What happens if a life insurance policy lapses due to nonpayment of premiums?

When you buy a life insurance policy, the insurance company’s obligation to pay out is contingent upon whether you have paid your premiums. In other words, if you do not pay the insurance company, they will not pay you.

How forgiving are insurance companies of nonpayment?

Insurance companies typically have a “grace period” for making late payments, usually around a month from the due date. If you fail to pay on time, you can make up your payment (and remain covered during this period). Be sure to check with your insurance provider so you know the length of your policy’s “grace period.”

What happens after the grace period?

 If you do not pay within the grace period of your life insurance policy, the policy will “lapse” (i.e. you won’t be covered.) Even if you have been making premium payments diligently for decades, if you miss one premium payment beyond the designated grace period, your policy is not in effect. If you die a day after your policy lapses, your beneficiary’s claim will be denied.

Nevertheless, there are several options available when your coverage lapses, depending on your form of coverage.

Term life insurance

If you have term life insurance, your options are limited. The policy will lapse, and future payments will not restart coverage. If you would like to “reinstate” your policy, you must contact your insurance provider. Generally, companies require you to fill out another application and let them know if your health has changed. Additionally, your insurance company may require a new medical exam before reinstating your policy, depending on how long it has been since the “grace period” ended.

Upon reinstating your policy, you will have to retroactively pay the premiums for the time your coverage was lapsed. This means that the longer you wait after your coverage lapses, the more premiums you will have to pay before you reinstate your previous policy.

Permanent life insurance

Permanent life insurance is more expensive than term life insurance, but it is also more forgiving of nonpayment. As with term life insurance, one option is to “reinstate” your previous policy by reapplying and retroactively paying the premiums you missed. If you cannot pay the required amount for reinstatement, however, there are other choices available.

Many permanent life insurance policies combine a “death benefit” (i.e. how much the beneficiary gets paid if/when the owner dies), as well as a “cash value.” This cash value functions as a savings investment separate from the death benefit. In this case, you may have the option to “cash out” your life insurance by withdrawing the policy’s cash value (i.e. its accumulated savings) when your death benefit coverage lapses.

Some insurance policies include a nonforfeiture clause, which means that if you stop paying premiums, you still receive some sort of benefit. If your coverage lapses, the insurance company will refund part of your premium payments and/or pay you the policy’s cash value. With some policies, your coverage will not lapse in case of nonpayment; instead, your policy will remain in place but with a reduced death benefit calculated as a percentage of your paid premiums.

If you are unsure of your options, the best thing to do is contact your insurance agent and ask for details regarding your policy’s grace period, reinstatement options, and nonforfeiture provisions. On the other hand, if you paid all your premiums yet your claim got denied, or if your insurance company failed to notify you that payment was due, it is best to get in contact with an experienced life insurance lawyer to evaluate possible alternatives.