How to Revive a Lapsed ULIP Within 2 Years

The insurance regulator of India, IRDA (Insurance Regulatory and Development Authority) has introduced another new rule for Unit Linked Insurance Plans (ULIPs).  After the overhaul of ULIPs in September 2010 which made ULIPs more investor friendly, here is another one to  take it to the next level. The new rule will now enable policy holders to revive a lapsed ULIP policy within two years from its premium due date.

But before we go into the specifics, let us do a quick recap of what are the rules of lapsed ULIP policy rules today.

The current rules

As it stands today, policyholders have only two months from the premium due date to revive a lapsed ULIP. So if you forget to pay the premium of your ULIP, the insurance company offers a grace or a notice period of 2 months in which you can still pay the premium. After the 60 days, the policy lapses. Once the policy has lapsed, the insurance companies treats it as withdrawn.

If the policy holder has held the ULIP for its mandatory period of holding, the payout is given to the investor. But if the policy holder has not finished the mandatory period of five years of holding the ULIP, then he is not eligible for any payout.

In such a case, the insurance companies maintain this money into something called the “discontinued policy fund”. The policyholder’s money is maintained in this account till he is eligible for a payout which is at the end of five years of the policy.

The new rules of lapsed ULIP policy effective November 1st 2011

Under the new rules that IRDA has come out with, a policy holder will have upto 2 years to revive his lapsed ULIP policy as against the two months he has today. But there are caveats to this as well.

Firstly, this is effective only for ULIPs that are taken after September 1st 2010.

Secondly, this is effective from November 1st 2011.

Thirdly, the policy should not have completed the mandatory lock in period of 5 years. If it has, then this rule is not applicable. If you think for a moment, then this makes sense as after the threshold of 5 years of lock in, the policy’s fund value is payable to the policy holder so in case he missed the premium payment, the policy is withdrawn and he is given the payout.

Once the policy holder decides to re-instate the policy under these new rules, normal underwriting kicks in.

What’s the benefit to policy holders ?

The biggest benefit is that now one can get more time to revive a lapsed cover. So effectively, one can skip payments for 2 years and come back and breathe some life into it again.

Currently, the money lying in the discontinued policy fund earns 3.5% for the policyholder. From November 1st, the returns will be linked to the savings account interest rates of State Bank of India (SBI). Today, the savings account interest rates of banks are 4%. But you must have read about the deregulation of savings account interest rates.

So this 4% could possibly be more or less depending on what SBI keeps it at.

Now, with every good thing comes a small unlikeable one as well. In this case, it’s called Fund Management Charges (FMCs). With the new rules, insurance companies are free to levy FMC of upto 0.5% for managing your fund. Earlier, this wasn’t the case and the insurers were managing the funds for free even after your policy had lapsed.

Here is a comparison of the rules before and after November 1st – I could not resist taking this from TheEconomicTimes as it’s very nicely done.

Image from TheEconomicTimes

Our take

Remember that ULIPs can make sense as investment avenues if you stick with them in the long run. Long term investing is about holding products long enough. Finally to give you more than decent returns – in ULIPs parlance, it is easily 8-10 years.

Having said that, you should have not missed paying the premiums for your ULIPs. But personal circumstances and cash crunch can make you see this day. You can use this new rule to your advantage.

IRDA has again proven that it’s a no-nonsense regulator. It meant to make products and the rules that govern them easy for investors. A welcome move.