Can you get money back from a lapsed life insurance policy?

A life insurance policy lapses when premium payments stop and the designated grace period, typically 30 to 60 days, expires without payment. This terminates coverage, meaning the death benefit is no longer paid to beneficiaries. While a lapsed policy often suggests no financial return, specific circumstances, particularly related to the policy type, can allow for some recovery.

Understanding Policy Types and Cash Value

Term life insurance policies provide coverage for a specific period, such as 10, 20, or 30 years, and typically do not accumulate cash value. Once premiums stop and the policy lapses, there is generally no accumulated savings component to recover.

In contrast, permanent life insurance policies, like whole life or universal life, include a cash value component. This cash value grows over time on a tax-deferred basis, similar to a savings account within the policy. The accumulation of cash value, which is distinct from the policy’s death benefit, is the primary reason some lapsed policies may offer a financial return.

The growth of this cash value is typically guaranteed in whole life policies or fluctuates with market performance or interest rates in universal life policies, minus policy expenses and fees. This accumulated value can be accessed by the policyholder during their lifetime. When a permanent policy lapses, any accumulated cash value may still be accessible through specific provisions.

Non-Forfeiture Options for Policies with Cash Value

Insurers offer “non-forfeiture options” that allow policyholders to utilize accumulated cash value instead of losing it entirely upon lapse.

One common option is the cash surrender value, where the policyholder receives a payout of the accumulated cash value. This amount is the cash value minus any outstanding policy loans, unpaid premiums, or applicable surrender charges, which can be significant in the early years of a policy. Surrender charges, which can range from 5% to 20% of the cash value, are fees for early termination and generally decline over time, often disappearing after 10 to 15 years. If the cash surrender value exceeds the total premiums paid into the policy, the excess amount, known as the gain, is typically taxable as ordinary income. For instance, if $50,000 in premiums were paid and the cash surrender value is $60,000, the $10,000 gain would be taxable.

Another option is reduced paid-up insurance, where the existing cash value is used as a single premium to purchase a new, smaller permanent life insurance policy. This new policy remains in force for the policyholder’s lifetime without further premium payments, though with a lower death benefit than the original.

A third non-forfeiture option is extended term insurance, which uses the policy’s cash value to purchase a term life insurance policy for the same death benefit amount as the original permanent policy. This term policy will remain in force for a specific period, determined by the amount of cash value available and the insured’s age. Once this term expires, coverage ends.

Situations Where Funds Are Not Recoverable

A policyholder typically cannot recover funds from a lapsed life insurance policy in several situations. Lapsed term life insurance policies offer no financial return upon termination, as they do not build cash value.

Even with permanent policies, recovery may not be possible if there is insufficient cash value. This can occur if a policy lapses very early in its life, perhaps within the first few years, when accumulated cash value is minimal or entirely offset by high surrender charges and administrative fees. If the policy’s cash value has been significantly depleted by previous policy loans or withdrawals, there may be little to no net value remaining.

Policy loans, if not repaid, reduce the cash value and the death benefit. If outstanding policy loans, including accrued interest, exceed or fully deplete the available cash value, the policy can lapse without any remaining value to recover.

Process for Inquiring and Recovering Funds

If you suspect funds might be recoverable from a lapsed policy, contact the original insurance company directly. You can typically find the insurer’s contact information on old policy documents, premium notices, or statements. If these are unavailable, state insurance departments maintain databases that can help locate insurers based on policyholder information.

When contacting the insurer, be prepared to provide specific details to help them locate the policy. This information usually includes the policyholder’s full name, date of birth, last known address, and the policy number if available. Having the approximate year the policy was purchased can also be helpful.

The insurer will determine the policy’s status—whether it fully lapsed, was converted to a non-forfeiture option, or if any cash value remains. They will provide information on any available cash surrender value or how non-forfeiture options were applied, and explain any outstanding loans or surrender charges that would reduce the payout.

If recovery is possible, the insurer will provide the necessary forms, such as a cash surrender request form. These forms must be accurately completed, often requiring a signature guarantee, and submitted back to the company. The processing time for such requests can vary, typically ranging from a few weeks to a couple of months, before funds are disbursed, usually via check or direct deposit.