Life Insurance Lapse: Understanding The Risks And Consequences

Life insurance policies lapse 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. A missed payment doesn't always mean immediate termination, as life insurance policies often have a grace period during which the policy remains in force. However, if the policyholder fails to pay the premiums within this grace period, the policy will lapse, and the coverage will end. This means that the insurance company will no longer be obligated to pay any death benefit or other contractual benefits if the policyholder dies.

Grace periods

It's important to note that the grace period is not a free pass to skip payments. If you miss a payment, it's best to pay it as soon as possible to avoid any negative consequences. The grace period is intended as a safety net to protect policyholders from immediate coverage loss due to an accidental or temporary lapse in payment.

In the unfortunate event of the policyholder's death during the grace period, the insurance company is legally required to review and honour the beneficiaries' claims, although any missed payments and associated late fees will be deducted from the total payout.

To summarise, grace periods offer a temporary safety net for policyholders who miss a premium payment, allowing them to maintain coverage and benefits during this time. However, it's important to get back on track with payments as soon as possible to avoid any adverse effects on your life insurance policy.

Reinstating a lapsed policy

Reinstating a lapsed life insurance policy is possible, but it may come with conditions and costs. The process and requirements vary across insurance companies, but here are some general steps and guidelines:

• Act promptly: Reinstatement is more likely to be successful the sooner you act after the lapse. Most insurers have a reinstatement period, typically ranging from 2 to 5 years, during which you can reinstate your policy.
• Contact your insurance company: Discuss the reinstatement process with your insurer or insurance agent, who will provide guidance and necessary forms.
• Complete a reinstatement application: This form is similar to the original insurance application and will require updated personal and health information.
• Provide evidence of insurability: Depending on the length of the lapse and the insurer's requirements, you may need to undergo a medical exam or provide recent health records to prove insurability.
• Pay past-due premiums: You will likely need to pay all 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 may need to repay the loan amount or adjust the policy to meet the insurer's requirements.
• Waiting period: Some policies and companies have a waiting period after reinstatement before the full benefits become active again.
• Policy riders and benefits: Ensure that any riders or additional benefits (e.g., accidental death benefit or premium waiver) from the original policy are still in effect or discuss their reinstatement.
• Keep records: Maintain copies of all documentation, payment proofs, and correspondence related to the reinstatement to have evidence in case of disputes.
• Seek expert advice: Consult a financial advisor or insurance expert for guidance and to ensure you make informed decisions based on your specific situation.

Remember, reinstating a lapsed policy is not guaranteed. The insurer may decline reinstatement based on changes in your health, age, or other factors. Therefore, it is essential to stay vigilant about premium payments and policy terms to avoid a lapse in the first place.

Loss of coverage

When a life insurance policy lapses, the coverage it provides ends, and the insured loses 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 after the policy has lapsed.

The repercussions of a lapsed policy can vary depending on the type of life insurance policy. For term life insurance, there is usually no cash value, so once a payment is missed, the policy immediately moves into a grace period. If a payment isn't received by the end of the grace period, the policy lapses, and the beneficiaries will not be able to claim any death benefit.

For permanent life insurance, the policy may include a "death benefit" and a "cash value". The "cash value" functions as a savings investment separate from the death benefit. In this case, the policyholder may have the option to "cash out" their life insurance by withdrawing the policy's cash value when the death benefit coverage lapses.

Regardless of the type of life insurance, a lapse in coverage can have significant consequences. It is important to understand the reasons behind such lapses and how to avoid them to ensure uninterrupted protection for your loved ones.

To avoid a lapse in life insurance coverage, consider the following strategies:

• Set up automatic payments or deductions from your bank account to ensure timely payments.
• Use dividends to pay premiums if your policy allows it.
• Set up calendar reminders to alert you before your premium is due.
• Maintain updated contact information with your insurer to receive important notifications.
• Treat your life insurance premium as a non-negotiable budget item and prioritise it.
• Understand your policy's grace period and reinstatement options in case of missed payments.

Increased premiums

When a life insurance policy lapses, the insured individual loses their coverage, and the beneficiaries will not receive any death benefits. However, there are ways to reinstate a lapsed policy or get a refund. That being said, reinstating a lapsed policy or purchasing a new one will likely result in increased premiums.

If you let your life insurance policy lapse and then decide to reinstate it or purchase a new one, you will likely face higher premiums. Insurance premiums tend to increase with age, and any new health issues that have arisen since the original policy was taken out can result in higher rates.

The process of reinstating a lapsed policy may involve providing evidence of insurability, which could mean undergoing a new medical exam. The insurance company will reassess the cost of your insurability, taking into account factors such as age and any changes in health, resulting in higher premiums.

In some cases, reinstating an old policy with higher premiums may not be the most cost-effective option. It might be more advantageous to purchase a new policy, especially if the old policy lapsed a long time ago. However, buying a new policy will also likely result in higher premiums due to increased age and any changes in health.

To summarise, letting your life insurance policy lapse can lead to increased premiums when reinstating the policy or purchasing a new one. The older age and any changes in health will be taken into account, resulting in higher rates compared to the original policy.

Loss of policy benefits

When a life insurance policy lapses, the insured loses 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 after the policy has lapsed. The repercussions of a lapsed policy can vary depending on the type of life insurance policy and the specific terms of the insurance contract.

For term life insurance policies, there is usually no cash value, so once a payment is missed, the policy immediately enters a grace period. If the payment is not received by the end of this period, the policy lapses, and the insured loses the premiums they have already paid. In this case, the beneficiaries will likely not be able to claim any death benefit.

Permanent life insurance policies, on the other hand, often have a cash value component that can be used to cover the premium if a payment is missed. These policies almost always have an automatic premium loan component, where the insurance company uses the cash value of the policy to pay the premium. However, if there is insufficient cash value, 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 lapse, resulting in the loss of coverage and no death benefit will be paid.

In both cases, the loss of policy benefits can have significant implications for the insured and their beneficiaries. The insured may face challenges in reinstating their policy, and even if reinstatement is possible, it may come with conditions such as providing evidence of insurability, paying all overdue premiums with interest, and undergoing a new waiting period. Additionally, the premiums may increase due to age and new health issues.

Frequently asked questions