Lapse, Paid-Up Value and an Underwriter Who Declines Revival
Rohit, 31, took a 20-year participating endowment policy in June 2019 with a sum assured of ₹10,00,000 and an annual premium of ₹46,000, payable yearly. He paid the premiums due in 2019, 2020, 2021 and 2022, but missed the June 2023 premium and did not pay within the grace period, so the policy lapsed. In January 2025 he applies for revival and waits for the insurer's response before paying anything. Since the lapse he has had a stroke (October 2023) with mild residual weakness in his left hand; his physician says he has resumed work and is stable. The underwriter declines revival on health grounds and tells him the policy "is now worthless because it lapsed" and that all premiums are forfeited. Rohit wants to know what the policy is worth today, and what protection his family has if he dies before the dispute is resolved.
1. Compute the paid-up sum assured and explain the non-forfeiture position after the lapse.
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The policy is not worthless. Four annual premiums had been paid on a 20-year contract, so the policy had been in force for well over the two-year threshold at which the non-forfeiture provisions attach. On lapse, the policy automatically converts into a reduced paid-up policy; the insurer does not need to be asked to do this and cannot simply forfeit the premiums.
Computation. Paid-up sum assured = original sum assured × (premiums paid ÷ premiums payable) = ₹10,00,000 × (4 ÷ 20) = ₹2,00,000
This amount, together with any bonuses that had already vested, remains payable on death or at maturity, and no further premiums are due. The cover is reduced, not extinguished.
Surrender is a separate option. Because more than two years' premiums were paid, the policy also carries a minimum guaranteed surrender value, expressed by regulation as a percentage of total premiums paid, with the percentage varying by policy term. Surrender and paid-up status are alternatives: if he surrenders, the cover ends and he takes the surrender value; if he does nothing, the ₹2,00,000 paid-up cover continues.
What the insurer may not say. Telling a policyholder that a four-year-old policy is "worthless" and that premiums are "forfeited" is inaccurate, and it would be treated as a servicing failure or mis-selling if repeated in a complaint.
2. Can the insurer legitimately refuse revival on health grounds, and what must it do if it refuses?
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Refusal is permissible in principle. Revival is a fresh underwriting decision, not an automatic right. The insurer is entitled to ask for a declaration of health, a medical examination where warranted, evidence of insurability since the date of first unpaid premium, and payment of arrears with interest. A stroke within the revival period, with residual deficit, is exactly the kind of deterioration that can lead an underwriter to decline or to offer revival on loaded terms or with a specific exclusion.
Timing is not the problem. The revival period for non-linked products is five years from the date of first unpaid premium; January 2025 is well inside that window, so the application is timely.
Process obligations. Refusal must be communicated in writing with reasons, not left to an oral remark by a service desk, and the same letter must set out the non-forfeiture alternatives: continuation as a reduced paid-up policy of ₹2,00,000 with vested bonuses, or surrender for the guaranteed surrender value. The insurer should also refund nothing and deduct nothing at this stage, because the paid-up cover remains live.
Practical judgement. A good underwriter might counter-offer rather than refuse outright, for example revival at a modified sum assured or with a cardiovascular exclusion, and the policyholder should be told that such an option exists if the insurer's own underwriting policy permits it.
3. If Rohit dies in March 2025 with the policy still unrevived, what does the nominee receive, and what would have happened had he surrendered instead in January 2025?
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If he dies unrevived. The nominee receives the paid-up sum assured of ₹2,00,000 plus any bonuses already vested at the date of lapse, on proof of death. The insurer cannot reduce this to a premium refund, and cannot demand unpaid premiums out of the claim: the policy is a paid-up contract and the premiums that were not paid simply were never required after the lapse. The claim is assessed on the paid-up policy document the insurer is obliged to issue on request; if it has not issued one, that omission does not prejudice the claimant.
If he had surrendered in January 2025. The insurer would pay the guaranteed surrender value (a regulated percentage of premiums paid, related to the term of the policy) and the contract would terminate. No death benefit would be payable thereafter, whatever happened to Rohit, and no further bonuses would accrue.
Why the distinction matters commercially. Surrender converts a contingent ₹2,00,000 death benefit into a certain but smaller cash amount. For a 31-year-old with a family and stable income, the paid-up option usually preserves more value than surrender unless the cash is genuinely needed. An adviser should quantify both figures in rupees before recommending either, and should note that a surrendered policy cannot be revived later.