What is a 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. 

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. Here’s all you need to know about how reduced paid-up policies work.  

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’.  NNon-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 lapsesonly when your policy lapses due to non-payment of premiums or when you willingly surrender 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.  

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.  

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!

 

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.