Understanding Lapses: Keeping Your Life Insurance Policy Active

A lapse in life insurance occurs when a policy is no longer active, meaning the insurance company is no longer legally obligated to pay the beneficiaries of the policy the death benefit upon the passing of the insured. This is usually due to missed payments or a series of missed payments. All life insurance policies are legally required to honour a grace period, typically 30 days from the payment due date, during which time the insurance company must pay the death benefit despite a lack of premium payments. After the grace period, a policy is officially considered lapsed.

What is a 'lapse' in life insurance?

A lapse in life insurance refers to a "lapse in coverage", meaning the life insurance contract is no longer active and will not pay out a death benefit or provide any insurance coverage for the insured person. This usually occurs when the policyholder fails to fulfil the conditions or requirements set out in the contract, most commonly by missing premium payments.

In the US, all life insurance policies are legally required to honour a grace period, typically 30 days from the payment due date, during which the insurance company must pay the death benefit, despite a lack of premium payments. During this time, the policyholder can also make a late payment to resume insurance coverage, although grace period payments are usually higher than standard premium payments. After the grace period, a policy is officially considered lapsed, and the insurance company is no longer legally obligated to pay the beneficiaries.

The consequences of a lapsed life insurance policy can be serious for beneficiaries, who may be left unprotected if they need the death benefit to cover day-to-day expenses, pay off a mortgage, or fund a college education. However, a lapsed policy can usually be reinstated, and it is generally cheaper to reinstate an existing policy than to take out a new one. The process for reinstatement depends on the length of time since the policy lapsed and the requirements of the individual insurance company. Most insurers will allow reinstatement for up to five years, but the policyholder will have to submit a reinstatement application and may be required to fill out a questionnaire about their health. They will also have to pay all premiums owed, as well as interest on past-due premiums.

Why do life insurance policies lapse?

Life insurance policies lapse when they are no longer active, meaning the insurance company is no longer legally bound to pay the beneficiaries of the policy the death benefit upon the passing of the insured. In other words, a lapsed policy will not pay out a death benefit or provide any insurance coverage. This usually occurs due to missed premium payments, but can also be the result of a breach of one of the terms on the policy.

In the US, all life insurance policies are legally required to honour a grace period, typically 30 days from the payment due date, during which time the insurance company must pay the death benefit, despite a lack of premium payments. During this grace period, the policyholder can also make a late payment to resume insurance coverage. After the grace period, a policy is officially considered lapsed.

There are many reasons why policyholders may miss premium payments, causing their life insurance policies to lapse. This could be due to a simple oversight, such as forgetting to send a premium in, or not updating an insurance company with a change of address and therefore not receiving a bill. In other cases, unexpected expenses, job loss, or the expense of caring for a sick loved one may make policy premiums unaffordable. In some cases, the policyholder may be experiencing serious health conditions and be both financially compromised and unaware of their situation.

What happens when a life insurance policy lapses?

A lapse in a life insurance policy means that the policy is no longer active, and the insurance company is no longer legally obligated to pay the beneficiaries of the policy the death benefit upon the passing of the insured. In other words, a life insurance lapse can have extremely serious repercussions for your beneficiaries.

Grace Period

In the U.S., all life insurance policies are legally required to honour a grace period, typically 30 days from the payment due date, during which time your life insurance company must pay the death benefit, despite a lack of premium payments. During a grace period, the policyholder may also make a late payment to resume insurance coverage. It's worth noting that grace period payments are almost always higher than standard premium payments. After the grace period, a policy is officially considered lapsed.

Reinstating a Lapsed Policy

If a policy's premiums aren't resumed during the grace period, the insurance is considered lapsed – but the insured may still have the option to reinstate their policy for up to six months after the first missed payment. Unlike a grace period, a reinstatement period is not legally required, though it is commonly offered by most insurance companies. Reinstating a lapsed policy can typically be done without underwriting within the first 30 days after the lapse. However, after that 30-day period, reinstating a policy requires limited underwriting that involves answering questions to confirm there are no significant changes in the health of the insured relative to when the policy was initially taken out.

Avoiding Lapsed Payments

It's pretty standard for a life insurance company to offer automatic checking account withdrawals for monthly premiums, which make it much easier to stay on top of payments. Many lapsed policies occur when the policyholder is experiencing serious health conditions, and it is both financially compromised and potentially unaware of their situation. As such, it is important for policyholders to communicate with their beneficiaries or other responsible individuals, who may be able to step in to resume premium payments should the insured be unable to.

How to reinstate a lapsed life insurance policy?

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, so it's important to understand how to reinstate a lapsed policy. Here are the steps to reinstate a lapsed life insurance policy:

Act Quickly:

Most insurers have a reinstatement period, often ranging from 2 to 6 months, or even up to 5 years from the date of the lapse. 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. They will provide guidance and the necessary forms to start the process.

Complete a Reinstatement Application:

This form will be similar to your original insurance application, asking for updated personal information and health history, and may include other relevant questions.

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. Be honest about your health condition, as lying could void your policy.

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 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.

Seek Expert Advice:

Consider consulting a financial advisor or insurance expert to guide you through the process and ensure you make the best decisions based on your specific circumstances.

Remember, reinstating a lapsed policy is possible but not guaranteed. The insurer may decline reinstatement based on changes in your health, age, or other factors. Therefore, it's always best to avoid a lapse in the first place by staying vigilant about premium payments and policy terms.

How to avoid a life insurance policy lapse?

A life insurance policy lapse occurs when premium payments are missed and, depending on the type of insurance, the cash value is exhausted. Lapsing means that the insurance company is no longer legally obligated to pay the beneficiaries of the policy the death benefit upon the passing of the insured.

To avoid a life insurance policy lapse, consider the following:

• Set up automatic payments: This reduces the risk of forgetting to make a payment.
• Review your policy: You might be paying extra for life insurance riders that provide additional coverage that you don't need. Removing these riders can make your premium more affordable.
• Take advantage of flexible premiums: If you have a universal life insurance policy, you may be able to adjust the premium amounts.
• Use cash value or dividends to pay premiums: The cash value in a permanent life insurance policy can be used to cover premiums temporarily. Dividends paid on whole life policies can also be used to offset premiums.
• Switch from annual to monthly premium payments: If you're struggling to make a large annual payment, ask your insurer if you can switch to monthly payments to spread out the cost.
• Reduce your death benefit: If your policy allows, you can lower your premium by reducing the death benefit.

If you're having trouble making payments, communicate with your insurance agent or company to explore these options and find a solution that works for you.

Frequently asked questions