Insurability Evidence: Life Insurance Lapse Requirements

Life insurance is a crucial financial tool that provides security and peace of mind to individuals and their families. However, maintaining the policy is just as important as having one. A life insurance lapse occurs when the policyholder fails to pay the required premiums, resulting in the termination of the policy benefits. This situation can have significant consequences for the insured and their beneficiaries, including lost coverage, higher future premiums, and loss of premiums paid. While reinstating a lapsed policy is possible, it often comes with conditions, such as providing evidence of insurability. This refers to the healthcare information collected to determine the insurance company's level of risk associated with extending insurance to an individual. This usually involves submitting an extensive questionnaire and official documentation of the applicant's medical history. The specific requirements for reinstating a lapsed policy vary depending on the insurance company and the policy type, and it is important to review the reinstatement provision in the contract to understand the exact requirements.

What is evidence of insurability?

Evidence of insurability (EOI) is the healthcare information collected by an insurance company to determine the level of risk associated with offering an insurance policy to an individual. It is used to assess an individual's eligibility for coverage, the type of coverage offered, and the level of coverage.

The EOI process involves submitting an application with an extensive questionnaire and official documentation of the applicant's medical history. The insurance company will also collect details such as the applicant's name, address, date of birth, driver's license or ID number, height, weight, and contact information. This helps to verify the person's identity and allows the insurer to contact the applicant if further questions arise.

EOI is typically required when an individual seeks to obtain coverage beyond the amount guaranteed by a group plan, or when they submit a late application for coverage for themselves or their dependents. It may also be required if an individual needs to reinstate their insurance coverage after a lapse.

In the context of life insurance, providing evidence of insurability may involve confirming that there have been no changes to an individual's health since the policy was written. This confirmation can be done through a medical examination or by reviewing recent health records.

The EOI process helps protect employers from adverse risks associated with disproportionate claims and assists them in controlling coverage costs. It is an important step in obtaining or reinstating an insurance policy and ensures that the insurance company has the necessary information to assess the level of risk accurately.

When is evidence of insurability required?

Evidence of insurability is required when an individual is applying for life insurance or attempting to reinstate a lapsed policy. In the US, evidence of insurability is also required by employees when enrolling in certain group insurance plans offered by their employers.

When applying for life insurance, individuals are typically required to submit an extensive questionnaire and provide official documentation of their medical history. This allows the insurance company to determine the level of risk associated with extending insurance coverage to the applicant.

If an individual's life insurance policy has lapsed, they may be required to provide evidence of insurability to reinstate their coverage. This typically involves proving that there have been no changes to their health since the original policy was written. In some cases, a medical examination may be required.

In the US, employees can usually enrol in group insurance plans offered by their employers without providing evidence of insurability. However, if an employee seeks to enrol a dependent or spouse, increase their coverage, or enrol after the initial commencement of employment, they may be required to provide evidence of insurability. This allows the insurer to assess the added risk associated with providing coverage.

What happens when life insurance lapses?

A life insurance lapse occurs when a policyholder fails to pay the required premiums, resulting in the termination of the policy benefits. This situation can have significant consequences for the insured and their beneficiaries. When a life insurance policy lapses, the following things can happen:

Loss of Coverage

The primary consequence of a lapse is that the life insurance coverage ceases. This means that if the insured individual dies after the policy lapses, the insurer will not pay a death claim, and the life insurance beneficiaries will not receive the death benefit.

Reinstatement Challenges

While many life insurance companies offer an option to reinstate a lapsed policy, it often comes with conditions. The policyholder might have to provide evidence of insurability, pay all overdue premium payments with interest, and possibly undergo a new waiting period. Reinstating a policy can be more cost-effective than applying for a new one, but it may also result in higher premiums due to changes in health or age.

Increased Premiums

If a lapsed policy is reinstated or the policyholder purchases a new policy, the premiums might be higher. Insurance premiums generally increase with age, and new health issues can result in higher rates.

Loss of Policy Benefits

Some insurance policies include riders or added benefits, such as an accidental death benefit or a waiver of premium rider. A lapse can lead to the loss of these additional benefits.

