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Term Insurance Grace Period

TeamAckoMay 20, 2024

Term Insurance is a type of life insurance that provides financial protection to the family of the insured person in case of their untimely demise. Term plans require policyholders to pay a premium at regular intervals to keep the policy in force. However, due to various reasons, policyholders may miss paying the premium on time. This is where the concept of grace period comes in.

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What is the grace period in Term insurance? 

A grace period is a specific duration of time after the due date of a premium payment when the cover remains active, even if the premium has not been paid. In other words, it is a period during which the policyholder can pay the premium without any penalty or interest. The duration of the grace period varies from one insurance company to another and depends on the premium payment frequency.

What will happen to the Term Insurance policy after the grace period is over?

If the policyholder fails to pay the premium even after the grace period, the policy will lapse. The policyholder will no longer be covered, and the benefits provided by the policy will no longer be available to them or their beneficiaries. However, some insurance companies offer a revival period, which is a specific duration of time during which the policyholder can revive the policy by paying the outstanding premium along with interest.

Legal and Regulatory Aspects of Grace Periods

The legal and regulatory framework surrounding grace periods in term insurance in India is designed to protect policyholders from sudden policy cancellations due to missed payments. In India, the regulations set by the Insurance Regulatory and Development Authority of India (IRDAI) mandate that all life insurance policies provide a grace period.

Typically, this grace period is 30 days for policies with annual premium payment modes and 15 days for policies with more frequent payment options, such as monthly or quarterly. These regulations ensure that policyholders have adequate time to pay their premiums without risking immediate loss of coverage following a missed payment deadline.

This legal safeguard is crucial for upholding the integrity of the insurance contract and providing a financial safety net for policyholders during economic or personal challenges.

Why is the grace period a critical component of Term Insurance policies?

The grace period is a critical component of Term Insurance policies because it provides policyholders with a window of opportunity to make the premium payment and keep the policy in force. Without a grace period, policyholders who miss paying the premium on time would have their policy lapse sooner, and the benefits provided by the policy would no longer be available to them or their beneficiaries. Therefore, grace period ensures that the policy remains in force for some time even after a lapse in premium payment and that policyholders have adequate uninterrupted coverage for their loved ones.

Psychological Impact of Grace Period on Policyholders

Here are the psychological impact of grace periods on policyholders:

Reduces Stress and Anxiety: Knowing there is a grace period provides peace of mind to policyholders. It alleviates the stress of strict deadlines, especially during financial strain or personal emergencies. The grace period acts as a buffer; reassuring coverage won't be lost immediately if a payment is momentarily overlooked.

Promotes Financial Confidence: A grace period can make policyholders feel more secure about their financial planning. This flexibility allows them to manage their budget more effectively, knowing they have extra time to align their finances without risking their insurance coverage.

Prevents Rash Financial Decisions: Policyholders are less likely to make hurried or ill-advised financial decisions without the pressure of a hard cutoff for premium payments. They have the time to properly assess their financial situation and make payments without taking drastic measures like borrowing at high interest rates.

Encourages Continued Investment in Insurance: A grace period can encourage policyholders to maintain their insurance policies rather than surrender them during short-term financial troubles. This continuous coverage ensures long-term security and benefits.

Builds Trust in the Insurance Provider: When insurers offer a grace period, it demonstrates understanding and flexibility, enhancing the policyholder's trust in the provider. This goodwill can lead to higher customer satisfaction and loyalty, as policyholders feel supported in times of need.

How does the grace period work?

Let's understand the concept of grace period with the help of an example. Mr. Kumar has a TI policy for which he pays  an annual premium of Rs. 10,000. The due date for the premium payment is 1st January every year. However, Mr. Kumar forgets to pay the premium by the due date. In this case, Mr. Kumar has a grace period of 30 days, which means that he can pay the premium by 31st January without any penalty or interest. If Mr. Kumar fails to pay the premium by 31st January, his policy will lapse, and he will lose the benefits provided by the policy.

