Letting your life insurance policy lapse is a big mistake.
Not only does it make reinstating your policy or finding a new one more difficult, but it also means your beneficiaries will receive nothing if you die after it’s lapsed.
That’s why avoiding a lapsed policy is so important.
You bought your life insurance to protect your loved ones and you fulfill the need if you fail to make your payments on time.
Here’s everything you need to know about life insurance lapses and what you can do to correct this problem.
What Is A Lapsed Life Insurance Policy?
Lapsed life insurance is simply a life insurance policy with a contract that is no longer valid.
By far the most common reason the contract is no longer valid is because the policyholder forgot to make a payment.
Failing to make a payment causes the policy to lapse.
In other words, the coverage is no longer valid, so your death benefit will not be paid out as agreed upon if you die unless you catch up on all premiums due.
Fortunately, most life insurance providers offer a short grace period for lapsed policies.
Is There a Grace Period?
Yes, there is a grace period for most life insurance policies.
According to the contracts offered by most providers, the providers are not allowed to immediately cancel the policy after a missed payment.
Instead, a grace period is given to allow you to make up for the missed payment and regain the service.
This must be done in a timely manner!
Most life insurance providers only offer a one-month grace period for you to make up for a missed payment.
Of course, your next payments must also be made on time. Most life insurance providers don’t offer additional grace periods after you’ve already missed one payment.
Your coverage will continue as normal during the grace period.
If you die, the coverage is still there and the death benefit is still available. A carrier may still make the payout, but reduce the benefit by the amount owed.
If you make the payment within the month grace period, your coverage continues on like normal.
If you fail to make the payment within the month grace period, you’ll likely experience a canceled life insurance policy.
A canceled life insurance policy means you’re no longer covered and your coverage will not take affect if you die.
Why You Must AVOID a Policy Lapse
The reasons to avoid a lapsed life insurance policy are relatively straightforward.
Simply put, it leaves your coverage in a sort of limbo.
If you fail to make a payment during the grace period, your loved ones will no longer be covered if you die. Additional death benefits are also no longer available. The contact is essentially void with the insurance company.
Another reason to avoid a policy lapse is that life insurance is more difficult to find the older that you get.
If you let the policy lapse and don’t make the payment during the grace period, you’ll likely be forced to find a new life insurance policy, but at your current age.
You’re older now than you were when you got your first policy. That in itself will make it harder to qualify for a new policy, not including if anything has changed in your health, or other risk factors considered by insurance companies.
Therefore, you’ll likely end up paying a higher premium.
And that’s not to mention the lapsed policy in itself. New life insurance companies you apply for will know about your missed payment. They’ll be more hesitant to insure you because of it.
Most life insurance companies don’t care to have ‘iffy’ clients on the books, so consider your payment history long term.
It’s just a lot easier and far less stressful to avoid a lapsed life insurance policy in the first place.
Reinstating a Lapsed Policy: Is This Allowed?
Some life insurance companies give you the chance to reinstate a lapsed policy even if you’ve missed the grace period.
Note: the specific rules and procedure for lapsed policy reinstatement differs from company to company. The exact way you will do this depends on your provider.
For instance, the length of time where reinstatement is even possible varies widely.
Some companies only allow reinstatement in a short time frame where others have more flexible deadlines.
Another factor to note is reinstatement is almost like applying for a new policy. Chances are you won’t receive the same coverage for the same rate upon reinstatement.
In fact, if you miss the grace period, you’ll likely have to go through the entire application process again. You can be subject to a new underwriting process.
You’ll likely be paying more for your new policy. The reason for this is you’ve may have aged quite a lot since buying the original policy. Any new medical issues you have will also be taken into consideration for your new policy.
Why You Should Reinstate A Lapsed Policy, Anyway.
Of course, your best course of action is to avoid a lapsed policy altogether.
Make the missed payment during the grace period to avoid the difficult process of reinstating altogether.
Still though, if you do let your policy lapse past the grace period, it’s still important to reinstate the policy despite the drawbacks.
The number one reason to do this is to ensure coverage continues. You want to make sure your loved ones are still covered in the event of your death.
Another reason to reinstate with your provider is that they’re more likely to offer you a new policy, even if it’s at a higher monthly premium. This does add additional time, if you so choose, so your coverage could last longer.
Finally, you’ve probably already made countless payments towards your current policy. Sure, you might pay a higher premium on a reinstated policy, but your past payments will still count towards the policy.
Be aware that not only will you likely have to pay higher premiums upon reinstatement, but you’ll also have to make up for missed payments and maybe even pay an additional fee.
Don’t Lapse Because of Disability, Though!
One quick thing to think about, though, is if you are unable to make payments because of a disability, you’re probably going to be okay!
Well, that is if you purchased a Disability Waiver of Premium rider.
The Waiver of Premium addition to a policy allows the life insurance company to ‘waive’ or ‘dismiss’ your premiums for as long as you are disabled, and not lapse your policy.
Once you get back on your feet and resume working, you’ll be responsible to pick up right where you left off, no worries of a lapse.
Bottom Line: Avoid Life Insurance Lapses in the First Place
Letting your life insurance policy lapse is a big no-no, but it can happen.
- Maybe you took an extended vacation.
- Maybe you changed banks.
- Maybe you’ve hit a rough spot and don’t have the money.
It creates countless problems which are difficult to solve. Yet, once they are solved, you’ll likely be paying much more for your policy than you otherwise would.
Simply put, avoid life insurance lapses at all costs, of course.
If you do miss a payment, be absolutely certain to make it up in the grace period.
Keep on top of your premium payments by making automated monthly payments or paying for multiple months up front.
Read all mail from your life insurance provider, so you do know if you’ve accidentally missed a payment.
Follow these simple steps and a lapsed life insurance payment should be the least of your worries.
Lapsed life insurance policies happen, whether you purposefully missed a payment or accidentally forgot to pay.
While you should do your best to avoid a lapsed policy, you do have several options to make things right.
The best is to make the payment within the grace period. Fail to do this and you’ll have to reinstate your policy.
Though reinstatement can be a tough pill to swallow, it’s a whole lot better than letting all your previous payments go to waste and failing to continue to provide coverage to your family.