A good financial portfolio should definitely have the insurance component to ensure financial security for loved ones. It's vital to make sure you choose your insurance policy based on your current and projected income or simply put, your current and projected ability to pay the insurance premiums, your medical state, your age, future financial plans etc.
However, your task does not end by just obtaining an insurance policy. You should ensure you do not forget your premium dues. Else when you actually need the money it can really put your dependants in dire straits. Let's consider what happens in a scenario where a bunch of premium payments have been skipped and how you can avoid it.
Vasanth, 33, has been going through an old bunch of documents, and comes across an insurance policy he had taken when he was 29, but had completely forgotten about it. The first (and only) annual premium paid was Rs 6,000, and he is now feeling bad that the money paid has gone down the drain. Or, has it?
Grace period for insurance premium
Generally, there is a grace period for paying your insurance premiums - a period of one month. During this period, the policy remains valid. However, beyond one month, the policy lapses, and no claims will be entertained by the insurance company in case of any eventuality.
How to revive an old policy
In Vasanth's case, the policy has ceased to be in force for 3 years; hence he is not within the grace period. Yet, Vasanth can still revive his policy, since an insurance policy can be revived within 5 years from the date of the last unpaid premium. What Vasanth needs to do is contact the insurance company, submit a declaration of health from a doctor recognized by the insurance company, and pay the amount of unpaid premiums along with a late payment penalty.
Benefits of reviving an old policy
What benefit would Vasanth get out of reviving an old policy? For one, he would get the benefit of having to pay regular premiums calculated when he was 29 - which would be less than the premium for a similar, new policy taken at the age of 33. Secondly, he will continue to get all the benefits and guaranteed returns of the policy as was promised to him 4 years ago. Last, but not the least, he benefits from tax deduction under Section 80C for the entire payment made towards arrears in premium payment, not counting the penalty.
On the other hand, if Vasanth decides not to revive the policy, he stands to lose the money he has paid as premium. If Vasanth had paid his premiums for 3 years before discontinuing the policy, he would still have received the amount paid as premium along with pro-rata accrued bonuses at the end of the policy term.
Doing it right
Vasanth's twin, Prasanth, is more meticulous. He has a similar policy, issued at the same time as Vasanth's, and his policy is still active. He has managed to do this even though he has been out of the country for the last 2 years. How did he manage that? The first thing Prasanth did was set up an ECS facility with his bank in India and every year his premiums get paid directly, without his intervention.