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What Happens When Your Life Insurance Lapses?

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A life insurance policy lapses when you fail to make premium payments, resulting in a loss of coverage.

When you first purchase a life insurance policy, you commit to making routine payments in exchange for coverage.

If the payments stop, so does the policy’s protection.

Thankfully, life insurance companies offer a grace period before considering your policy lapsed, giving you a chance to reinstate coverage.

Below, we’ll give more insight into the grace period and how to reinstate a policy, and provide you with a few strategies to avoid letting your policy lapse.

What Is A Lapsed Life Insurance Policy?

Lapsed life insurance is simply a life insurance policy with a contract that is no longer valid.

The most common reason for lapsed life insurance is failure to make payments, whether due to an oversight or an inability to keep up with the cost of coverage.

If you die after your policy has lapsed, your death benefit will not be paid out as agreed upon unless you catch up on all premiums due first.

In the busyness of life, sometimes a bill can slip through the cracks. While not all industries are as forgiving, most life insurance providers offer a short grace period for lapsed policies.

During the grace period, it is crucial to take the necessary steps to reinstate your policy and protect your family.

The longer you wait to attempt to reinstate coverage, the more challenging (and costly) it can be.

How Does the Grace Period Work?

Typically, life insurance companies are required to offer a grace period of some sort.

As most providers state in your life insurance contract, they are not allowed to immediately cancel your policy after a missed payment.

Instead, a grace period is given to allow you to make up for the missed payment and regain the policy benefits.

During the grace period, your coverage stays intact, meaning your beneficiaries will still receive the policy’s benefits if you pass away.

While the carrier is required to still make the payout, they may reduce the benefit by the amount owed.

Most life insurance providers offer a one-month grace period for you to make up for a missed payment.

This means you must catch up on payments in a timely manner and make your next payment on time.

Most life insurance providers will not offer additional grace periods after you’ve already missed one payment.

Once you catch up on payments, your coverage will continue on like normal.

But if you fail to make the payment within 30 days, you’ll likely experience a canceled life insurance policy.

What Happens When You Miss a Payment?

Exactly what happens next when you miss a payment depends on what type of coverage you have.

Policyowners with term life insurance may have a different experience than policyholders with whole, universal, indexed, or variable life insurance.

Whether you have a term or permanent policy, your provider is required to notify you when your policy is at risk of lapsing, has lapsed, and is close to being canceled.

Term Life Insurance Lapse

The policy lapse process is quite straightforward for term life insurance. Once a payment is missed, you typically have 30 days to contact your provider and catch up on payments.

If you fail to make a payment before the grace period is up, you lose your life insurance policy.

Regardless of the amount you have contributed to the policy, your beneficiaries will not receive any of the funds within it.

Permanent Life Insurance Lapse

There’s another element involved when a permanent policy lapses, because most of these policies come with a cash value component.

The majority of policies with an added cash value come with an automatic premium loan, or APL, provision, which means your insurer will draw from your cash value to make up for missed payments at the end of the grace period.

If you fail to catch up on payments during the grace period and your cash value is insufficient, your policy will be voided.

What Are the Consequences of Letting a Policy Lapse?

The reasons to avoid a lapsed life insurance policy are relatively straightforward.

Simply put, it leaves your coverage in limbo.

If you don’t catch up on payments during the grace period, here are a few of the ways it can impact your access to life insurance:

  • Loss of coverage: Your loved ones will no longer be protected if you die as the contract is essentially void with the insurance company.
  • Insurability: Life insurance is more difficult to find the older you get.  If you don’t pay up during the grace period, you’ll likely be forced to find a new policy at your current age with a higher premium.
  • Reputation: The new providers you apply with will be aware of your missed payment and be more hesitant to insure you because of it. In assessing your risk, they’ll consider your payment history long term.

Though keeping up with payments can be stressful and challenging at times, it’s well worth the effort to avoid a lapsed life insurance policy in the first place.

Can You Reinstate a Lapsed Policy?

Some life insurance companies give you the chance to reinstate a lapsed policy even if you’ve missed the grace period.

The specific rules and procedures for lapsed policy reinstatement differ from company to company.

For instance, some providers only allow reinstatement in a short time frame, whereas others have more flexible deadlines.

Most likely, you’ll be required to sign a statement declaring your health is in the same condition as when you applied. You’ll then be expected to settle all unpaid premiums, potentially with a fee.

Another factor worth considering is that reinstatement can be like applying for a new policy, usually if your payments have lapsed for more than 6 months.

Chances are you won’t receive the same coverage for the same rate upon reinstatement. You may have to go through the application process and be subject to a new underwriting process.

This means you’ll likely be paying more for your new policy, especially if you’ve aged or had changes to your medical condition since buying the original policy.

Should You Reinstate A Lapsed Policy?

The best option when you miss a payment is to make amends during the grace period and avoid the difficult process of reinstating altogether.

The second-best option, despite the drawbacks above, is to reinstate the policy.

Here’s why:

  • Guaranteed Protection: The number one reason to reinstate is to ensure your loved ones are still covered in the event of your death.
  • Likelihood of approval: You should also reinstate with your current provider because they’re more likely to offer you a new policy than new providers, even if it’s at a higher monthly premium than your current one.
  • Extended coverage: This process could allow you to add additional time to your policy, if you choose, so your coverage could last longer
  • Previous payments: While you might pay a higher premium on a reinstated policy, your past payments will still count towards the policy.

While the above is true, it doesn’t necessarily apply to all cases.

If you purchased a Disability Waiver of Premium rider and a disability renders you unable to make payments, lapsation and reinstatement rules don’t apply.

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, with no worries of a lapse.

How to Avoid a Life Insurance Lapse

Letting your life insurance policy lapse is a big no-no, creating problems that are challenging and expensive to solve.

Simply put, you should avoid life insurance lapses at all costs.

Here are a few key ways to avoid a policy lapse:

  1. Enroll in auto-pay so you’ll never have to worry about forgetting to make timely payments.
  2. Switch from monthly to annual payments (and you’ll get a discount).
  3. Adjust your coverage to a cost you can afford better if possible.
  4. Share the expense of premiums with your beneficiaries.
  5. Tack on a Waiver of Premium rider for a few extra dollars a month to offset disability risk.
  6. Read all mail from your provider so you’re up to date.

Whether you’ve let your life insurance lapse in the past or not, you can follow these simple steps to avoiding a lapse in the future.

Author:

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Jason Fisher

Jason Fisher is the founder and CEO of BestLifeRates.org, LLC. and a multi-state licensed life insurance agent who has helped over a million Americans seek out affordable coverage, compare quotes, or get their family and businesses covered.

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