You’ve paid your premiums for years. But now you find yourself in a position where you’re wondering whether a life insurance policy still makes sense for you. Perhaps your retirement plans have changed, or you’ve run into unforeseen expenses that require your immediate attention. So you miss your first payment. And maybe even your second. When your premiums go unpaid, your policy lapses — or becomes inactive — and any associated benefits are no longer valid.
The annual U.S. life insurance lapse rate is 4.5%. A 2013 study by the Insurance Studies Institute revealed that 55% of seniors lapse their policies, viewing them as a liability instead of an asset. According to the Life Insurance Settlement Association (LISA), Americans who are 65 or older forfeit almost $112 billion in benefits each year by lapsing or surrendering their life insurance policies.
Generally, premiums increase every year, growing more expensive as you get older. Most policyholders are not informed of next year’s premiums until it’s time to renew their policies; at that point, they’re more likely to lapse their policies, either because they are unable to accommodate a new price jump or because their financial goals have changed. Other reasons a lapse may occur include unexpected medical expenses from caring for a sick loved one, reduced funds from a sudden job loss, or even inadvertently forgetting a payment.
The grace period
If you have a permanent life insurance policy (such as whole life, universal life, and variable universal life), your insurance company will tap into your cash surrender value to cover the cost of your missed premiums. Your policy becomes lapsed once your cash surrender value has been exhausted.
All 50 U.S. states require a grace period before a policy lapse. Although grace periods vary between states and insurance companies, a standard grace period is typically 30 days.
How to avoid a policy lapse
While paying your monthly premiums on time is the best approach, below are additional tips to help you avoid a lapse:
- Actively reach out to your insurance agent or company to check for any changes to your annual premium and to determine whether it is still affordable for you.
- Sign up for automatic payments with your insurance company to avoid missed payments.
- If you move, immediately notify your insurer of your new address.
- Promptly open any correspondence from your insurer to ensure that you do not miss important notifications, like a time-critical grace period notice.
- Immediately reinstate your policy if it lapses. Reinstating early is less expensive and can help you avoid a new medical exam.
- If you are in a high-risk occupation, opt to add a waiver of premium rider (also known as a disability income rider), which waives premium payments in the event that you are critically injured.
- Consider cashing out your life insurance policy in a life settlement.
You can repair your policy if it lapses
If you choose to retain your life insurance policy, you can reinstate your policy within a certain lapse period. Insurers usually offer policyholders a three-to-five year lapse window. Make sure you review your policy to understand the requirements involved.
30 Days or Less:
In most cases, you can reinstate a recently lapsed policy without an underwriting process. Just call your insurer, submit a reinstatement application, and pay your premiums.
30 Days to Six Months:
Most insurers will require you to fill out a health questionnaire and disclose whether your health has changed since you obtained your policy. You may also be required to take a medical exam. Honesty is critical here. If you misrepresent your health in any way, your insurer can deny your claim, which could create serious repercussions for your beneficiaries. If your policy is reinstated, you will have to pay all of the premiums owed, plus any interest, fees, or penalties.
90 Days to Five Years:
Be sure to speak to your insurance company if your lapse period exceeds 90 days, as reinstatement options vary greatly between insurers within this time frame.
If you determine that selling your life insurance may be a better option for you, be sure to ask your insurance company for your policy’s cash surrender value, see if you qualify for a life settlement, and obtain a quote from a life settlement provider or broker before you settle on a final decision.
The bottom line
Reinstating your policy quickly is always beneficial, both to you and your beneficiaries. Even if your policy has lapsed for several years, reinstating it will always be less expensive than purchasing a new policy, simply because life insurance costs spike as you age — even if your health has not changed.
If your financial needs have changed or you find that you no longer need your life insurance policy, you always have the option to sell your life insurance in a life settlement. Life insurance settlements can be a valuable source of cash, and selling life insurance is a preferred alternative for anyone considering surrendering or lapsing their life insurance policy.