There’s only one way to avoid a lapsed insurance policy – pay – but the loss of coverage may not start right away
The meaning of a word may be open to interpretation during a conversation, but there’s no latitude when it comes to an agreement or contract. Letting something lapse means allowing it to become invalid because it wasn’t used, claimed, or renewed.
What does this mean when it comes to your insurance policy? It’s a legal definition and the terms are not open to interpretation. You must understand and agree with the definition of “lapse” to acquire the policy. Here’s what it means and how you can avoid it.
Life insurance policy lapse
Most insurance ceases coverage if premium payments are not received on time. The exception is life insurance. Unlike homeowners or vehicle insurance, a life insurance policy usually features a grace period – where the policy coverage is extended.
NerdWallet notes that this grace period varies by state, but it’s usually 30 to 31 days in length. During that time, your beneficiary will receive the insurance policy’s benefit if it’s required. The life insurance company will deduct the money you owed. So, in this case, your life insurance policy would not officially lapse until the grace period expires.
At this point, the lapsed policy means your coverage has ended. Depending on the policy, you may need to reapply for coverage – and this could mean a higher rate.
There may still be another option available to you if you don’t pay a premium by the end of your policy’s grace period – but this has to do with the type of life insurance you purchased. There are generally two types of life insurance:
- Term life insurance – a type of life insurance that has no cash value. In most cases, the coverage is terminated if you don’t pay the premium and the policy lapses after the grace period.
- Whole life insurance – a type of life insurance that generates a cash value component over time. Insurance companies refer to this as a policy’s cash surrender value, and the terms of your agreement may allow it to be used to cover the cost of missed premium payments.
If you are able to reinstate an insurance policy, it means that the coverage has again become active. Not paying a premium when its due and allowing the grace period to expire generally communicate that you aren’t able or don’t wish to continue with the agreement. Insurance companies are not legally obligated to reinstate a policy in such cases. It’s your responsibility to read and understand the terms of your agreement.
If you are still within your policy’s grace period, most life insurance companies will reinstate the policy. There are no additional underwriting questions, and the rate will not change. However, if you allow the policy to truly lapse – meaning that you don’t pay the premium prior to the completion of the grace period – your life insurance company may ask you to update health-related questions. And changes to your health could mean you’ll pay more to be covered.
Bottom line: Avoid missing a premium payment. A late payment on a life insurance policy isn’t necessarily a reason to panic – as long as you make it before the end of the grace period.
Vehicle insurance policy lapse
Unlike life insurance, coverage for your vehicle seldom has a grace period. Coverage ends when the premium is not paid by the due date. Also, unlike life insurance, there’s no guarantee you’ll be eligible for the same rate – even if you pay a premium after the due date.
DMV.org is a private organization that seeks to help people understand rules and regulations associated with the automotive and transportation industry. The organization advises that allowing your insurance coverage to lapse is a serious issue. A lapse in insurance coverage means you no longer have the required coverage set by each state. This exposes you to penalties and great financial risk.
The vehicle insurance industry commonly considers a lapse of coverage to be the day that you do not carry the minimum insurance necessary until:
- You purchase new vehicle insurance coverage
- You prove the vehicle no longer needs to be insured – usually because you no longer own it
Technology has made it a quick and automated process for insurance companies to inform your local department of motor vehicles (DMV) that they no longer cover your car because of a lapse. The DMV is often quick to penalize you with fines, or even by suspending your registration or license.
Driving without insurance is illegal in nearly every state. What are your options? Some states, such as Alabama and Arizona, allow you to deposit money into a fund used to cover damage caused by vehicle accidents. This can cost as much as $50,000. Regular vehicle insurance, in most cases, is far less expensive.
The most serious consequences occur if you have lapsed coverage and are involved in an accident. Even if the accident is not your fault, you may not be able to seek reimbursement for your vehicle’s damage or your own medical attention. Meanwhile, if the accident was your fault, you will be solely responsible for damages.
Bottom line: Avoid missing a premium payment. Regardless of the reason, a lapse in vehicle insurance coverage can mean that you will pay more to replace it – even if it’s a lapse of one day. You’ve made a clear communication that you don’t want to play by the rules. The increased rate will be reduced over time as you reestablish responsibility.
Homeowners insurance policy lapse
Protecting your home with insurance is much like protecting a vehicle. It’s important to know the details of your policy and understand the consequences of failing to pay a premium by its due date.
In most cases, there is no grace period. You’ll no longer be able to file a claim if your home or its contents are damaged. You also may be breaking the agreement you made with your mortgage lender.
Your homeowner’s insurance company may send a letter to the lien holder listed on the policy. The issuer of your mortgage has the right to purchase an insurance policy on your behalf and then pay for it with your escrow – or charge you for it if you don’t have an escrow account. It’s known as force-placed insurance, and this type of coverage is often more expensive than coverage you could find on your own.
Bottom line: Again, avoid missing a premium payment. Insurance companies can easily discover if there was a lapse in your previous policy. They’ll determine that you are a higher risk. Your replacement homeowners policy may cost you more.
Keep all of your insurance policies current and in good standing to guarantee your coverage continues – and stays at the same rate. Fortunately, companies provide auto-payment options that can prevent mistaken lapses in coverage, and they often provide discounts to customers who use them.
If you need help finding an appropriate policy that’s affordable and meets your needs, book a free one-hour personalized insurance review.