A “lapsed policy” refers to an insurance policy that has been terminated due to the policyholder’s failure to pay the required premiums within the specified grace period. Once a policy lapses, the insurance coverage is no longer in effect, and the insurer is released from any obligation to pay claims under that policy. This situation can occur in various types of insurance, including life insurance and health insurance. A policy lapses when a premium isn’t paid by the end of the grace period.
Characteristics and implications of a lapsed policy include:
Loss of coverage
The most immediate consequence of a policy lapse is the loss of insurance protection. For life insurance, this means that if the insured individual dies after the policy has lapsed, the beneficiaries will not receive the death benefit.
Grace period
Insurance policies typically offer a grace period after the premium due date, during which the policy remains active despite the non-payment of premiums. For life insurance, provincial law generally gives you a grace period of at least 30 days after a premium (other than the first) is due; Quebec’s Civil Code also allows 30 days. A lapse occurs if the premium is not paid by the end of this grace period.
Reinstatement options
For individual life insurance, provincial law generally requires the insurer to reinstate a lapsed policy if, within two years of the lapse, you apply, pay all past due premiums and any amounts owing on the policy with interest, and provide evidence of continued insurability, unless the cash value has been paid out or you chose paid-up or extended insurance; Quebec’s Civil Code has a similar rule. For other types of insurance, reinstatement depends on the policy.
Automatic premium loans
Some types of life insurance policies, particularly those with a cash value component, may have provisions to automatically use the policy’s cash value to cover unpaid premiums and prevent a lapse. This feature, however, will decrease the policy’s cash value.