Life Insurance: Owner's Rights To Remaining Balance Explained

A life insurance policy lapse occurs when a policyholder stops paying their premiums, leading to the termination of benefits. This can have significant consequences for the insured and their beneficiaries. In the event of a lapse, the insurance company is no longer obligated to pay the death benefit or other benefits outlined in the policy. However, it is important to note that a missed payment does not always result in immediate termination. Most policies have a grace period, typically between 30 and 90 days, during which the policy remains in force. If the insured dies during this time, the beneficiaries will still receive a payout, although the premium payment owed will likely be deducted from the total.

After the grace period, reinstating a lapsed policy can be challenging and costly. Policyholders may need to provide evidence of insurability, pay overdue premiums with interest, and undergo a new waiting period. The specific conditions and consequences of a lapse depend on the insurance contract and the type of policy.

To avoid a lapse, policyholders can set up automatic payments, use dividends to pay premiums, maintain updated contact information, and understand the grace period offered by their insurance provider.

Policy reinstatement conditions

The ability to reinstate a lapsed life insurance policy is not guaranteed by law, and the process and requirements may vary between insurance providers. However, reinstatement is often possible, and there are several conditions that commonly apply.

Firstly, reinstatement is generally only possible within a certain timeframe after the policy has lapsed. While this timeframe can vary, it is typically between three and five years. The sooner reinstatement is sought, the better, as the process may become more involved over time, and waiting too long could result in being denied coverage.

Secondly, the policy owner will usually need to submit a reinstatement application and fill out a questionnaire about their health. They may also need to attest that their health condition hasn't changed since the policy was approved. Being honest in these health declarations is crucial, as providing fraudulent information can be grounds for the insurance company to deny a death claim in the future.

Thirdly, the policy owner will need to pay all premiums owed, plus any interest charged on past-due premiums. A larger reinstatement premium is often required, which is added to the accumulated cash value of the policy and used to cover administrative expenses incurred from the lapse.

In some cases, additional requirements may be necessary, such as undergoing a medical examination or submitting to the full underwriting process again. These requirements are more likely to be imposed if a significant amount of time has passed since the policy lapsed or if the insured person's health has deteriorated.

It is important to note that reinstating a lapsed policy may not always be the most cost-effective option. In some cases, purchasing a new policy could result in lower premiums, especially if the insured person's health has improved since the original policy was taken out. Therefore, it is recommended to compare the costs of reinstating an old policy versus obtaining a new one before making a decision.

Premium payment methods

Payment Methods

Most life insurance companies accept premium payments via electronic bank transfer, with some also accepting checks. Credit cards are rarely accepted beyond the first payment and usually incur a processing fee. Cash is never accepted.

Payment Frequency

The frequency of premium payments can vary from monthly to annually, with some companies offering more specific options such as semi-annually or quarterly. The less frequent the payments, the lower the administrative burden on the insurer, and so the lower the overall cost of the policy. However, more frequent payments can help with budgeting and ensure that you don't miss a payment.

Lapsed Policies

If you stop paying your premiums, your life insurance policy will lapse and your coverage will end. However, there is usually a grace period of around 30 days, during which you can reinstate your policy by paying any outstanding premiums and associated late fees. If you die during the grace period, your insurer is legally required to honour your beneficiaries' claims, although missed payments will be deducted from the total payout.

Policy lapse implications

A life insurance policy lapse occurs when the policyholder stops paying their premiums and the grace period for late payment has expired. It is important to note that missing a single payment does not automatically result in a policy lapse. All life insurance companies are legally required to provide a grace period, typically lasting around 30 days, during which the policy remains in force. Policyholders can avoid a lapse by making the missed payment before the grace period ends.

Term Life Insurance Lapse

A term life insurance policy has no cash value, so once a payment is missed, the policy immediately enters the grace period. If no payment is received by the end of this period, the policy lapses. This means that beneficiaries will not be able to claim the death benefit, and the policyholder will lose the premiums they have already paid.

Permanent Life Insurance Lapse

Permanent life insurance policies with a cash value component, such as whole life policies, typically include an automatic premium loan feature. If the policyholder misses a payment, the insurance company will use the cash value of the policy to cover the premium. If there is insufficient cash value in the policy to cover the premium, or if the cash value is depleted due to continued non-payment, the policy will enter the grace period. Once the grace period ends, the policy will officially lapse, and no death benefit will be paid.

Reinstating a Lapsed Policy

It is usually possible to reinstate a lapsed life insurance policy within two years of the lapse. The process for reinstatement varies depending on the insurance company and the length of time since the policy lapsed. In most cases, the policyholder will need to provide evidence of insurability, pay back missed premiums (plus late fees or interest), and restart the contestability period. Some companies may also require the policyholder to undergo the application and underwriting process again.

Preventing a Policy Lapse

To avoid a policy lapse, policyholders can take several steps, including enrolling in automated payments, switching to an annual payment schedule, adding a waiver of premium rider, or lowering their coverage amount. It is important to communicate with the insurance company to explore these options if there are difficulties in making payments.

Policy termination

A life insurance policy lapse occurs when a policyholder fails to pay the required premiums, resulting in the termination of policy benefits. This situation can have significant consequences for the insured and their beneficiaries. Understanding the reasons behind such lapses and how to avoid them is crucial.

