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What Happens if Your Life Insurance Policy Lapses?

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If your life insurance policy lapses due to non-payment, you are in danger of losing the protection you purchased. Typically, life insurance plan holders have a 31-day grace period to pay their premiums. For term life insurance plans, your life insurance policy will lapse if premiums remain to be unpaid after the grace period has elapsed. Cash value policies on the other hand also lapse if the cash value isn’t sufficient enough to cover the charges for the premium. Should any life insurance policy lapse, insurance companies usually provide a set period of extension wherein policy holders have the opportunity to reinstate their plans.

What Happens if Your Life Insurance Policy Lapses?

If you own a whole life insurance policy that has accrued cash value, your insurance company will drain the cash value to compensate for the premiums until it empties out. In the event that it does run out, your insurance policy will lapse. For term life insurance holders, your policy lapses when the grace period for late payment ends and your payment has not been received.

Once your policy lapses, your policy protection ends. This means your beneficiaries will not receive payment in the event of your death. Money you have paid in premiums is forfeited and your policy no longer has a cash value, if it was a cash value policy.

Getting Insurance Back After a Life Insurance Policy Lapse

Reinstating your lapsed insurance policy may cost you money above-and-beyond the missed premiums. According to some insurance companies, to reinstate your policy, you may be required to fully pay all overdue premiums including interest. If you have taken loans before the policy lapsed, they have to be repaid to enforce the policy again. There are insurance companies that will give its holders a 5-year grace period to reinstate their lapsed insurance policies, but others have a much shorter period and you will not be able to reinstate after a lapse. You may also be required to retake a medical exam and your life insurance rates may go up.

Allowing an insurance policy to lapse can also lead to future problems should you decide to shop for a new insurance plan. Generally, insurance companies may simply overlook a single insurance policy lapse, but multiple cases of it may lead to higher rates and premiums, and possibly even denial of your application. While there are insurance companies that won’t even inquire about your history of policy lapses when you file for an application, others will review your background and accommodate you on a case-to-case basis. However, expect most insurers to deny you if you have consistently failed to pay for insurance premiums in the past.

Multiple policy lapses costs insurers money since insurance agent commissions are paid based on a percentage of the 1st year's premium rate. To approve a new application for an insurance policy means having to pay another insurance agent with commission. Companies cannot afford such outflow of money if plan holders keep lapsing and buying policies consistently. Thus, allowing a policy to lapse gives you the reputation of being an undesirable client.

Buying Life Insurance Policies

Most insurance policy experts advise customers to purchase life insurance while still young because as people age, insurance becomes more expensive. To avoid the problems that a future policy lapse can cause, you should be sure to completely review your life insurance policy, coverage, lifestyle, and needs to avoid any complications. Remember, it is not just you who may suffer, but your beneficiaries as well of you allow your life insurance policy to lapse.

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