Insurance policies play a crucial role in safeguarding your financial well-being and providing you peace of mind when life throws unexpected challenges your way. Therefore, it's important to stay on top of your premium payments to avoid a lapse in insurance coverage.
 

When a policy lapses, it means losing the financial safety net that insurance provides, leaving you exposed to financial risks during critical times. This article delves into the circumstances that can lead to a policy lapse, the potential downsides of letting a policy lapse, and the available options when facing difficulties with premium payments due to financial constraints.

When does an insurance policy lapse?

An insurance policy may lapse when the premiums are not paid within the grace period specified by your insurer. This grace period, which typically begins after the premium due date, allows for payment without incurring any penalties. The length of the grace period varies depending on the policy and the insurer. If the premium is not paid during this period, your policy may lapse.
 

What type of insurance policies are at risk?

Any insurance policy, be it life insurance, investment-linked policies (ILPs) or health insurance (eg Integrated Shield Plan and critical illness plan), can lapse if premiums are not paid on time or within the grace period. It's important to stay on top of your payments to ensure continuous insurance coverage.
 

What are the downsides of a lapsed policy?

Allowing your insurance policy to lapse can have serious consequences. It may result in the loss of insurance coverage, exposing you to financial risks and making it challenging to reinstate the lapsed policy.

1. Loss of coverage: When a policy lapses, you will no longer have insurance coverage for the duration of the lapse. This means that if an unfortunate event occurs during this period, you won't be eligible for any benefits from the insurance company. Without insurance coverage, you may be responsible for bearing the entire financial weight of the costs including medical expenses. This can be overwhelming and put a strain on your finances.

2. Reinstatement challenges: Reinstating a lapsed policy may require undergoing a new health declaration or meeting other eligibility criteria again. This could potentially lead to higher premiums or exclusions for pre-existing conditions.

It's important to stay informed and be proactive to avoid these potential pitfalls associated with a lapsed insurance policy.

How to prevent an insurance policy lapse?

Consider taking the following preventive measures to avoid any disruptions in your insurance coverage:

1. Opt for automatic renewal: Choose this option to ensure that your policy remains active without the need for manual intervention. This ensures that your premiums are paid on time and prevents any policy lapse. Many insurers offer premium payments via GIRO (General Interbank Recurring Order). However, it is important to keep track of your premium due dates and make sure you have enough funds in your bank account to cover the payments.

2. Stay in touch with your Financial Planner: Maintain regular communication with your Financial Planner as they can provide timely reminders about premium payments and keep you updated on any changes to your policy.

3. Choose affordable premiums: When purchasing an insurance policy, ensure you can comfortably afford the premiums throughout the premium term.

What are the options if you're struggling with premium payments?

If you find yourself facing financial challenges and struggling to pay your premiums on time, there are several options that you can consider depending on the type of policy:

1) Health insurance policies

For health insurance policies such as Integrated Shield Plans, you can consider downgrading to a more affordable plan. But remember, downgrading will result in reduced benefits. If you switch insurers to downgrade a plan, you will lose the coverage for your pre-existing conditions covered by your current plan as you will need to go through underwriting again. So speak to your Financial Planner and evaluate all factors before deciding.

2) Life insurance policies

If your life insurance policy accumulates cash value, you have an option to borrow against the cash value of the policy to cover the premiums, as long as there is sufficient amount available and allowed by your insurer. This is known as an insurance policy loan and it will incur interest.

3) Investment-linked policies

With ILPs, you have the option to take a premium holiday, which allows for a temporary pause of payments. The eligibility criteria, terms, and duration of a premium holiday may vary depending on your policy and insurer.

It is also worth noting that if your ILP goes on a premium holiday, the growth and accumulation of its value may be limited, depending on the funds selected and the market conditions. In addition, ILPs come with fees and charges that are typically deducted from the policy value. These fees and charges may continue to be payable while your policy is on a premium holiday and could have the potential to gradually erode the overall value of your policy.

Keep in mind that activating these features may incur fees or penalties, depending on the terms and conditions of your policy. Furthermore, choosing these options may result in a reduction in the policy’s benefits and value.

If you are unable to continue paying the premiums and see no way to sustain the policy, you have the choice to surrender it fully. By doing so, you may receive the cash surrender value, and this will terminate the insurance coverage. Keep in mind that you will lose the insurance protection by surrendering the policy in full, so speak to your Financial Planner and evaluate all factors before deciding.

Why is it important to prevent a policy lapse?

Ensuring the continuity of your insurance coverage is vital for safeguarding your financial security during uncertain times. It is important to have in mind affordability of premiums for the duration of the payment term when signing up for a policy in order to ensure you can continue to benefit from the protective coverage the policy offers. This is especially so for life and health insurance policies, which offer essential coverage and are often a long-term commitment.

By taking a proactive approach and leveraging the available options, you can maintain the financial safety net provided by your insurance policies. If you encounter financial challenges and struggle to meet premium obligations, don't hesitate to reach out to your insurer. They may offer solutions or accommodations to help you navigate difficult times while preserving your coverage.

What's next?

Contact a Financial Planner >