Ch. 10: Reduced Paid Up Benefit

Normally, to make sure that your Child plan remains active until the end of the term, you are required to pay the premiums for a specific tenure. If you choose the limited pay option, you will have to pay the premiums for at least 10-15 years. And if you choose the regular pay option, you will have to continue paying the premiums until the end of the policy duration.

Now, what if you’re unable to pay the premiums for such a long duration? Or, say you meet with an accident or get a serious disease because of which you are forced to quit your job. You lose your income, and hence, are no longer in a state to pay the premiums. What happens then?

Will your policy lapse? No, it won’t!

There is a way to still continue the Child plan without paying the premiums - on a reduced paid-up basis. But, what is reduced paid-up? How does a reduced paid-up policy work? We’ll find out - but before that, let’s find out what happens once you stop paying the premiums under a Child plan.

Once you discontinue paying the premiums and if the policy has acquired a surrender value, two situations arise -

1. You can take the surrender value and stop the policy.
If you surrender the Child plan, you will be eligible to receive a surrender value. This surrender value will be applicable only if you have paid the premiums for at least two or three full years. Please note that you will need to intimate the insurer about this.

There are 2 types of surrender values -

a. Guaranteed Surrender Value
It is the percentage of total premiums paid minus already paid assured survival benefits. The Guaranteed Surrender Value will vary as per the year in which the Child plan is surrendered. The calculation factors for Guaranteed Surrender Value will be mentioned in your policy document.

b. Special Surrender Value
It is determined periodically by the insurance company and is always higher or equal to the Guaranteed Surrender Value.

2. The policy continues on a reduced paid-up basis
If you do not take the surrender value or intimate the insurer about the same, your policy will continue on a reduced paid-up basis. Under this option, you can continue enjoying reduced benefits of the Child plan without paying any future premiums.

It’s very simple. Once the policy is converted into reduced paid-up, the amount payable under the policy, i.e., the sum assured and other benefits such as enhanced cover, assured benefits, bonuses, etc. will be reduced in proportion to the number of premiums you have actually paid to the total number of premiums payable during the policy term.

Please note that you may or may not receive the reduced bonuses, depending on the product. Whether or not the bonus will be reduced, also depends on the product.

The loyalty additions under the policy will not be payable, and rider benefits (if any) will cease.

Let’s learn in detail how the sum assured and bonuses will be reduced.

Sum Assured under a Reduced Paid-up Policy

The sum assured under the Child plan will be reduced by proportionately reducing the sum assured you choose at the time of buying.

This proportionate reduction is called the RPU factor.

The resulting sum assured after the deduction is called the ‘reduced sum assured’.

The reduced paid-up factor (RPU factor) is calculated by dividing the total number of premiums payable under the Child plan by the total number of premiums paid.

The formula to calculate the reduced sum assured is as follows -

Bonuses under a Reduced Paid-up Policy

The bonuses that are accumulated under the policy up to the date of the first unpaid premium will not be reduced. However, the bonus payable in the policy year in which you’ve discontinued the premium payment will be reduced proportionately to the unpaid premiums in that policy year.

Please note that you may or may not receive the reduced bonuses, depending on the product. Whether or not the bonus will be reduced, also depends on the product.

This is known as ‘reduced bonus’, which is calculated by multiplying the bonus that is payable with an RPU factor.

Example:
Say Jay buys a Participating Child plan worth Rs. 50 Lakhs for a duration of 25 years. He is supposed to pay an annual premium of Rs. 20,000 for 20 years. After 10 years, however, he is unable to afford the premiums due to personal reasons. He informs the insurer that he wants to continue the policy on a reduced paid-up basis.

The bonus accumulated under Jay’s policy for 9 years is Rs. 9000. In the 10th year, Jay was eligible to receive a bonus of Rs. 1000 - however, it will now be reduced proportionately.

Let’s see what the reduced sum assured and reduced bonus in the 10th year under Jay’s policy would look like.

RPU Factor = No. of Premiums Paid/ No. of Premiums Payable
= 10/20
= 0.5

Reduced Sum Assured = Sum Assured x RPU Factor
= 50,00,000 X 0.5
= 25,00,000

Reduced Bonus for the 10th year = Bonus x RPU Factor
= 1000 x 0.5
= 500

So, the reduced sum assured is Rs 50,00,000. Jay will receive a bonus of Rs. 9500, with the assured payouts or the death benefit, whichever happens earlier. (100% of the bonuses his policy has accrued during the first 9 years and the reduced bonus for the 10th year.)

