What Happens When Life Insurance Lapses?

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

What happens when life insurance lapses?

Life Insurance Lapse

When a life insurance policy matures, it means that the premium payments have been missed and the policy is no longer in force. This results in the policy no longer providing a death benefit to the insured person. There is usually a grace period after a missed payment where the policy remains in force, but once this period expires and the cash value is exhausted, the policy will terminate. Reinstating a lapsed policy typically requires making up missed premiums with interest and may involve new underwriting and higher premiums. Lapse rates for ordinary life insurance policies were 5.2% by the number of policies and 3.8% by the amount of insurance in 2021.

Key Takeaways:

  • When a life insurance policy lapses, the premium payments have been missed, and the policy is no longer in force.
  • A grace period is usually provided after a missed payment, but once it expires and the cash value is exhausted, the policy will terminate.
  • Reinstating a lapsed policy may require making up missed premiums with interest and may result in new underwriting and higher premiums.
  • Lapse rates for ordinary life insurance policies were 5.2% by the number of policies and 3.8% by the amount of insurance in 2021.
  • To learn more about life insurance maturity and the options available, inquire about a free quote today.

Life insurance lapse procedures and options

When premium payments are missed on a life insurance policy, understanding the procedures and available options becomes crucial. Let’s explore the grace period, automatic premium loans, reinstatement, and policy termination:

1. Grace Period

A grace period is the time frame after a missed premium payment during which the policy remains in force or provides limited benefits. It offers policyholders an opportunity to catch up on payments and maintain coverage. The length of the grace period may vary depending on the policy and insurer. It is essential to be aware of the duration to avoid unintentional policy termination.

2. Automatic Premium Loans

Whole life insurance policies often have a built-in option known as automatic premium loans. When premium payments are missed, the insurer may lend funds from the policy’s cash value to cover the premiums and keep the policy in force during the grace period. This feature can help policyholders avoid immediate policy termination while ensuring continuous coverage.

3. Reinstating a Lapsed Policy

If a policy is terminated due to missed premium payments and expiration of the grace period, there is usually an opportunity to reinstate the policy. Reinstating involves making up the missed premiums plus interest. However, it’s important to note that reinstatement may require additional underwriting, such as medical exams or updated health information. The insurance underwriting process may result in a premium increase based on the insured person’s current health status.

4. Policy Termination

If premium payments are not brought up to date and the cash value is exhausted, the life insurance policy will terminate. This means the policy will no longer provide any death benefits or cash value accumulation. It is crucial to stay informed about the policy’s termination provisions to make appropriate decisions regarding coverage continuation or exploring alternative options.

Understanding life insurance lapse procedures and available options helps policyholders navigate potential pitfalls and make informed decisions. Whether it involves utilizing the grace period, automatic premium loans, or reinstating a lapsed policy, being proactive can prevent the loss of life insurance benefits and ensure continuous coverage.

Procedure/OptionDescription
Grace PeriodTermination of a life insurance policy when premium payments are not brought up to date, and the cash value is exhausted, resulting in the loss of death benefits and cash value accumulation.
Automatic Premium LoansFeature in whole life insurance policies where funds from the policy’s cash value are borrowed to cover missed premiums during the grace period and keep the policy in force.
Reinstating a Lapsed PolicyProcess of bringing a lapsed policy back into force by making up missed premiums with interest and potentially undergoing new underwriting.
Policy TerminationTermination of a life insurance policy when premium payments are not brought up to date and the cash value is exhausted, resulting in the loss of death benefits and cash value accumulation.
Lapsed Life Insurance

Lapse rates and policy longevity

Lapse rates for ordinary life insurance policies can vary depending on the type of insurance. When it comes to whole life insurance policies, they tend to have lower lapse rates compared to term policies. Whole life insurance is known for its longevity, meaning it can remain in force as long as the premium commitments are met. This ensures continuous coverage and provides peace of mind to policyholders.

A shining example of the policy longevity offered by whole life insurance can be seen with MassMutual. MassMutual has many policies that have been in force for 50 years or longer, demonstrating the enduring value of these policies. In fact, there have even been cases of policies written during World War II that have paid out death benefits many years later. These policies can have initial face values that increase over time due to dividends, making them a reliable and potentially lucrative long-term investment.

Whole Life vs Term Policies

Let’s compare whole life insurance and term policies to understand the differences and advantages of each:

Whole Life InsuranceTerm Policies
Provides coverage for the insured’s entire lifeOffers coverage for a specific term or period
Accumulates cash value over timeDoes not build cash value
Premiums remain level throughout the policyPremiums may increase upon renewal
Potential dividend paymentsNo dividends

As seen in the comparison table, whole life insurance provides lifelong coverage, accumulates cash value, and may even offer dividends. On the other hand, term policies are typically more cost-effective in the short term and are often used to meet specific coverage needs for a fixed period.

When considering life insurance options, it’s essential to assess your individual circumstances and financial goals. Whole life insurance offers long-term security and potential financial benefits, while term policies can be tailored to specific needs for a defined period. Consulting with a life insurance professional can help you make an informed decision that aligns with your unique requirements.

What Happens When Your Life Insurance Lapses

Conclusion

In conclusion, it is crucial to prioritize paying life insurance premiums to maintain coverage and ensure that the policy remains in force. Letting a policy lapse can result in a loss of protection and may require higher premiums to reinstate. Understanding the grace period and the available options for reinstating a lapsed policy is essential to prevent the loss of life insurance benefits.

Whole life insurance policies are a viable option for individuals seeking longer-term coverage and the accumulation of cash value over time. These policies provide stability and financial security for the insured and their beneficiaries. On the other hand, term policies can be suitable for specific needs and may not require long-term coverage commitments.

Decisions regarding life insurance should be made based on an individual’s specific circumstances and financial goals. Consulting with a trusted insurance advisor can provide valuable guidance in choosing the right policy options that align with one’s needs and objectives. Ultimately, securing life insurance coverage and prioritizing premium payments are key to ensuring the financial well-being and security of loved ones in the face of any unfortunate event.

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Frequently Asked Questions

What happens when a life insurance policy lapses?

When a life insurance policy lapses, it means that the premium payments have been missed and the policy is no longer in force. This results in the policy no longer providing a death benefit to the insured person.

Is there a grace period for missed premium payments?

Yes, there is usually a grace period after a missed payment where the policy remains in force. However, once this period expires and the cash value is exhausted, the policy will terminate.

How can a lapsed policy be reinstated?

Reinstating a lapsed policy typically requires making up missed premiums with interest. It may also involve new underwriting and result in higher premiums.

What are the options for maintaining a policy during the grace period?

Whole life insurance policies may use automatic premium loans from the cash value to keep the policy in force during the grace period. Other types of insurance, like universal life, may tap into any account value to maintain the policy.

How does whole life insurance differ from term policies in terms of lapse rates?

Whole life insurance policies have a lower lapse rate compared to term policies. Whole life insurance is known for its longevity and can remain in force as long as premium commitments are met.

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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