What Happens if Your Life Insurance Policy Lapses?
Life insurance is a contract that indemnifies your life against accidental or natural death. This is a binding contract between the insurance company and the insured person. With this contract, the company agrees to pay a predetermined sum of money to the beneficiaries specified in the contract. The aim of life insurance is to allow continuity of financial support that you would otherwise have provided to your family.
Concept of Premiums
Every life insurance policy can be purchased with a monthly or yearly payment to the insurance company. This contribution is called the premium. The premium is a relatively small amount towards the contingency. An insurance policy is considered lapsed if this premium is stopped due to any reason before the specified time. If a policy has lapsed, the obligation of the insurance company to provide monetary compensation ceases.
Why Does a Policy Lapse?
In the normal course, if you are paying your premiums regularly your policy will not lapse. However, in case you miss out on a few payments to the insurance company, the contract is breached. In such instances, typically, the insurance company will notify you of your outstanding amount and allow you a few more days to make the payments. After this grace period, if you still don’t make the payments, your policy is lapsed.
It should be noted that you can renew your policy even if it has lapsed. However, the period between lapse and renewal is uninsured. This means that if there is an incident of death during this time, your beneficiaries will not receive any assistance. Moreover, in case of a lapse, you may need to pay extra to renew your policy.
Effect of a Lapsed Policy
Many insurance companies also allow you to revive the policy once it has lapsed. However, there would be some conditions imposed on you depending on how long the policy has lapsed. This may be as simple as a payment on the premium that is outstanding to paying an interest and penalty fee.
Conversely, in some cases, the company may decline renewing the contract. This could be due to the loss of confidence of the company in the ability of the insured to pay subsequent premiums.
If your policy lapses it becomes invalid. The recompense to your beneficiaries is null and void and they do not get any money. The burden of any debts and the financial gap through the loss of your income in your household falls on the shoulder of your loved ones. In their time of sorrow, this adds to their pain.
In addition, if your policy has lapsed and you do not renew it, you also lose out on the money you have paid the company previously. Consequently, not only will your family not be compensated for in case of your death but you would lose your hard earned money while living too. Therefore, it is not desirable to allow this incident to occur in the first place.
In conclusion, by allowing your life insurance policy to lapse, you are putting the welfare of your family in jeopardy. For example, your dependent spouse might be left with little financial security after you pass away. Plus, if you want to then revive it at a later date, you might have to pay more than you would have paid for premiums.