Key Takeaways
- If your life insurance policy recently lapsed due to unpaid premiums, you might be able to reinstate it.
- Unless your health has deteriorated, a reinstated policy could be cheaper than a new one.
- Contact your insurance agent to explore available options if you’re struggling to pay premiums.
Life insurance is a vital part of financial planning. However, missed payments can lead to policy lapses, which may leave you and your beneficiaries without protection. A job loss or unexpected expenses might disrupt the ability to pay premiums. If you stop paying the required life insurance premiums, your policy will lapse, and your coverage will end. Fortunately, if your life insurance policy has recently lapsed, reinstatement may be an option.
How to Reinstate a Lapsed Policy
“Insurers typically allow three to five years to reinstate a policy after it lapses,” explains Erin Ardleigh, founder and president of Dynama Insurance, an independent insurance brokerage firm. However, there are specific requirements for reinstatement. At a minimum, you’ll need to submit a reinstatement application, complete a questionnaire about your health, and confirm that your health hasn’t changed since your policy application was initially approved.
“It’s really important to be honest with them,” Ardleigh emphasizes. “If you lie, it could void your policy at death. Insurance companies don’t have to pay a claim if they can prove there’s a material misrepresentation you’ve made.”
Your insurer may also review your medical records from your doctors and potentially request a life insurance medical exam – similar to the process when you originally applied for coverage. If your health has worsened, the insurance company may not reinstate your policy.
If the insurer approves reinstatement, you’ll be required to pay all outstanding premiums. Insurers may also charge interest on past-due premiums. Ardleigh notes that a 6% interest rate is common. Ensure you read the fine print of your policy or call your agent to find out which terms apply.
Benefits of Reinstatement
The advantage of reinstating an existing policy, rather than applying for a new policy, lies in potential cost savings. Ardleigh notes that if your health remains unchanged, your insurer will honor the original pricing of your policy. However, if your health has changed, it could impact your rate or insurability. But your age won’t be a factor, as the premium will still be based on your age when you first applied for coverage. You wouldn’t get this preferential treatment if you were to apply for coverage with another insurer. Your rate would be based on your current age.
According to Ardleigh, rates can increase by 6% each year beyond your initial application. If it’s been several years since you purchased the initial policy, you could face significantly higher premiums. It is always a good idea to ask your insurer to calculate the interest and past payments owed. Then, compare these costs to those of a new policy to evaluate your options.
What Is the Grace Period for Life Insurance?
Ardleigh states that life insurance companies typically offer policyholders a grace period–usually 30 or 31 days – from the premium due date. Fortunately, missing one payment generally won’t result in losing your policy. The policy remains in force during the grace period. If you pass away within this period, your beneficiaries would still receive a payout. However, the insurance company would likely subtract the unpaid premium from the death benefit.
How Long Can You Go Without Paying Life Insurance Premiums?
While the length of grace periods is usually consistent, the duration you can go without paying premiums – and not lose your coverage permanently – varies depending on the type of life insurance. If you miss a payment on a term life insurance policy during the grace period, your policy will lapse and no longer be active. However, if you have a permanent life insurance policy, such as whole life, you may have more flexibility. If your policy has accumulated cash value, the insurance company might use it to cover premium payments until the cash value is depleted. Whole life policies may also provide dividends that can go toward premium payments. Talk to your insurance company to find out which options are available to you and what impact they’ll have on your policy.
What Happens When Life Insurance Lapses
Once a policy lapses, coverage ends, meaning the insurer is not obligated to pay the death benefit to your beneficiaries if you die. However, reinstatement may be possible depending on when the policy lapsed. In fact, many companies offer a 15- to 30-day buffer after a policy lapse to reinstate it with minimal requirements. You would likely only need to pay the missed premiums, Ardleigh says. It’s best to act fast to reinstate your policy. Delaying could complicate the process, and you might face denial of coverage.
What to Do If You’re the Beneficiary of a Lapsed Policy
Unfortunately, if you are the beneficiary of a lapsed insurance policy, you likely won’t receive a payout upon the insured’s death. Regardless, Ardleigh suggests contacting the insurance company and inquiring if they would allow you to pay the back premiums and file a claim.
How to Prevent a Life Insurance Lapse
Ideally, you’d want to avoid a policy lapse altogether. Here are some steps to consider if you’re having trouble making your payments:
- Set Up Automatic Payments: Reduce the risk of missed payments (or not receiving statements) by setting up automatic premium deductions.
- Ditch Riders: You may be paying extra for life insurance riders providing extra coverage that isn’t needed. Removing these riders might make your premium more affordable.
- Take Advantage of Flexible Premiums: Consider whether you have a universal life insurance policy with premium adjustment flexibility.
- Use Cash Value or Dividends to Pay Premiums: The cash value of permanent life insurance can temporarily cover premiums. Dividends from whole life policies can also offset premiums. Verify with your insurer that the policy won’t lapse in the future if the cash value drops below a specific amount.
- Switch From Annual to Monthly Premium Payments: If you have a large annual payment due, ask to switch to monthly payments to spread out the costs.
- Consider Reducing Your Death Benefit: You can lower your premium if your policy allows you to reduce the death benefit, though it can usually not be increased later. You’ll have some coverage instead of none.
The critical step is communicating with your agent or insurance company regarding any difficulty paying premiums or if you face a lapsed policy. Do not assume that giving up your life insurance is your only option.