Grace period table for various frequencies of premium payment

The grace period for the payment of TI premium varies depending on the frequency of the premium payment. The following table illustrates the grace period for various premium payment frequencies.

PREMIUM PAYMENT FREQUENCY GRACE PERIOD 
Monthly15 days 
Quarterly30 days 
Half-yearly30 days
Yearly30 days

Please note that this is the general scenario. An insurance company may have different schedules of grace periods. You are advised to check the respective company website for the accurate grace period schedule.

Disadvantages of not paying the premium on time 

Here are the drawbacks of not paying the insurance premium on time. 

1. Lapse of insurance coverage

Lapse of insurance coverage means if a policyholder fails to pay their premium within the Term Insurance grace period, the policy will cease to exist, and the benefits provided by the policy will no longer be available to the policyholder or their beneficiaries.

This includes the coverage amount, which means that if the policyholder passes away, their beneficiaries would not receive any death benefit. Moreover, any riders, such as Accidental Death BenefitWaiver of Premium Rider, or Critical Illness Benefit, would also be terminated along with the policy.

In addition, the policyholder would not be able to avail of any other benefits provided by the policy, such as tax benefits or loans against the policy. 

2. Pre-existing illnesses are not covered anymore

Insurance policies are designed to provide coverage for various risks, including pre-existing diseases. Certain insurance policies include a waiting period before the coverage for pre-existing diseases becomes active. During this period, the policyholder is not entitled to claim coverage for any pre-existing illnesses. However, once the waiting period is over, the policyholder can claim coverage for their pre-existing conditions, subject to the terms and conditions of the policy.

If a policy lapses due to non-payment of premiums within the grace period, the coverage for pre-existing diseases may become void. This means that the policyholder would have to serve the waiting period outlined in the policy agreement again before being eligible for coverage for any pre-existing conditions. This waiting period can range from a few months to a year, depending on the insurer and the policy.

In some cases, insurers may also exclude coverage for pre-existing diseases altogether if the policy has lapsed, and the waiting period has already been served. This means that the policyholder may not be eligible for any coverage related to pre-existing conditions, even if they have served the waiting period in the past.

3. Loss of No Claim Bonus

A No-claim Bonus (NCB) is a benefit offered by the insurer to the insurer for not raising claims during the insurance policy term. The NCB increases every year, and it can accumulate up to a certain limit, which varies depending on the insurer.

If a policy lapses due to non-payment of premiums within the insurance grace period, the policyholder loses the benefits of the policy, including the accumulated NCB. When the policy is renewed, the policyholder would have to start from scratch, without the NCB they had accumulated over the years. This can lead to an increase in the renewal premium, as the NCB is a factor that affects the premium amount.

For instance, if Ms. Pooja has a five-year term insurance policy with an NCB of 10% each year, and she does not make any claims during the policy term, the accumulated NCB would be 50% of the premium amount. However, if the policy lapses, and Ms. Pooja fails to renew it within the specified period, the NCB would be lost, and she would have to pay a higher premium amount to renew the policy.

4. Loss of portability

Portability is a process that allows policyholders to switch from one insurer to another without losing the benefits of their existing policy. It is a useful feature that allows policyholders to avail better coverage, higher sum assured, and other benefits offered by other insurers.

However, if the policy lapses due to non-payment of premiums, the policyholder loses the option to port the policy to another insurer. This means that the policyholder cannot avail of the benefits of their existing policy with another insurer. Instead, they would have to apply for a new policy with a different insurer, and their coverage would be subject to the terms and conditions of the new policy.

The loss of portability can be a significant disadvantage for policyholders as it restricts their ability to switch to another insurer to avail better coverage or other benefits. Moreover, policyholders who have pre-existing conditions may find it difficult to obtain coverage from a new insurer, as the new insurer may subject them to a waiting period or other restrictions.

5. Renewal of a lapsed policy involves higher cost

If the policyholder wishes to reinstate the lapsed policy, they would need to renew the policy by paying the outstanding premiums along with interest and possibly providing a health certificate.

