What Is Lapsed Policy In Insurance?

Updated On: 2024-03-21

Author : Team Policybachat

Have you ever wondered what happens to your insurance policy if you forget to pay premiums on time? Well, here’s a surprising fact: If you have an insurance policy, it is essential to pay regular premiums to keep the coverage active. If you stop paying premiums, the coverage will lapse and you will be uninsured. In simple terms, a lapsed policy occurs when you miss paying your insurance premium, and the consequences can be more significant than you might think. Let’s dive into lapsed insurance policies, unravelling the impact they can have on your coverage and financial well-being.

What is a Lapsed Policy?

A lapsed policy is an insurance policy that has terminated or expired because the policyholder failed to pay the premium within the specified grace period. Insurance policies typically require regular premium payments to remain in force, and if a policyholder misses a payment and doesn’t rectify it within the grace period, the policy may lapse.

When a policy lapses, the coverage is no longer active, and the policyholder loses the benefits and protection provided by the insurance policy. In some cases, policyholders may have the option to reinstate a lapsed policy by paying the overdue premiums and any applicable fees, but this is usually subject to certain conditions and time limits.

What Happens If Policy Lapses

When an insurance policy lapses, several consequences may occur, and the policyholder typically loses the benefits and coverage provided by the policy. In the case of a term life insurance policy, no amount will be paid to the beneficiary in the event of unfortunate demise. Here are some common outcomes of a lapsed policy:

  • Loss of Coverage: The most immediate consequence is the loss of insurance coverage. This means that if an insured event occurs after the policy lapses, the policyholder or beneficiaries may not be entitled to any benefits or payouts.
  • Reinstatement Options: In some cases, policyholders may have a limited period during which they can reinstate the lapsed policy. This usually involves paying the overdue premiums, and any fees, and potentially meeting other conditions set by the insurance company. However, the ability to reinstate a policy varies by insurance company and policy type.
  • Changes in Premiums: If the policy is reinstated, the insurance company may require the payment of any missed premiums along with interest or fees. Additionally, the premiums for the reinstated policy may be higher than the original premiums.
  • Loss of Policy Value: For certain types of insurance policies, such as cash value life insurance, a lapse may result in the loss of accumulated cash value. If the policy has a surrender value or cash surrender option, the policyholder may receive a reduced amount if they choose to surrender the policy after it has lapsed.
  • New Underwriting Requirements: If a policyholder wants to reapply for insurance after a lapse, they may be subject to new underwriting requirements. This could include a new health assessment, updated information about lifestyle changes, and potentially higher premiums.

When is Policy Deemed to Be Lapsed?

An insurance policy is deemed to be lapsed when the policyholder fails to pay the required premium within the grace period specified by the insurance company. The grace period is a specified period (usually 30 days to 90 days depending on the insurance company) following the premium due date during which the policy remains in force, and the policyholder can make the overdue payment without the policy lapsing.

The exact conditions for a policy to be considered lapsed may vary depending on the terms outlined in the insurance contract. However, the general process is as follows:

  • Missed Premium Payment: The policyholder misses the deadline for paying the premium on the insurance policy.
  • Grace Period: After missing the payment, the insurance company provides a grace period during which the policy remains in force. The grace period is intended to allow the policyholder to catch up on the overdue payment.
  • Lapse: If the policyholder does not make the required payment within the grace period, the policy is deemed to have lapsed. Once the lapse occurs, the coverage is no longer active, and the policyholder loses the benefits provided by the policy.

Policyholders need to be aware of their premium due dates, understand the grace period provided by their insurance company, and take timely action to avoid unintentional lapses in coverage. If there are difficulties in making a payment, communicating with the insurance company as early as possible may provide options or assistance in managing the situation.

Can a Lapsed Insurance Policy Be Revived?

Yes, a lapsed life insurance policy can be revived or reinstated. The policyholder needs to make an application for a revival period to the insurance company. It can be replaced at any time within 5 years from the date of the first due premium. To revive a lapsed policy, you need to pay the accumulated due premiums along with the interest. Depending on the policy and the insurer, you will be paying a penalty on unpaid premiums for a plan that will yield some returns.

How to Revive Lapsed Life Insurance Policy

Reviving a lapsed life insurance policy involves several steps, and the process may vary depending on the insurance company and the specific terms of the policy. Following are the steps on how to revive a lapsed life insurance policy:

  • Step 1: As soon as you become aware that your life insurance policy has lapsed, contact your insurance company.
  • Step 2: Ask the insurance company about the options available for reinstating your lapsed policy. Different companies have different procedures, so it’s important to understand their specific requirements.
  • Step 3: In most cases, the first step in reinstating a lapsed life insurance policy is to pay the overdue premiums. This includes any missed payments from the grace period.
  • Step 4: Be prepared to pay any additional fees and interest associated with the reinstatement process. Insurance companies may charge interest on overdue premiums, and there could be administrative fees as well.
  • Step 5: Ask about the reinstatement period, which is when you can revive the lapsed policy.
  • Step 6: Depending on the duration of the lapse and the insurance company's policies, you may be required to undergo a health review. This could involve answering health-related questions or even undergoing a new medical examination.
  • Step 7: The insurance company may review the terms of your policy during the reinstatement process. They may make adjustments to the coverage, premiums, or other policy conditions based on your current circumstances.
  • Step 8: Once you have completed the reinstatement process, wait for confirmation from the insurance company. They will inform you whether the policy has been successfully reinstated and provide details on the updated terms.

How to Avoid Policy Lapse?

Avoiding a policy lapse is essential to maintain continuous insurance coverage. Here are tips to take to prevent a policy lapse:

  • Understand your policy terms such as premium due dates, grace periods, etc.
  • Set up automatic payments to ensure timely premium payments.
  • Utilize electronic statements and reminders for prompt payment notifications.
  • Maintain an emergency fund to cover unexpected financial hurdles.
  • Regularly review your policy documents for any changes in coverage or terms.
  • Consider adjusting your budget to accommodate insurance premiums during financial changes.
  • Communicate proactively with the insurance company if facing payment challenges.
  • Explore flexible payment options or billing frequencies offered by your insurer.
  • Assess and update your coverage needs to align with changing life circumstances.
  • Periodically review your overall financial situation to prioritize insurance premium payments.

Wrapping Up

Understanding the implications of a lapsed insurance policy is crucial for policyholders. Failing to pay premiums on time can lead to the termination of coverage, leaving beneficiaries without the intended financial protection. It’s essential to stay informed about payment deadlines and explore options for reinstating policies to ensure continuous coverage and peace of mind.

Start Saving Money on Insurance Policy

Compare Life, Health, Car and Two wheeler Insurance rates from top Insurance companies for free.

1,000+ Reviews
Been Here Before?
Get Back to My Quotes

Leave a rating!

0.0 (0 votes)

Please wait while your request is being processed.