Reasons for Policy Lapse

There are various reasons why an individual may stop paying their life insurance premiums, leading to a lapse in coverage. These can include job loss, unexpected expenses, or simply forgetting to make a payment. In some cases, the policyholder may no longer feel the need for the policy, especially in the case of term policies which are taken out to cover specific risks or obligations.

Consequences of Policy Lapse

The implications of a policy lapse can be significant for both the insured and their beneficiaries:

• Loss of Coverage: Once a policy has lapsed, the coverage ceases, and the insurer is no longer obligated to pay any death benefit or other contractual benefits if the insured dies.
• Reinstatement Challenges: While many insurers offer an option to reinstate a lapsed policy, it often comes with conditions such as providing evidence of insurability, paying overdue premiums with interest, and undergoing a new waiting period.
• Increased Premiums: If a lapsed policy is reinstated or the policyholder purchases a new policy, the premiums are likely to be higher due to increased age and potential new health issues.
• Loss of Policy Benefits: Additional benefits, such as accidental death coverage or waiver of premium riders, may be lost due to the lapse.
• Surrender Charges: For policies with a cash value, surrender charges may be applied if the policy lapses or is surrendered, resulting in the policyholder receiving less than the total accumulated cash value.
• Tax Implications: Lapsing a policy with a cash value can have tax consequences, especially if the policyholder has taken loans or withdrawals from the policy.

Avoiding Policy Lapse

To protect the financial interests of beneficiaries, it is essential to take proactive measures to avoid a policy lapse. Here are some strategies to consider:

• Automatic Payments: Setting up automatic deductions from a bank account or credit card ensures that payments are made on time and reduces the risk of forgetfulness.
• Use Dividends to Pay Premiums: For permanent life insurance policies that pay dividends, these dividends can be used to pay premiums or take advantage of automatic premium loans.
• Calendar Reminders: For those who prefer not to use automatic payments, setting up calendar reminders can help ensure that payments are made before the due date.
• Maintain Updated Contact Information: Providing the insurer with current contact information ensures that important notifications, bills, and reminders are received.
• Budgeting: Treating life insurance premiums as a non-negotiable budget item and prioritizing them alongside essential expenses can help ensure timely payments.
• Understanding Grace Periods: Knowing the grace period offered by the insurer can provide some flexibility in making payments without risking a policy lapse.

Alternatives to Policy Lapse

If an individual is considering letting their policy lapse due to financial difficulties, there are a few alternative options to explore:

• Reducing Coverage: If the full coverage is no longer required, reducing the policy coverage can lower premiums, although this will also decrease the payout to beneficiaries in the event of the insured's death.
• Borrowing Against the Policy: For whole life insurance policies with a cash value, borrowing against this value can be an option to cover unexpected expenses or financial hardships.
• Surrendering the Policy: If the policy is no longer needed, surrendering it to the insurance company will result in a cash payment. The amount will depend on the type of policy and the accumulated cash value.

It is important to carefully weigh the pros and cons of each option before making a decision. Consulting with a financial advisor or insurance professional is recommended to ensure the best course of action for an individual's specific circumstances.

Policy reinstatement challenges

Reinstating a lapsed life insurance policy is possible, but it is not a straightforward process and is dependent on several factors. While many life insurance companies offer the option to reinstate a lapsed policy, it often comes with conditions that must be met. Here are some of the challenges you may face when attempting to reinstate a lapsed policy:

Time Constraints

Insurers typically allow a limited period for reinstating a lapsed policy, often ranging from 2 to 5 years from the date of the lapse. The sooner you act, the better your chances of a successful reinstatement. Some companies may offer a 15- to 30-day buffer after a policy lapses, allowing for easier reinstatement without additional requirements. However, if you wait too long, you may face denial of coverage.

Evidence of Insurability

You may be required to provide evidence of insurability, which includes proving that your health condition has not changed since the original policy was approved. This may involve undergoing a medical examination or providing recent health records. If your health has deteriorated or you have developed new health issues, the insurer may decline to reinstate your policy.

Payment of Past-Due Premiums

Reinstating a policy will likely require you to pay all the premiums that were due from the time of the lapse, plus any interest or penalties charged by the insurer. This can be a significant financial burden, especially if the lapse occurred some time ago.

Additional Requirements

Insurers may have specific requirements for reinstatement, such as submitting a reinstatement application, filling out questionnaires, or undergoing a new waiting period. Some policies may also require you to clear any policy loans or adjust your coverage to meet their reinstatement criteria.

Higher Premiums

If you are successful in reinstating your policy, you may face higher premiums than before. Insurance premiums generally increase with age, and any new health issues can result in even higher rates.

Loss of Policy Benefits

Reinstating a lapsed policy may result in the loss of additional benefits or riders that were previously included, such as an accidental death benefit or a waiver of premium rider.

Underwriting Process

If a significant amount of time has passed since the lapse, you may be required to go through the underwriting process again. This involves assessing your current health, age, and other factors, which could impact your eligibility for reinstatement.

It is important to note that the specific requirements and challenges of reinstating a lapsed life insurance policy can vary depending on the insurer, the type of policy, and the length of time since the lapse. It is always best to consult directly with your insurance provider to understand their specific requirements and processes.

Frequently asked questions