What Happens When Your Life Insurance Lapses?
A life insurance policy lapses when the owner stops making premium payments. If the owner makes up missed premium payments, the policy may be reinstated, but if the owner dies while the policy is lapsed, no benefits will be paid. Letting a policy lapse may also make it more difficult for the owner to qualify for future life insurance policies.
How Life Insurance Works
A life insurance policy is a contract entered into by a policy owner and an insurer. The owner pays premiums for a specific death benefit amount that is given to named beneficiaries upon the owner's death. While policy owners enjoy some benefits of the policy while alive (loans and partial surrenders from cash values on permanent policies), the main value of a life insurance policy, and the reason it is purchased, is for the death benefit. If an owner stops paying premiums, the policy will lapse and the death benefit will become invalid.
If a Policy Lapses
When an owner stops making premium payments on an insurance policy, that policy will lapse. The owner will have a grace period (varying from one insurer to another) during which she may make the appropriate amount of premium payments to make the policy active and valid again. Some insurers only allow a few months while others give a longer lapse period. Eventually, when the lapse period ends, the certificate will be cancelled.
Reasons to Let a Policy Lapse
Unforeseen economic hardship may make it impossible for you to continue making premium payments on an insurance policy. Every insurance policy offers a "free look period" (usually 30 days) during which a buyer can cancel the policy without any payments owed or negative impact. If, however, after the free look period expires and an owner decides he no longer wants the policy, he can let it lapse.
Reinstatement is the term for a policy that becomes in force, or valid, again after having lapsed. It is a condition that occurs before a policy is cancelled. It is an action that an insurer performs upon a policy after an owner has paid the necessary premiums to bring the policy out of indebtedness.
Implications on Future Policies
Allowing a policy to lapse once or even a few times will likely not hinder a person's future chances of being insured. However, repeated lapses may make one or more insurers unwilling to insure that person. When a policy lapses, it costs the insurer money--often in lost commissions paid on a policy that is no longer earning premiums. For that reason, a person who allows policies to lapse often will likely be undesirable to insurers. When you are considering buying life insurance, take your time and do your best to make sure you are buying the right type and amount of life insurance for your unique situation. This will help avoid the need for you to allow your policy to lapse.