Life Insurance Policy Lapse: What It Means and How to Avoid It

Discover what it means for a life insurance policy to lapse, how to avoid it, and what to do if it happens.

9 Minute read

Originally Published: April 17, 2024

Life Insurance Policy Lapse What It Means and How to Avoid It Logo

Discover what it means for a life insurance policy to lapse, how to avoid it, and what to do if it happens.

9 Minute read

Originally Published: April 17, 2024

Life Insurance Policy Lapse What It Means and How to Avoid It Logo

Life insurance serves as a crucial financial safety net, providing peace of mind and protection for loved ones in the event of unexpected tragedies. However, if policyholders would like to continue enjoying the peace of mind offered through a life insurance policy they will need to ensure they don’t let it lapse. A policy lapse occurs when premium payments are not made as scheduled, leading to the termination of coverage. In this helpful guide, we will explore what it means if a life insurance policy lapses, how to avoid a policy lapse, how it impacts future coverage, and what to do if it happens.

What is a Life Insurance Policy Lapse

A life insurance policy lapse occurs when the policyholder fails to pay the required premiums for their life insurance policy. When a life insurance policy lapses it means that in the event of the insured’s death, the beneficiaries will no longer be eligible to receive the death benefit payout. A lapsed permanent life insurance policy with a cash value, such as whole life or universal life insurance, will also lose the accumulated cash value within the policy.

How a Policy Lapse Impacts Future Life Insurance Coverage

After a policy lapse with one insurer, it’s still possible to obtain life insurance through another insurance provider. However, the process may be more complicated, and there are a few factors you’ll need to consider:

  • Disclosing a Previous Lapse: It’s crucial to be honest and transparent about your previous policy lapse when applying for a new life insurance policy. Insurers may inquire about lapses on an application, and withholding this information could lead to complications or even the denial of coverage. Providing accurate information allows the insurer to assess your risk accurately and offer you appropriate coverage.
  • Underwriting Process: When applying for a new life insurance policy after a lapse, the new insurer will likely assess your risk profile through a process called underwriting. This process involves evaluating your age, health, lifestyle, and other factors to determine your eligibility for coverage and the premium rate you’ll be offered. If you’ve experienced health changes since your previous policy lapse, it could affect your insurability and the cost of coverage.
  • Premium Rates: Depending on the circumstances of your previous policy lapse and your current risk profile, you may be subject to higher premium rates with a new insurer. Insurers base their rates on the level of risk they perceive in insuring you, and a history of policy lapse could be seen as an increased risk factor.

While it’s possible to obtain life insurance after a previous policy lapse, you may face higher premiums when obtaining insurance through another provider. This is why it is important to avoid a policy lapse where possible or consider reinstating your previous policy after a lapse.

How to Avoid a Policy Lapse

If you would like to avoid a lapse in your life insurance policy there are a few steps you can take:

  • The first and most obvious step is to ensure you can pay your premiums on time and avoid missed payments.
  • Setting up automatic payments from your bank account will also lower the chance of forgotten payments.
  • Make sure to update your contact information when necessary so that your insurance provider can reach you if there are any payment issues.
  • Certain plans may have premium increases over the length of the policy so it’s important to review your life insurance policy and ensure you understand your premium payment obligations.
  • Cancel any unnecessary policy riders that offer coverage you don’t need as they often increase the cost of premiums.
  • If you aren’t able to afford the premium payments due to a change in your financial situation, look into updating or canceling your policy.
 How to Avoid a Life Insurance Policy Lapse

What is a Policy Lapse Grace Period

Many life insurance policies offer a grace period of around 30 days after a missed payment. During this time the policy is still in effect and if the insured were to pass away their beneficiaries would receive the death benefit minus the missed payment amount. While the grace period is in effect, you can still pay for the missed payment amount to keep your policy in good standing.

Additionally, if you have a permanent life insurance policy with an accumulated cash value, you can use this amount to cover premium payments. However, if you are unable to pay out of pocket and premiums can not be paid with the cash value component of your policy then your policy will lapse after the grace period, the same as any other type of policy.

Can I Reinstate a Lapsed Life Insurance Policy

If a policy does lapse, the policy may still be able to be reinstated. The length of time where reinstatement is available can vary between insurers and ranges from 6 months up to 5 years after a policy lapse. During this time, you will not have coverage but are still able to apply to reinstate the policy.

