Insurance Lapse: Definition, How It Works & Grace Period

Insurance Lapse
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If you have an insurance policy, it is necessary to pay regular premiums to keep the coverage active. If you stop paying premiums, the insurance coverage will lapse and you will be uninsured. This could leave you vulnerable to high medical costs if you are diagnosed with any disease in the future.

In the case of term plans, no amount will be paid to your family in case of your unfortunate demise.

Therefore, it is important to know what a lapsed policy means and avoid the policy from getting lapsed.

What is an insurance lapse?

A lapse is the removal or expiration of a privilege, right, or policy due to the passage of time or some sort of inaction. A lapse of a privilege due to inaction occurs when the party that is to receive the benefit does not fulfill the conditions or requirements set forth by a contract or agreement.

When something has lapsed, the benefits and everything stated in the lapsed contract or agreement no longer remain active.

Lapse is most often used in the context of insurance, where the term implies a “lapse in coverage,” a direct translation of how a lapsed policy no longer confers benefits or provides coverage. Lapsing can also occur in other contexts

When an insurance policy lapses, it usually occurs because one party fails to act on its obligations, or one of the terms of the policy is breached. For example, an insurance policy will lapse if the holder does not pay the premiums.

Similarly, in derivatives trading, the right given by an options contract will lapse when the option reaches maturity, at which time the holder will no longer possess the right to buy or sell the underlying asset.

If you allow your insurance policy to lapse, it will be canceled. You will then lose any coverage and will not be able to make any future claims on the policy. In some cases, the policy may be reinstated if you pay back all of the premiums that you have missed. However, the coverage will usually be reduced, and you may end up paying a higher premium.

A lapsed state means:

  • The policy has not acquired a surrender value, and
  • For which you have failed to pay the due premium within the grace period for the last 2 consecutive policy years

Lapsed insurance policies

When policyholders stop paying premiums and when the account value of the insurance policy has already been exhausted, the policy lapses. A policy does not lapse each and every time a premium payment is missed. Insurers are legally bound to give a grace period to policyholders before the policy falls into a lapse.

The grace period is usually 30 days. Insurers provide policyholders with a period of 30 days to pay for the missed premium deadline.

Whole life, variable universal life, and universal life (UL) insurance policies use existing cash values of policies if payments are missed. If policyholders still do not pay within the grace period, a policy may use its own account value to pay for the unpaid premiums. If the account value is not sufficient to pay for the policyholder’s premiums, then the policy will be considered lapsed.

Once a policy lapses, the insurer is not under any legal obligation to provide the benefits stated in the policy.

Term life insurance does not have this benefit because it does not gain cash value. In this case, when premium payments are missed, the policy goes straight to the grace period and then falls into a lapse when the grace period is over.

Most insurers offer policyholders the benefit of reinstating a policy during a grace period. The requirements for reinstating a policy depend on the time that the policy has lapsed. For example, insurers do not require documentation or proof of health if the policyholder wants to reinstate a policy within 30 days after it lapsed.

Documentation regarding health and finances may be required in cases where the lapsed period for a policy is between 30 days and six months. Any period longer than six months and up to five years would be dependent on the insurance company.

How to avoid policy lapse

Ideally, you don’t want to get to the point where your policy has lapsed. Take these steps if you’re having trouble making your payments.

Set Up Automatic Payments

Reduce the risk of forgetting to make a payment (or not getting statements in the mail) by having your premium deducted automatically.

Ditch Riders

You might be paying extra for life insurance riders that provide additional coverage that you don’t need. to have. Asking your insurer to remove those riders might make your premium more affordable.

Take Advantage of Flexible Premiums

If you have a universal life insurance policy, you might have the flexibility to adjust premium amounts.

Use Cash Value or Dividends to Pay Premiums

The cash value of a permanent life insurance policy can be used to cover premiums temporarily. Dividends paid on whole-life policies can also be used to offset premiums. If you use cash value to pay premiums, check with your insurer to make sure the policy won’t lapse in the future if the cash value dips below a certain amount.

Your insurer can provide an in-force policy illustration to show you the outcome of taking out cash value.

Switch From Annual to Monthly Premium Payments

If you have a large annual payment due, ask if you can switch to monthly payments to spread out what you owe.

Consider Reducing Your Death Benefit

You can lower your premium if your policy allows you to reduce the death benefit. You generally won’t be able to increase the death benefit later. But at least you’ll have some coverage rather than none.

