Own a life insurance and have your premiums due? If it is intentional, it is okay. But if it is simply falling behind the schedule for any reasons whatever, it may turn ominous for you. Your life insurance policy might fall into what insurers say ‘lapse’ state. Life insurance lapse is no good thing.
As life insurance lapse is really a worrying issue, you should know what it is and how to stay away from it.
What Does Life Insurance Lapse Mean?
As you own a life insurance policy you already know you need to pay off your life insurance premiums according to the schedule you chose during the policy purchase: monthly, quarterly, semi-annually or annually. If you fail to maintain the schedule and are in arrears taking you into lapse, the policy beneficiaries are to lose the coverage you would expect them to get. That means they will be deprived of the very protection you bought the life insurance policy for.
Life insurance policy lapse, however, does not occur till you cross the grace period.
How Long Is Life Insurance Grace Period?
Good news is life insurance lapse does not start as soon as you fail to pay off your premium after schedule. Before it goes into lapse, you will have a typically 30 or 31 days for the lapse to take into effect. This period is known as the grace period. You are in safe zone as long as you are inside of the grace period. If something (hopefully you understand what we mean) happens to you within the grace period, the beneficiaries will have the coverage or policy benefit. Trouble starts once the grace period is over.
However, you should be happy to know that you are eligible to keep your policy back in track during this period or even later.
One more thing to note for you is the grace period is company-specific or may even be policy-specific. So, it is always a good idea that you check exactly how long your grace period is.
What Happens When a Policy Lapses?
You have already known that a life insurance policy fallen in lapse translates into decline of the coverage by the insurer. We are going to tell what to do if so really happens to you later in this article.
Let’s now know what happens when your life insurance policy goes into lapse state.
As to how your beneficiaries will get affected in the event of lapsing depends on which of the different types of life insurance policies you own. If it is a term life insurance plan, lapse can be pretty devastating. Your insurers will decline the beneficiaries’ request for coverage. So, it is good to keep track of your premium payments and stay up-to-date for their best interest.
A whole life insurance is, however, a comparatively safe bet. It lets you cash in on the cash value component in it. If there is cash value accumulation through the policy, it will guard the policy from falling into lapse. But, the policy needs to be old enough to have enough the cash value. Of course, if you take out your cash value, this feature will not work for you.
Can a Lapsed Life Insurance Policy Be Reinstated?
While death of a policyholder past the grace period can boomerang the interest of the beneficiaries, it is possible for an insured to get his policy back in force. However, reinstating a policy may not be always too easy. For your good, the quicker is the better approach for you. If you make it too tardy, you may have to face things that may not quite be favorable to you. For example, you may have to answer queries about your health status and documentarily confirm your insurer that your health has not gone through changes since you signed up the policy. This is termed limited underwriting. The riskier part of any misstatement may prove negative for the beneficiaries.
Also, it is important to know that there is a specific reinstatement period that each company sticks to. If you apply for reinstatement inside of a span of 30 days, you will not require undergoing through the limited underwriting process. Once this period is over and you cross 6 months back-to-back, things might not be very rosy for you.
As you might guess, going through (a limited) underwriting may cause your cost of life insurance to rise. So trying to escape it is what you are advised.
Is Reinstatement a Good Idea?
Life insurance lapse may fall negatively back on you in several ways. Your premiums may rise through limited underwriting. Also, you may become ineligible for buying life insurance either for age or for changed physical conditions. Besides, when another company finds out you were at default, they may disapprove your application for a policy. This is why reinstatement is a better option than applying for a new insurance policy.
What If Your Policy Lapses and Coverage Is Denied?
Technically speaking, you are not eligible for life insurance benefits if your policy lapsed. But law requires that life insurance companies inform you of non-payment of your premiums. This is wherein law often comes to your rescue when you are denied coverage.
A lawyer is who you need then. Hopefully, you should not want to get into such hassles.
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