What Is a Life Insurance Policy Lapse?
A life insurance policy lapse happens when a required premium is not paid within the policy’s grace period. When this occurs, coverage ends and the policy no longer provides benefits.
Once a policy has lapsed, the life insurance company is no longer required to pay a death benefit or any other contractual benefits if the insured passes away. Reinstating the policy later may be difficult or more expensive, and in some cases, a new policy may be required.
The rules and outcomes tied to a lapse depend on the policy terms and the type of life insurance policy, such as term life insurance, whole life insurance, or universal life insurance.
What Happens When a Life Insurance Policy Lapses?
When a life insurance policy lapses, several outcomes may follow. These changes can have financial and coverage related effects:
- Loss of Coverage: The most immediate result is the loss of coverage. If the insured person passes away after the policy lapses, the insurer will not pay a death claim, and beneficiaries will not receive a death benefit.
- Reinstatement Challenges: Some insurers allow a lapsed policy to be reinstated, but conditions often apply. The policyholder may need to provide proof of insurability, pay past due premiums with interest, and complete a new waiting period.
- Increased Premiums: If a policy is reinstated or replaced with a new one, premiums may increase. Rates often rise with age, and new or worsening health conditions can lead to higher costs.
- Loss of Policy Benefits: A lapse may also result in the loss of added features, such as accidental death benefits or a waiver of premium riders.
- Surrender Charges: For policies with cash value, a lapse or surrender can trigger surrender charges. This may reduce the amount received compared to the total accumulated cash value.
- Tax Implications: Lapsing a cash value policy can create tax consequences, especially if loans or withdrawals were taken from the policy.
How to Avoid a Life Insurance Policy Lapse?
Keeping a life insurance policy active helps protect your beneficiaries. The steps below can help reduce the risk of a lapse:
- Set Up Automatic Payments: Automatic deductions from a bank account or credit card can prevent missed payments due to forgetfulness.
- Use Dividends to Pay Premiums: If you have a permanent life insurance policy that earns dividends, you may be able to apply them toward premiums or use an automatic premium loan.
- Use Calendar Reminders: If you prefer manual payments, schedule reminders a few days before the due date.
- Keep Contact Information Up-To-Date: Make sure your insurer has your current address, phone number, and email so you receive bills and policy notices.
- Budget for Premiums: Treat your premium as a fixed expense and plan for it alongside housing and utilities.
- Know the Grace Period: Understand how long your grace period lasts and when payment must be made to keep coverage active.
If financial strain is expected, contact your insurance company early. Options may include adjusting coverage, changing payment frequency, or using available policy features such as a premium waiver.
Life insurance is a long term commitment. Taking proactive steps can help keep coverage in place without interruption.
Avoid insurance lapse by understanding and acting within your grace period. Request a Free Life Insurance Quote
How to Reinstate a Lapsed Life Insurance Policy?
Reinstating a lapsed policy means restoring your coverage after it ended due to missed premium payments. While requirements vary by insurer, most reinstatement processes follow similar steps.
Common Steps to Reinstate a Policy
- Act Quickly: Most insurers allow reinstatement within a set time frame, often between two and five years after the lapse. Acting sooner generally improves the chance of approval.
- Contact Your Insurance Company: Reach out to your insurer or agent to confirm eligibility and request reinstatement forms. They can explain the specific requirements for your policy.
- Complete a Reinstatement Application: This application is similar to your original one and typically asks for updated personal details and health information.
- Provide Evidence of Insurability: Depending on how long the policy has been lapsed, you may need a medical exam or recent health records.
- Pay Past Due Premiums: You will usually need to pay all missed premiums, along with any interest or fees required by the insurer.
- Address Policy Loans if Applicable: If your policy had cash value and an outstanding loan, repayment or adjustments may be required before reinstatement.
- Understand Any Waiting Period: Some policies include a waiting period after reinstatement before full benefits apply. Confirm this with your insurer.
- Confirm Riders and Benefits: Verify whether riders or additional benefits from the original policy are still active or need to be reinstated.
- Keep Records: Save copies of all forms, payments, and communications related to reinstatement.
- Seek Expert Advice: A financial advisor or insurance professional can help guide you through the process and explain your options.
Important Considerations
Reinstatement is not guaranteed. Insurers may decline based on changes in health, age, or other factors. Avoiding a lapse by staying current on premium payments is always the best approach.
Alternatives to Letting Your Life Insurance Policy Lapse
If you are considering letting your life insurance policy lapse, there are a few other options that may better fit your situation.
- Reduce Your Coverage: You may be able to lower your coverage amount to reduce premium payments. This also lowers the amount your beneficiaries would receive.
- Borrow Against Your Policy: If you have a whole life insurance policy, you may be able to borrow against its cash value. This option can help cover unexpected expenses or short term financial strain.
- Surrender Your Policy: If you no longer need or want coverage, you can surrender the policy to the insurance company. You would receive a cash payment based on the policy type and any accumulated cash value.
Before making a decision, take time to weigh the pros and cons of each option. It can also help to review your choices with a financial advisor or insurance professional.
Final Thoughts
A life insurance policy lapse can have lasting financial consequences, but it is often preventable. Understanding how lapses happen, the options available, and how reinstatement works can help protect your coverage and avoid unnecessary costs. Regularly reviewing your policy and staying current on payments can help keep coverage in place when it matters most.
Consider your options in helping secure your financial future. Request a Free Life Insurance Quote
