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What Happens When a Life Insurance Policy Lapses?

Life insurance provides financial security for policyholders and their families. However, maintaining these benefits requires timely payment of premiums. When payments are missed, the policy may lapse, leading to a loss of coverage.

Understanding what causes a policy lapse and its repercussions is crucial to ensure continued protection.

In this post, we’ll go over what happens when a life insurance policy lapses and your available options. Depending on the situation and circumstances, there may be actions you can take to get a payout from the insurance company if a policyholder’s policy lapses.

Get your free consultation with a Boonswang life insurance attorney today, and learn more about how we can help you get the payout you deserve.

Causes of a Life Insurance Policy Lapse

There are several reasons why a life insurance policy might lapse. The most common cause of a life insurance policy lapse is non-payment of premiums. Policyholders might forget to pay, not have sufficient funds to cover the payment, or choose not to pay due to financial hardship or oversight.

Other reasons may include administrative errors, such as incorrect contact information resulting in missed notifications about due payments.

The Life Insurance Grace Period

When a premium payment is missed, life insurance companies don’t immediately terminate the policy. They provide a “grace period,” typically 30 days from the due date of the unpaid premium. During this grace period, the policyholder has the opportunity to pay the overdue premium to the insurance company without any penalty, and the policy remains in force.

If the insured person were to pass away during the grace period, the death benefit would still be paid out, but the overdue premium might be deducted from the benefit.

What Happens to Your Money If Your Life Insurance Lapses?

When a life insurance policy lapses due to non-payment of premiums, the coverage ends, and the policyholder loses the protection of the policy. The consequences depend on the type of life insurance policy you hold.

For term life insurance policies, you typically will not receive any refund of the premiums paid once your policy lapses. For permanent life insurance policies, like whole or universal life, the policy may have accumulated a cash value. The cash value component accrues interest and acts like an investment that has special tax benefits.

Depending on the specifics of your lapsed policy, you may be able to receive some of this cash value, but it’s important to note that surrender charges might apply. That’s why it’s crucial to know what happens in the event of a life insurance lapse.

Can You Get Money Back from a Lapsed Life Insurance Policy?

In most cases, with term life insurance, you cannot get money back if your life insurance lapses. The premiums paid toward term life insurance are not returned. However, with permanent life insurance, you may be able to access the policy’s cash value before a life insurance lapse.

You must understand your lapsed policy’s terms and discuss with your insurance agent or financial advisor if you’re considering this step, as it can have significant implications for your coverage and potential surrender charges.

Life Insurance Lapse vs. Surrender

A life insurance lapse occurs when you unintentionally fail to pay premiums, leading to an automatic termination of the policy. On the other hand, a surrender happens when you intentionally end your policy before its term, usually in exchange for the cash value it has accrued.

A surrender can provide immediate funds if needed, but it also means losing the death benefit entirely. It can also have tax implications. A lapse, while it results in the loss of coverage, typically doesn’t have immediate financial consequences other than the loss of peace of mind and financial protection for beneficiaries.

Illness-Related Insurance Lapses

A common cause of life insurance policy lapses is a serious illness or decline in the mental health of the policyholder. Such individuals often miss premium payments due to their health conditions. Courts and life insurance companies may consider these circumstances, especially if the policyholder had a good payment history before falling ill.

It’s crucial to inform your insurer about any significant health changes to explore potential accommodations.

Reinstating Lapsed Policies After the Death of the Policyholder

Reinstating lapsed life insurance policies after the death of the policyholder can be a complex process. Generally, insurance companies don’t allow reinstatement after death because the coverage ends when the policy lapses.

However, if the policyholder died within the grace period or if there was an error on the part of the insurer, the beneficiaries might have a case to reinstate a lapsed life insurance policy. It’s advisable to consult with a life insurance lawyer to navigate these circumstances.

How to Avoid a Lapse in Your Life Insurance Policy

Preventing a lapse in your life insurance policy primarily involves ensuring timely premium payments. Here are some strategies to help keep your policy in force:

Sign Up For Automatic Payments

Setting up automatic payments through your bank account can prevent missed payments and the risk of policy lapse due to forgetfulness or oversight. You can set it up such that the premium amount gets deducted automatically on the due date.

Adjust Your Life Insurance Coverage

If financial hardship is making it difficult to afford premiums, consider adjusting your coverage. You could lower the death benefit amount, which in turn can reduce the premiums. Before making this decision, consult with your insurance agent or a financial advisor to understand the potential impacts on your financial plan.

Get A “No Lapse” Insurance Policy

Some insurance providers offer “no lapse” or “guaranteed universal” life insurance policies. These policies guarantee that as long as you pay the specified premium, your policy will remain in force, regardless of changes in health, age, or market conditions.

This could be a good option if you want to ensure your policy doesn’t lapse, but make sure to understand the terms and costs associated with such policies.

Fighting Against a Life Insurance Denial Due to Lapse

When a life insurance policy lapses, beneficiaries might face a claim denial when they try to access the death benefits. However, the denial of a claim doesn’t have to be the end of the story. There may be grounds to dispute the insurer’s decision, particularly if the insurer did not comply with legal requirements around notifying policyholders of impending lapses.

Insurance Companies Acting In Bad Faith

Some insurance companies may act in bad faith, seeking reasons to deny claims or not conducting a thorough investigation before denying a claim. They might also fail to provide timely and proper notification of a missed premium payment and an impending policy lapse.

If you suspect your insurance company acted in bad faith in denying a claim due to a policy lapse, it may be time to seek legal help.

An Insurance Lawyer Can Help With Lapsed-Policy Claims

Insurance laws can be complex, and dealing with insurance companies can be daunting, especially when grieving a loved one’s loss. An experienced life insurance attorney can help you navigate these challenges and advocate for your rights.

Know Your Rights

It’s important to understand your rights as a life insurance beneficiary. An attorney can help you understand these rights, ensuring you’re not being unjustly deprived of a death benefit due to policy lapse.

Review Your Policy

Legal professionals can thoroughly review your lapsed policy to ensure the insurance company is acting within the terms of the agreement and the law. They can help identify any failures on the part of the insurer that could potentially reverse a policy lapse or claim denial.

Properly Write Your Claim

Writing a life insurance claim requires a clear presentation of facts and adherence to certain formalities. A lawyer can help prepare a strong claim that clearly outlines your case and meets all the insurer’s requirements.

File An Appeal

If your life insurance claim is denied due to a policy lapse, it’s possible to appeal the decision. An experienced attorney can guide you through the appeals process, presenting a strong case to help you secure the death benefits.

Contact Boonswang Law Firm For A Free Legal Consultation

Life insurance disputes can be emotionally and legally complex.

At Boonswang Law Firm, our experienced attorneys are ready to assist. We offer a free legal consultation to review your situation, explain your rights, and discuss potential legal strategies.

Don’t navigate this challenging situation alone — contact us today to find out how we can help.

Written By: Chad Boonswang
Chad G. Boonswang, Esquire is a litigation lawyer based in Philadelphia, PA. Selected as an ASLA 2014, 2015, 2016, 2017 and 2018 Top 100 Litigation Lawyer, Mr. Boonswang plays to win. As a lawyer, athlete, and scholar, he has always put in the energy, time, and commitment to be the best. After working for several prominent law firms in Philadelphia, including Montgomery McCracken Walker & Rhoads LLP, he founded his own practice in 2002.  Since then Chad has recovered tens of millions of dollars on behalf of his clients from life insurance claims and catastrophic injury cases.  Year after year, he has earned a 10.00 Superb rating on Avvo.

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