Renewing a lapsed policy can be more expensive than continuing with an existing policy without any lapses. Insurance companies charge interest on outstanding premiums to compensate for the time value of money and the cost of recovering the premium. The interest rate can vary depending on the insurer and the policy terms, but it is usually higher than the prevailing market rate.

In addition to the outstanding premium and interest, some insurers may require the policyholder to provide a medical certificate. This certificate ensures that the policyholder is still insurable and does not have any medical conditions that would make them a high-risk candidate for insurance. The cost of obtaining a health certificate can vary depending on the insurer and the type of life insurance policy.

Revival of the lapsed term versus buying a new plan

If the policy lapses due to non-payment of premium, the policyholder has two options: revive the lapsed policy or buy a new plan. 

Reviving a lapsed policy involves paying the outstanding premium along with interest and, in some cases, providing a health certificate. The cost of reviving a lapsed policy is generally lower than buying a new plan, and the policyholder retains the benefits and features of the original policy. However, if the policyholder has developed any pre-existing illnesses after the policy lapse, the insurance company may reject the policy revival.

Buying a new plan involves undergoing the underwriting process again and paying the premiums as per the current age and health condition of the policyholder. The cost of a new policy may be higher than reviving the lapsed policy, and the policyholder may lose the benefits and features of the original policy.

This table summarizes the comparison between reviving a lapsed policy and buying a new plan. The policyholder should weigh the costs, benefits, and underwriting requirements of both options before deciding.

CRITERIAREVIVAL OF LAPSED POLICYBUYING A NEW PLAN
CostLower (outstanding premium + interest)Higher (premium as per current age and health condition)
BenefitsRetains benefits and features of original policyMay lose benefits and features of original policy
UnderwritingNo need to undergo underwriting againNeeds to undergo underwriting again
Pre-existing IllnessCoverage may be rejected May cover pre-existing illnesses based on the insurer's policy

Impact of Missed Payments on Credit Scores

While insurance premiums do not directly impact your credit score, consistently missing payments or letting a policy lapse can indirectly affect your financial health. For example, if you fail to pay the premium and it goes into collections, this can be reported to credit agencies and negatively impact your credit score. Therefore, managing premium payments diligently and utilising grace periods wisely is crucial to avoid any adverse effects on your broader financial standing.

Technological Solutions to Manage Premium Payments

These are the ways in which technological solutions can help manage premium payments more effectively, enhancing convenience and reliability for policyholders:

Automated Payment Setups: Many insurance companies offer the option to set up automatic payments through ECS (Electronic Clearing Service) or auto-debit facilities linked to a bank account or credit card. This ensures premiums are paid on time every cycle, eliminating the risk of forgetting a payment and potentially causing a policy to lapse.

Mobile Apps: Insurance providers increasingly provide mobile applications that allow policyholders to manage their accounts on the go. These apps often include features for viewing policy details, upcoming payment notifications, and secure payment gateways to pay premiums directly from smartphones. This convenience increases engagement and timely payments. Explore ACKO Life Flexi Term Plan, a pure and non-linked term insurance offering large life coverage and unmatched benefits. Seamlessly manage your plan through the user-friendly ACKO App, giving you full control over your insurance.

Online Customer Portals: Insurers have robust online portals where policyholders can log in to view their policy status, payment history, and due dates. These portals may also offer the flexibility to change payment plans, update personal information, and download relevant documents, all contributing to a better-managed insurance experience.

Payment Reminders and Alerts: Email and SMS alerts are commonly used by insurance companies to remind policyholders of upcoming premium payments. These reminders can be set a few days or weeks in advance, giving ample notice to arrange funds, thereby preventing lapses due to oversight.

Online Banking: Integrating digital wallet services and online banking with insurance payment systems allows for quick and easy premium payments. This is especially useful for tech-savvy policyholders who prefer conducting financial transactions digitally for added convenience and speed.

Interactive Voice Response (IVR) Systems: Some insurers utilise IVR systems for premium payments, allowing policyholders to make payments over the phone using their credit/debit card. This can be particularly beneficial for those who may need to be more comfortable with online transactions but are familiar with telephone-based services.

