By Tamara’s Financial Planning and Consultancy

 

“At Tamara’s, a policy isn’t just paper—it’s a future waiting to be fulfilled.”

 

Insurance is not just a financial product—it is a long-term promise, a pillar of protection that cushions you and your loved ones from life’s uncertainties. Whether you’re safeguarding your child’s education, securing retirement income, or ensuring your family’s well-being in your absence, insurance plays a vital role in your financial journey. But what happens when you can no longer fulfill your side of that promise? This brings us to a crucial subject that is often misunderstood: lapsed insurance policies.

At Tamara’s Financial Planning and Consultancy, we believe financial literacy is power. In this comprehensive guide, we break down everything you need to know about lapsed policies, policy surrender, premium reduction, and how to revive your insurance cover without unnecessary losses.

 

What Is a Lapsed Insurance Policy?

A lapsed insurance policy occurs when the policyholder fails to pay the required premium within the stipulated grace period, usually 30 or 31 days. Once this period elapses without payment, the policy becomes inactive, and all benefits, including insurance cover and any bonuses, are suspended.

According to a 2022 report by the Insurance Regulatory Authority (IRA) of Kenya, over 21% of life insurance policies lapse within the first three years. The major causes? Financial hardship, lack of proper financial advice, and poor understanding of how insurance works.

A lapsed policy doesn’t just signify missed payments. It reflects lost time, lost financial goals, and in many cases, lost hope for the family depending on that protection.

 

What Happens When a Policy Lapses?

Once a policy lapses:

All coverage ceases. Your beneficiaries will no longer be eligible for any payouts in case of death, illness, or other claims.

Any accumulated bonuses or loyalty benefits are forfeited.

You may be subject to penalties or loss of accumulated value.

The cash value in savings-linked policies may be used to offset overdue premiums, eventually exhausting the value.

If the policy was underwritten by an agent, the insurer may claw back commissions previously paid to them.

The emotional and financial consequences of lapsed policies are immense. It leaves policyholders exposed to life risks and nullifies the very purpose for which the policy was bought.

 

When Can You Surrender a Policy?

A policy can be surrendered when it has acquired a surrender value, typically after the second or third year of consistent premium payments. Surrendering means you voluntarily terminate the policy and request the insurer to pay the surrender value accrued.

It may seem like an escape route during a financial crunch, but it comes at a cost. The amount you receive is often far less than what you’ve paid in premiums.

 

Why Do Policyholders Lose Money When They Surrender a Policy?

Surrendering a policy, especially in its early stages, leads to financial loss due to:

High acquisition costs: Insurers spend a lot in the first years on administration and commissions.

Lack of accumulated cash value: Early surrender may mean there isn’t much value to pay out.

Penalties and surrender charges: A portion of your premiums is deducted to recover set-up costs.

Imagine paying for two years and receiving less than 30% of your contributions back. That’s why surrendering should always be a last resort.(a divorce)

 

Solutions for a Lapsed Policy

Fortunately, a lapsed policy is not the end of the road. You can still recover your investment, your coverage, and your original goals. Some of the practical solutions include:

1. Policy Re-dating

This is a lesser-known but very effective option. Policy re-dating allows the policyholder to revive the policy by treating it as if it started on a new date. Instead of paying all the missed premiums plus interest, you restart the policy from today.

This has many advantages:

No backdated penalties.

More affordable.

Immediate reactivation of cover.

However, it resets the policy term, meaning you may wait longer to claim maturity benefits. But for many, especially young parents or early-stage earners, it’s a smart trade-off.

 

2. Premium Reduction

If you’re struggling financially, talk to your insurer or advisor about reducing your premium. This helps you keep the policy active at a lower cost.

 What changes:

You continue building savings or coverage.

Your maturity value may reduce proportionally.

But here’s the truth: Something is better than nothing. Having partial cover or smaller savings is better than losing everything you’ve worked for.

 

Why It’s Better to Reduce Premiums Than Surrender

Reducing premiums helps you stay committed to your goals. With rising inflation and uncertain job markets, financial flexibility is more important than ever. By negotiating your premiums downward, you avoid policy lapse and protect your long-term vision.

According to a 2023 Pan-African insurance survey, clients who reduced premiums instead of surrendering were 72% more likely to keep their policy active for the full term.

 

Why You Must Keep Your Part of the Bargain

Insurance is a two-way contract. The insurer agrees to cover you; you agree to keep the premiums flowing. Breaking your end weakens the trust, voids benefits, and can even affect your ability to get future policies.

More importantly, when you stop paying, you lose the very financial safety net your family would rely on if you weren’t around. That’s a bargain not worth breaking.

 

Understanding Surrender Value

The surrender value is the amount you receive when you voluntarily cancel a policy. It includes the total of your paid premiums, minus admin fees and surrender charges, plus bonuses (if applicable).

It grows slowly over time, so the longer you stay invested, the higher the value.

Early surrender = bigger loss.

Long-term consistency = greater reward.

 

Why Insurers Claw Back Agent Commissions on Lapsed Policies

Agents are paid upfront by the insurance company, assuming the policy will last its full term. When you lapse or cancel early, insurers claw back the commission to recover their marketing and acquisition costs.

This not only affects the agent’s income but also your relationship with them. It’s a lose-lose situation that can be avoided with better planning.

 

Can You Take a Loan Against Your Policy?

Yes. If you have a life or education policy with cash value, you can take a policy loan. This loan doesn’t require credit checks because your policy serves as collateral.

 Benefits of Policy Loans:

Quick approval.

Lower interest than commercial loans.

No need to surrender the policy.

However, if unpaid, the loan and interest will be deducted from your maturity benefits or death payout. Always have a repayment plan.

Final Word from Tamara’s Financial Planning and Consultancy

Every policy you take is a step toward a secure future. But to make that vision a reality, consistency is key. A lapsed policy doesn’t mean failure—it’s simply a chance to reassess and restart.

At Tamara’s Financial Planning and Consultancy, we offer:

Free policy assessments.

Re-dating and premium adjustment support.

Financial education sessions.

Personalized guidance on loans, savings, and policy recovery.

“A policy is not just paper. It’s a promise. Keep your promise and we’ll help you keep your future.”

Selestine Tamara Were, Founder & Financial Advisor

 

 

Do you have a lapsed policy? Unsure about surrendering? Need to revise your premiums?

Let’s talk. We’re not here to sell. We’re here to guide and protect.

 

WhatsApp only: 0777 675 977

📩 Email: info@tamaras.co.ke

🌐 Visit: www.tamaras.co.ke

 

Tamara’s Financial Planning and Consultancy Empowering your journey. Securing your tomorrow.

“Your Insurance Ally in Every Season of Life.”