What Happens If Your Life Insurance Lapses?

A life insurance policy lapses when the policyholder fails to pay required premiums. This can happen due to financial oversights, changes in banking information, or forgetting a payment. Understanding the implications of a policy lapse is important for ensuring continued financial protection for beneficiaries.

Immediate Impact of Lapse

The immediate consequence of a life insurance policy lapsing is the complete loss of coverage. The death benefit ceases, meaning the insurance company is no longer obligated to pay beneficiaries upon the insured’s death. This leaves loved ones without the intended financial protection. For permanent life insurance policies, such as whole life or universal life, a lapse also results in the loss of any accumulated cash value if no alternative arrangements were made. This cash value, which grows with premium payments, is forfeited along with the coverage.

Policy Mechanisms Before Full Lapse

Life insurance policies include several built-in mechanisms to prevent an immediate lapse. These offer options to policyholders facing premium payment difficulties.

A grace period is a standard provision allowing policyholders a set amount of time, typically 30 or 31 days after the premium due date, to make a payment without the policy lapsing. During this period, the coverage remains fully in force, meaning beneficiaries would still receive the death benefit, minus any overdue premium, if the insured were to pass away. If the payment is made within this timeframe, the policy continues without interruption or penalty.

For cash value policies, an Automatic Premium Loan (APL) provision can prevent a lapse by using the policy’s accumulated cash value to pay an overdue premium. If enabled, the insurer automatically deducts the premium amount from the cash value, creating a loan against the policy that accrues interest. This mechanism helps keep the policy in force, protecting coverage, but the loan balance and accumulated interest will reduce the death benefit paid to beneficiaries if not repaid.

If a policyholder stops paying premiums on a cash value policy, non-forfeiture options offer ways to retain some value from the policy. One option is Extended Term Insurance, where the accumulated cash value is used to purchase a new term life policy for the original face amount. This new term policy remains in effect for a specific duration, determined by the cash value and the insured’s age, without requiring further premium payments.

Another non-forfeiture option is Reduced Paid-Up Insurance, which uses the policy’s cash value to purchase a new, smaller amount of permanent life insurance. This new policy is fully paid up, meaning no additional premiums are required, and it provides lifelong coverage, albeit for a reduced death benefit. The reduced death benefit amount is calculated based on the policy’s cash value and the insured’s age.

Finally, policyholders can choose the Cash Surrender Value option, which involves terminating the policy and receiving its net cash value as a lump sum. The cash surrender value is typically the accumulated cash value minus any surrender charges or outstanding loans. While this provides immediate funds, it completely ends the life insurance coverage. Any amount received that exceeds the total premiums paid into the policy may also be subject to income tax.

Reactivating a Lapsed Policy

Many life insurance policies offer a reinstatement period, typically three to five years after a lapse, during which the policy can be reactivated. Reinstatement allows policyholders to restore their original policy without purchasing a new one, potentially avoiding higher premiums due to increased age or health changes.

To reinstate a lapsed policy, a formal application is usually required. This application asks for updated personal and health information. All missed premiums must be paid, often along with accrued interest and any applicable late fees.

A requirement for reinstatement is providing evidence of insurability. This demonstrates to the insurer that the insured’s health has not significantly declined since the policy began. This may involve completing a health questionnaire, submitting medical records, or undergoing a medical examination. Any outstanding policy loans, such as an Automatic Premium Loan, may need to be repaid or reinstated with the policy.

Reinstating a policy can restart certain policy periods. The contestability period, typically two years from the policy’s issue date, often restarts upon reinstatement. During this period, the insurer can investigate the accuracy of information provided in the original and reinstatement applications, and may deny a claim if material misrepresentations are found. A new suicide clause period, also two years, might also begin, during which the death benefit may not be paid if the insured dies by suicide.