What happens when your insurance policy is in paid-up status

What happens when a policy is in paid-up status? - Shaul Hameed

For an insurance policy to qualify as 'paid-up', you must have paid premiums for a minimum specified period (often two or three years).

In case you stop paying premiums before the end of this period, not only will your insurance policy lapse, but you will also lose all benefits. However, if you discontinue the premiums after this period, the policy will remain active but with reduced benefits and a lower sum assured.

How does a paid-up policy work?

Suppose Rohan bought a life insurance policy with an assured sum of Rs 10 lakh and a premium payment term of 20 years. He continued to pay premiums for the first six years but had to stop after owing to financial difficulties.

However, since Rohan has paid premiums for longer than the minimum specified period, his policy will not lapse and will convert to a paid-up policy instead.

What will happen to the sum assured?

The sum assured will now be calculated based on the number of premiums paid by Rohan:

(Number of premiums paid (6) / Total premiums payable (20))*Original sum assured (Rs 10 lakh) = Paid-up sum assured (Rs 3 lakh).

This means that instead of the original Rs 10 lakh, Rohan's family would now receive only Rs 3 lakh in case of his demise.

Will you lose benefits on your paid-up policy?

Besides a reduction in the sum assured, a paid-up policy stops earning any future bonuses. However, if any bonuses were declared before the policy was paid up, they would be disbursed along with the sum assured.

When it comes to the maturity amount of the endowment or money-back plan, the policyholder will receive only the reduced sum assured at maturity. Thus, in Rohan's case, if he survives the policy term, he will be paid only Rs 3 lakh instead of the original Rs 10 lakh upon
maturity, i.e., after 20 years.

Can you revive a paid-up policy?

Yes. Insurers generally allow you to revive a paid-up policy within a given period (usually up to five years from the last unpaid premium). To do so, you must first pay the pending premiums and interest.

Should you consider keeping a paid-up policy?

Though the paid-up value is higher than the surrender value of a policy, the sum assured is paid only upon maturity. On the other hand, the surrender value is disbursed at once. Thus, if you have a long time horizon, surrendering the policy and investing in better alternatives
may be the smarter move.

At the same time, having sufficient life cover remains crucial if you have financial dependents. A pure-term insurance plan is often the best way to do so.

Also read: Why you should avoid guaranteed return insurance plans

This article was originally published on February 18, 2025.