Chatbots and AI Assistants: Advanced AI-driven tools like chatbots are being deployed by insurers to assist with customer inquiries, guide through the payment process, and even troubleshoot common issues around the clock. This technology enhances the user experience by providing immediate assistance and personalised support.

These technological solutions not only streamline the process of paying premiums but also add layers of security and efficiency, making the management of term insurance policies more user-friendly and less prone to human error.

Future Trends in Term Insurance Policies

Here are some key future trends in term insurance policies:

Increased Customisation and Flexibility: As consumer demand for personalised products grows, insurers will likely offer more tailored term insurance policies. This could include adjustable coverage options, where policyholders can modify their coverage amount or premiums based on life changes like marriage, parenthood, or retirement.

Automated Underwriting Processes: With the rise of big data analytics and AI, the underwriting process is becoming faster and more accurate. Automated underwriting can significantly reduce the time it takes to approve policies, making term insurance more accessible and convenient.

Expansion of Digital Sales Channels: The COVID-19 pandemic has accelerated the shift towards digital sales and service channels. Insurers are likely to continue enhancing their digital platforms, allowing the entire purchasing and managing term insurance process to be conducted online.

Greater Focus on Chronic Disease and Wellness Management: There's a growing trend towards policies that offer benefits not just for death but also for diagnosing critical illnesses or chronic diseases. Insurers might provide incentives for policyholders who participate in disease prevention and wellness programs.

You can explore valuable riders such as ACKO Life Accidental Total Permanent Disability Benefit Rider and ACKO Life Critical Illness Rider, covering 21 critical illnesses, including life-threatening common diseases among women, such as breast, cervical, fallopian, and ovarian cancer.

Use of AI and Machine Learning for Fraud Detection: As the insurance industry collects more data, the potential for fraud increases. AI and machine learning are being employed to detect fraudulent claims more effectively, which helps keep premiums affordable for genuine policyholders.

More Inclusive Coverage: Insurers are moving towards more inclusive policies that cater to a broader demographic, including older adults and people with pre-existing conditions, providing them with viable insurance solutions that were previously hard to obtain.

Sustainability and Social Responsibility: The insurance industry increasingly recognises the importance of sustainability and social responsibility in its operations. Future policies may incorporate more elements that reflect the insurer's commitment to social and environmental causes, potentially influencing consumer choice.

These trends indicate a future shift towards more consumer-friendly, efficient, and inclusive term insurance offerings driven by technological innovation and changing societal expectations.

Frequently Asked Questions

Here’s a list of questions and answers related to grace period in Term Insurance.

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In insurance, how is the waiting period different from the grace period?

The waiting period is a specific duration of time during which the policyholder cannot make a claim for a particular illness or condition. On the other hand, the grace period is a specific duration of time during which the policyholder can pay the premium without any penalty or interest.

Is it possible to make a payment for a Term Insurance plan premium after the grace period for insurance has expired?

If the grace period has ended, some insurance companies offer a revival period, during which the policyholder can revive the policy by paying the outstanding premium along with interest.

Are policyholders allowed to make an advance payment for the premium of Term Insurance?

Yes, policyholders are allowed to make an advance payment of their Term Insurance premium for a specific duration of time, which is usually up to one year. Some insurance companies even offer discounts for advance premium payments.

Can I claim the benefits if I pay the premium during the grace period? 

Yes, the policyholder can claim the benefits if they pay the premium during the grace period. However, it is advisable to pay the premium within the due date to avoid any inconvenience.

What happens if the policyholder passes away during the grace period?

If the policyholder passes away during the grace period, the death benefit will be paid to the beneficiaries as per the policy terms and conditions. However, the outstanding premium will be deducted from the death benefit before it is paid out.

Is there a maximum number of times a policy can be revived after it lapses?

Generally, insurance companies do not have a limit on the number of times a policy can be revived after it lapses. However, the revival process may become more difficult and expensive after multiple lapses, and the insurance company may require additional documentation or medical check-ups before approving the revival. It's always advisable to pay premiums on time to avoid lapsing of the policy.

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes

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