Last week, I received a call from a regular reader of this column asking to know about yet another ‘controversial’ aspect of life insurance policies similar to a recent piece.
According to her, she has almost forgotten about her nearly five-year-old policy with one of the notable insurance companies in Ghana, until she recently chanced upon the policy document, which was apparently locked up in her drawer. Upon contacting her insurers to verify the status of the policy, “….your policy is paid up, Madam…” was the simple response she got. She, therefore, decided to seek clarity on this ‘so called’ paid up policy.
Like our dear reader, many others have also come across this jargon; hence the need to discuss what it means to have a ‘PAID UP’ policy. The following scenario will, therefore, suffice:
Scenario: Denis used to work in BR Life Insurance Company. As an employee, he purchased a three-year endowment policy with his employer. Premium deductions were effected at source. Denis resigned for a new company after only paying 25 months’ contributions.
After joining a new employment, Denis failed to arrange for his monthly premiums to be deducted at source. With only 26 months of contributions, the policy neither qualified for a surrender nor maturity; hence the only option for Denis was to arrange deduction either through his bankers or pay in cash.
Unfortunately, he ill-advised himself and, therefore, chose not to pay any further premiums, but waited till maturity. At maturity, the policy was treated as ‘paid up’ and only his contributions, less accrued interest, was paid him.
Inference: The policy could technically be said to have lapsed due to non-payment of premiums, but because Denis had done more than 24 months of the policy duration, the policy fund had accumulated value.
Why paid-up?
A policy is said to be paid up when the policy owner decides that he/she cannot or does not wish to pay any further premiums; thus a form of policy surrender. In this regard, the policy owner may have what is termed as a fully paid policy. This means he/she pays no more premiums and the policy stays in force exactly as before, except that the sum insured (the face amount) becomes lower, in line with the premiums already paid to date.
In other words, to make a policy paid up is to discontinue with premium payments on a life insurance policy. This may, however, take one of two forms. First, in most whole life policies, premiums automatically cease and the policy becomes paid up (i.e., before maturity) when the insured turns 90 years.
Second, if the insured has paid premiums in installment for more than half the duration of the policy and there is a fund value. In this situation, however, the lump sum payment will decrease appropriately along with applicable bonuses to the policyholder after the policy’s maturity.
Essentially, a policy can be made paid-up after a minimum number of month’s contribution; usually 24 to 36 aggregate payments.
Similar to ‘paid up’ is policy Surrender: To surrender a policy is to break every relationship with the insurance company. For the most part, a policy may only be surrendered for a value after a minimum of 24 months.
In the particular case of surrenders, policy charges often apply. Thus the policyholder will be charged a penalty, which takes into account the duration of the policy, premiums over time and previous withdrawals on the policy.
Moreover, a policy may also go into Non-forfeiture, which is a consequence of a premium system having a cash value. Thus in the event that renewal or recurrent premiums are not paid, the policy does not lapse, but become forfeited because the cash value may be used to keep the policy in force.
What triggers paid-up?
The following conditions may trigger a policy to be ‘paid up’:
• When premium payments exceed 24 months of the policy duration, but premiums are no longer forthcoming;
• When there is no regular or legal source of income to sustain premium payment;
• When the premium payer attains the maximum age stipulated on the policy and;
• Other conditions as may be stipulated in the policy document.
• Aside from all the above, some policyholders may also get excited by the fact that their accounts are not debited for premium payment, hence, make no efforts to regularise the continuous payment of premiums till maturity.
The way forward
Life insurance policies, typically, provide financial comfort and security for policyholders, particularly in times of challenges. It is, therefore, imperative for insurers to continuously uphold this sacred responsibility.
Essentially, insurers must endeavour to educate the insuring public on the various dimensions of life policies, especially those that may inhibit claims at maturity in order that clients in need may not be disappointed.
Policyholders should equally take cognisance of the fact that having an insurance policy is vastly different from operating just a savings scheme hence the need to ask all the questions regarding the technicalities in insurance against other forms of investment. This would inure to the mutual benefit of all parties.
Until next week,” This is Insurance from the eyes of my mind.”