In the last few weeks, a couple of insurers have launched campaigns for reviving lapsed insurance policies. The offers look good — a waiver of medical tests and a discount on interest for the unpaid premium.

But, before you revive those old policies, here’s a heads-up. Recent regulatory changes on traditional and unit-linked insurance plans (ULIPs) have reduced their costs, capped commissions and made them more investor-friendly. They are better investments in their current, and not earlier, avatar.

Pre-2010 ULIPs and pre-2014 traditional plans actually have low risk cover and are high-cost plans, with a chunk of the premium going towards agent commissions. Therefore, reviving a policy belonging to the earlier crop may not be a bright idea. Here’s why.

Check out the discount First, read the ad carefully. There is no discount on unpaid premiums. To revive a policy, all the unpaid premiums for the period you failed to pay them have to be settled in full. Usually insurers also levy an interest on this unpaid premium. The discount the ad talks about is only on this interest on the lapsed premium.

Next, when a policy lapses, i.e., when premium remains unpaid beyond the grace period, the risk cover ceases. So the insurer, though letting go of interest, is collecting premiums from you for periods when you actually didn’t enjoy any insurance cover!

The third point is that though insurers advertise waiver of medical requirements, they assume that the policyholder has not developed any new health complications in the in-between years.

The insurance contract is renewed on the principle of ‘utmost faith’. If you hide facts about your health condition and skip a medical test while renewing your plan, you could run into problems when you file a claim, if you have developed some new health problems in the interim.

Term policies cheaper now In the case of insurance, new policies are far cheaper than the old ones. Term policies, which are pure risk covers, have seen premium rates come down sharply in the last few years. One, due to lower mortality rates and two, more detailed medical disclosures that make risk pricing more accurate. Says Suresh Sadagopan, founder of Ladder7 Financial Advisories, “There is a 90 per cent probability of term insurance rates being cheaper now than they were three or four years ago. Reviving a lapsed term plan doesn’t make sense now because, you will be asked to shell out premium for the lapsed years. You will also probably end up paying a higher premium for the years to come.”

Life insurers have moved to a new mortality table capturing new life expectancy rates in the last few years. So, it is possible that you will get a lower rate on change in mortality assumptions despite a higher age.

Be it in ULIPs or in traditional endowment plans, the choice to revive a lapsed policy needs to be taken on a case-to-case basis.

Look at the specifics One has to consider the specific product structure, number of years left to the lock-in period, and the fund’s performance.

If it’s a ULIP where you have paid just one premium instalment — say, in August 2010 — and then let it lapse, go to the insurer’s website and take a look at the fund’s performance.

If you revive this policy now, you will have to pay premiums for the last three years where all the set charges will be deducted and then invested. In old ULIPs, charges were higher even in the second, third and fourth years.

However, if yours is a pre-2010 ULIP and you stopped paying premium after the lock-in period, consider reviving it as you would have already covered much of the expenses. But make sure that you don’t rely on this policy alone for life cover; it may not be adequate.

The new ULIPs have a cap on charges (where the reduction in net yield can’t be more than 2.5 per cent). Returns will be better as charges will be evenly distributed through the life of the policy.

Policies with regular premium offer a minimum sum assured of ten times the annualised premium. If it’s a traditional endowment plan, current products in this space offer higher risk covers (a minimum sum assured of 10 times the premium for policies of tenure more than 10 years and those of age below 45 years) and have lower agent commissions.

Why at all? If you are looking at endowment plans as an investment tool, hold on. There are better products from non-insurers. There are fixed return generating products such as PPF, National Pension System and balanced mutual funds which can deliver a higher return over the same 15-20 years.

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