When it comes to life insurance, the word “lapse” isn’t typically a good thing. What is a life insurance lapse, you ask? In short, if your life insurance policy has lapsed, it means that the policy is no longer valid, and you won’t be provided with coverage and protection.
The only case where this isn’t bad is if you plan on cancelling your life insurance. But If that isn’t your intention, read on to learn more about insurance lapses, and how you can prevent it.
Quick Article Guide:
As mentioned above, if you fail to pay your premiums on your policy and your cash surrender value (a component of permanent life insurance) has been exhausted, you will no longer receive life insurance coverage or any protection that went along with that policy. However, before the lapse commences, each state requires life insurance companies to have a policy endure something called a grace period.
A grace period is a period of time, typically 30 or 31 days, where the insurance policy will still provide coverage to the policyholder and pays the beneficiary/beneficiaries the policy’s death benefit if said policyholder passes away – despite the missed payment. This seems only fair, because if you’ve been paying for your life insurance policy for years but miss one payment, it’d be pretty unkind for the company to just shut you out and drop your policy immediately (and frankly, it wouldn’t look good on the company either).
If you make your payment during the grace period, there usually aren’t any dire repercussions, and you will continue to be covered. If you fail to pay before your grace period ends, though, that’s when the lapse begins (dun dun duuun)
Two things to note:Once the lapse period begins, your previous life insurance company is not under any legal obligation to pay the death benefit if you pass away. This means that your family will not be given any money for your funeral, memorial service, etc. In addition, if you enter the life insurance lapse and want to repurchase coverage, your new premiums will be more expensive due to your older age (and possible medical conditions).
After the grace period, there is an additional time span where you can reinstate your policy. This essentially means making your policy active again, providing you with coverage, the death benefit, and any other riders previously added to your policy. Unfortunately, this isn’t a legal requirement for companies, but most life insurance companies will let you reinstate as long as you start making premium payments again and meet their requirements.
As a general rule of thumb, you want to speak with a licensed agent to know what your company’s regulations are, and reinstate as quickly as possible if you can. Since each life insurance company is different, it’s hard to generalize what will happen within a certain time period when it comes to reinstating. Nonetheless, we’ll try our best to sum it up below:
Within 30 days After Grace Period: Most companies will not require you to undergo the underwriting process again; typically you can call your agent, fill out a reinstatement application, and sign documents stating that you haven’t had any changes to your health since the original policy was issued. We strongly recommend reinstating within 30 days if you can.
Between 31 Days and 6 Months: Like before, you will have to fill out the reinstatement application and sign documents regarding your health state. In addition to this, many companies will require you to answer some questions regarding your health to ensure that it is still the same as when you originally bought the policy. Many people are tempted to lie during this process due to their current health status or conditions, but that does more harm than good. Lying could result in denial of your claim and denied access to your death benefit, so it’s better to just be honest.
6 Months to 5 Years: This is the area where it gets tricky. It can even be difficult reinstating prior to 6 months, depending on the life insurance company. If you fall within this range of time, your best option is to speak with your licensed agent to find out what the next steps are, since each company’s guidelines will be different.
If you pass the 5 year mark, it’s safe to say that you won’t be able to reinstate your policy – but many companies will let you reinstate if you apply before then. However, you will most likely have to submit a new medical exam with your reinstatement application before you can get approved. Many times, going through the underwriting process again and resubmitting a medical exam will result in higher premiums, so it’s important to avoid doing so if possible.
Let’s discuss cost. If you do get approved, you will not only have to pay your life insurance company the premium amount owed from when the grace period started, but in addition, many companies will add fees or penalties onto that premium amount, depending on how long the lapse period was. If you reinstate soon after the grace period, this may not be a big deal. But if you wait years before reinstating, it could be pretty costly, and you might just be better off getting a new policy (depending on the company and your circumstances).
As we stated before, if the policy lapses, the beneficiary (or beneficiaries) will no longer receive any benefits associated with said policy. If you are the beneficiary, you obviously aren’t at fault for the lapse, and you may not even know about it until the insured individual dies. Sadly, if it gets to that point, there isn’t really anything you can do about it.
However, if you learn about the lapse while the insured is still living, you have a few alternatives. If it is a permanent coverage policy, you can see if there is any cash value available. If so, the life insurance company can use that to pay the premiums and keep the policy active.
Another option is the waiver of premium – a rider that can be added to the initial policy. This rider keeps the policy active if the policy owner isn’t able to make payments due to a serious illness or disability that keeps him/her from working. This waiver will be enacted for as long as the disability lasts. Yet we must note that there is an age limit on the waiver of premium rider, meaning that life insurance companies will only use it until a certain age – such as 55 or 60. The age limit varies by company, so it is best to research your specific company’s rules.
If neither of the other two options work, you have one more option: to make the premium payments yourself. If the policy owner has declined in his/her mental capabilities, you can hire an attorney and execute the power of attorney. By doing so, you can take over the financial needs, and keep the policy active. If an attorney isn’t an option, contact the life insurance company directly to see if they can work with you and allow you to take over payments. Companies usually try to be as compassionate as possible, especially if there is an illness or disability involved.
Hopefully we’ve made it pretty clear at this point that you don’t want to endure a policy lapse. To avoid it, there’s a few things you can do:
- First and foremost, make all your premium payments! Most companies offer the option of automatic payments on your premium each month by automatically deducting money from your bank account so you don’t miss any payments.
- If you move, make sure to contact your life insurance company right away to let them know of the new address, so they send your premium bill to the right location.
- Ensure that you have cash value saved up on your permanent policy so that if you ever happen to miss a payment, you don’t go into the grace period. While this isn’t ideal usage of your cash value, it is a good back-up option if need be. Term policies don’t have this option, so keep that in mind!
- Open all mail received from your life insurance company as soon as you get it. You may not think it’s important, but it could be a notice of a missed payment or something else important regarding your policy. Companies will always send you a letter forewarning you of your lapse before it happens, so it’s better to be safe than sorry!
- If all else fails and you enter the grace or lapse period, reinstate as soon as possible. Doing so will be less expensive and keep you from having to undergo the underwriting process and medical exam again.
Overall, we at Term Life Advice want to help you and make sure that your life insurance experience is as smooth as possible. If you have any questions, or are looking to purchase a policy, give us a toll-free call at 855-902-6494. Our services are free, our agency can quickly compare your options and rates by asking you a few questions about your health and lifestyle, as well as assist in any other questions you may have.