When a Life Insurance Claim Is Denied Due to Lapse

Reviewed by Chad G. Boonswang, Esq.

When an insurer denies a claim because the policy lapsed, many families assume there’s nothing they can do. That isn’t always true. Insurers have to follow specific rules before they can end a policy for nonpayment, including grace periods and written notices that most states require. When an insurer skips a step, the lapse may not be valid, and the beneficiary may still be entitled to the death benefit.

What Does It Mean When a Life Insurance Policy Lapses?

A policy lapses when a required premium isn’t paid and the coverage ends. Premiums may be due monthly, quarterly, twice a year or annually. A lapse is automatic: no one decides to cancel the policy, the coverage simply ends once the grace period runs out without payment.

A lapse is different from a surrender. A surrender happens when the policyholder chooses to end a policy early, usually in exchange for its cash value. A surrender can provide money right away, but it gives up the death benefit entirely and can have tax consequences.

The Grace Period

Life insurance policies include a grace period after a missed premium, usually 30 or 31 days. Coverage stays in force during the grace period. If the insured dies during the grace period, the insurer generally must pay the death benefit, though it may deduct the unpaid premium. Some states and some policies require longer grace periods. For more detail, see my post on the life insurance grace period.

Lapse Notices: Where Insurers Most Often Go Wrong

Most states require insurers to send written notice before a policy lapses, often to the policy owner and to any third person the owner designated to receive notices. The required timing and content of those notices vary by state, and the rules change. When an insurer doesn’t keep up, a policy can be cancelled even though the law requires the insurer to do more first.

Common insurer mistakes include:

• Sending a premium bill late, or outside the time frame the law allows
• Sending the bill or the lapse notice to the wrong address
• Using a grace period shorter than the one the law or the policy requires
• Never sending a lapse notice at all
• Not sending the annual notice that lets a policyholder name a third person to receive premium and lapse notices
• Giving no information, or incomplete information, about conversion or portability rights when the insured changed jobs or retired

If you’re the beneficiary, ask the insurer for copies of every notice they say they sent and proof of when and where it sent them. In one case, the insured fell into a coma and the family never received notice that premiums were past due, only a notice that the policy had already terminated. The beneficiary was paid. Past results don’t guarantee a similar outcome in any other case.

Other Situations Where a Beneficiary May Still Be Paid

The Premium Payment Was Lost or Delayed

If a payment was lost or delayed through no fault of the insured, the beneficiary may still be paid. This often comes up when the insured was in the hospital or assisted living and no longer handling their own finances. The question is whether the insured, or the insured’s power of attorney, received the notices the law requires.

The Insurer Miscalculated Flexible or Vanishing Premiums

Some policies let the insured vary their premium payments. That flexibility leaves room for administrative errors by the insurance company, and a policy that lapses because of the insurer’s own error can still pay out.

The Employer Mismanaged the Group Plan

With employer-provided group life insurance, the employer may have failed to provide a conversion application, failed to provide a disability premium waiver application, failed to send required notices, or stopped paying premiums when it shouldn’t have. If the lapse traces back to the employer, the policy may still pay. Most of these plans are governed by ERISA, which has its own appeal rules.

The Insured Was Seriously Ill or Disabled

A serious illness or a decline in mental health is a common reason premiums go unpaid. If the insured qualified for a waiver of premium because of a disability, premiums may not have been due at all. Courts and insurers may also take a good payment history before the illness into account.

Reinstating a Lapsed Policy

Most policies allow reinstatement within a set period after a lapse, often three to five years, if the policyholder applies, shows evidence of insurability (sometimes a new medical exam) and pays the missed premiums with interest. Reinstatement restarts the two-year contestability period, so a misstatement on the reinstatement application can be used to deny a later claim.

Reinstatement after the insured has died is a different question. It’s rare, but it can happen when the lapse itself wasn’t valid.

Want to know more about whether a lapsed policy can be reinstated after death? We explain more in our full blog.

Can You Get Money Back From a Lapsed Policy?

It depends on the type of policy. Term life insurance usually has no cash value, so there’s nothing to refund. Permanent policies such as whole life and universal life build cash value, and state nonforfeiture laws generally give the owner options when premiums stop.

We explain whether you can get money back from a lapsed life insurance policy in our full blog.

Lapse Denials on AARP Policies

Lapse denials come up often with direct-to-consumer policies sold through AARP and similar programs, where premiums are billed by mail or drafted automatically. If your claim involves one of these policies, read our full blog to find out what happens when an AARP life insurance claim is denied due to lapse.

How to Keep a Policy From Lapsing

• Set up automatic premium payments from a bank account so a due date isn’t missed.
• Name a third person to receive lapse notices, especially for an older policyholder.
• If premiums have become hard to afford, ask about lowering the death benefit, which lowers the premium.
• Ask whether a “no lapse” guaranteed universal life policy is available, which stays in force as long as the specified premium is paid.

If Your Claim Was Denied Because of a Lapse

• Request the full policy, the premium payment history and copies of every bill and lapse notice the insurer says it sent.
• Check whether the insured was disabled, hospitalized or in assisted living when the premiums stopped.
• For employer coverage, ask the employer for any conversion or waiver paperwork it provided.
• Have the denial reviewed by an experienced life insurance dispute lawyer before you accept it.

Contact Boonswang Law for a free case review. We work on a contingency fee basis, so there’s no fee unless we recover benefits for you.