Term Life Insurance Lapse: What Happens And What To Do?

If you stop paying your term life insurance premiums, your policy will lapse and your coverage will end. This means that your beneficiaries will not be able to claim your death benefit, and you will lose the premiums you have already paid. However, there are steps you can take to reinstate your policy and avoid this situation in the future.

What is a grace period and how does it work?

A grace period is a set duration after the premium due date during which the policyholder can pay the outstanding premium without penalty and without the risk of the policy lapsing. The grace period is typically 30 days, but it can vary depending on the insurance provider and the type of policy. Some insurers may extend the grace period to 60 or 90 days under certain circumstances. During the grace period, the life insurance coverage remains in effect, and the policy benefits are still applicable. If the insured party passes away after a missed payment but within the grace period, the insurance company is legally required to pay out on the claim, although they may deduct any missed premiums from the benefits payout.

If the premium is not paid during the grace period, the policy will lapse. The specific consequences of a lapse depend on the terms of the insurance contract and the type of policy. In the case of term life insurance, the policy will usually lapse at the end of the grace period, and the insured will lose coverage and any death benefits. For permanent (whole) life insurance policies, the insurer may use the cash value of the policy to cover premium payments, and the policy will only lapse once this cash value has been used up.

If a policy has lapsed, it may be possible to reinstate it, but this will depend on the insurance provider and may involve a new application or a reinstatement application. The policyholder may have to provide evidence of insurability, pay all overdue premiums with interest, and possibly undergo a new waiting period.

What happens when your insurance lapses?

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. When a policy lapses, the insured loses coverage and is no longer eligible for any death benefits. However, there is usually an opportunity to reinstate the policy, although this may come with conditions.

Grace Period

Most insurance policies offer a grace period, which is an additional period after the premium due date during which the policyholder can pay the outstanding premium without the policy lapsing. During the grace period, the policy remains in force, and the nominee would still be eligible for benefits if anything happens to the insured. The grace period typically lasts around 30 days, but it can vary depending on the policy and insurance provider. Some insurers may extend it up to 60 or 90 days under certain circumstances.

Reinstatement of Lapsed Policy

If your policy lapses, you may be able to reinstate it by meeting certain requirements. Most insurance policies offer a revival feature, but there is usually a process to follow. The policyholder will typically have to submit proof of continued insurability, pay all due premiums along with any applicable revival charges, and may also have to undergo a medical examination. If the insurance company approves the reinstatement, the policy will come back into force with all its original benefits.

New vs Revived Policy

It is generally more cost-effective to reinstate a lapsed policy than to purchase a new one. The premiums for term plans increase with age, so a reinstated policy will likely have the same premium as before, whereas a new policy will be more expensive. Additionally, with a new policy, the policyholder would lose the premiums they had already paid for the old policy.

Preventing Policy Lapse

To avoid a policy lapse, it is important to pay premiums regularly and on time. Setting up automatic payments or standing instructions with your bank can help ensure that premiums are paid without delay. It is also a good idea to consult with an insurance provider or financial advisor to discuss specific strategies for your situation.

Can a lapsed policy be reinstated?

A lapsed life insurance policy can typically be reinstated within a certain period, but it will require you to take several steps and meet specific requirements. The process for reinstating a lapsed policy can vary across insurance companies, but here are some general guidelines:

Time Frame for Reinstatement

Most insurers allow for reinstatement within a specific time frame, often within three to five years from the date of the lapse. The sooner you act after the lapse, the better your chances of a successful and smooth reinstatement. If it has been only a few days, you can likely reinstate the policy without much hassle. However, if it has been several months or years, you will likely need to go through a more extensive reinstatement process.

Contact Your Insurance Company

Get in touch with your insurer or insurance agent to discuss the reinstatement process and understand their specific requirements. They will guide you through the necessary steps and provide you with any relevant forms or documentation.

Complete a Reinstatement Application

You will typically need to submit a reinstatement application, which may resemble your original insurance application. Be prepared to provide updated personal information, details about your current health status, and answer other relevant questions.

Provide Evidence of Insurability

You may be required to demonstrate that your health has not significantly changed since you initially obtained your policy. This may involve submitting recent health records or undergoing a new medical examination. The specific requirements will depend on the insurer and the time elapsed since the lapse.

Pay Past-Due Premiums and Associated Fees

To reinstate your policy, you will likely need to pay all the premiums that were due during the period of the lapse, along with any interest or penalties charged by the insurer. Make sure to clarify all the outstanding amounts and associated costs before proceeding with reinstatement.

Clear Any Policy Loans

If your policy had accumulated cash value, and you had taken out loans against it, you might need to repay the loan amount or make adjustments to meet the insurer's reinstatement requirements.

