What happens when a life insurance policy lapses?
When a life insurance policy lapses, you lose its benefits. You no longer have the much-needed financial protection. Your dependents don’t get any help if something unfortunate happens to you.
What results in the lapse of a life insurance policy?
You need to pay premiums consistently to keep the policy alive. In case you fail to pay the premiums, the policy lapses. The lapse of policy means that your beneficiary does not get the benefits.
A life insurance policy does not lapse instantly on the default of one payment. Insurance companies award you a grace period of 30 days. If you fail to make a payment within that period, the company can cancel your policy.
How can you reinstate a lapsed insurance policy?
You can reinstate a lapsed insurance policy within 3 to 5 years. But you will have to meet some requirements for reinstatement. The first thing you will need to do is apply for reinstatement and fill out a questionnaire. An insurance company needs to ascertain that your health condition is in the same state as it was at the policy’s approval.
An insurance company may ask you to undertake a medical exam. It may also check your past medical record. If the insurance company finds out that your health condition has changed for the worse, it may not reinstate the policy.
If the insurance company agrees to reinstate the policy, you will pay the missed premiums. The company can ask you to pay these premiums with interest. The general rate of interest charged is 6 percent.
About 30 million people with life insurance in the U.S. are underinsured in 2021.
What are the benefits of policy reinstatement?
The primary benefit of reinstating a lapsed insurance policy is paying less money. If your health condition has not changed, the insurance company charges you the initially agreed price. But if it has deteriorated, you will have to pay a higher rate. However, this rate will not factor in your age.
If you apply for a new insurance policy, the insurance company will determine the amount of premium based on your age. Insurance rates go up by 6 percent with each passing year. It will significantly increase the cost.
You can compare the price of policy reinstatement with the cost of the new insurance policy. Get quotations from different companies to find out the best rates. Don’t opt for the reinstatement option if the accumulated reinstatement cost is higher than the price of a new insurance policy.
How can you avoid the lapse of insurance policy?
The best way is to pay the insurance premiums on time. Other than that, you can do the following:
No lapse insurance
You can purchase a no-lapse insurance policy. Such a policy comprises a single premium life insurance plan which eliminates all the chances of policy lapse.
If you think that your busy schedule can make you miss the payment, you can choose the auto-debit feature. Using this feature, you can preschedule the premiums.