Policy Lapse and Revival in Life Insurance
Five years to revive a traditional policy, three for a ULIP. And until it is revived, the premium is not income.
A policy lapses when a premium is not paid by the end of the grace period. Revival restores it. IRDAI's Insurance Products Regulations, 2024 define revival as restoring a policy discontinued for non-payment, with all its benefits, once the insurer receives all premiums due plus any charges or late fee, within the revival period, and is satisfied the life is still insurable under its Board-approved underwriting policy.
For IC-26 the real question is what lapse and revival do to the accounts. A lapsed premium is not income. A revived premium is. In between, the insurer may still have to hold reserves for the policy, and for unit-linked policies the money sits in a separate discontinued policy fund. This page covers both halves: the rules in brief, then the accounting.
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Lapse and Revival Rules at a Glance
From Schedule I of the IRDAI (Insurance Products) Regulations, 2024 and IRDAI's Master Circular on Life Insurance Products (12 June 2024). For the policyholder's side in more detail, see IC-38's grace period page.
Grace period
Non-linked policy
15 days for monthly premium, 30 days in all other cases; the policy stays in force
Unit-linked policy (ULIP)
Same
Revival period
Non-linked policy
Five consecutive complete years from the first unpaid premium
Unit-linked policy (ULIP)
Three consecutive complete years from the first unpaid premium
Unpaid after grace, no surrender value yet
Non-linked policy
Policy lapses; no paid-up value
Unit-linked policy (ULIP)
In the 5-year lock-in: fund value less discontinuance charge moves to the discontinued policy fund and risk cover ceases
Unpaid after grace, surrender value acquired
Non-linked policy
Does not lapse; continues as a paid-up policy for the paid-up sum assured
Unit-linked policy (ULIP)
After lock-in: converts to a reduced paid-up policy
When a surrender value is acquired
Non-linked policy
Regular premium: after at least two consecutive years' premium
Unit-linked policy (ULIP)
Fund value; proceeds payable only after the lock-in
| Rule | Non-linked policy | Unit-linked policy (ULIP) |
|---|---|---|
| Grace period | 15 days for monthly premium, 30 days in all other cases; the policy stays in force | Same |
| Revival period | Five consecutive complete years from the first unpaid premium | Three consecutive complete years from the first unpaid premium |
| Unpaid after grace, no surrender value yet | Policy lapses; no paid-up value | In the 5-year lock-in: fund value less discontinuance charge moves to the discontinued policy fund and risk cover ceases |
| Unpaid after grace, surrender value acquired | Does not lapse; continues as a paid-up policy for the paid-up sum assured | After lock-in: converts to a reduced paid-up policy |
| When a surrender value is acquired | Regular premium: after at least two consecutive years' premium | Fund value; proceeds payable only after the lock-in |
Key Terms
- Lapse
- A policy with no surrender value that stops because a premium was not paid within the grace period. Cover ends, but the policy can be revived within the revival period.
- Paid-up policy
- A non-linked policy that has acquired a surrender value does not lapse when premiums stop. It continues for a reduced (paid-up) sum assured, in the ratio of premiums paid to premiums originally payable.
- Discontinuance
- For a linked policy, the state that arises on surrender or on non-payment of premium before the grace period ends (Schedule I, 1.22).
- Discontinued policy fund
- The segregated fund holding the fund value of linked policies discontinued during the lock-in. Each insurer keeps three: one for pension, one for life and one for health products. Only a fund management charge, capped at 50 basis points a year, may be taken from it.
- Revival (reinstatement)
- Restoring a discontinued policy with its benefits, on payment of all premiums due plus any charges or late fee, subject to continued insurability. Insurer accounting policies use "reinstated" and "revived" for the same event.
How Lapse and Revival Hit the Accounts
Each row names the source. Company policies are that company's wording, not an industry rule.
Premium on a lapsed policy
Accounting treatment
Not income at the original due date; recognised as income only when the policy is reinstated
Source
HDFC Life, LIC and SBI Life accounting policies
Premium at the 31 March year end
Accounting treatment
Accrued only for a policy in force on 31 March, if the premium is due and still within the grace period
Source
IRDAI AFI master circular, Section III para 1
LIC's extra condition
Accounting treatment
Non-linked premium is recognised when due only if the grace period has not expired and previous instalments are paid
Source
LIC accounting policy
Interest charged on reinstatement
Accounting treatment
Received basis, shown under "Others" in Other Income in the Revenue Account
Source
HDFC Life accounting policy
Reserve for a lapsed non-linked policy
Accounting treatment
The Appointed Actuary must adopt an appropriate method of reserving for revival, because the reserve can jump if the policy is revived
Source
IRDAI AFI master circular, Section II para 1(1)(i)
Reserve for a discontinued ULIP in lock-in
Accounting treatment
Provision for the strain of likely revivals, shown explicitly in Form LB-1
Source
IRDAI AFI master circular, Section II para 1(1)(ii)
Discontinuance charges deducted
Accounting treatment
Held as a separate item under Funds for Future Appropriations until the policy exits (revival period ends, death, or lock-in ends)
Source
IRDAI AFI master circular, Section II para 1(1)(ii)
Reduced paid-up linked policies
Accounting treatment
Provision for the strain that may arise on their revival
Source
IRDAI AFI master circular, Section II para 1(1)(iii)
LIC's aggregate provisions
Accounting treatment
Additional aggregate provisions are made for revival or reinstatement of policies
Source
LIC accounting policy
Amounts payable on lapsed or discontinued ULIPs
Accounting treatment
Accounted for on expiry of the lock-in period
Source
HDFC Life accounting policy
| Item | Accounting treatment | Source |
|---|---|---|
| Premium on a lapsed policy | Not income at the original due date; recognised as income only when the policy is reinstated | HDFC Life, LIC and SBI Life accounting policies |