If a reinstatement application is submitted, applicants will be required to provide information on their medical situation and if it has changed since the policy was originally underwritten. If your health hasn’t changed, insurers will often honour the original pricing of the lapsed policy. However, applicants will still be obligated to pay for the missed payments, often charged with interest.

Life Insurance Policy Lapse Timeline

Is It Worth Reinstating a Lapsed Life Insurance Policy

Since life insurance costs increase with age, if you were to apply for a new policy the cost would be based on your current age, health, occupation, and lifestyle. This often means that a new policy is more expensive than an existing policy that was underwritten at a younger age. Because of this, it is often worth reinstating a lapsed life insurance policy so that you can maintain the lower premium costs of the original policy, as long as your health hasn’t changed.

However, if there is a significant change in your health, the original insurer may not reinstate the policy or may increase the premium costs on the previous policy. In this case, reinstating the policy may not be a viable option and a new policy through another insurer may be advisable.

What to Do if Your Life Insurance Policy Lapses

If you would still like coverage but cannot afford your premium payments there are a few things you will need to do.

  • Reach out to your insurer: If you are unable to afford the premiums for your life insurance policy, then reaching out to your insurer ahead of time to make changes to the policy may help lower premium costs.
  • Look into your policy’s grace period: After missing a payment, inquire how long the grace period of your policy is and make the payment during this time if you are able.
  • Reinstate the life insurance policy: After the grace period, when the policy has lapsed, you can look into reinstating the policy. Oftentimes, this is a more affordable option than obtaining insurance through a new insurer as the original provider may honour the original payment structure of the policy depending on your current health.
  • Obtain insurance through another provider: If your policy has lapsed too long ago to reinstate, or it would be unaffordable to reinstate the original policy, obtaining insurance through a different provider may be the best option.

Frequently Asked Questions (FAQs) About Life Insurance Policy Lapse

The period you have after a policy lapse to reinstate your previous policy will differ between different insurers. Some insurers offer only 6 months to reinstate a lapsed policy whereas others allow for up to 5 years. If you want information about your specific policy, you should reach out to your insurance provider to better understand the rules for your specific policy.

Whether your premium rates or coverage will be affected after reinstating a lapsed policy will depend on certain factors. Typically if your health hasn’t changed since the policy was originally underwritten many insurers will still honour the original payment structure of the policy. If you reinstate a lapsed policy, you will also be responsible for any previous missed payments with interest.

If you have faced significant health changes and would be a higher risk to insure, you may face increased premiums, lowered coverage amounts, or have your request for reinstatement denied. In this case, it may be better to apply for a new insurance policy that can be underwritten for your current situation.

If you are unable or not interested in reinstating a lapsed policy, you are still able to apply for a new insurance policy. However, insurance providers may inquire if you have ever experienced a policy lapse previously, and may charge higher premiums based on this information. If you are significantly older or in worse health than the underwriting of your original policy you may also be charged higher premiums on a new policy than you previously were paying.

After a missed premium payment, your policy will enter the grace period which typically lasts 30 days. During this time, beneficiaries are still covered, and if the insured were to pass away the death benefit would be paid out minus the amount of the missed payment. However, after a policy has lapsed and the grace period has ended, beneficiaries will no longer receive a death benefit if the insured were to pass away.

If you can’t afford your current life insurance premiums, you can consider canceling any optional riders that you don’t need. You can also reach out to your insurance provider and inquire if it’s possible to lower your coverage maximum. Another option is to switch from paying your premium annually to monthly as this may be more manageable.

Find a Solution That’s Right for You.

If you would like to discuss life insurance with a financial expert to help avoid a potential policy lapse and find a plan that is right for you, feel free to reach out to one of our expert financial advisors.

At Protect Your Wealth, we work with and compare policies and quotes from the best life insurance companies in Canada to ensure the best solution for you and your needs. We provide expert life insurance solutions, including no medical life insurance, critical illness insurance, term life insurance, and permanent life insurance to build the best package for you and your family.

Contact us online or call us at 1-877-654-6119 to talk to an expert advisor today. We’re proudly based out of Hamilton, and service clients anywhere in Ontario, Alberta, Manitoba, and British Columbia including areas such as Stoney Creek, Airdrie, Brandon, and Nanaimo.

Reach out to a financial advisor today!

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