Assured Benefits

Under Child plans, you receive a predefined percentage of the sum assured throughout the benefit payout period, on an annual or biannual basis - depending on the product you choose. If the plan is converted to reduced paid-up, the assured benefits payable under the plan will also be reduced in proportion to the number of premiums actually paid to the total premiums payable during the policy term.

Maturity Benefit

You can choose to receive the maturity benefit either in one go as a lump sum amount, as periodic payments, or as a combination of both. If you choose to continue the policy on a reduced paid-up basis, you’ll be entitled to receive the reduced sum assured along with reduced bonuses and other benefits, if any.

Death Benefit

In case you pass away during the policy tenure, the insurance company will reduce the sum assured, and other benefits such as enhanced cover, assured benefits, bonuses, etc., and pay the amount to your child. If your child is a minor, the reduced death benefit amount will be paid to the appointee you chose at the time of buying the Child plan.

Rakesh buys a Participating Child plan for his 5-year-old daughter, Anaisha, to save money for her education and marriage. He buys the policy with a sum assured of Rs 50,00,000 for a policy term of 25 years. He has to pay an annual premium of Rs. 30,000 for 20 years.

He chooses to receive the sum assured as a combination of periodic payments and lump sum, where -

• Periodic payments will be paid over a span of 3 years when his daughter is 18. Let’s assume the insurer will pay 30% of the sum assured in the first and second years, and 40% in the third year.
• 100% of the sum assured will be paid as a lump sum when the policy term ends, i.e, when she is 25 years old.

In the 10th policy year, Rakesh loses his job and is unable to pay the premiums. He informs the insurer and converts the policy to a reduced paid-up. The bonuses accumulated under the plan for 9 years are Rs. 18,000. In the 10th year, he was supposed to receive a bonus of Rs. 2000.

So…

RPU Factor = No. of Premiums Paid/ No. of Premiums Payable
= 10/20
= 0.5

Let’s see how the bonuses, death benefit, maturity benefit, and assured benefits are reduced under the Child plan taken by Rakesh.

1.Bonus
In the 10th year, the bonus will be reduced as follows -

Reduced bonus for the 10th year = Bonus payable x RPU Factor
= 2000 X 0.5
= 1000

So, a total bonus of Rs. 19,000 will be payable under the Child plan with the assured payouts or the death benefit, whichever happens earlier. (Bonus of Rs. 18,000 accrued over 9 years, and reduced bonus of Rs. 1000.)

2. Assured Benefits
As per the policy T&C, Rakesh will receive periodic payments over a span of 3 years when his daughter turns 18. To understand how the assured benefits under his policy are reduced, we’ll first have to find out the reduced sum assured under his policy.

Reduced Sum Assured = Sum Assured x RPU Factor
= 50,00,000 X 0.5
= 25,00,000

The reduced assured payout benefit will be paid over a span of 3 years as follows -

3. Maturity Benefit
Since Rakesh has opted for a Child plan that will take care of his daughter’s education and marriage expenses, this is how the maturity benefit payout be done under his policy -

When his daughter turns 18
The reduced assured payout benefit, i.e., Rs 25 Lakhs, will be paid over a span of 3 years along with the reduced bonuses, as we’ve mentioned above.

When his daughter turns 25
100% of the reduced sum assured, i.e., Rs. 25 Lakhs will be paid which he can use for Anaisha’s wedding expenses.

4. Death Benefit
Say the assured payout for 1 year is already paid to Rakesh. There are 2 assured payouts pending - Rakesh, however, passes away before they are paid. So, the payout here will be as follows -

When Rakesh passes away
The insurance company will pay the reduced sum assured to Anaisha. Here’s how the sum assured will be reduced -

Reduced Sum Assured = Sum Assured x RPU Factor
= 50,00,000 X 0.5
= 25,00,000

So, Anaisha will receive the reduced sum assured of Rs 25 lakhs as a lump sum immediately.

Reduced Assured payouts for the remaining 2 years
The remaining two reduced assured payouts pending under the policy will be paid to Anaisha on the respective due dates.

When Anaisha turns 25
The reduced sum assured of Rs. 25 Lakhs will be paid at the end of the policy term as a lump sum, which can be used for Anaisha’s wedding expenses.

Please note, some Child plans get terminated as soon as the reduced death benefit is paid - there won’t be any further payout under the policy. This will, however, depend on the type of plan you purchase.

So, this is all about the reduced paid-up benefit in Child plans. Converting the policy to reduced paid-up is a good way to continue the policy without paying the premiums. But do keep in mind that the sum assured amount and bonuses will be reduced proportionately too. Also, once you stop paying the premiums, there will be no further bonus declarations under the plan.