WAYS TO AVOID LAPSATION OF POLICIES

A customer suffers a heavy loss if his insurance policy lapses.Here's what you need to remember to ensure that it doesn't happen to you. What do you do if the expensive dress you bought doesn't fit? If it hasn't been used, you could exchange it, or get a credit note from the store to buy something later. If you are lucky, you could even get a refund. Unfortunately, none of these options are available to those who buy life insurance policies that don't fit their needs. A customer does get a window of 15 days within which he can return the policy, but this option is rarely used. Most of the time, the unsuitability of the plan comes to light when the customer reads the fine print or when it's time to pay the next premium. The disenchanted policyholder doesn't pay the premium and the policy lapses. According to the Insurance Regulatory and Development Authority (Irda), nearly 91 lakh policies with a combined risk cover of over Rs 1,00,000 crore lapsed in 2008-9. This was the highest lapse ratio recorded by the sector. These included traditional endowment and moneyback insurance plans, term plans and health policies. If Ulips are also taken into account, the number of lapsed policies will be higher. While lapsed policies are a cause for concern for the insurance industry, it is the customer who suffers the most. If the policy is less than three years old, the premiums are forfeited, resulting in a total loss for the policyholder. WHY POLICIES LAPSE: The huge number of policy lapses in 2008-09 was one of the several unhappy fallouts of the financial crisis that gripped the country in 2008. Hit by job losses and shrinking incomes, many policyholders didn't have the money to pay the premiums. There are other reasons too. Mis-selling of unsuitable insurance policies by agents and the buyers' failure to understand the policy's features are common reasons for their ending up in trash. "People usually expect something in return for the premium they pay. There are cases where an agent has convinced a policyholder who has a term plan to dump it in favour of a Ulip, saying it would provide him the same benefits and also make his money grow.  Several policies also lapse because the agent, who pockets a handsome commission in the first year, leaves the client in search of new ones. Insurers must share the blame for this as they tend to focus more on generating new business than retaining the existing customers. IN CASE OF DELAYED PREMIUMS: In this age of connectivity, you have to work really hard to miss your premium. Insurance companies send out SMS alerts, emails and even snail mail to inform customers that their premium is due. Still, thousands of policyholders get so caught up in the day-to-day work that they forget about their insurance premiums every year. Often, this is also because changes in contact details have not been updated.  "There is always a feeling of pain to part with money, particularly to buy risk covers." To be fair, insurance companies have made premium payment fairly simple and offer several easy options to customers. You can pay the premium online, use your credit card, drop a cheque at any branch or even call the company to pick it from your home. Customers are even given a grace period of up to 30 days for paying the premium. However, the grace period comes with conditions. Insurers happily accept the premium for moneyback and endowment policies if you are late by one or two months. They won't mind too much even if you are delayed by six or eight months. Some insurance firms also agree to settle a death claim by paying the sum assured after deducting the unpaid premium. However, if it is a term insurance policy, the insurance company may dictate its own terms. If the premium has not been paid even during the grace period, the policy lapses, though it can be revived. For the past few years, LIC has been conducting a policy revival campaign each February to get disgruntled customers back to its fold. Late payment penalties and revival fees are waived during the two-week campaign. USING THE PAID-UP OPTION: If a traditional insurance policy has been in force for over three years, it attains a paid-up value. In such a case, even if the policyholder stops paying the premium, the policy does not lapse, though some of the benefits are curtailed. The policyholder then has two options. He either gets the same risk cover as under the policy, with the insurer deducting the mortality charge from the corpus, and the policy terminates after the corpus is depleted. Ulips, which are often hawked by agents on the promise that the policyholder needs to pay premiums for only three years, use this option. The second option is that the risk cover or sum assured offered under the policy is proportionately reduced, but the policy continues for the full term. IF YOU HAVE TO SURRENDER: A customer can surrender a policy if he is not satisfied with it, but he stands to lose heavily in such cases. The surrender value is only 30-50 per cent of the premium paid, depending on the number of years the policy has been in force. The Irda has now made it mandatory for Ulips to not levy a surrender charge if the policy is relinquished after five years. Surrendering is an option that should be resorted to only in case of an emergency. It is better to study the policy features in detail before signing up. Also, when you buy a policy, avail of the 15-day free-look period to find out whether the policy suits you. As they say, prevention is better than cure. A policyholder is likely to face three scenarios depending on the premiums paid through the three stages - early, middle and final years - of a policy. Many insurance agents push policies that require premium payment only for three years. You should be extremely wary of such agents. This is because if you terminate the policy within three years, you will not get anything from the insurer. The stage of a policy determines whether you should give it up: Early stage: A policy can be surrendered only if it has been in force for three years and the premiums for this period have been paid. But this results in a heavy loss for the policyholder. Middle stage: At this point, you can either surrender the policy or convert it to a paid-up plan, the latter being a better option. You will get the accrued bonus, but only at the end of the original tenure. Late stage: If your policy is about to mature in three to five years, it may be prudent to let it run its course. Four ways to avoid policy lapsation UPDATE CONTACT DETAILS: Often, policyholders don't get alerts sent by insurers because their contact details have changed. So, update the company on the changes in your phone number, e-mail ID and postal address. CHANGE PREMIUM FREQUENCY: If a lump-sum annual payment poses a problem, change the frequency to monthly or quarterly payments. The premium goes up slightly, but becomes manageable. OPT FOR ECS: Give an ECS mandate to your bank to pay the premium when it's due. Banks alert you about ECS payments 6-7 days in advance so that you arrange for the funds. AUTO-PAY BY CREDIT CARD: This is a foolproof way to pay your insurance premium. The credit card company pays the premium and bills it to you in the next billing cycle.
		from INDIA TODAY 12th april 2010.