What Is the Advantage of Reinstating a Policy Instead of Applying?

A lapsed insurance policy refers to coverage that has ended because the policyholder stopped making premium payments. After a grace period, the policy ceases to be in force, meaning it no longer provides benefits or coverage. If your policy has lapsed, two primary paths are available: seeking to reinstate the original policy or applying for a new one.

Understanding Policy Reinstatement

Policy reinstatement reactivates a lapsed insurance policy, restoring it to active status. This option allows you to regain coverage under the terms of your original contract. Insurers typically require several conditions for reinstatement.

A common requirement involves paying all overdue premiums, often with accrued interest or applicable fees, which can be substantial depending on the duration of the lapse. You will also need to submit a formal reinstatement application to the insurer. A significant condition is providing proof of continued insurability, which might involve completing a health questionnaire or, if a longer period has passed, undergoing a medical examination. Insurers generally impose a time limit for reinstatement, often ranging from three to five years from the date the policy lapsed.

Understanding a New Policy Application

Applying for a new insurance policy means initiating a fresh contract for coverage, as if purchasing insurance for the first time. The application typically requires providing personal, medical, and financial information.

A new underwriting process assesses your current risk profile, usually including a review of your health history and potentially a medical exam. New policy terms and premium rates will be based on your current age and health status. A new contestability period and suicide clause will also begin from the new policy’s effective date.

Key Differences When Choosing Between Reinstatement and a New Policy

Choosing between reinstating a lapsed policy and applying for a new one involves distinct considerations regarding underwriting, policy terms, and costs. Reinstatement often preserves elements of the original policy that a new application would not.

Reinstatement’s underwriting can be simpler, especially if the lapse period was short, possibly requiring only a health questionnaire rather than a full medical examination. Conversely, a new policy application always necessitates a comprehensive underwriting review, including medical exams and a thorough health history assessment. This re-evaluation can become more stringent if your health has declined since the original policy was issued.

Policy terms and features are generally preserved upon reinstatement, retaining the original contract’s benefits, riders, and provisions. A new policy, however, comes with new terms and conditions, which may differ significantly from your previous coverage due to changes in insurance products or your current circumstances. This could mean losing valuable features or having different coverage limits.

The cost of premiums differs significantly. Reinstating often maintains premiums based on your original, younger issue age, leading to substantial savings, especially if your age or health has changed since the policy was first purchased. A new policy’s premiums are calculated based on your current age and health, often resulting in higher costs.

For policies with a cash value component, such as whole life insurance, reinstatement allows the accumulated cash value and any existing policy loans to continue. A new policy, however, starts with no cash value, requiring time to build it up again. This can impact your ability to access policy loans or surrender values in the near future.

The contestability period and suicide clause also differ between the two options. A contestability period, typically two years, allows the insurer to investigate claims for misrepresentation in the application. For a reinstated policy, the original contestability and suicide clauses may continue or be reset only for the period of lapse. A new policy, however, initiates these periods from the new policy’s effective date, meaning your beneficiaries might face a two-year window during which a claim could be contested or denied under these clauses.

Factors to Consider for Your Decision

When deciding between reinstating a lapsed policy and applying for a new one, consider several factors. The time that has passed since the policy lapsed is important, as reinstatement generally becomes more difficult and potentially more costly the longer the policy has been inactive.

Your current health status plays a significant role in the decision. If your health has deteriorated, reinstating an existing policy might be the only viable option, as obtaining a new policy could be more expensive or even impossible.

It is important to assess if the original policy contained unique or favorable features, such as specific riders or guaranteed insurability, that may no longer be available in new policies. You should also evaluate your financial situation, considering your ability to pay back all missed premiums and interest required for reinstatement versus the ongoing cost of potentially higher premiums for a new policy.

A thorough cost analysis comparing the total outlay for both options over the long term is advisable. Consulting with a qualified insurance professional can provide personalized guidance based on your specific circumstances and policy details.