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How to Avoid a Life Insurance Lapse

Researcher & Writer
April 09, 2020

If you've had to tighten your belt lately, you may be worried about losing your life insurance coverage if you can't pay your premiums. A lapse in coverage for your life insurance policy typically happens due to nonpayment. If your insurance coverage lapses, your beneficiaries won't receive a death benefit if you die and you may lose other benefits from your policy as well.

While a life insurance policy lapse is usually bad news, you may be able to reinstate your coverage later, but you'll have to follow your insurer's rules for doing so.

Lapsed Life Insurance: What You Need to Know

Definition of Life Insurance Lapse: Having your life insurance lapse means that the contract between the insured and the insurer is no longer valid. The insurer is no longer bound by all terms of the insurance contract. In short, your death benefit and any other benefits won't be paid to you if you need them after your life insurance policy lapses.

Generally, your life insurance policy lapses when the premium payments aren't made and the cash surrender value has depleted. Once the insurance policy has lapsed, the insured loses their coverage and the death benefit will not be paid under the terms of the policy, for things such as chronic illness, terminal illness or death.

Grace Period definition: If you life insurance policy lapses, insurance providers can’t just cancel the contract once one premium payment is missed. After years (or even decades!) of paying for the policy, it would be a little harsh to let the insurance company out of the contract after one late payment. Therefore, insurance contracts offer a ‘grace period’ which begins as soon as the owner fails to make a premium payment.

Warning: Letting your policy lapse is different from cancelling your life insurance, and different rules apply. If you cancel your policy, you won't be entitled to the same reinstatement opportunities you'd get if your policy lapses. Read on to learn more about policy lapses and reinstatement.

Typically, the grace period lasts for 31 days. During this time, the insurance company continues your coverage and you can catch up on your premium by making a late payment without severe consequences. Even if you were to pass away during the grace period, your beneficiary would most likely still get the death benefit. However, once the policy lapses and the grace period has ended, you can run into a serious problem.

If the grace period ends with no payment made, we have a life insurance lapse and the company doesn’t have to pay anything should the insured die. Once the grace period is over and the lapsing occurs, the legal contract has been broken by the insured and so the law now protects the insurance company after giving the policyholder more than a chance to pay late premiums.

Two reasons why you should avoid letting your life insurance policy lapse

First, it leaves you and your loved ones exposed with no life insurance coverage protection. If you pass away without a policy in place, your loved ones will have to find money for the funeral while also trying to maintain their lifestyle without your income; for most, this is the reason they buy life insurance in the first place.

Second, assuming you still want or need the life insurance coverage. You will now be older, and age is the number one factor when determining your life insurance premium rate. So now you will need to pay more for the coverage you previously had.

Life Insurance Policy Reinstatement

If the grace period ends, the policy will then enter another time-frame in which the policy can be reinstated. Although you no longer have coverage, you’ll need to get in contact with the provider and follow their own rules for reinstatement and this is where our guide becomes a little loose on the details.

Why? Because every life insurance company will have their own rules regarding reinstatement of a life insurance policy. Not only are the rules different depending on which life insurance company you are insured with, the length of time you must reinstate will vary depending on the policy you have and the provider themselves. To keep things simple, we’re going to use average numbers and what you’re likely to come across with your provider so keep in mind yours might be a little different.

During the first 31 days of the life insurance lapse, you can have the policy reinstated without any underwriting. With a simple phone call and a payment to catch up with what you’ve missed, the policy will be reinstated so long as the provider confirms. Between 31 days and six months, your reinstatement will require limited underwriting. For example, you might need to answer some simple health questions while also confirming that your health hasn't changed dramatically since the policy lapsed.

At this stage, many consider lying or bending the truth but this isn't wise because it’ll only land you (or your family) in a world of trouble down the line. Whenever you lie, it effectively invalidates your policy which means you could be paying for years only for your family to receive none of the death benefit after you pass away. At all times, make sure the insurance company knows everything they should know otherwise it’s only your loved ones that lose out.

Importance of Reinstatement

The simple answer on why it is important to not let your insurance lapse is because you lose your insurance coverage. By allowing the life insurance lapse to occur, you’ve already been by the grace period but now this is your last chance to keep your life insurance in place.

If you fail to act during this period, all your payments so far will be wasted and you’ll be forced into buying a new policy. Regardless of how long it’s been since you set up the first policy, you’ll almost certainly pay more now because you’ve aged even if you don’t have any health concerns. The older you are, the more expensive your policy will be.

Additionally, quick reinstatement is also important if you want to avoid underwriting. If you act to reinstate your insurance policy within the first month or so, you don’t have to worry about underwriting and the policy should continue as normal.

After this, you’ll need to answer some health questions and this could allow the providers to uncover information they simply didn't have before. As a general rule, you should always be looking to avoid underwriting with reinstatement because it increases the risk of having your premiums increased or your policy denied.

Payment after Insurance Lapsation

So far, we haven't yet addressed the cost of reinstatement. If you didn't have to pay a penny, you’d gain because you’ve already missed one and perhaps even two months of premium payments. The insurance industry, they saw the potential of people doing this just to avoid payments and so they introduced certain charges for life insurance lapses.

When reinstating, not only will you need to catch up with your premiums but you may also have to pay extra and this is why it’s in your best interest to never let your policy lapse (this is without even mentioning the lack of coverage you have when the grace period ends).

How Do I Get My Lapsed Insurance Reinstated?

Before we head into the final section of preventing a life insurance lapse, we should also note that providers have made the reinstatement process easier than ever before. As soon as you notice the lapse in coverage, you should approach your life insurance carrier and request an application for reinstatement. In this application, you’ll have to provide a series of personal details as well as enclosing a check for the missed premiums (plus any charges they choose to add on top).

Once the application has been received, the provider will assess the details and either resume the policy or contact you for more information. Since the entire process is time sensitive, the insurance companies normally act with pace as far as reinstatement is concerned.

So, if you aren't sure of where to start, just ask your provider for details and they’ll tell you how to get the policy reinstated. Nowadays, every company seems to have a slightly different process, so you need to know what they require step-by-step. If your health hasn't changed, reinstatement is easy, but you don’t want to take the system for granted in case the policy is too far beyond the normal reinstatement period.

How to Avoid Life Insurance Lapses

If you take anything from this guide, it should be the fact that a life insurance lapse is bad news. Instead of taking risks, you should be doing all you can to make sure your policy stays in good standing not only to avoid the hassle but to avoid losing coverage; this can be detrimental and there are plenty of examples of it happening.

If you want to avoid lapsing your coverage, the best tip we can provide is to keep on top of your premium payments. For those of you who pay monthly, strangely enough this is actually easier to remember because you are typically required to have your payments made by monthly EFT payments.

With permanent life insurance such as whole life, universal life, and variable life - the provider will dip into your cash value if you miss a payment. Once the cash value drops to zero, the policy will lapse. However, we believe this is a bad way to use your cash value unless you really have no other way to pay. Later in life, your cash value funds can become incredibly helpful so bear this in mind.

Of course, term life insurance and disability insurance doesn’t have a cash value feature at all so the grace period begins the day after you miss your normally scheduled payment. If you have a term life policy, you need to be more alert because the entire process moves a little faster. Once again, automatic payments can help if you don’t trust yourself to remember.

Additionally, we advise you to read all your mail from your insurance company. If you see a letter from your insurance provider, don’t just assume it’s an advertisement because they must give you notice before the policy lapses; also, check your emails because this will allow you to deal with the issue much faster. If you follow these tips, there’s no reason why you should miss another payment.

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