Life Insurance Policy Lapses and How to Avoid Them

July 6, 2020
Jonathan Fritz
B.A. Risk Management
Life Insurance Agent

When you take out a life insurance policy, you're agreeing to pay your life insurance company a monthly or annual premium based on your health and lifestyle factors. If you stop paying your premiums at any point during your life insurance term, your policy will lapse and you'll lose your life insurance coverage. According to some studies, as many as 80% of life insurance policyholders lapse on payment before payout or end of life insurance term.

Read on to find out about what happens when a life insurance policy lapses, how to reinstate a life insurance policy, and how to avoid a lapse in coverage.

Why Might My Life Insurance Policy Lapse?

If you fail to pay your life insurance premiums for any reason, your life insurance policy will be considered lapsed. When this happens, your policy is no longer active and will not pay out death benefits until you reinstate your life insurance coverage.

Lapsed policies leave your beneficiaries unprotected in the event of your untimely death. You'll want to reinstate your policy as quickly as possible to ensure your family's peace of mind.

Lapses can happen for many reasons. Maybe you didn't receive your bill one month because you had change of address or banking information. Maybe an unexpected expense made your premium unaffordable. Regardless of the reason, your life insurance coverage will stop as soon as you miss your due date for a payment. To reinstate a lapsed policy, you’ll need to pay backdated premiums and follow other guidelines specified by your insurance carrier.

What Happens When A Life Insurance Policy Lapses?

What happens when your life insurance policy lapses depends on the type of life insurance policy you have. Whole life policies have cash surrender value components which can be used to cover the cost of the policy if a policyholder stops making payments. Term life insurance policies have no cash value, so policies lapse as soon as a premium payment is missed.

Luckily, all states require a grace period after a missed payment before a life insurance lapse. Typically, this grace period will be 30 or 31 days. If you die within the grace period, your insurer will still pay a full death benefit payout to your beneficiaries.

After the grace period ends, a life insurance company is not under legal obligation to pay your beneficiaries. Your life insurance company is required by law to notify you when your policy is in danger of lapsing, so you'll know if you're about to lose your coverage.

Can I Reinstate My Policy?

Reinstatement is not a legal right for policyholders, so you'll need to check with your life insurance company about their individual requirements for reinstatement. You should review your life insurance policy to learn about reinstatement requirements or ask your life insurance representative for more information. In most cases, you'll be able to reinstate your policy if you start making premium payments within a certain time frame.

Reinstatement procedures vary depending on how long your policy has lapsed. Most companies will allow you to reinstate a policy without any underwriting requirements if your policy has lapsed for 30 days or less. In this case, you'll need to call your insurer, fill out an application for reinstatement, and catch up on your missed premium payment.

If your policy lapses for an extended period of time, many insurers will want to verify that no major changes to your health have occurred since the policy was approved. In many cases, this means you'll need to take a new medical exam. Fraud of any kind during this verification process may result in denial of claims in the future.

Most insurers allow reinstatement of a policy for up to five years after a lapse. Talk to your insurance company to learn about their individual requirements. Keep in mind that you'll be required to make all unpaid premium payments when you reinstate, often with fees and penalties added. However, in nearly all instances, it's cheaper to reinstate rather than purchasing a new policy.

What Are My Options as the Beneficiary of a Lapsed Policy?

In many instances, a beneficiary may not be aware that a policyholder has lapsed on payment until the insured party dies without a valid policy in place. If you're concerned about this, you'll want to check in with the policyholder, since nothing can be done to reinstate a policy after the death of the insured.

If you become aware of a lapse as a beneficiary while the insured party is still alive, you have several options. Beneficiaries of permanent life insurance policies can tap the cash value of the policy and receive whatever cash surrender value is available for the policy. If your insured party purchased a waiver of premium rider with their policy, you might be able to keep the policy in place if the policyholder is unable to make payments due to illness or disability. You might also be able to make life insurance premium payments yourself as a beneficiary, especially if you're able to establish power of attorney over the policyholder.

How To Avoid a Life Insurance Lapse

Most life insurance companies offer the option of automatic payments, which will automatically deduct premiums from your checking account each month. Setting up automatic payments can ensure you never miss a payment. Many life insurance companies also offer electronic notifications, including email and text notifications. Additionally, you'll want to make sure to notify your insurer of a change of address any time you move, to make sure you don't miss any mail communication.

If you're having trouble making your monthly payments, you may be able to switch your life insurance payment terms from monthly to annual payments. This can reduce the hassle of having to remember monthly payments, especially if you don't have automatic payments set up. Many companies also offer a discount of between 2-8% for setting up annual instead of monthly payments.

Takeaway

If you miss a premium payment for your life insurance policy for any reason, you'll be in danger of losing your life insurance coverage for you and your beneficiaries. Even one missed payment can result in consequences from your insurance company like late fees and penalties. If your life insurance policy lapses, be sure to reinstate your policy as soon as possible according to your company's requirements. The sooner you reinstate a policy, the less expensive and complicated reinstatement will be for you and your family.