Life insurance is a great way to provide a safety net for your surviving family members if you die earlier than expected. A life insurance death benefit can be a financial lifesaver to your beneficiaries.
The money provided by a life insurance policy can give your family valuable breathing room by covering immediate expenses related to your death, paying off the mortgage or other outstanding debts, and even bankrolling a college fund for your children.
All of the benefits of a life insurance policy become null and void if you let the policy lapse by not paying the premium. This can leave your family vulnerable. Luckily, a lapsed life insurance policy can be reinstated, if you act within a certain timeframe.
Didn’t Pay Your Life Insurance Premium?
If you fail to pay your life insurance premium, your policy will be considered lapsed. A life insurance lapse means that your life insurance policy is no longer active and will not pay out a death benefit or provide any insurance coverage.
A life insurance lapse can have extremely serious repercussions for your beneficiaries. If they will need the death benefit to pay off a mortgage, fund a college education, or just cover day-to-day expenses, a lapsed policy will leave them unprotected.
Lapses can happen for a number of reasons. You may have simply forgotten to send your premium in, or you moved and didn’t get your bill that month, or an unexpected expense has made the policy unaffordable.
Regardless of the reason, a life insurance lapse can have serious consequences for your family, and reinstating the policy quickly is important.
Exactly What Happens When a Policy Lapses?
Life insurance policies are a bit different from other insurance products with regard to a lapse. A car or homeowners policy lapses as soon as you fail to make a premium payment on time. This may not be the case with life insurance, depending on what type of policy you have.
- Permanent Life Insurance: This type of policy (think whole life, universal life, and variable universal life) usually has a cash value component. If sufficient cash surrender value has built up, it will be used to cover the cost of the premiums if the policy owner stops making payments and the insurance company is not instructed otherwise.
Once the cash surrender value has been used, up the policy is considered lapsed.
- Term Life Insurance: These policies have no cash value. Once a premium payment is missed, the policy will immediately fall into the grace period; the policy will lapse when the grace period expires.
One other major difference with life insurance is the grace period. Every state requires a grace period before a life insurance lapse. The grace period varies between states and insurance companies, but 30 days is pretty standard.
Once you miss a premium payment, the policy goes into the grace period, which means that if you die within the grace period (usually 30 days), the insurer will still provide coverage and pay the death benefit. Once the grace period is over, the policy is considered lapsed and the death benefit will not be paid.
Reinstating Your Policy Is Usually an Option
Reinstating your policy simply means that the policy becomes active again and will provide the coverage outlined in the policy and pay a death benefit. In most cases you can reinstate your life insurance policy within a certain time frame if you start making premium payments again and meet certain requirements.
Reinstatement is not a legal right, so the ability to reinstate and the requirements to do so vary by insurance company. Review your policy to verify that reinstatement is possible and what the requirements are. When it comes to reinstatement, the quicker the better.
Reinstatement procedures also vary depending on how long the policy has been lapsed. Here are some common conditions for reinstatement:
- 30 Days or Less: The majority of insurance companies allow you to reinstate a lapsed policy without any underwriting or questions. Simply call your insurer, fill out a reinstatement application, catch up on the premiums, and the policy will be reinstated.
- 30 Days to Six Months: Most insurers require you to answer a few health questions in addition to the reinstatement application, and also sign documents that state that no material changes to your health have occurred since the original policy was approved.
If you are less than honest in any of these forms, the insurer may have grounds to deny a claim, which means your beneficiaries will not be able to collect a death benefit when you die.
- 90 Days to 5 Years: Your options can vary greatly when you get into this time frame. Insurance companies have different requirements, so it is best to talk to your insurance company regarding reinstatement.
The majority of insurers will let you reinstate the policy for up to five years, but in most cases you will have to submit to a new medical exam before your reinstatement request will be approved.
Regardless of the time frame, you will be required to make all premium payments from the date the policy went into its grace period. There may be fees or penalties tacked on as well; it depends on your specific policy wording. Obviously, this can be a significant amount if the policy has been lapsed for years.
In almost all cases, reinstating a life insurance policy, even after a lapse of five years, is always cheaper than purchasing a new one, simply because you are older. Life insurance costs increase dramatically as you age.
I Am the Beneficiary of a Lapsed Life Insurance Policy. What Are My Options?
In the world of life insurance, there is a policy owner, the insured and the
beneficiary. The owner of the policy is responsible for paying the premiums, the insured is the person whose life is covered by the policy, and the beneficiary is the person who will receive the death benefit.
In most cases the owner and the insured are the same, but it is possible for them to be different. The father in a family may be the policy owner, with the mother as the insured and their children as the beneficiaries.
If the owner of the policy stops paying the premiums, the policy will lapse and become void, leaving the “insured” without a valid policy and a beneficiary who will not be able to collect a death benefit.
Unfortunately, in many cases the beneficiary may not even know about a life insurance lapse until the “insured” dies and they try to make a claim. Insurers are not obligated to notify a beneficiary if the policy owner stops making premium payments. If this is the case, there is no hope of reinstating the policy or collecting a death benefit. You are simply out of luck.
On the other hand, if you become aware of the policy lapse before the insured passes away, you do have a few options:
- Tap the Cash Value: This is only an option with permanent life insurance policies; term life policies do not accumulate a cash value. If the policy has accumulated cash value, the insurer will use the cash value to pay the premiums. This will keep the policy in force. If the insured dies while the cash value is paying the premium, the policy will be considered valid and the death benefit will be paid. Once the cash value is used up, the policy will lapse.
- Waiver of Premium: This is a rider that is added to a policy when it’s purchased. It will keep the policy active (or “in force” in insurance-speak) if the policy owner is unable to make the premium payments due to a serious illness or disability. Most policies have age limits for taking advantage of this rider, commonly 55 or 60.
A waiver of premium rider must be purchased when the policy is initiated. It cannot be added later by the beneficiary. Most waiver of premium riders specify what disabilities or illnesses will trigger the rider, and many have a six-month waiting period.
It is also important to note that if the policy owner simply stops making the premium payments because they can no longer afford it, or just don’t want to pay anymore, this type of rider will not cover the premiums and the policy will lapse.
- You Pay the Premium: This is the only option that you have any control over. If you are aware that the policy owner has stopped making payments or they have diminished mental capacities, you may be able to take over the premium payment.
Executing a power of attorney is one possibility. It will put you in charge of their financial affairs and you can continue making the premium payments.
If a power of attorney is not an option, you may be able to contact the insurance company to see if there is anything you can do to continue paying the premiums. They may or may not allow this, or they may be able to help you find a suitable solution.
How to Avoid a Life Insurance Lapse
The best way to deal with a life insurance lapse is to not let the policy lapse in
the first place. Here are a few ways to avoid a lapse:
- The majority of life insurance companies offer automatic payments so the premium is automatically deducted from your checking account every month, which ensures that there are no missed payments.
- If you move, notify your insurer of your new address immediately so you don’t miss your policy premium bill.
- Immediately open any correspondence you receive from your insurer. It could be a grace period notice if they didn’t receive payment. Reinstating your policy during the grace period is simple and inexpensive.
- If your policy does lapse, reinstate it immediately. The quicker you reinstate the policy, the less expensive it will be and you will not be required to have a new medical exam.