Cause and effect of lapse of insurance policy- An analysis

1.1 Introduction
The term lapse of policy means the termination of policy that is the policy no longer exist in the
eyes of law. When a policy lapses all rights of the insured ceases to exist. The main cause of lapse
of policy is due to non payment of premium after the due date or after the grace period given. It
generally means lapse in coverage and that the insurance contract will no longer provide any
coverage or benefit to the insured. The term lapse has not been directly defined under the
insurance laws except under Section 50 of The Insurance Act 1938 talks about the notice of option
to be given to the assured on the lapse of the policy. Section 113 of the act talks about acquisition
of surrender value by the policy after three years. Lapse rates vary significantly between rural and
urban customers. This can also be related to lack of communication, service reach, etc. in rural
areas. Quarterly and monthly modes of payment tend to have higher lapse ratios. Lapse rate is
higher for younger policyholders most probably due to lower and uncertain income levels, greater
job mobility and lack of appreciation of concepts like risk cover, family protection, old age
provision etc. There are certain options available when a policy lapses which are as follows
 Surrendering of the policy
 Converting it into a paid up policy
 Revival of the policy

1.2 Scope and Limitation - The scope of my project is to study the causes and
effects of lapse of policies in India stressing on life insurance. The primary area of my
research will be to understand the role played by agents when a policy lapses. It shall also
include an analysis about the effect of such lapses. This project shall be limited to life
insurance policies in the Indian context.

1.3 Objective-The following are the objectives of my research:-

 To examine the role of agents in the entire process
 To analyse the effect of such lapses on the policy holders and insurance companies.
 To suggest measures that will in curbing lapses.
1.4 Research problem- Lapses of insurance policies are a common circumstance.
About 20% of the policies lapse in the first year causing huge losses to policy holders and
insurance companies. The most predominant cause of lapse is identified as financial
incapacity of the policy holders but other factors like personal circumstances and role of
agents which have also been of importance in the recent times have not been considered.
Though the insurance sector is growing at a fast rate so are the rate of lapses yet there are
no measures to curb the same.

1.5 Hypotheses-Lapse of insurance policy causes huge losses for policy holders as
well to insurance companies.

1.6 Research Methodology- My research methodology will be mainly doctrinal

based on the relevant sections of The Insurance Act 1938 , The Insurance Law Amendment
Act 2015 and IRDA Regulations as my primary source. As my secondary source I will be
taking the help of books, IRDA reports, journals and other articles.

1.7 Research questions

 What is the role played by the agents?
 How does lapses of policy effect the insurance companies and the insured?
 What steps may be undertaken in order to reduce the frequency of lapses?

1.8 CHAPTERIZATION
Chapter 1 Role played by agents- The agents are intermediaries between the
insurance companies and the policy holders and hence they play a vital role. The role of
agents can be vividly seen in cases of mis-selling and rebating of policies. The agents in lieu
of commission induce the policy holders to buy polices who thereafter become incapable of
paying the same and hence the policy lapses.

Chapter 2 Effect of lapsed policy-Whenever a policy lapses the coverage which was
available to the policy holders and they are suffer a loss. On the other hand the insurance
companies also suffer loses as whenever a policy lapses the investment plans of the
insurance companies comes to an end. Thereby there are huge loses on the economy.
Chapter 3- Measure to be undertaken – The measures which are to be taken in order to
curb lapses must be on both end- insurer and insured. The agents must explain the terms of
the policies and the effect of lapses to the policy holders. The insurance companies may
require such conversation to be recorded for the purposes of better analysis. The agents
should be trained in this respect. On the context of insured a better financial awareness on
their part would reduce lapse to a great extent.