When you take out a life insurance policy, you pay a premium monthly or annually to keep the policy active. If you stop paying those premiums your policy will lapse, meaning you lose your life insurance coverage and your beneficiaries won’t get any life insurance money when you die.
Missing a payment will not automatically result in a policy lapse. All life insurance companies have a grace period, usually around 30 days, which allows your policy to stay in force temporarily if you need to make a late payment. You need to resume payments before the end of the grace period to avoid any gaps in your coverage.
What causes a life insurance lapse?
Life insurance policies lapse when you haven’t paid your premiums and the grace period has ended. If you’ve missed payments, but are still within your policy’s grace period, you’ll still be covered if you die.
You can also regain your good standing by paying back the premiums you missed. After the grace period has ended, your policy will have lapsed.
It’s easy to miss a premium payment: Maybe your address or banking information changed and you forgot to let your insurance company know. Or maybe your life insurance policy doesn’t fit into your budget anymore.
With any type of life insurance, your insurer is required to inform you when your policy is in danger of lapsing, and then again when it has officially lapsed. Losing your coverage works slightly differently depending on whether you have term life or permanent life insurance.
Term life insurance lapses
A term life insurance lapse is fairly straightforward. Once you stop paying premiums, you lose coverage and you don’t receive a refund of any premiums you paid previously.
Cash value life insurance lapses
Most cash value life insurance policies, such as whole life insurance, include a feature called an automatic premium loan. This allows your insurer to use your policy’s cash value to pay your premium if you miss a payment and the grace period ends.
However, if there isn’t enough cash value to cover your premiums — or if it’s depleted by continued non-payment — your policy will lapse. You may need to pay a surrender fee if your policy is less than 10 years old.
How does the life insurance grace period work?
Every state’s department of insurance requires life insurance companies to provide a grace period for late payments. That period is usually 30 or 31 days and begins on the due date of your missed payment.
During the grace period you’re still fully covered by your policy, so your beneficiaries will receive the death benefit payout if you die. But you need to pay your missed premium to keep your policy active past 30 or 31 days. Depending on your insurer’s guidelines, you may also owe a late fee.
Can you reinstate a lapsed life insurance policy?
You usually have the option to reinstate your life insurance policy after a lapse within two years of a policy lapse. Start by contacting your insurer. The process for reinstatement varies for each company.
In addition to speaking with your insurer, you’ll also need to:
Prove your evidence of insurability
Pay back missed premiums (plus late fees or interest)
Restart your contestability period
“Each carrier tends to have different guidelines for reinstating policies, and reinstatement is often a case-by-case basis depending on the situation,” says Patrick Hanzel, certified financial planner and advanced planning manager at Policygenius. “Applying for reinstatement of a policy might involve signing a document stating that your health has not changed. Also, you will need to pay backdated premiums to the date that the policy lapsed.”
Depending on your insurer, you may also need to go through underwriting again. Your provider will evaluate how long ago your policy lapsed and whether you had any red flags in your medical history when you first applied for life insurance.
Some companies won’t require new underwriting if the policy has been inactive for less than six months; others may require only limited underwriting.
Is it cheaper to reinstate your policy or buy new life insurance?
It will likely take less time to reinstate your coverage than to buy a brand new policy, but the cost of reinstating your policy compared to buying a new one will depend on several factors.
When your policy lapsed
Your age
Whether your health has changed
Purchasing a new policy can be more expensive because life insurance premiums increase with age and underwriting will catch any medical conditions you’ve developed since buying your last policy.
However, it can be more affordable to buy a new policy and avoid reinstating a policy that lapsed long ago that would come with higher premiums and penalties for your missed payments.
How to avoid a life insurance lapse
There are a few simple steps you can take to avoid missing a premium payment and jeopardizing your life insurance coverage:
Enroll in automated payments. Most providers allow you to set up automatic bank drafts for premiums so you don’t have to track payments every month.
Switch to an annual payment schedule. If it fits your budget, paying premiums annually gives you fewer payments to stay on top of and may come with a discount.
Add a waiver of premium rider to your policy. Many providers offer a waiver of premium rider that exempts you from paying premiums if you become disabled.
Lower your coverage amount. If affordability is a concern, you can usually decrease your death benefit amount or term length, which will lower your premiums.
Life insurance policies financially protect your loved ones if you pass away. You can ensure that protection by doing your part to prevent a policy lapse and knowing what your options are if you lose your coverage due to nonpayment. If you need help understanding your life insurance policy details or payment schedule, you can contact a Policygenius expert.
