A lapse means a life insurance policy is no longer an active contract due to missed premium payments. A life insurance policy will lapse when both premium payments are missed and cash surrender value is exhausted if it is a permanent life insurance policy. The term lapse refers to a “lapse in coverage”, meaning the life insurance contract will no longer pay a death benefit or provide any insurance coverage for the insured person. A policy will only lapse after a grace period has passed, and most companies will allow their clients to reinstate their policies for a short period after the policy has lapsed without further underwriting. Read on to learn how to reinstate your policy. In this article we cover:
- Grace Period Must Happen Before a Lapse
- What to do if Your Policy Lapses
- Most Policies Can be Reinstated After a Lapse
- The Importance of a Reinstatement Period After a Lapse
- The Premium Payment Due May be Larger After a Lapse
- How to Avoid a Policy Lapse
A Grace Period Happens Before A Lapse
To prevent a life insurance policy from lapsing each and every time a premium payment is slightly late, every state in the country requires that a life insurance policy first goes through what is known as a grace period after a payment is missed. This is a period of time (usually 30 days) where despite the missed payment, the insurance policy will still provide coverage and make a full payout if the insured dies. To reach more about the grace period, read our reference here.
Only after the grace period has passed without receiving the due premiums can the life insurance company consider the policy to have lapsed. Once a life insurance policy lapses the life insurance company is not under any legal obligation to pay the beneficiaries if an insured person passes away.
What to Do if Your Policy Lapses
You need to act as quickly as you can after a policy lapse. You may be eligible for reinstatement. Contact your agent as quickly as possible for advice. If you can not get in touch with your agent immediately, call the home office of your life insurance company. They will be able to advise you about the payment that you need to make, and the ways that you can make payment. If you intend to send a check by overnight delivery, they probably have a separate mailing address that will allow for faster processing. If you wish to send a wire, this is also an option and they will provide the wiring instructions. Make sure to follow these precisely so that your account gets credited and not someone else’s. You may be able to drop a check off at your local office, and the payment will be considered accepted on that day. The key after any lapse is to speak to your insurance company as quickly as possible to discuss your options.
Most Policies Can Be Reinstated After Lapsing
For some period of time (depending on company and policy type) after a policy first lapses, the owner may have the option to reinstate the policy. You want to make sure that you reinstate your policy as quickly as possible after a lapse. Different companies have different rules for reinstatement and you could miss your window to reinstate your policy if you do not act quickly enough.
A reinstatement can usually be done with no underwriting within the first 30 days, and with limited underwriting after 30 days but for less than six months. The limited underwriting usually requires that the insured person answers some health questions, and attests that no material changes in health have occurred since the policy was underwritten. Lying on this questionnaire, if caught during the claims process, can negate a life insurance claim from being required to be paid. Never lie on the reinstatement questionnaire or you may force your beneficiaries to forgo the benefits they were expecting.
The Importance of the Reinstatement Period After a Policy Lapse
The reinstatement period is very important to policy owners and insured persons for a couple of reasons. The first reason is as discussed, the insured person may not need to go through the underwriting process if they accidentally miss a payment and let a policy lapse. If a person has had a major health change, he or she may not necessarily be aware of the change. As long as he or she doesn’t lie on the reinstatement form and can prove that they were unaware of any changes in health, the insurance company will reinstate the policy and make a payout if a claim is filed. The underwriting process may uncover more about a person’s health than they ever knew, for better and worse. Avoiding underwriting when possible almost always leads to lower insurance premiums.
The second reason the reinstatement period is very important is that even with the same health rating, a new life insurance policy will always be more expensive than an old policy because the insured person has aged. The older the insured person, the higher the rates will be, all else being equal. The bottom line is: Reinstating a life insurance policy rather than taking out a new policy will save a lot of money.
Reinstatement Will Cost More Than One Month Premium
After a policy has lapsed, a larger payment must be made to reinstate the policy. It is in the best interest of a policyholder never to let a policy lapse. This extra payment is not a late fee, but it does signal to the life insurance company that a person is not going to constantly be letting a policy lapse. The large payment will cover the policy premium due for at least a few months.
How to Avoid a Policy Lapse
The best way to avoid a lapse is to always make premium payments on time. All major life insurance carriers offer the ability to automatically draft payments from your checking account to pay the policy on time every month. This is a nice feature because it removes the need to think about life insurance premium payments every month, which is not at the top of most people’s priority lists.
Whole life, universal life, and variable universal life insurance policies will generally take the cost of insurance from the cash value in some way if a premium payment is missed. While this can ease the burden for clients during times when it is not possible to make payments into the policy, clients must stay on top of the policy values. If the value slips near zero and there are not sufficient funds to cover the cost of life insurance, the policy will lapse.
Term life insurance has no cash value. Therefore when a premium payment is missed, the policy will immediately go into a grace period, and then lapse after the prescribed amount of time. Always make a premium payment on time for a term life insurance policy, and do not miss payments. Term life insurance can be easy to replace, but if the insured person loses coverage they put their beneficiaries in financial peril.
Insurance companies will always put out lapse notices to their client prior to the lapse taking place, and immediately after it has. By doing something as simple as opening and reading your mail from your insurance company, you will be kept aware of any changes to your insurance policy’s status and avoid lapses.
A life insurance policy lapse means that life insurance coverage is no longer active. No death claim payments will be made if an insured passes, no policy changes can be made, and there is no cash surrender value at this point. To avoid lapse always make your scheduled payments on time to your life insurance company.
If your life insurance policy has lapsed and you would like to find the least expensive option for new life insurance coverage, use our quote comparison tool to save money on your next life insurance policy.