A life insurance policy offers financial protection for the policyholder’s family in case something unexpected happens. However, the policyholder must keep up their part of the bargain. Otherwise, there could be a life insurance policy lapse, rendering it worthless unless corrected quickly.
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While this can happen to anyone, no lapse in premium payments must occur because the ramifications are certainly clear. If you stop paying your premiums, you may very well lose your life insurance policy and all its benefits.
The Definition of a Life Insurance Policy Lapse:
By definition, a life insurance lapse occurs when premium payments are no longer made and the cash surrender value has become exhausted under the conditions of the policy itself. The term itself refers to lapse in the coverage which means that the death benefit will now not be paid even if the policy has been regularly maintained for many years.
What Happens When Life Insurance Lapses?
If you do not make your premium payment on time, your policy will go into what is known as a “grace period.” The grace period is generally a set number of days that must pass before the policy will lapse. The grace period was set up to avoid issues such as delays in the mail or forgetting to pay right on time but paying a very short time later.
The grace period prevents people trying hard to keep their life insurance policy from facing a lapse due to forces beyond their control. Generally speaking, the grace period is roughly 30 days and the insurance company will still provide coverage. However, if the grace period passes and the insurance company still has not received a premium payment, it will be considered a lapsed life insurance policy.
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Life Insurance Lapse Reinstatement:
If the policy passes the grace period with no payment, it has lapsed, and there is no coverage. This means that no benefits are paid if the policyholder should pass away during this time. The resumption of premium payments must begin soon, or the policy itself may never be brought back.
Can you reinstate a lapsed policy?
Even if the policy has lapsed, it can still be reinstated under certain conditions. Generally speaking, the life insurance lapsed rates are generally higher depending on how late the payment is being made and considering the additional premium payments that must be made. In most cases, the time that the policyholder has to pay is two-fold.
If the payment is made within the first thirty days the policy has lapsed, there is no additional underwriting. However, if the period has passed 30 days and up to six months, there will be limited underwriting to verify that all the information is still correct.
The lapse ratio may vary depending on the company and the policy, so be sure to read all the pertinent information about the grace and lapse period terms so you can maintain your life insurance policy.
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