What Happens If Your Life Insurance Lapses?

A life insurance policy lapses when the policyholder fails to pay premiums as required by the insurance contract. This terminates the agreement, meaning the financial protection it once offered is no longer in effect.

Understanding Policy Lapse and Grace Periods

When a premium payment is missed, a life insurance policy does not immediately terminate; instead, it enters a grace period. This grace period serves as a temporary safety net, allowing the policyholder a specific timeframe to make the overdue payment without losing coverage. Most policies include a grace period that typically lasts 30 or 31 days from the premium due date, though some policies might offer a slightly longer window. During this period, the policy remains in force, and if the insured passes away, the death benefit is usually still paid, with the missed premium deducted.

A policy officially lapses after this grace period expires without payment. For permanent life insurance policies that accumulate cash value, a lapse can also occur if loans or withdrawals deplete the policy’s reserves, and no additional premiums are paid. Some permanent policies may have an automatic premium loan feature, where the insurer uses cash value to pay missed premiums, but this can also lead to a lapse if the cash value is exhausted.

Immediate Outcomes of a Lapsed Policy

The immediate outcome of a lapsed life insurance policy is the loss of the death benefit. Once a policy lapses, the insurance company is no longer obligated to pay the sum assured to the beneficiaries upon the insured’s death.

For permanent life insurance policies, such as whole life or universal life, a lapse also impacts any accumulated cash value. This cash value may be forfeited or reduced, depending on the policy’s terms and any non-forfeiture options. Non-forfeiture options are provisions that allow policyholders to retain some value from their policy even if they stop paying premiums. These options include:
Taking the cash surrender value as a lump sum.
Converting to a reduced paid-up insurance policy with a smaller death benefit but no further premiums.
Opting for extended term insurance, which provides the original death benefit for a limited period.

If a policyholder seeks new life insurance coverage after a lapse, premiums will likely be higher. This increase is due to the insured’s increased age, as premiums rise with age. Changes in health since the original policy was issued could also lead to higher premium rates or make it difficult to obtain new coverage.

Reinstating a Lapsed Policy

Many life insurance policies offer a reinstatement provision, allowing policyholders to reactivate a lapsed policy within a specified timeframe, often ranging from three to five years after the lapse date. To initiate the process, the policyholder needs to contact their insurance provider to confirm eligibility and understand the requirements.

Reinstatement requires payment of all missed premiums, along with any accrued interest or penalties. The amount due can be substantial if the policy has been lapsed for an extended period. Policyholders also need to provide evidence of insurability, which may involve a medical examination or health questionnaire.

This allows the insurer to assess any health changes since the original policy was issued. Any outstanding policy loans against the cash value may need to be repaid or re-established. A formal reinstatement application must be completed and submitted to the insurer.

Reinstating a lapsed policy offers advantages over purchasing a new one. Premiums for the reinstated policy are based on the insured’s original age when the policy was first issued, rather than their current, older age. This can result in lower premiums compared to a new policy, especially if considerable time has passed. Reinstatement also allows the policyholder to retain the original policy’s terms, riders, and benefits, avoiding new waiting periods that might apply to a brand-new policy. Challenges include the lump sum payment required for past-due premiums and interest, or the possibility of being denied reinstatement if health has deteriorated since the lapse.

Considering New Coverage After a Lapse

If reinstating a lapsed life insurance policy is not feasible, not desired, or too financially burdensome, securing new coverage is the next course of action. This often occurs when the reinstatement period has expired, or the policyholder’s health has changed to such an extent that reinstatement is denied or prohibitively expensive.

A concern when seeking new coverage is higher premiums. As individuals age, the cost of life insurance increases, and new health conditions will further impact rates. The new insurer will conduct a full underwriting process, evaluating the applicant’s current age, health, and lifestyle, which can lead to different premium structures. If health has declined, securing traditional life insurance may be difficult, prompting consideration of alternative policy types.

Policyholders can explore various types of new coverage depending on their circumstances. Term life insurance offers coverage for a specific period, while whole life insurance provides lifelong coverage and accumulates cash value. For individuals with health challenges, guaranteed issue life insurance might be an option, though these policies have lower death benefits and higher premiums. When considering new coverage, assess current financial needs, evaluate health status, and determine a realistic budget for premiums.