Check How to Convert a Paid-Up Policy

You buy a life insurance policy to secure your future and provide financial protection for your loved ones. However, the uncertainties of life make it hard to predict when paying premiums becomes challenging. To safeguard you from this situation, life insurance companies offer the flexibility of paid-up policy conversion. 

But do you know what is a paid-up policy?

A paid-up policy is a type of insurance policy where the policyholder stops making premium payments, yet the policy remains in force due to accumulated cash value. This type of policy ensures that you can continue to receive the policy benefits even if your financial situation changes or if you decide not to pay premiums after a specific time. However, it’s worth remembering that payouts or benefits will be lower than the original face value of the policy. 

In this blog, we will learn everything about the paid-up policy, reasons for converting a paid-up policy, understanding paid-up policies, benefits and drawbacks of a paid-up policy, steps to convert paid-up policy, and factors to consider before converting. 

Reasons for Converting a Paid-Up Policy

Here are a few important reasons why converting your regular insurance to a paid-up policy will be a good idea.

• Adjusting to Life’s Changes

In case of major life-changing events such as marriage, having children, or retirement, might change the need for your previous insurance. In any of these scenarios, it is wise to convert to a paid-up policy as it gives you the ability to adapt to new circumstances without cancelling the policy outright.

• Financial Goals

Your financial goals will change with time. If, at a certain point in life, your financial goal doesn’t include paying the premium of the insurance, then you should convert to a paid-up policy. 

• Avoiding Lapsed Coverage

If you’re concerned that you might not be able to pay your premiums in the future and your policy could lapse, converting it to a paid-up policy in advance is a smart move. This way, you can keep your coverage active without worrying about missing payments.

• Policy Benefits

If you find that your current policy is not meeting all your needs, then also paid-up policy conversion is a good idea. This way, you will continue to receive the benefits of the policy without paying premiums anymore. Also, the amount you would have spent on premiums can be used for other investments instead.

Understanding Paid-Up Policies

The paid-up policy is one of the best ways to keep your insurance active when you are unable to pay your premiums due to some financial burdens. In the paid-up policy, the sum assured of the policy will depend on the premium value that you have paid to date.

Below is the formula to calculate the paid-up value for the life insurance policy conversion process:

Paid-Up Value = Sum Assured x (No. of Premiums Paid / No. of Premiums Payable)+ Bonus (if applicable).

Let’s understand it with a simple example.

Imagine Priya bought an insurance policy when she was 35 years old and the life cover amount is Rs. 40 lakhs and will provide her coverage until 65 years.

Priya has paid 20 premiums annually, and after that, she opted for a paid-up policy due to her financial problems.

The paid-up value that Priya will receive is:

Paid-Up Value = 40,00,000 x 20/30 = 26,66,667/-

Benefits and Drawbacks of a Paid-Up Policy

Benefits

Now, we will discuss some of the benefits of a paid-up policy.

• No More Premium Payments

Once your original policy is converted into a paid-up policy, you no longer need to worry about premium payments. This can free up money in your budget for other important expenses or investments. 

• Cash Value Growth

 If your original policy had a cash value component, it would continue to grow over time, however, at a slower pace. This cash value can further be used for future needs or emergencies.

• Continued Coverage

The best part about converting a paid-up policy to an active policy is that the insured continues to receive coverage and benefits without paying a single penny. 

• Flexibility

Life circumstances can change, and the paid-up policy gives you the flexibility to stop making premium payments if your financial situation becomes challenging. 

• Avoiding Policy Lapse 

If you stop paying premiums, your policy will lapse, and all the benefits will cease. However, converting to a paid-up policy prevents your insurance from lapsing due to unpaid premiums, and you can retain the benefits accumulated over the years. 

Drawbacks

While a paid-up policy offers a lot of benefits, there are some drawbacks as well, which you must understand before converting your life insurance policy. 

• Reduced Coverage

The policyholder will not receive the original insurance coverage if they convert to a paid-up policy. The amount of premium paid to date will decide the coverage amount.

• Surrender charges

Some insurance providers might charge you an extra amount under surrender charges for the conversion. It’s important to understand these costs before making the decision.

• Limited Benefits

The paid-up policy will provide the policyholder with fewer benefits than the original policy. For instance, there’ll be no rider benefits, and the beneficiaries will receive less money than the original policy amount.

• Reduced Cash Value Growth

If the policy you purchased had a cash value component, its value would grow more slowly without ongoing premium payments, which might affect your long-term financial plans.

Steps to Convert a Paid-Up Policy

You need to follow the below-mentioned steps for converting life insurance policy to a paid-up policy.

• Notify The Insurance Company

Let your insurance provider know that you want to opt for a paid-up policy, stating your current financial situation. 

• Fill Out the Paid-Up Form

For the initial formalities, they will provide you with a paid-up policy form. Fill out the form with the correct details and keep one copy of the form to yourself for future reference. 

• Submit the Form and Documents

Help the insurer with the below-mentioned documents and paid-up form to speed up the process. 

• • Original policy documents 
  • Any ID proof, such as an Aadhar Card, Voter ID, or PAN card 
  • Passbook copy or bank statement
  • A cancelled cheque

• Verification Process

After verifying all the documents, the insurer will provide you with their decision. This procedure might take weeks or sometimes months, depending on the company. 

Factors to Consider Before Converting

Now, let’s dive into the factors that you need to consider before converting your insurance policy to a paid-up policy.

• Reduced Benefits

The first and foremost thing you need to consider before converting is that you’ll get reduced benefits. No doubt, you don’t have to worry about premium payments, but it also significantly reduces the benefits you would receive from the policy.

• Long-Term Goals

Consider your long-term goals before converting to the paid-up policy to check if the policy aligns with your future goals or not. Because after converting to a paid-up policy both the coverage and the benefits will reduce.

• Policy Terms and Conditions

Read all the terms and conditions of both your current policy and the paid-up policy. This will help you to understand how the conversion will impact your policy term, benefits, and coverage.

• Current Coverage Needs

Before converting, carefully analyse whether the current policy coverage and benefits align with all your current and future needs. Because after converting, the coverage will be reduced compared to your current insurance policy.

Conclusion

Opting for paid-up policy conversion is the ideal choice when you are unable to pay premiums. Though the paid-up policy reduces the sum assured and doesn’t allow for additional riders, it still provides some level of protection based on the premiums you’ve already paid. But before converting to a paid-up policy, consider your financial goals carefully and ensure the decision is right for you. 

Frequently Asked Questions (FAQs)

Ques 1. What is a paid-up policy?

Ans. In a paid-up insurance policy, the policyholder stops paying premiums but continues to enjoy insurance coverage equivalent to the premiums that they have paid to date. 

Ques 2. What happens if you surrender the policy instead of opting for the paid-up value?

Ans. If you opt for policy surrendering instead of the paid-up value, then you will receive the surrender value. It is calculated by the accumulated amount of the premiums paid and the investment component of the insurance policy. Once the surrender value is paid, all the benefits will immediately cease. 

Ques 3. When does the insurance policy acquire paid-up value?

Ans. The insurance policy acquires a paid-up value if 

• It is active for at least three to five years
• It has an investment component

Ques 4. Can policyholders borrow against the paid-up policy?

Ans. Yes, some insurers allow policyholders to borrow money against the paid-up value, but it depends on the type of life insurance policy and the amount of cash value it has accumulated.