurance Regulatory and Development Authority of India) is eligible for Section 80C deduction and not just LIC life insurance policies, according to ClearTax.
Apart from tax deduction available on premium payments, Section 10(10D) of the Income Tax Act provides exemption on amounts received under a life insurance policy, including any bonus, maturity proceeds, surrender value and death benefits, subject to certain conditions. This exemption applies to traditional life insurance policies, ULIPs, and endowment plans, helping policyholders receive eligible proceeds tax-free if the applicable conditions are satisfied.