A lapse means a life insurance policy is no longer an active contract. A life insurance policy will lapse when premium payments are missed and cash surrender value is exhausted on a life insurance policy. The term lapse refers to a “lapse in coverage”, meaning the life insurance contract will no longer pay a death benefit or provide any insurance coverage for the insured person. A policy will only lapse after a grace period has passed, and in some cases it is possible to have the policy reinstated.
Grace Period Must Expire Before Lapse
Life insurance lapse refers to the termination or discontinuation of a life insurance policy due to the policyholder’s failure to pay the required premiums. When you have a life insurance policy, you are generally required to make regular premium payments to keep the policy in force. These premiums are payments you make to the insurance company in exchange for the coverage provided by the policy.
If you miss premium payments and the policy’s cash value (if applicable) is insufficient to cover the premium, the policy can lapse. When a policy lapses, the insurance company terminates the coverage, and the benefits associated with the policy, such as the death benefit or any accumulated cash value, are no longer available to the policyholder or the beneficiaries.
The specifics of how a policy lapse is handled can depend on the type of life insurance policy you have:
Term Life Insurance: If you have a term life insurance policy, which provides coverage for a specific period (term), the policy will generally lapse if you miss premium payments. There is typically no cash value associated with term life insurance, so once the policy lapses, you lose the coverage without any financial value returned.
Permanent Life Insurance: Permanent life insurance policies, such as whole life or universal life insurance, may have a cash value component that accumulates over time. If you miss premium payments, the insurance company might use the cash value to cover the premiums for a certain period. If the cash value is not sufficient to cover the premiums and you do not make up the missed payments, the policy could still lapse, resulting in a loss of coverage and potential forfeiture of the cash value.
To prevent a life insurance lapse, it’s important to make timely premium payments. Some policies offer a grace period during which you can make a late payment without losing coverage. Additionally, you may have options like utilizing the cash value to cover premiums or reducing the death benefit to lower premium costs if you’re facing financial difficulties.
If you’re concerned about a potential lapse or are facing financial challenges, it’s recommended to contact your insurance company or agent to explore your options and understand the potential consequences of missed premium payments.
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