Everything You Need to Know About Reduced Paid-Up Life Insurance Policy

Life insurance plans can come with multiple benefits including life cover, returns on maturity, income payouts, and more. But to avail of these benefits, you need to keep your policy active by paying your premiums on time. So, if you fail to pay your premiums for any reason, does that mean that your plan benefits are lost forever? Well, not necessarily.  

Some plans may have a ‘reduced paid-up’ feature that will keep your plan benefits active even after you stop paying your premiums. Below is a detailed breakdown of the reduced paid-up benefit and how it can be used to your advantage.    

What is Reduced Paid-Up Life Insurance? 

Whole life plans, savings plans, and ULIPs may still provide certain benefits even after the policy lapses. Certain plans are converted to a ‘paid-up’ version upon policy lapse. When your plan is converted to the reduced paid-up status, all your plan benefits are proportional reduced as per the total premiums you have already paid.  

How are Reduced Paid-Up Benefits Calculated?  

The first thing to note is that you need to pay premiums for at least 2 years before your plan can attain a paid-up status. If your policy lapses within the first two years itself, then you will not be eligible for any paid-up benefits even if your policy has a non-forfeiture clause.   

Once you have paid premiums for 2 years, your policy will be converted to a reduced paid-up plan after policy lapse. Your plan benefits will be proportionally reduced as per your ‘reduced paid-up factor’. Reduced paid-up factor is calculated using the formula given below:  

 Reduced Paid-Up Factor =          Total number of months for which premiums are paid 
                                                               Total number of months for which Premiums were originally payable    

As you can see, your paid-up factor will be completely dependent on payments that you have already made. So, the longer your policy remains active, the higher your paid-up factor will be post policy lapse.   

Types of Reduced Paid-Up Benefits  

Reduced Paid-Up Life Cover: Life cover is the primary benefit of all life insurance plans. When your policy is converted to a paid-up plan, your life cover will be reduced as per your reduced paid-up factor.   
Paid-Up Life Cover = Sum Assured on Death X Reduced Paid-Up Factor at Time of Policy Lapse  

Reduced Paid-Up Maturity Benefit: Your plan’s maturity benefit is also eligible for paid-up conversion. Once again, your maturity benefit will be completely dependent on the premiums you have already paid. For guaranteed returns plans, your maturity benefit will be directly calculated using the formula given below.  

Maturity Benefit = Sum Assured on Maturity (Guaranteed Benefit) X Reduced Paid-Up Factor  

Reduced Paid-Up Bonus: Plans that include non-guaranteed ‘cash bonus’ payments can also be converted to paid-up status. Your paid-up cash bonus will be calculated as follows:  

Cash Bonus Amount = (Annualized Premium X Declared Cash Bonus Rate) X Reduced Paid-Up Factor  

Paid-Up ULIPs: ULIPs with paid-up option will remain active after policy lapse. A small fee will be deducted from your funds as a termination fee, but the rest of your funds will remain in your control. Your funds will grow as per market rates, and you will receive a maturity benefit that is equal to your fund value at maturity. Your sum assured will be reduced as per the paid-up factor. Note that you will not be able to invest any more money into your funds once your policy lapses. 

Example of Reduced Paid-Up Life Insurance 

Let’s assume that you have purchased a life insurance policy that provided a life cover payout of up to ₹1.5 crores. This plan requires you to pay an annual premium of ₹1.5 lakhs, with a limited premium paying term of 10 years. So, your total due premium will be ₹15 lakhs. You successfully manage to pay your premiums for the first five years of the policy. However, on the sixth policy year, you are unable to make your payment due to personal financial problems.  

This means that you have managed to pay premiums for 60 months (5 years), but you originally had to pay premiums for 120 months (10 years). so, your reduced paid-up factor will be: 

Reduced Paid-Up Factor =          Total number of months for which premiums are paid   
                                                              Total number of months for which Premiums were originally payable    

Reduced Paid-Up Factor = 60/120 = 0.5 

Since your original life cover was ₹1.5 crores, you can calculate your reduced paid-up life cover by multiplying the original value with the reduced paid-up factor.  

Reduced Paid-Up Life Cover = 1,50,00,000 X 0.5 = 75,00,000 

Hence, your reduced paid-up life cover in this example will be equal to ₹75 lakhs.  

When Should You Consider Reduced Paid Up? 

Ideally, you should always pay your premiums on time to maintain all of your plan’s benefits. However, life can be unpredictable, and financial emergencies can strike at any time. So, sometimes maintaining your premium payments might just not be possible. In such cases, a reduced paid-up plan can be a lifesaver. Even a lowered life cover is preferable to having no security whatsoever. Moreover, if you have a savings plan, you will still receive the survival/maturity benefits at a reduced rate.  

Which Plans Can Be Converted to Reduced Paid-Up? 

Not all plans have a reduced paid-up clause. The first thing you need to check is whether your plan has a ‘non-forfeiture benefit’.  Non-forfeiture benefit clause is an option available in some life insurance plans that allows you to continue receiving insurance benefit even after the policy lapses. This option comes into play when your policy lapses only when your policy lapses due to non-payment of premiums or when you willingly surrendr the policy. Reduced paid-up status can only be attained by a policy if the document specifically includes a non-forfeiture clause.   

Generally, term insurance plans do not include any paid-up benefits. If a basic term plan lapses, then your policy will be terminated, and all benefits will cease. Paid-up benefits are usually only offered for savings plans like Guaranteed Income Plans, Unit-Linked Insurance Plans (ULIPs), Participating Plans etc. Certain term plans that include a money-back/return of premium benefit may also offer paid-up benefits post policy lapse. The specific details of your plan’s paid-up status will be written in your policy document.    

 Conclusion  

Paid-up benefits ensure that the premiums you have already paid do not go to waste. Look for a plan with paid-up clauses to ensure that you are financially compensated even if your policy lapses. However, the best practice is to not let your policy lapse in the first place. This is why it is important to thoroughly research a policy before making a purchase. Ensure that the premium rate is cost effective for you. Remember that the returns and life cover for an active plan are significantly higher than that of a paid-up plan! 

FAQs 

Are there any charges associated with converting a policy to Reduced Paid-Up status? 
No, there are no charges levied to covert a policy to reduced paid-up status.  

Can a Reduced Paid-Up policy be revived to its original status? 
Yes, most insurance companies allow you to revive a plan that has been converted to a reduced paid-up status. However, the time-limit to revive the plan can vary from company to company. Plus, some insurers may also require you to undergo medical tests again to revive your policy.  

What is the difference between fully paid-up and reduced paid-up? 
Your plan is considered ‘fully paid-up’ once you pay off all your due premiums. If you pay your premiums consistently for the entire premium paying term, then your plan will eventually reach the ‘fully paid-up’ status. However, if you fail to pay all your due premiums during the premium paying term, then your plan will reach the ‘reduced paid-up’ state.  

What is the difference between surrender value and reduced paid up? 
Surrender value is the money you get back upon surrendering (cancelling) your plan. On the other hand, a reduced paid-up plan has not been cancelled and is still active. A reduced paid-up plan offers the same benefits that your normal plan does, the only difference being that the plan’s benefits have been reduced in proportion to the premium paid.   

Aastha Mestry - Portfolio Manager  

An Author and a Full-Time Portfolio Manager, Aastha has 6 years of experience working in the Insurance Industry with businesses globally. With a profound interest in traveling, Aastha also loves to blog in her free time.