| Premium at the 31 March year end | Accrued only for a policy in force on 31 March, if the premium is due and still within the grace period | IRDAI AFI master circular, Section III para 1 |
| LIC's extra condition | Non-linked premium is recognised when due only if the grace period has not expired and previous instalments are paid | LIC accounting policy |
| Interest charged on reinstatement | Received basis, shown under "Others" in Other Income in the Revenue Account | HDFC Life accounting policy |
| Reserve for a lapsed non-linked policy | The Appointed Actuary must adopt an appropriate method of reserving for revival, because the reserve can jump if the policy is revived | IRDAI AFI master circular, Section II para 1(1)(i) |
| Reserve for a discontinued ULIP in lock-in | Provision for the strain of likely revivals, shown explicitly in Form LB-1 | IRDAI AFI master circular, Section II para 1(1)(ii) |
| Discontinuance charges deducted | Held as a separate item under Funds for Future Appropriations until the policy exits (revival period ends, death, or lock-in ends) | IRDAI AFI master circular, Section II para 1(1)(ii) |
| Reduced paid-up linked policies | Provision for the strain that may arise on their revival | IRDAI AFI master circular, Section II para 1(1)(iii) |
| LIC's aggregate provisions | Additional aggregate provisions are made for revival or reinstatement of policies | LIC accounting policy |
| Amounts payable on lapsed or discontinued ULIPs | Accounted for on expiry of the lock-in period | HDFC Life accounting policy |
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Discontinued Policies in the Balance Sheet and Notes
IRDAI requires discontinued-policy money to be visible, not buried in policy liabilities.
- check_circle"Funds for discontinued policies" is a separate head under Policyholders' Funds in the Balance Sheet, alongside policy liabilities, split into (i) discontinued on account of non-payment of premiums and (ii) others.
- check_circleThe amount refunded to policyholders and the amount transferred to Funds for discontinued policies during the year are shown in a specified format.
- check_circleThe notes to accounts disclose the number of policies discontinued in the year, the percentage of discontinued to total policies (product-wise), the number and percentage revived, charges imposed on discontinued policies and charges readjusted on revival.
- check_circleThe minimum guaranteed interest on the discontinued fund is 4% a year (master circular para 40.1.5). Income above that goes to the discontinued policy fund, never to shareholders.
Reviving a Discontinued ULIP: What the Insurer Does
The insurer must tell the ULIP policyholder the policy status within three months of the first unpaid premium and offer revival. For a ULIP revived during the lock-in, the master circular (para 40.1.4) sets the steps.
- 1
Collect the arrears
All due and unpaid premiums, without charging any interest or fee.
- 2
Levy only permitted charges
Policy administration and premium allocation charges for the discontinuance period, and guarantee charges if the guarantee still applies. No other charges.
- 3
Add back the discontinuance charge
The discontinuance charge deducted at discontinuance goes back into the fund.
- 4
Restore cover and units
Risk cover is restored and the money moves from the discontinued fund back into the segregated funds the policyholder chose.
Why Lapses Matter to an Insurer's Finances
Lapses change future cash flows. A premium stream the insurer priced for stops early, and the reserve for that policy may later have to be rebuilt if the policy is revived, which is why the AFI master circular singles out reserving for revival. Crisil's insurance rating criteria note that surrenders, lapses and cancellations can weaken a life insurer's liquidity.
The master circular on life products also tells insurers to examine persistency across all distribution channels and curb mis-selling that leads to surrenders or lapses (para 26.1). Persistency ratios, covered on our financial ratios page, are how the paper measures this.
Exam Traps
Non-linked revival period is five years; linked is three. Don't swap them, and don't confuse the three-year ULIP revival period with the five-year lock-in. Premium on a lapsed policy is income on reinstatement, not at its original due date. Reinstatement interest at HDFC Life is on a received basis, while policy loan interest is accrual. Revival restarts the clocks: the 12-month suicide clause and the three-year contestability window both run from the revival date where it is later. A ULIP revived in lock-in pays no interest on arrears and gets its discontinuance charge back.
FAQs
What does revival mean in life insurance?expand_more
Restoring a policy that was discontinued for non-payment of premium, with all its benefits, after the insurer receives all premiums due plus any charges or late fee within the revival period and is satisfied the life is still insurable. That is the definition in IRDAI's Insurance Products Regulations, 2024, and it applies to LIC as to every life insurer.
How long can a lapsed life insurance policy be revived?expand_more
Five consecutive complete years from the first unpaid premium for a non-linked policy, and three years for a unit-linked policy, under the 2024 product regulations.
What is the difference between lapse and paid-up?expand_more
A non-linked policy without a surrender value lapses when premiums stop. Once it has acquired a surrender value (after at least two consecutive years of premium for regular premium plans), it does not lapse but continues as a paid-up policy for a reduced sum assured.
When does an insurer count the premium of a lapsed policy as income?expand_more
Only when the policy is reinstated. HDFC Life, LIC and SBI Life all say so in their accounting policies.
Where do discontinued ULIP funds appear in the accounts?expand_more
Under a separate head, "Funds for discontinued policies", within Policyholders' Funds in the Balance Sheet. Discontinuance charges deducted are held separately under Funds for Future Appropriations until the policy exits.
Does reviving a policy restart the suicide clause?expand_more
Yes. For a non-linked policy, death by suicide within 12 months of the revival date entitles the nominee to at least 80% of premiums paid or the surrender value, whichever is higher, if the policy is in force. For a linked policy the nominee gets the fund value on the date death is intimated.
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