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Term insurance is a long-term policy, and often, people find themselves unable to pay the premiums. Even if the policyholder stops paying the premiums, he can still keep the coverage going and benefit from it.
People’s lives change in the long run. What seems feasible today may face some challenges tomorrow. And such a turn of events often has a great impact on our lives. Long-term savings plans, investments and insurance plans are often impacted by such events. Policyholders sometimes face financial challenges and discontinue their policies, losing all the accumulated benefits.
However, the reduced paid-up feature in term insurance plans allows the policyholder to benefit from the policy even after they discontinue it. If you are unaware of this feature, consider reading this blog that discusses what reduced paid-up means and how it works in term life insurance.
Understanding Reduced Paid-Up in Term Insurance
Reduced paid-up is an option that benefits life insurance policyholders. Most life insurance plans offer this feature where the policyholder can stop paying the premium but still be able to reap the benefits of the term plan. However, the original sum assured of the term plan is reduced, with future premiums not being payable any more.
While opting for reduced paid-up can still offer the policy benefits, the policyholder loses the rider# benefits. Please note that reduced paid-up is not generally offered in pure risk policies that offer simple life covers. However, it is strongly advised that you enquire before purchasing a term plan if it offers a reduced paid-up option.
Reduced Paid-up Term Insurance — How Does it Work?
The reduced paid-up option in a policy will only be activated after the policy has reached its surrender value. In general, the surrender value is reached after paying a certain percentage of the total premium. After the policy has acquired the surrender value, it will automatically activate the reduced paid-up option in case the policyholder misses paying a premium.
Some insurance policies allow the policyholder to resurrect the policy to its original state by paying all the due premiums within 2 years of stopping the first premium payment. However, it solely depends on the policy and the insurance provider.
How to Calculate Reduced Paid-Up?
If the policyholder dies during the term, the policy will pay a reduced death benefit sum assured. The revised sum assured, in this case, will be calculated based on the following formula:
RPU Sum Assured = (Total number of premiums paid/ Total number of remaining premiums) x Sum Assured |
If you are planning to purchase a term insurance plan that offers a Reduced Paid-Up option, we suggest you read the policy document to understand the Reduced Paid-Up criteria.
Benefits of Reduced Paid-Up
If you have a reduced paid-up term insurance policy, you can expect the following benefit from its features:
- A reduced paid-up term insurance allows a breather to the policyholder if he or she is financially struggling to pay the premiums.
- Instead of forfeiting the policy entirely, the policyholder can still get the reduced benefits of the insurance policy.
- Policyholders who are nearing their retirement may find it difficult to continue paying the policy premium, but the reduced paid-up option gives them peace of mind and security even after they discontinue the premiums.
Surrendering the Policy vs Reduced Paid-Up
Now that you know what reduced paid-up means, you will understand that it is always better to opt for reduced paid-up term insurance over a policy that does not provide such a feature.
Reduced paid-up still offers a lot of benefits that came along with the fresh policy. In case of an untimely demise of the policyholder, his family can still be protected by the death benefits even after the policy has been discontinued.
On the other hand, surrendering a policy means completely giving away all the premiums paid to date and the accumulated bonuses. Surrendering the policy will leave the policyholder and his family without any protection from uncertainties.
So, the next time you are out looking for life insurance plans, make sure you choose one that offers a reduced paid-up feature.
When Can I Opt for Reduced Paid Up?
Generally, policyholders do not purchase plans, thinking about forfeiting them in the middle of the term. A policy is sold on its value proposition after maturity. However, there are certain circumstances when the policyholder finds surrendering the policy easier than continuing it.
- During a Sudden Financial Crunch
Life experiences many ups and downs, and financial turmoils are more common than other difficulties in life. During such a time, people cannot afford regular premium payments. They consider converting their term life insurance into a reduced paid-up policy. - Changing Life Cover Priorities
Every year, the financial sector goes through changes. Insurance providers launch new financial products offering better features and coverage. Also, after a few years, people rearrange their priorities and buy insurance plans according to that. If you find a better term insurance product than your last one, you can discontinue the previous one to buy the new one. Opting for the reduced paid-up option can make sense in such a scenario.
Conclusion
Reduced paid-up insurance policies are boons for the policyholders. The option to discontinue the premiums and yet be eligible for the coverage, although reduced, is a great convenience for all policyholders. However, this feature may not be available with all types of insurance plans, and therefore, you must enquire about details before buying one.
Moreover, as an informed buyer, you can browse through several popular term insurance plans online and see what they offer..