Understand Potential Waiting Periods and Benefits Restoration

Some insurers may impose a waiting period after reinstatement before the full benefits of the policy become active again. Additionally, there may be specific conditions or challenges in restoring certain policy benefits or riders. Be sure to clarify with your insurer if any waiting periods or benefits restoration processes apply.

Seek Expert Advice

Consider consulting a financial advisor or insurance expert who can guide you through the reinstatement process and help you make informed decisions based on your specific circumstances.

It is important to remember that reinstating a lapsed policy is not guaranteed. The insurer may deny reinstatement based on changes in your health, age, or other factors. Therefore, it is always best to prioritize staying current with your premium payments and proactively managing your policy to avoid a lapse in coverage.

What are the repercussions of a lapsed policy?

Repercussions of a Lapsed Policy

The repercussions of a lapsed life insurance policy can be significant and vary depending on the type of policy and the specific terms of the insurance contract. Here are the key repercussions to consider:

Loss of Coverage

The most immediate consequence of a lapsed policy is the loss of coverage. If the insured individual dies after the policy lapses, the insurance company is no longer obligated to honour the death benefit, and the beneficiaries will not receive the intended financial protection. This loss of coverage can have a significant financial impact on the insured's loved ones.

Reinstatement Challenges

While many insurance companies offer an option to reinstate a lapsed policy, it often comes with conditions and potential costs. The policyholder may have to provide evidence of continued insurability, such as undergoing a medical examination or providing recent health records. Additionally, they will likely need to pay all overdue premium payments, along with interest and penalties. The reinstatement process can be labour-intensive and may involve submitting a new application.

Increased Premiums

If the policyholder chooses to reinstate a lapsed policy or purchase a new one, they may face higher premiums. Insurance premiums tend to increase with age, and any new health issues or changes in health status can result in higher rates. This increase in premiums can make it more expensive to maintain the desired level of coverage.

Loss of Policy Benefits

In addition to the primary death benefit, life insurance policies often include additional riders or benefits, such as an accidental death benefit or a waiver of premium rider. A lapse in the policy can result in the loss of these valuable supplementary benefits, reducing the overall protection provided by the policy.

Surrender Charges

For policies with a cash value component, if the policy lapses or is surrendered by the policyholder, surrender charges may be applied. This means that the policyholder may receive less than the total accumulated cash value, resulting in a financial loss.

Tax Implications

Lapsed policies with a cash value component can also have tax consequences, especially if the policyholder has taken loans or made withdrawals from the policy. It's important to consider the potential tax liabilities associated with a lapsed policy.

Impact on Future Insurability

A lapsed policy can also affect the policyholder's future insurability. Insurance companies may view a lapse as an indicator of higher risk, which could lead to increased premiums or difficulty in obtaining coverage in the future.

To avoid these repercussions, it is crucial to maintain timely premium payments and stay vigilant about adhering to the terms of the insurance contract. Understanding the grace period and taking proactive measures, such as setting up automatic payments, can help prevent a policy lapse and ensure continuous coverage.

How can I avoid lapsing?

A life insurance policy 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. Therefore, it is crucial to understand the reasons behind policy lapses and take proactive measures to avoid them. Here are some strategies to help you avoid lapsing:

• Set up automatic payments: Consider setting up automatic deductions from your bank account or credit card. This way, you can avoid late payments due to forgetfulness.
• Use dividends to pay premiums: If you have a permanent life insurance policy that pays dividends, you may be able to use those dividends to pay premiums or take out an automatic premium loan.
• Calendar reminders: If you prefer not to use automatic payments, set reminders on your calendar to alert you a few days before your premium is due.
• Maintain updated contact information: Ensure your insurer has your current address, phone number, and email to receive important notifications, bills, and reminders related to your policy.
• Budget accordingly: Treat your life insurance premium as a non-negotiable budget item. Prioritize it alongside essential expenses such as your mortgage or rent.
• Understand grace periods: Be aware of the grace period specified in your policy. This is the window after the premium due date during which you can make the payment without your policy lapsing. Understanding this period will help you act promptly if you encounter financial difficulties.
• Communicate with your insurance company: If you anticipate financial difficulties, speak to your insurance provider. They may offer solutions such as adjusting your coverage, changing the premium payment frequency, or leveraging policy benefits like a premium waiver under certain conditions.
• Regular premium payments: Paying your premiums regularly is essential. Set up standing instructions with your bank to ensure timely payments. Opting for an annual payment mode can also reduce the hassle of remembering due dates.
• Choose a suitable payment frequency: Some insurance providers offer various payment options, including annual, semi-annual, or quarterly payments. Assess your situation and select the frequency that best suits your financial situation and preferences.

By following these strategies, you can proactively avoid a lapse in your term life insurance policy, ensuring uninterrupted protection for your loved ones.

Frequently asked questions