What is a Lapsed Policy?
A lapsed policy is an insurance policy with coverage that is no longer active because the policy owner failed to make on-time premium payments, causing a policy lapse. A missed premium payment triggers a grace period. If the policy owner doesn’t make up the payment during that period, the policy lapses.
When a policy lapse occurs
Life insurance providers are required to notify you if you miss a payment and risk a policy lapse. They’ll send another notification when your policy has officially lapsed, too.
If you bought a term life insurance policy, policy lapse occurs as soon as the grace period after a missed premium payment expires.
With permanent life insurance, it’s more complicated. That’s because many permanent life insurance policies include a feature called automatic premium loans.
In those cases, the insurance company can use the cash value accumulated in your policy to make up missed premium payments. But if you don’t have sufficient cash value or you continually miss payments and all of your cash value gets used up in automatic premium loans, your policy will lapse.
Once your policy has lapsed, its benefits are voided. In other words, if the insured dies while the policy is lapsed, the beneficiaries won’t get any money from the insurance company.
Reinstating coverage after a lapse
A policy lapse doesn’t necessarily mean you’ve permanently lost life insurance coverage. Most life insurance providers will give you options to reinstate your coverage (called a reinstatement provision, a clause of many insurance contracts).
In all cases, you’ll need to make up the payments you’ve missed. And those missed premiums might be subject to interest or late fees.
You might also be required to submit new evidence of insurability (EOI) to reinstate the policy. That could mean submitting for a new medical exam. And if that exam turns up anything problematic, you can expect your reinstated policy to come with higher premiums.
The requirement for new EOI depends on how much time has passed and the protocols your life insurer uses. Some insurers might require EOI if your policy has been lapsed for six months or more, for example.
A policy lapse may not mean losing coverage, but it will mean more work and extra costs. Plus, those higher costs might continue in perpetuity. Ultimately, it’s well worth acting quickly during the grace period to avoid a policy lapse. And if your policy has lapsed, reach out to your insurer right away. Doing so may help you avoid the requirement to submit new EOI and risk higher premiums.