Surrender Charges

For policies with a cash value, if the policy lapses or the policyholder surrenders it, surrender charges may be applied, resulting in the policyholder receiving less than the total accumulated cash value.

Tax Implications

For policies with a cash value, lapsing can have tax consequences, especially if the policyholder has taken loans or withdrawals from the policy. Depending on the specific policy, a lapse can lead to tax consequences, and the policyholder might owe taxes on any gains that were not previously taxed.

How can you reinstate a lapsed policy?

If your life insurance policy has lapsed, you may be able to reinstate it, but the process varies depending on the insurance company and the type of policy. The sooner you act, the better, as the process of getting your coverage back can be more involved the longer you wait. Here are the general steps and requirements for reinstating a lapsed life insurance policy:

• Act quickly: Most insurers have a reinstatement period, often ranging from 2 to 5 years from the date of the lapse, during which you can reinstate your policy. It's easier and more likely to be successful the sooner you act after the lapse.
• Contact your insurance company: Get in touch with your insurer or insurance agent to discuss the reinstatement process and obtain the necessary forms.
• Complete a reinstatement application: This form will ask for updated personal information and health history, similar to the original insurance application.
• Provide evidence of insurability: Depending on how long the policy has been lapsed and the insurer's requirements, you may need to undergo a medical exam or provide recent health records to prove insurability. You may also need to confirm that your health condition hasn't changed since your policy was approved.
• Pay past-due premiums: You will likely need to pay all the premiums due from the time of the lapse, plus any interest or penalties charged by the insurer.
• Clear any policy loans: If your policy had a cash value and you took out loans against it, you might need to repay the loan amount or adjust the policy to meet the insurer's reinstatement requirements.
• Waiting period: Be aware that some life insurance policies and companies have a waiting period after reinstatement before the full benefits of the policy become active again.
• Policy riders and benefits: Ensure that any riders or additional benefits (like an accidental death benefit or premium waiver) that were part of the original policy are still in effect or discuss their reinstatement.
• Keep records: Always keep a copy of all documentation, payment proofs, and correspondence related to the reinstatement to ensure you have evidence in case of any disputes.

It's important to note that reinstating a lapsed policy is not guaranteed. The insurer may decline reinstatement based on changes in your health, age, or other factors. Additionally, if your health has changed significantly, your reinstatement application might be denied, and you may need to purchase an entirely new policy.

What are the consequences of a lapsed policy?

A life insurance policy is said to have lapsed when a policyholder fails to pay the required premiums, resulting in the termination of the policy benefits. This can have significant consequences for the insured and their beneficiaries.

When a life insurance policy lapses, the insured loses coverage and all the benefits associated with the policy. This means that the insurance company is no longer obligated to pay any death benefit or other contractual benefits if the policyholder dies. Reinstating a lapsed policy or securing a new one may be difficult and more expensive.

The specific conditions and consequences of a lapse depend on the terms of the insurance contract and the type of life insurance policy. Here are some of the common consequences:

• Loss of Coverage: The primary consequence of a lapsed policy is the termination of life insurance coverage. If the insured individual dies after the policy lapses, the insurer will not pay a death claim, and the beneficiaries will not receive the death benefit.
• Reinstatement Challenges: While many life insurance companies offer the option to reinstate a lapsed policy, it often comes with conditions. The policyholder may have to provide evidence of insurability, pay all overdue premium payments with interest, and possibly undergo 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. Insurance premiums generally increase with age, and new health issues can result in higher rates.
• Loss of Policy Benefits: Some insurance policies include riders or added benefits, such as an accidental death benefit or a waiver of premium rider. A lapse can lead to the loss of these additional benefits.
• Surrender Charges: For policies with a cash value, if the policy lapses or the policyholder surrenders it, surrender charges may be applied, resulting in the policyholder receiving less than the total accumulated cash value.
• Tax Implications: Lapsing can have tax consequences for policies with a cash value, especially if the policyholder has taken loans or withdrawals from the policy.

It is important to understand the reasons behind policy lapses and how to avoid them. Proactive measures, such as setting up automatic payments or using dividends to pay premiums, can help prevent lapses and ensure uninterrupted protection for your loved ones.

Frequently asked questions