Life insurance policies secure your beneficiaries future by compensating them in the event of your death. Most insurance companies offer two types of life insurance; whole life policies and term policy. Unfortunately, a lot of policyholders experience life insurance policy lapses which nullify the beneficiaries’ rights to compensation.
This column unravels the insights into life insurance lapses and highlights the causes, corrections, and means that can be used to revive lapsed insurance covers. In addition, it also covers the best practices to carry out -when choosing an insurer- that will minimize the risks of a policy lapse.
What is a Life Insurance Policy Lapse?
A life insurance policy lapse refers to a state where an insurance contract is no longer valid. It happens when the insured stops paying premiums or when the account value of the policy suffers depletion.
When a policy lapse occurs, the insurance company stops being under any legal obligation to pay your beneficiaries in the event of chronic or terminal illnesses or even your death.
While most policy lapses are never intended for by most people who take up insurance policies, they do happen quite often. Statistics place whole life insurance lapses at more than 10% during the first and second years after applicants commence their life insurance plans.
Term insurance covers have a less turnover compared to whole life policies, but they also experience their fair share of policy lapses.
Circumstances that Lead to a Life Insurance Policy Lapse
Life insurance policies lapse due to unpaid premiums by the insured. Failure to pay even a single premium can easily result in the lapse of the insurance depending on the type of policy.
Whole life insurance and term insurance policies have a different sequence of events that lead to lapse of the insurance contracts. Each plan is further discussed with more depth below.
Whole Life Insurance
This form of insurance covers you for the rest of your life, even if you live up to 100 years. When policyholders of this form of insurance fail to pay their premiums, their current cash values are used to make the payments.
It goes on until the account value is no longer enough to cover the premiums. Then the policy lapses. The insurer immediately becomes free of any legal obligation to compensate the beneficiaries in case the policyholder dies.
Term insurance does not enjoy the advantages of whole life insurance since it gains no cash value. However, the benefit of this type of policy is that late premium payment instantly kicks the grace period into action. The 30-day countdown begins and once they are over, then the insurance lapses.
Life Insurance Lapse Grace Period
The law requires insurance companies to provide a grace period on life insurance policies to protect consumers from losing on the years of premiums paid due to one missed payment.
Most insurance companies offer 30-day or more extended grace periods. During this time, your beneficiaries will still receive compensation in the event of your death.
If no payment is made during the grace period, then the insurance contract ceases to be valid. Your insurer will no longer be liable to paying the compensation to your beneficiaries if you die or suffer a terminal illness.
How to Reinstate a Lapsed Policy?
Does the end of a grace period mean you lose out on your insurance?
You can still reinstate your policy and continue to enjoy the benefits it came with.
Different insurance companies have different rules and requirements on reinstatement based on how long the insurance contract has lapsed.
Reinstating Your Policy During the Grace Period
If you were late in paying your premium, but you manage to pay it during the grace period, then the insurance contract retains its validity.
All you have to do to reinstate it is call your insurance provider. Inform them of your situation, cut them a cheque of the required amount and the policy remains alive.
The advantage of this is that the insurer will not require any documentation or underwriting to rejuvenate the contract.
Reinstating Your Policy After the Grace Period
Majority of the companies allow 30 days to 6 months to reinstate your policy. Once the 30-day grace period expires, insurance companies give policyholders another extra 30 days to restore their contract without underwriting. Others, however, may require documentation of your health and financial status.
To reinstate your insurance policy after the grace period is over, contact your insurance provider to inform them. They will explain to you their rules and procedures on reinstatement. Each insurance company has different requirements.
You will then be given an application to fill where you will provide your personal details. Besides that, you will also be required to include a check of the charges you will be required to pay.
Once all the above is accomplished, the insurer assesses your details. The company then reinstates the policy or gets in touch with you if there is a need for more information. Due to the time-sensitive nature of the process, most insurance companies tend to be quick in carrying out a reinstatement.
Generally, most insurance providers accept payments and reinstate the policy without underwriting 30 days after the lapse. However, if it was longer than one month, they will ask for a limited underwriting.
During underwriting, you will be asked questions about your health and financial status. This will includes assessments to find out if your health has changed during the lapse period.
A lot of people consider lying during underwriting since any changes lead to premium revisions. You are obligated to provide accurate and truthful information.
Lying or omitting information invalidates the insurance contract once the truth is discovered. This means that your loved ones lose out on all the benefits when you pass away.
