Do not fall prey to cold-callers who may offer you money to assign lapsed policies to them
In one of our previous columns, we threw light on ingenious motor insurance frauds, where the customer was made, knowingly or unknowingly, to cheat the insurer. There are some fraudulent practices you have to watch out for in the case of life insurance policies as well.
The last two years of the pandemic and lockdowns have seen both sicknesses and deaths as well as considerable personal financial hardships. Life insurance companies are seeing an awareness-driven increase in new life policies on the one hand and a trend of policyholders either delaying or defaulting on instalment premiums they suddenly cannot afford, on the other.
Buying a life insurance policy means committing to pay the premium over a certain period of time. This is what keeps the policy valid for making a maturity or a death claim. In the case of single-premium policies, the obligation, of course, is over with a single payment upfront.
If you stop paying premium on a life insurance policy, provided you have paid premiums up to a defined period, the policy coverage continues with a proportionately reduced sum assured. The policy is now called ‘paid-up’ or is said to have acquired a ‘paid-up value’.
Policy lapse
If you stop paying premium before the defined period, then the coverage stops and the policy lapses. The premium you paid is down the drain.
How soon it lapses depends on the kind of policy. A term policy lapses on default of a single instalment of premium and cannot be revived. Other types of policies have a longer leash and can be revived under certain terms and conditions.
If you are facing a tough financial situation and are tempted to let slide the next instalment of your life insurance premium, stop and think hard through this.
You created this protection for your loved ones and have already invested money in it.
Pay the premium by credit card, forego some other expense and pay the premium or take a loan on the policy if possible and use the money to pay the premium as you tide over your difficult situation, but try to find a way. If a policy has lapsed, it makes sense to revive it. Insurers will be very helpful as ‘lapsation’ has negative implications for them as well. In fact, they even hold special drives with incentives for revival of policies.
If your considered decision is to let your life policy stay lapsed, let the insurance company know and get an acknowledgement, both in writing. If the policy is eligible for surrender, then go ahead with the process and you will get back the pre-decided surrender value.
Whatever you do, do not fall prey to cold-callers who may offer you money to assign the policy to them. Assignment of a policy means transferring the rights and obligations under the policy to somebody else. There are fly-by-night operators who revive lapsed policies, keep them valid and take the maturity/death proceeds.
Why not, you may ask, if it is no skin off your nose? You are even getting paid for it! The reason to not go down this path is that you can only assign your life policy as a gift, as a security or for taking a loan against the policy. Any assignment has to be conveyed in writing by the assignor and assignee to the insurer, who has to accept it for it to become valid. The insurer accepting an assignment depends on whether there is an insurable interest between the assignor and the assignee.
That is, the assignee has to face financial loss if the insured person dies. This would be so for a family member, who has a financial relationship with the policyholder such as an employer or lender. Further, the assignment has to be in the interest of the policyholder, bonafide, not against the public interest and not for trading.
The life policy is a contract between you and your life insurer and cannot be used for trading. So, such an assignment is illegal and would not be accepted by your insurer and will land you in a spot.
Apart from that, remember you are letting somebody misuse your identity for financial reasons. That itself is letting somebody get a foot in your door and the idea should distress you deeply.
(The writer is a business journalist specialising in insurance and corporate history)
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