When Life Insurance Policy Lapse? Reasons, Effects & Prevention

By Okbima 25 Jun 2024
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When a life insurance policy lapses, it means that the policyholder has failed to make the required premium payments. The most common reasons for a policy lapse include financial difficulties, or simply choosing not to continue coverage. Know the effects, steps & preventions to take.

 

When Life Insurance Policy Lapse?

A life insurance policy lapses when the policyholder doesn’t pay the premiums of the life insurance policy on time. The grace period for making a premium payment varies depending on the policy but usually, it is around 30 to 60 days. 

If the policyholder does not make the payment within the grace period, the policy will lapse and the coverage will be terminated. In some cases, the policyholder may be able to restore the policy by paying the overdue premiums and any applicable fees.

 

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Reasons For Life Insurance Policy Lapse

There are some reasons for life insurance policy lapse such as non-payment of premiums, change in financial circumstances, misunderstanding of policy terms, etc.

  • Non-payment of premiums: One of the most common reasons for a life insurance policy to lapse is the policyholder failing to pay the premiums. If premiums are not paid on time, the insurance company may cancel the policy.

  • Change in financial circumstances: If a policyholder's financial situation changes and they are no longer able to afford the premiums, they may choose to let the policy lapse.

  • Poor health: If a policyholder's health is not good and they become uninsurable, they may no longer be able to maintain their life insurance policy.

  • Misunderstanding of policy terms: Sometimes policyholders may not fully understand the terms of their policy or may be misinformed about the consequences of missing a premium payment, which can cause unintentional policy lapse

  • Lack of awareness: Some policyholders may forget about their policy or fail to keep up with communication from their insurance company which can cause policy lapse.

  • Better coverage options: Policyholders may find better coverage options or more affordable policies with different insurance providers which can cause policy lapse.

  • Change in life circumstances: Significant life events such as divorce, remarriage, children leaving the home, or retirement may change a policyholder's need for life insurance which can cause policy lapse.

 

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Effects Of Life Insurance Policy Lapse

The effects of life insurance policy lapses are loss of coverage, increased premiums, loss of cash value, inability to restore the policy, impact on nominees, etc.

  • Loss of coverage: The most immediate effect of a life insurance policy lapse is the loss of coverage. This means that if the policyholder were to pass away after the policy has lapsed, their nominees would not receive the death benefit.

  • Inability to restore the policy: In some cases, a policyholder may be able to restore their lapsed policy by paying any missed premiums. However, if too much time has passed since the policy lapsed, the insurance company may no longer allow the policy to be restored.

  • Increased premiums: If a policyholder can restore a lapsed policy, they may need to pay higher premiums to cover the missed payments. This can make the policy more expensive and unaffordable for the policyholder.

  • Loss of cash value: If a permanent life insurance policy lapses, the policyholder may lose any cash value that has accumulated in the policy. This can be a significant financial loss, especially if the policyholder has been paying premiums for many years.

  • Impact on nominees: The primary purpose of life insurance is to provide financial protection for the policyholder's nominees in the event of their death. If a policy lapses, the nominees may be left without the financial support that the death benefit would have provided.

 

Steps to Take If Your Life Insurance Policy Might Lapse

If your life insurance policy might lapse, it is important to contact your insurance company immediately to discuss changing the policy terms or making a payment to prevent it from lapsing.

  • Contact your insurance company: If you are life insurance policy might lapse, it is important to contact your insurance company as soon as possible.

  • Know about grace periods: Many life insurance policies have a grace period, which is a time after the premium due date during which you can still make a payment without the policy lapsing. Be sure to ask your insurance company about the grace period and how much time you have to make a payment.

  • Consider reinstatement: If your policy does lapse, you may be able to restore it by paying the overdue premiums and any fees or interest that have accrued.

  • Explore other options: If restoring your policy is not an option, you may want to explore other alternatives, such as purchasing a new policy or converting your existing policy to a different type of policy.

  • Review your financial situation: If you are having trouble paying for your life insurance, it's important to take a look at your finances. You can try to spend less money, earn more money, or make changes to your budget so you can afford your premiums in the future.

  • Keep up with future payments: Once you have resolved the issue with your lapsed policy, be sure to stay on top of your future premium payments to avoid the same situation happening again in the future. Set up automatic payments or reminders to ensure that you do not miss any future payments.

 

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Prevention Of Life Insurance Policy Lapse

There is some prevention for life insurance policy lapse such as regularly reviewing your policy, setting up automatic payments, communicating with your insurance provider, etc.

  • Regularly Review Your Policy: Make sure you understand the terms and conditions of your life insurance policy and regularly review it to ensure that you are meeting all requirements, such as premium payments and renewal.

  • Set Up Automatic Payments: Consider setting up automatic payments for your premium so that you never miss a payment and risk your policy lapsing.

  • Communicate With Your Insurance Provider: If you are facing financial difficulties and may be unable to make a payment, communicate with your insurance provider to discuss options such as grace periods or payment plans to prevent your policy from lapsing.

  • Keep Your Contact Information Up to Date: Make sure that your insurance provider has your current contact information so that you can be notified of any changes or updates to your policy.

  • Get Professional Advice: If you are unsure about how to prevent your life insurance policy from lapsing, consider getting advice from a financial advisor or you can contact “Our Experts”.


 

Read More:

Can Life Insurance Policy Be Used As Collateral?

Why Life Insurance Is Not A Contract Of Indemnity?

What is Life Insurance Policy? Benefits & How Does it Work in India

Types of Life Insurance: Definition & Benefits in India 2024

 

Conclusion

In conclusion, a life insurance policy lapses when the premium payments are not made on time, which can cause loss of coverage and other consequences. To prevent this, stay informed, communicate with your provider & review your policy regularly. Setting up automatic payments and getting professional advice can help avoid a lapse and provide financial protection for you and your family.

FAQs

A life insurance policy lapse happens when a policyholder fails to pay the required premium and the policy is terminated as a result.

When a life insurance policy lapses, the coverage and benefits provided by the policy cease to exist. The policyholder may lose the money invested in the policy and will no longer have the protection provided by the policy.

Yes, in some cases, a lapsed life insurance policy can be restored by paying any outstanding premiums and any fees or penalties imposed by the insurance company.

The time during which a lapsed life insurance policy can be restored varies by insurance company and policy. Some policies may allow for restoration within a specific time, while others may not offer the option to restore at all.

Yes, a life insurance policy lapse can be avoided by ensuring that premium payments are made on time. Setting up automatic payments or reminders can help prevent a policy lapse.

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