The key is to communicate with your insurance agent or insurance company to explore your options if you’re having trouble paying premiums or have a policy that has recently lapsed. Don’t assume that your only choice is to give up your life insurance.

The only way to avoid policy lapse is to pay the due premiums on time. You can also use the simple ways given below to ensure that you deposit all insurance premiums on time:

  • Buy a single-premium policy which requires only one single upfront payment. As there are no periodic payments, there is no question of remembering to pay premiums before due dates. This removes the chances of a policy lapsing due to default on premium payments.
  • Opt for auto-debit from your account or debit/credit card: Auto-debit ensures an uninterrupted payment as long as there is a balance in your account/card.
  • Set reminders for timely premium payments
  • Keep track of policy dates and make sure to renew before the policy expires
  • Contact your insurance company and opt for email/SMS reminders

Can you revive a lapsed policy?

It is possible to revive a lapsed policy, although the conditions for doing so vary by the insurance company. In some cases, the insurance company may require that the policyholder submit proof of insurability.

Most insurers permit a grace period within which you can pay and revive your insurance policy. This grace period is generally in line with the guidelines of the IRDAI and can also depend on the type of insurance plan that you have opted for. However, the insurer may levy a penalty on the missed premiums before reinstating the cover.

Once the missed premiums and penalty amounts are paid, the policy will be revived and you may enjoy the standard benefits offered under the policy.

How to revive a lapsed insurance policy

There are a few things you can do to revive a lapsed insurance policy. The first thing you need to do is contact your insurance company and let them know that you want to reinstate your policy. They will likely require you to submit a written request and may also require you to submit certain documents as proof.

Once you have submitted your request, the insurance company will review your case and determine if they can reinstate your policy. Some steps that are routinely followed for reinstatement of lapsed policies:

Step 1: Contact your insurance company. The first step is to contact your insurance company.

Step 2: Review your policy documents.

Step 3: Determine if you need to submit a written request.

Step 4: Pay your overdue premiums.

Step 5: Start paying your current premiums on time.

What happens if you miss an insurance payment?

Fortunately, missing one insurance payment won’t result in losing your policy. Insurance companies typically offer policyholders a 30- or 31-day grace period to pay premiums from the date they are due.

A policy is still in force during the grace period. If it is a life insurance policy and you were to die during that period, your beneficiaries still would get a payout. However, the insurance company would likely subtract the premium payment owed from the death benefit.

If you’ve missed a payment, call your insurer to pay what you owe by phone or logging onto your account to make a payment online. This will be the fastest way to fix the problem. If you can’t afford to pay insurance premiums now, discuss your payment options with your insurer.

How long can you go without paying?

Although the length of grace periods is pretty standard, the amount of time you can actually go without paying premiums—and not lose your coverage forever—depends on the type of life insurance.

If you don’t make a payment on a term life insurance policy during the grace period, your policy will lapse. That means your policy will no longer be in force.

If you have a permanent life insurance policy, such as a whole life insurance policy, you might be able to go longer without making payments. If your policy has cash value built up, you could use it to cover premium payments. You might also be receiving dividends that could be used to offset premiums if you have a whole-life policy.

Talk to your insurance company about whether these options are available to you and what impact they’ll have on your policy.

Benefits of reinstatement

The benefit of reinstating an existing policy rather than applying for a new policy is that you’ll likely pay less. If your health hasn’t changed, your insurer will honor the original pricing on your policy.

If your health has changed, that could affect your rate (or your insurability). But your age won’t be a factor because the premium still will be based on the age you were when you first applied for coverage.

You wouldn’t get this preferential treatment if you were to apply for coverage with another insurer. Your rate would be based on your current age. Rates can go up 6% every year you are older. So if it’s been several years since you first got coverage, you could be looking at a much higher premium.

Ask your insurer to calculate how much you owe in interest and past payments. Then shop around for a new policy to compare prices. You might find you’d be better off getting a new policy.

What to do if you are the beneficiary of a lapsed policy

Unfortunately, if you’re the beneficiary of a lapsed insurance policy, you likely won’t receive a payout when the insured dies. You’d be in luck if the insured died during the grace period. But you couldn’t reinstate a lapsed policy to get a death benefit after the insured’s death.

That said, it is always worth calling the insurance company and asking if it would let you pay the back premiums and file a claim.


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