Imagine you are building a fortress against an unseen enemy. If you require four outer walls bordering its periphery to complete the structure, would you build only three? Or, would you suddenly stop building the fortress and instead start focusing on a guesthouse inside it with the intention of selling it later?
More ironically, would you stop transporting the individual concrete slabs and stacking them up to form the walls when an assault by the enemy is imminent?
This is precisely what many insurance policyholders do with their insurance. They either take insufficient cover or try to combine insurance with investment.
More commonly, when they are unable to pay their premiums, they simply stop paying. Thereby, they let their policy lapse and expose themselves to the very risk they had wanted to guard against by taking insurance.
What can be done to avoid such a situation? Let’s wade through three scenarios:
Scenario 1
Sachin has a term insurance cover for Rs. 1 crore. Sachin works in an MNC and he pays an annual premium of Rs. 11,000 towards this term policy. Unexpectedly, he loses his job as his employer wants to downsize the workforce. As a result, Sachin struggles to meet his monthly expenses. The following month, his insurance premium is due. Sachin realises that he will not be able to pay the premium, which will result in discontinuance of the policy.
What can Sachin do to avoid this situation? Does he simply stop paying?
The term policy taken by Sachin had the feature of increasing or decreasing the Sum Assured amount depending on the changing needs of the policyholder. Sachin approached his insurance company and placed a request to reduce the Sum Assured to Rs. 50 lakhs. Consequently, the premium payable also reduced to Rs. 5,000, which Sachin found easier to manage.
This option helps the policy to stay in force and at the same time gives him flexibility. Of course, if there were an eventuality, Sachin’s dependents would only receive the reduced Sum Assured amount from the insurance company.
Nevertheless, this is a viable option, because it is certainly better than receiving nothing if Sachin had not continued paying the full premiums and let the policy lapse.
Another option that Sachin could have explored was to change the frequency of paying the premium. Earlier, Sachin had opted for annual payment of the premium. He could have split the payment amount into 4 quarterly instalments to make it easier on his pocket. This would have not only kept the Sum Assured amount intact, but would have also reduced the burden of paying the entire premium in one go.
Scenario 2
Raj has 6 Unit Linked Insurance Policies (ULIPs) which requires him to pay a total annual premium of Rs. 1 lakh. In addition, he has a term policy for Rs. 1 crore, which carries an annual insurance premium of Rs. 14,000. Of the ULIP policies, 3 of them are very expensive and are not performing well on the investment front as well. Raj has persisted with these policies for the past 5 years. The other 3 ULIP policies are relatively new and are comparatively cheaper.
Raj realises that he is unable to service all the 7 policies. What can Raj do in this situation?
Raj should review all his insurance policies and discontinue the expensive ones which give him a low Sum Assured option and which are also not giving him good returns. As Raj pays high premium on the non-performing ULIP policies, he is unable to pay the premium for the term policy that gives him a high life cover. By discontinuing expensive policies, Raj can continue servicing the important term cover.
Scenario 3
Priya has a health insurance family floater policy for Rs. 5 lakhs, which carries an annual premium of Rs. 14,500. The premium is due on January 5th every year. The grace period to pay the premium is one month after the due date, i.e. by February 5th.
In a particular year, Priya realises in January that she hasn’t invested enough for tax purposes and invests heavily during the month to save taxes. As a result, she recognizes that she does not have enough funds in her account to pay the health insurance premium. Priya understands that failure to pay the premium on time will result in a default and her family will not be covered if this happens. What can Priya do to overcome this financial crunch she faces in paying the insurance premium?
Priya’s financial problem is temporary, as she will get funds in her account when her salary is credited at the end of the month. Priya does not wish to wait till the last day of the grace period to make the premium payment. As a result, she resorts to paying using her credit card, which gives her the benefit of enjoying 45 days interest free credit. When she gets her salary, she will be in a position to pay the credit card bill which carries the insurance premium amount.
If the financial crunch prevails for a little longer than one month, or if the insurance premium is a large amount, a short-term loan can be availed to pay the premium amount. A loan carries an interest and this is an additional cost you need to bear in order to get around the crunch situation.
Remember, paying your insurance premium on time is the basic requirement to keep the policy in force. When a policy lapses, you will not be reimbursed with the policy amount in case there is an eventuality. This defeats the very purpose of an insurance policy.
Therefore, adopt proactive strategies like Sachin, Raj or Priya did in order to avoid non-payment of premium and the consequent policy lapse. Take care that the fortress you are building serves the purpose it was designed for – to keep the unseen enemy at bay.
Disclaimer: The figures mentioned in the article are not actual premium amounts, and are used only for illustrative purpose.