Lapsation in Insurance

It's important to pay your life insurance premiums on time. Otherwise, your policy may lapse. What does a lapse mean? Find out what your options are if this happens to you?

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A lapse in your life insurance means the policy is no longer active.

In other words, the death benefit will no longer be paid or any coverage provided if you die.

This happens when you miss a premium payment or the cash surrender value is exhausted. The good news is that a policy will only lapse after a grace period has passed. And most companies allow you to reinstate your policy within a certain time period.

Learn all about lapses and what steps to take if it happens to you in our guide.

What Is a Grace Period?

Before your policy officially lapses, you will be notified of the grace period. This period prevents the policy from lapsing every time you miss or make a late payment. During this time, your policy is still in effect.

The grace period begins the day the missed premium payment is due. It usually lasts 30 days.

The actual length of time varies by state, but averages between 28 and 31 days.

The insurance company will still pay the death benefit if you die within those 30 days.

But if that time passes and you do not make a payment, the policy is considered lapsed. The company no longer has any obligation to make the death benefit payout to your beneficiaries.

The purpose of the grace period is to save the policyholder from losing their coverage, especially when the missed payment may have been due to circumstances out of their control.

Perhaps the insured is in the hospital or near death, and therefore the premium bill is overlooked. Or they moved and the bill was sent to the wrong address, or had another life change that delays payment.

What to Do if Your Policy Lapses

If you do not make a payment during the grace period, you should restart your policy as quickly as possible after it lapses.

This is called the reinstatement period. To reinstate the policy means the policy becomes active again and will provide the death benefit coverage.

Some companies will reinstate the policy with no additional medical exam if you do so within a certain period of time. After this period of time, though, additional underwriting may be necessary.

Know that your company is not obligated to reinstate the policy without medical underwriting.

The sooner you reinstate the policy, the less likely you are to have to go through additional underwriting. However, even with the same health rating, a reinstated policy will have a higher monthly premium because you are older than when you first got the policy.

It should, however, still be cheaper than taking out a completely new policy.

How to Reinstate a Policy

The first step is to contact your insurance company. Depending on your company, you'll probably be sent an application for reinstatement.

If you contact them within the 30-day grace period and make the missed payment, your policy will likely be reinstated with no additional medical underwriting.

If you make the payment between 30 days and six months AFTER the grace period, you can still make the payment to reinstate the policy.

But you will have to go through some level of medical underwriting. This could be answering health questions in a survey or over the phone, or completing a medical exam.

Some companies give you up to five years to reinstate the policy. Though at that point, you will have to submit to a new medical exam before being approved, your premium will be higher, and the chances of you getting denied coverage increase.

To pay for reinstating the policy, you will be required to make all premium payments missed from the date the policy went into its grace period.

This means that if you wait six months to reinstate, you will have to pay six months' of premiums. And remember, these payments may be higher because they were incurred during the grace period.

If you decide to let this policy lapse and purchase a new one from a different company, be aware that some insurance companies will check to see if you've had a lapsed policy in the past. If you do, they are less likely to approve you for a new policy.

How to Best Avoid a Lapse in Coverage

The #1 way to avoid a lapse in coverage is to make your premium payments every month and on time.

Automatic Payments
This allows them to withdraw payments directly from your checking account at the same time every month. That way, you'll never forget to make a payment.

If You Move
Make sure to let your company know you have a change in address so any bills or other correspondence gets to you on time.

You'll likely get a lapse notice in the mail—and possibly even email. Be sure to open everything you receive from your insurance company to avoid missing anything.

I'm a Beneficiary of a Lapsed Policy—What Are My Options?

In most cases, the beneficiary of a policy does not know the policy lapsed until after the insured, or policyholder, dies.

Insurance companies are not obligated to notify a beneficiary if a policy lapses. When they try to make a claim, it will be denied.

Unfortunately, if this is the case, there is no way to reinstate the policy or collect the death benefit.

However, if the beneficiary does become aware of the lapse BEFORE the insured dies, they have the option to make the payments themselves.

You can do this if you have power of attorney, or by calling the insurance company and asking if there is anything you can do to continue the premium payments. Some companies are willing to work with you, so they may be able to help find a solution.

The Importance of Life Insurance

Life insurance provides financial protection for your family and beneficiaries after you die. The payout, or death benefit, can be used for funeral or other end-of-life expenses. It can also pay off other debts or financial obligations you may leave behind.

You should have life insurance if you have:

• Children
  
• Loans
  
• Mortgage Payments

It can give you and your family peace of mind that certain obligations will be taken care of, without the burden falling on your family.

Bottom Line

Ensuring you pay your monthly premium on time is the best way to avoid any lapse in coverage. It ensures your beneficiaries receive the death benefit, on time and without any challenges.

If for some reason your policy does lapse, follow our guide to get it reinstated as quickly as possible.