Ping! The notice comes through, either in an email or in the mailbox, that you’ve had a life insurance policy lapse. Missed payments, often caused by suddenly unaffordable premiums, can create real challenges for older adults. With strategic action, you can take control of what happens next.
When you can no longer afford premiums and fail to pay, your insurer can notify you of a lapsed life insurance policy. Most companies will grant a short grace period. If you still cannot pay, your coverage ends, and you risk losing your investment in your financial future.
The faster you learn about your options, the better positioned you’ll be to make a smart decision for you and your family. In this practical guide, Life Settlement Advisors explains why lapses happen, the risks associated with them, and alternatives that help you recover the real market value of your policy.
What Does It Mean for a Life Insurance Policy to Lapse?
A life insurance lapse occurs when a policyholder stops paying their premiums and the grace period expires. When the grace period ends and no payments are recorded, the coverage officially ends. This means you will no longer be eligible for a death benefit. In most cases, you also won’t have access to the accumulated cash value of the policy. It’s the worst-case scenario for any policyholder because all the money you’ve paid in premiums will be lost.
Can a lapsed life insurance policy be reinstated? Unfortunately, most insurance companies won’t allow you to recover the policy. You’ll have to go through the lengthy policy reinstatement process, and the terms may be different.
Importantly, a life insurance lapse is different from surrendering your policy. Surrendering is a voluntary cancelation. You can also consider the life settlement alternative to lapse in order to receive a better financial result. Both surrendering and a life settlement must be initiated before the grace period ends.
The Grace Period: How Much Time Do You Have?
Many companies offer a 30- or 31-day grace period for a missed premium payment, but that’s not always the case. Look at the terms and conditions of your policy. Grace periods can also vary by policy type and even by state.
This is an important window when action can be taken to avoid losing the cash value of your policy. This is the time to contact a life settlement broker to learn more about your options.
The policy is still valid during the grace period even if you miss a payment. If the person who’s insured dies during this grace period, they will typically still receive their death benefit, minus any overdue premiums.
What Happens After a Policy Lapses
If you miss a payment and it’s beyond the grace period, contact your insurer right away. One of two scenarios can happen once your policy lapses:
Your insurer could agree to reinstate your policy:
- You’ll likely have to pay all back premium payments with interest immediately.
- You may require new underwriting, depending on how long the policy has lapsed.
Your insurer could deny your request to reinstate your policy:
- In this case, you won’t receive any money back.
- You won’t receive the death benefit.
Can a Lapsed Life Insurance Policy Be Reinstated?
Sometimes, yes, a life insurance lapse can be reinstated. However, nothing is guaranteed, and it gets harder the longer it’s been since the policy lapsed. Also, if the policyholder has had a significant change in health since the original policy was issued, reinstatement may be unavailable or may include new exclusions.
What to Do Before Your Policy Lapses
Of course, avoiding a life insurance lapse is the best position for any policyholder. Whenever possible, decide your strategy before the grace period ends. From most valuable to least, your options during this time include:
- Choosing a life insurance settlement to get a life settlement payout
- Surrendering your policy voluntarily for the cash surrender value, which does not allow for competitive payouts
- Using your policy’s cash value to cover your premiums, which depletes the policy’s cash value
- Taking a policy loan, which requires interest payments and repaying the balance
- Switching to reduced paid-up insurance, which will likely have smaller benefits
Request a Grace Period Extension or Payment Plan
If you missed a payment and are still within the grace period, don’t hesitate to call your insurance company.
Explain the situation and request a grace period extension or short-term deferral arrangements. They may be willing to set up a payment plan. While this won’t make premiums suddenly affordable, it will give you additional time to decide, “Should I lapse or sell my life insurance to recuperate as much cash value as possible?”
Use the Policy’s Non-Forfeiture Options
Your permanent policy may offer other non-forfeiture options. If the policy’s cash value is sufficient, you may be able to buy reduced paid-up insurance. This is a smaller, fully paid-up policy with no future payments.
Or, you may be able to purchase extended term coverage, which will offer the same death benefit as your original plan but for a shorter term. This coverage would also be fully paid with no future payments.
These options can preserve some value and eliminate your premiums, but it still may be better to surrender or sell your policy.
Surrender the Policy for Cash Value
When you voluntarily surrender your policy, you permanently cancel it. In exchange, you’ll receive the cash surrender value. This is a better option than a lapse, since you can recover some value. However, the insurer will determine this amount, and surrender charges may reduce the payout. Charges are often greater earlier in the policy.
Before surrendering, talk with a life settlement broker to compare the return on your investment.
Sell the Policy Through a Life Settlement
By far, the best strategy before a life insurance lapse is a life settlement on the secondary market. A qualifying permanent policy can be sold to a third-party buyer for a lump sum that typically exceeds the cash surrender value. Your premium payments will end at the point of sale, and you can use the money as you wish.
Life Settlement Advisors works exclusively for the seller, submitting the policy to multiple buyers to generate competitive offers. Connect with us to learn the eligibility requirements.
Don’t Let Your Policy Lapse Before Knowing What It’s Worth
If you can, take action to avoid a lapse and years of premium payments being lost. Life Settlement Advisors can help you find out if your policy qualifies for a life settlement. Submit your policy for a free review today.
