What to Do When Your Life Insurance Lapses?

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By Patrick Pierce

A Life Insurance Policy is an instrument which we take when we are alive. In the event of an unexpected death, it provides financial security to our surviving family members. The death benefit from a life insurance can be a life saver to the beneficiaries or to our nominees.

A lapse means a Life Insurance Policy is no longer active. The policy will lapse when we fail to pay our premiums on time or when the premium payments are missed and cash surrender value is exhausted on the policy. A lapse also means a lapse in coverage. It means that the insured person is no longer under the insurance coverage and the life insurance policy document will cease to be in existence. It can be the most disastrous thing to happen as the nominee will not receive a single penny as death benefit.

The money received from a life insurance policy can give the family of the deceased some financial stability to meet the immediate expenses. The children’s education, school or college fees, clearing some outstanding debts or paying off mortgage, settling the hospital or medical bills can be immediately taken care of by the death benefit.

The benefits of a life insurance policy will become null and void if we let the policy lapse by not paying the premiums. Such carelessness on our part can leave our family vulnerable in our absence. Luckily, a lapsed life insurance policy can be reinstated if we act within a certain timeframe.

Reasons for a Life Insurance Lapse:

If you disregard to pay your Insurance premium on time:

Your Insurance Policy will lapse if you fail to pay your life insurance premium. A lapse means that the policy is no longer active. As a result there will be no insurance cover hence no death benefit will be given to the nominee, who is the beneficiary of the policy. This lapse may seriously affect your loved ones as they might have to face grave repercussions for your carelessness. The death benefit will be extremely useful to them to get-on with their day to day activities and to bear the daily expenditure. A lapsed policy will cause severe hardships and suddenly expose them to unexpected expenses thus making them financially insecure.

What causes a policy to lapse?

The reasons may be many for a policy to lapse. The policy holder owing to his busy schedule might have forgotten to pay the premium or he may not have received the premium notice if he has shifted to a new place or to a new city and has forgotten to inform the insurance company. Sometimes he may be in the midst of a financial crisis and decided to postpone paying the premium amount resulting in the policy to lapse. In case of financial crisis, you are supposed to use life insurance calculator whenever you are going to buy a new insurance plan. The life insurance calculator helps you to calculate the insurance premium so that the premium can’t be missed due to the shortage of money.

Even though the reasons are genuine, a lapse in the policy can severely affect the family so one should try to reinstate it as soon as possible.

To know what might happen when a policy lapses, one should be aware of what type of policy one has.

The policies for a home insurance or a vehicle insurance lapse immediately if the premium is not paid on time. But for life insurance policies the rules for a policy to lapse are slightly different and depend on the type of policy one has.

Cash Value Life Insurance – It is a type of life insurance plan that does not expire and is called Permanent Life Insurance Plan as it has a cash value saving component along with death benefit. It provides a dual benefit as it has a provision for savings along with the provision for death benefit. A policy holder can withdraw cash from the savings portion to cover his immediate needs such as paying for children’s education or meeting a medical emergency or to cover his shortfall. He can even borrow from it. He can also use this savings portion to pay the premium policies. Once this cash component is completely exhausted, the policy becomes a lapsed policy.

Term Life Insurance – It is a type of life insurance policy which does not have any provision for cash value saving component in the policy. So once a policy holder forgets to pay the premium amount, the policy will go into the grace period after the due date and will lapse once the grace period expires.

Unit Linked Insurance Plans or ULIPs – It is a type of life insurance policy which provides risk cover along with investment options such as mutual funds, bonds or stocks for the policy holder. In ULIPs the policy is considered lapsed if the premiums are not paid in the first five years or missed during the lock-in period. Whatever insurance benefits exist, they are forfeited and the invested amount is shifted to a discontinuance fund and is paid after the lock-in period.

If the premiums are paid in the first five years and discontinued after the lock-in period, the policy can still be continued till the end of the policy term. He becomes eligible to claim whatever is due to him. He can also surrender the policy after the lock-in period and claim the investment corpus.

Grace Period – In a life insurance, a grace period can be a great help to a policy holder to prevent his policy getting lapsed. Every state in India has a policy of grace period for a life insurance. The grace period varies from state to state and from one insurance company to the other. But in general a period of 30 days grace is followed.

Once the premium amount is missed, the policy will automatically go into the grace period. If the insured person dies during the grace period, the insurer is bound to provide life coverage and pay the death benefits to the nominee. But once the grace period is over, the beneficiary will not receive any death benefit and the policy will be considered as lapsed.

How to Reinstate the Policy

A lapsed policy can be made active after it is reinstated. Once it is reinstated, it will provide the life cover mentioned in the policy and pay the death benefit too. Reinstating the life insurance policy is possible when it is done within a certain time frame. The insured person has to fulfill certain requirements and also has to pay the premium amounts which are due till that date.

It must be remembered that reinstatement depends totally upon the insurance company and the rules can vary from one company to the other. The policy holder can only request and not demand for reinstatement. He has to read the policy document thoroughly to know if it is possible or not, and if it is possible, then what and how it should be done. Sometimes to reinstate a policy depends upon how long it has been lapsed.

The procedures and the conditions vary according to the time period. It is important to know them to reinstate a policy.

If the policy has lapsed for 30 days or less then it is very easy to get it reinstated. Most of the insurance companies allow that without any questions.  All that the insured person needs to do is go to the insurance company and apply for reinstatement by filling out a form and pay the pending premiums. Once this is over, the policy will become active once again.

If the policy has lapsed for more than 30 days but less than six months, then the insured person has to answer questions concerning his health. He has to fill in an application form requesting for reinstatement of his policy and also need to sign documents. He has to confirm by signing that his health continues to remain the same as it was when he took the policy in the first place. He has to answer all the questions honestly and faithfully so that in the event of his death, the insurer should not find any reason to reject the claim and denying his nominees to collect the death benefit.

If the policy has lapsed for nearly 5 years, then it is very difficult to reinstate it as the insurance companies follow processes that are different from each other. The policy holder has to talk to the insurer. Most of the companies might comply and allow for reinstating the lapsed policy if the policy holder agrees to go for fresh medical tests. If the insurer finds the medical results to be satisfactory then the policy can be reinstated. But the premium amount will be more.

We can safely conclude that to reinstate, the policy holder has to pay all the premiums from the date the policy went into its grace period. The time lapse may be 30 days or 5 years. He might have to pay some penalty too depending on the terms and conditions mentioned in the policy document. The amount along with the penalty amount may be very high if the policy has lapsed for many years. Even then, reinstating a policy works cheaper than taking a new one for the simple reason that the premium amounts increase with increase in age.

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