Charges on Life insurance Policy Reinstatement
Making your premium payment within the grace period involves paying for the missed premiums only. However, insurance companies add extra fees to the amount once your insurance contract lapses. You will, therefore, spend more on top of the missed premiums to have your policy reinstated.
Why you shouldn’t let your insurance policy lapse?
There are a variety of reasons as to why you should reinstate your insurance contract instead of letting it lapse. Even with an insurance lapse, the idea is to avoid allowing it to stretch for far too long to avoid underwriting. This is because they can lead to higher premiums or having your policy denied.
Below are three main reasons why you shouldn’t let your policy lapse:
- You will lose years of saving on premiums when you lose your coverage.
- You will leave your family or beneficiaries exposed since they will no longer be protected in the event of your death.
- And three, taking up a new policy will be more expensive than reinstating your current one. As you grow older, the premiums you will pay when you apply for a new insurance cover will be higher. Restoring your previous policy, however, ensures you continue paying the lower premiums.
Steps to Avoid a Lapse
There are a variety of measures you can put in place that can protect you from ever having to deal with a life insurance lapse.
Here are a few ideas to help you secure your insurance contract.
- Paying your premiums on time. There is no better way to be safer from lapses than to make timely premium payments and avoid submitting late premiums.
- Automatic billing. The best way to deal with this is to set up automatic billing so that the premiums are paid even when you forget to pay manually. All insurance companies provide automated payment methods for their services.
- Reading your insurer’s emails. Don’t always assume they are advertisements for products or packages they are offering. They could be warning you about a missed payment or a looming deadline for your grace period. Insurance companies always send warning emails to their clients.
- Do not take more insurance plans than you can afford to pay for – Paying for three or more insurance plans can be an excessive burden to bear.
How to Choose the Right Policy to Avoid Lapses?
Before settling on any insurance plan, it is essential to consider several factors. These include features that will go a long way in making sure you don’t default on your premiums or face a lapse.
Shopping around for insurance companies helps you to find the best prices. It also helps you find one that has the best value for your money and a minimum risk of a lapse. Discussed below are four key factors to look into before settling on an insurance plan.
Whole Life or Term Insurance?
Each policy comes with its advantages and downsides.
Whole life insurance provides cover for the rest of your life. Additionally, you also have the upside of the account cash value that will chip in when you default on your premiums.
However, whole life insurance policies do not enjoy grace periods. Once your cash value can no longer sustain your premium, the policy lapses; this type of insurance is also more expensive.
Term insurance, on the other hand, has benefits such as a grace period and you also pay cheaper premiums. The downside is that once you default on a payment, the grace period kicks in and if you still haven’t paid by its end, the policy lapses.
Furthermore, if the insurance contract ends without the misfortune of death, the insurer and the insured walk away from each other, and you don’t get any payment.
Grace Period and Reinstatement Period
There are insurance companies that offer more extended grace periods for their insurance packages. These would be better alternatives to consider. Additionally, others offer you a longer duration to reinstate your policy than the conventional 1-6 months with some going for a year or more.
Different insurance companies have varying reputations built over the years. Be wary of those known for having difficulties in reinstating their policies. Make sure you fully know and understand their procedure in policy reinstatement and assess the ease of the process. The easier it is, the better.
How much can you afford to pay in premiums every month or year?
Cost is a crucial factor to account for. Some companies will charge fewer premiums for similar insurance packages compared to others. Ensure you also look into the extra charges that come with policy reinstatement.
Avoid taking multiple insurance plans. Instead of having several, you can bargain with your insurer to have one where you pay a higher premium for a bigger compensation package to your beneficiaries. It’s easier to pay for one package since you are more likely to forget or miss to pay for one when handling multiple packages. Especially if it’s from different insurance companies.
An additional tip: Sometimes, things get murky, and you can no longer afford to pay your premiums. In this case, you can always sell your insurance package. Instead of letting it lapse, use a broker to help you sell it in the open ‘secondary insurance market.’
The broker sells the policies at a bargain, but it will be better than to lose it all. The prices in the ‘secondary insurance market’ usually range between 10 and 60 cents.
To summarize on life policy insurance lapse; it is mainly caused by defaulting on premium payments. Based on the type of insurance, you will get a grace period, or your account value pays for your premiums.
Policy reinstatement varies according to insurance companies’ regulations and requirements. Defaulting on premiums for a long time can lead to termination of the insurance contract, and the insurer can refuse to reinstate the policy.
Always pay your insurance premiums on time to minimize any risks of a lapse or going through an underwriting that could lead to the payment of more expensive premiums.