A policy lapses if premium isn’t paid even during grace time

Published in Mint on 28 April, 2015, Written by Abhishek Bondia

I have started my own company and it has about 30 members. I am required to subscribe to provident fund (PF). I was also told about employees’ deposit-linked insurance (EDLI) scheme. What is it?
—Kunal Shekhar

Under the PF rules, it is mandatory for a subscriber firm to provide a certain minimum amount of life insurance to its employees. The default life insurance is provided by the Employees’ Provident Fund Organisation (EPFO). The insurance scheme provided by EPFO is called EDLI. The Organisation charges a premium for this cover.
Under section 17 (2A) of the Employee’s Provident Funds and Miscellaneous Provisions Act, you may be exempted from subscribing to this scheme if you have provided for better insurance benefits than the cover offered by EPFO through a life insurer. This is called life insurance in lieu of EDLI. Life insurers meet the above criteria by offering marginally higher sum assured than EPFO. Life insurance in lieu of EDLI does not have any exclusion. Generally life insurance provided by insurers is considerably cheaper than the rate charged by EPFO. This is especially true if the group is either very large, or small but young.

How can life insurance be used as a tax-saving tool?
—Supriya Anantharama

Life insurance is one of the eligible instruments for tax saving under section 80C of the income-tax Act. Any payment made towards such a policy is allowed as a deduction from the total taxable income subject to a maximum of Rs.1.5 lakh. Unit-linked, endowment, or term insurances are eligible. Both regular and single premium are eligible too.
Two conditions have to be met to avail the tax benefit. First, the death benefit on the plan should be more than or equal to 10 times of the annual contribution. If this condition is not fulfilled, proportionate premium is disallowed. Second, an amount should not be withdrawn from the plan within five years of payment. If there is partial or total withdrawal, the corresponding premium allowed as deduction initially will be considered as income for that year.

I could not pay my premiums before the due date. What is the time period for paying up?
—David D’costa

You can resume your policy even after the due date has expired. Most policies offer a grace period after the due date. If you pay within the grace period, the policy is carried forward as usual. The typical grace period is 30 days. If the premium is unpaid even after the grace period, the policy would lapse. The process of reviving a policy varies depending on the time lapsed.
You can revive a policy any time before the expiry of the policy term. However, once the policy lapses, insurers get a right to conduct fresh underwriting. Depending on the number of years the policy was in force, some insurers waive off fresh underwriting at the time of revival of policy.

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