What Happens When Your Life Insurance Policy Lapses?

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.

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.

Conclusion

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.

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