Which one should you choose - Reinstatement or New policy?

Life insurance policy is a long term policy where the premium payments can be made till the end of the policy period or for a certain period. It might be difficult to maintain the premium payments throughout the policy period due to certain unavoidable issues. In case of non payment of premium within the due date, grace period is provided to the customer to complete the payment of premium. If the premium payment is not done during the grace period then the policy will be lapsed and the customer would have the option to either reinstate the lapsed policy or take a new policy.

Let us understand the advantages of reinstatement of the lapsed policy over the new policy:

Benefits:

1. Medical Test: Every new life insurance policy requires medical tests which can be either done in person or through phone. These medical tests determine the eligibility of the customer in terms of the sum assured, period of insurance cover etc. In case of reinstatement in most cases insurance companies ask for a declaration of good health from the customer.
2. Incontestability Clause: Almost all the life insurance contracts have a clause of incontestability for a particular period of time i.e. 3 years. In simple terms, it means that the insurance companies cannot deny the claim in case of a misstatement by the policyholder after a certain period of time. The exception being for the cases of fraud. If you take a fresh policy you have to satisfy the 3 year time before this clause becomes applicable. In case of reinstatement, after reinstating the lapsed policy this clause will not be applicable if the time period of 3 years has passed before the policy was lapsed.
3. Terms & Conditions: The terms and conditions of the lapsed policy will continue if reinstated. But there could be some policies which were withdrawn from the market and would not be offered to you even if you are ready to pay the premium. So, reinstatement helps you to get hold of the policy with the existing terms and conditions.

4. Premium Payment: The reinstatement of a policy requires the payment of premiums for the lapsed period along with the penalty. Let us understand this scenario with an example: In 2010, Benz bought a term insurance policy when he was 30 years old. The policy was meant to cover him till the age of 60 years for a Sum Assured of Rs.1 Crore. For this sum assured he was paying a premium of Rs.20k per year till the end of the policy period. Fast forward to 2017, he is 37 years old then and has paid premiums for 7 years which was around Rs1.4 Lacs. He had not paid premium for the past 3 years and now in 2020 he wishes to reinstate the policy and contacts the insurance company.

   The two years premium would amount to Rs.40k and the penalty charged by the insurance company is another Rs.15k. Now would it make sense to pay Rs.55k for the time he was not covered and reinstate the contract? Or go for a new policy for the reaming period of coverage?

For New policy:

Present Age: 40 years
Policy Term: 60 years
Per year premium: Rs.35k
Total premium to be paid: Rs.35k *20 (years) = Rs.7 Lacs
Medical Tests: Compulsory

For Reinstatement:

Present Age: 40 years
Policy Term: 60 years
Per year premium: Rs.20k
Penalty & Lapsed premiums: Rs.55k
Total premium to be paid: Rs.20k *20 (years) + Rs.55k = Rs.4.55 Lacs.
Medical Tests: May not be required.

It is clearly evident that the customer will end up paying more than Rs.2.5lacs if taken a new policy rather than reinstating the existing policy. The lapsed premium and the penalty might look a bit high but in the long run customer will end up paying fewer premiums if reinstated.

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