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What is a Reduced Paid-Up Term Insurance Policy?

Reduced paid-up insurance allows you to maintain a term life insurance policy with a reduced sum assured when you can no longer afford premium payments.

  • 4,121 Views | Updated on: Sep 03, 2024

Term life insurance is like a safety net for your family. It helps protect them financially if something unexpected happens to you. Sometimes, life throws curveballs, and you might find it tough to keep up with your insurance payments. That is where reduced paid-up (RPU) can be helpful. It is a way to keep your insurance alive, even if you cannot pay the full amount. But it is important to understand how RPU works before making a decision, so you can choose what is best for you and your family.

Understanding Reduced Paid-up in Term Life Insurance

Reduced paid-up insurance allows you to keep your policy in force even if you stop paying premiums. Instead of lapsing, your policy continues with a reduced sum assured, proportionate to the premiums already paid. This option can be handy when you can no longer afford the premium payments but still want coverage.

How Does Reduced Paid-up Term Insurance Work?

When you decide to convert your term life insurance policy to reduced paid-up, you freeze the policy’s premium payments. The insurer recalculates the sum assured based on the amount of premiums you have already paid relative to the total premiums that would have been due over the policy’s original term.


Once you opt for reduced paid-up, you no longer have to pay premiums for your term insurance policy. The insurance company calculates the accumulated cash value of your policy based on the premiums paid so far. This cash value becomes the new sum assured. Since this amount is typically lower than the original sum assured, it is called “reduced paid-up.” Despite the reduced sum assured, your life insurance coverage remains active for the entire policy term.

How is Reduced Paid-up Value Calculated?

Reduced paid-up value is calculated based on a simple proportion: the ratio of premiums paid to the total number of premiums payable. This ratio is multiplied by the original sum assured to determine the new, reduced sum.

RPU Factor = Number of premiums paid / Total number of premiums payable

Reduced Sum Assured = Original Sum Assured * RPU Factor

For instance, let us say you have a term insurance policy with a sum assured of ₹10 lakhs and a policy term of 20 years. After paying premiums for 10 years, you opt for reduced paid-up.

RPU Factor = 10 years (premiums paid) / 20 years (total premiums payable) = 0.5

Reduced Sum Assured = ₹10 lakhs * 0.5 = ₹5 lakhs

Benefits of Reduced Paid-Up

Converting your policy to reduced paid-up can offer several benefits, especially if facing financial difficulties or changing circumstances.

Continued Coverage

The most significant benefit is that your coverage continues at a reduced amount. This ensures that your beneficiaries still receive some financial protection.

No Additional Payments

Once converted, you no longer have to make premium payments. This can be a relief if you are experiencing financial strain or your priorities have shifted.

Retained Benefits

Many policies retain certain benefits even in reduced paid-up status, such as terminal illness or accidental death benefits. It is essential to check your specific policy terms to understand what remains covered.

Flexibility

Reduced paid-up insurance provides flexibility. If your financial situation improves, you may have the option to reinstate the original policy by paying the outstanding premiums and any applicable interest.

Cost-Effective

This option is more cost-effective than letting the policy lapse and purchasing a new policy later at a higher age and potentially higher premiums.

When Can I Opt for Reduced Paid-Up?

Opting for a reduced paid-up option is available after a certain period or several premium payments, depending on your insurer’s policy terms. Here are common scenarios when you might consider this option:

Financial Hardship

If you are facing financial difficulties and can no longer afford the premium payments, converting to reduced paid-up can help maintain some level of coverage without the ongoing financial burden.

Changing Priorities

Life changes, such as retirement or a shift in financial responsibilities, might reduce your need for the full sum assured. In such cases, reduced paid-up insurance provides a way to adjust your coverage to align with your new circumstances.

Policy Nearing Maturity

If your policy is nearing its maturity and you have already paid a significant portion of the premiums, converting to reduced paid-up can preserve some of the benefits you have already paid for, even if you stop paying premiums towards the end.

Unforeseen Circumstances

Unforeseen circumstances, such as health issues or unexpected expenses, can also prompt the need to convert your policy to reduced paid-up. This ensures that you do not lose all the benefits of your policy when facing challenging times.

Conclusion

Now that you know the basics of reduced paid-up insurance, you know you can protect your family, even if you are in a crux. It is like hitting pause on your life insurance payments while still keeping some protection in place. If you cannot afford the total premium anymore, this option lets you keep your policy alive but with a smaller payout if something happens to you. It is like trading a bigger safety net for a smaller one, but without having to pay more. Before making a decision, it is smart to talk to an expert to see if reduced paid-up is the best choice for your situation.

FAQs on Reduced Paid-up Insurance

1

What happens to the sum assured when a policy is converted to Reduced Paid-Up?

The sum assured is reduced proportionally based on the premiums paid before the policy was converted to reduced paid-up status.

2

Are there any charges associated with converting a policy to Reduced Paid-Up status?

No, there are typically no charges for converting a policy to reduced paid-up status.

3

Can a Reduced Paid-Up policy be revived to its original status?

Yes, a reduced paid-up policy can often be revived to its original status by paying the outstanding premiums and any applicable interest and charges.

4

How does Reduced Paid-Up insurance affect policy maturity benefits?

The maturity benefits are reduced proportionately to the Reduced Paid-Up sum assured compared to the original sum assured.

5

Is the policy term affected when it is converted to Reduced Paid-Up?

No, the policy term remains unchanged when a policy is converted to reduced paid-up status.

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.