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BLOG 04/05/2021

What happens when your life insurance lapses?

People typically buy life insurance to give their family a financial safety net if the unexpected happens. That’s why it’s important to keep up with your life insurance premiums, or payments, so the policy is there when your loved ones need it.

If you don’t make regular payments, you run the risk of lapsing your life insurance policy, which means losing that financial safety net. Here’s what to know to avoid a life insurance policy lapse, along with some options if your policy has already lapsed.

What happens when your life insurance lapses?

When you buy your life insurance policy, you agree to pay regular premiums to keep the policy active. You typically pay life insurance premiums monthly, but it can be annual or on another schedule.

If you stop making those payments for any reason, your life insurance policy will lapse. This means that you’re no longer covered by the life insurance policy and that the life insurer won’t pay out your death benefit to your beneficiaries if you die. Lapses happens for plenty of reasons, like:

  • You update your banking or other personal information and forget to update it with the life insurance carrier.
  • Your budget gets tight and you can’t afford payments. This is one big reason to consider term life insurance instead of permanent life insurance, since premiums are so much more affordable.
  • You decide you don’t want the life insurance policy anymore and discontinue payments.

If you forget to pay your life insurance, don’t worry. The life insurance company won’t cancel your life insurance policy immediately. Life insurance carriers typically have a grace period of roughly 30 days for you to make up the payment, during which time you’re still covered. You might also need to pay a late fee.

During the COVID-19 pandemic, some life insurance carriers are offering longer grace periods or modified payment terms to help people who are hurting financially but want to keep their life insurance coverage.

Once you reach the end of the grace period, what happens next depends on the type of coverage:

  • With term life insurance coverage, the policy will end. Wondering if you can get money back from a lapsed life insurance policy? A lapsed term plan unfortunately won’t provide your beneficiaries with a life insurance payout, no matter how much you’ve paid in premiums.
  • With permanent life insurance, your policy might automatically draw from the cash value built up in the life insurance policy to cover the premium. If there isn’t any cash value or it gets spent down, the life insurance policy will lapse.

Can lapsed life insurance policies be reinstated?

If your life insurance policy lapses and you still want coverage, you might be able to reinstate it. Every life insurance carrier has its own method for reinstatement. Many life insurance companies will allow you to reinstate the policy within two years, but you might need to do the following:

  • Sign a document saying that your health has not changed.
  • Pay back your life insurance premiums with interest.
  • Go through a new contestability period.

Depending on how long it’s been, you might also need to go through an underwriting process, which could include a medical exam.

Should I reinstate or buy a new policy?

There are benefits to both reinstatement and buying a new policy. With reinstatement, you can keep the life insurance rates you had before and you might not need to go through underwriting or take another medical exam.

When you purchase an entirely new life insurance policy, you don’t need to pay back premiums or interest, and you can choose a different policy if something else would suit your needs better. For example, your last policy might have lapsed because the last one was too expensive.

How can I avoid a life insurance lapse?

Choosing a term life insurance policy rather than permanent life insurance can help you avoid a lapse in the first place, since the premiums are so much lower. You can also enroll in autopay for payments to ensure that you don’t forget to pay your premiums and put your life insurance coverage at risk.

If you’re struggling to pay your life insurance bills, call your life insurance carrier. Especially during the COVID-19 pandemic, many life insurance carriers are working with customers on payment plans. Keeping your original plan is often less expensive in the long run than canceling and having to buy again later, since life insurance rates go up as you age. Maintaining your coverage also means no gaps in protection, so your policy is there for your family when they need it.

Still have questions or want more information about a lapse in life insurance?

We’re here to help. eFinancial works with top-rated life insurance companies to help you find the right coverage for you and your family. Call us or start your quote online today.

 

At eFinancial, our goal is to make life insurance simple, affordable, and understandable for everyday families. This content is intended for educational purposes only. Each post is carefully fact-checked, reviewed and updated regularly to ensure the information is as relevant as possible.