POLICY LAPSE MEANING IN INSURANCE

Overview

In today's uncertain world, it is impossible to predict when, where, and what kind of crisis will strike. Emergency never warns. At such times when something unexpected happens and the situation changes suddenly, health insurance is beneficial. It is the need of the hour to make financial provision for the future.

 

Life insurance is indispensable for future financial stability. So, today, we are discussing the details of insurance.

 

What does Insurance policy mean?

Insurance policy is a paper or we can say it a financial contract between an individual or organization and insurance providing company. Companies that provide promise individuals a financial protection for particular risks in exchange for a premium. 

It means if you want financial security for the future, then you need to find a trustworthy insurance giving company and pay them a premium, and they will hand out a wholesome amount in an unpleasant situation in future. 

What is important here is that you need to pay premiums monthly, yearly, or as per the plan suggested by the insurance company. But what if you forget to pay premium charges for insurance? Stay tuned to know this.

 

What is a Lapse Policy in Insurance?

A lapse policy in insurance refers to a policy that has become inactive due to non-payment of premiums. Policy also expires if an insurer fails to meet policy terms within the stipulated timeframe. In such a situation, an individual is no longer obligated to pay claims and provide advantages. 

In such a case, an individual may face a huge financial loss. During this time, if a policyholder passes away, he or she does not get any help from the company and all the premiums paid to the company, gets wasted.

 

Causes of Insurance Policy Lapse

Common causes for an insurance lapse includes, 

Missed Renewal Deadlines:  For renewable policies like term, motor, and health insurance, failure to renew the policy within the predetermined timeframe may result in policy lapse. 

Financial Difficulties: In a situation when a policyholder is facing financial struggle due to job loss, or any medical emergency, then policy premiums may interrupt. 

Lack of awareness: When policyholders unable to remember the due dates or being unaware of the Grace Period in Health Insurance may lead to lapse. 

Changing financial goals: Sometimes, policyholders change their financial plans and deprioritize the premium payments due to which policy lapse. 

Insufficient Balance in Bank account:  If a policyholder does not have enough money in the bank account, and the premium is set to auto-debit, then payments may fail and lead to policy lapse. 

Not updating Contact details: If a policyholder changed their contact number, email address, or physical address and is not informed to the company, they might fail to receive payment reminders or renewals.

 

Consequences of a Lapsed Policy

The consequences of a lapsed policy can vary depending on the type of insurance. General consequences for lapsed insurance policy includes,

Loss of Coverage: The major consequence is that the policyholder loses the benefits and protection offered by the insurance policy. It doesn’t deliver a death benefit and a health insurance policy for a longer time period, also it does not cover any medical expenses. 

Financial Risk: Policyholders without coverage become financially vulnerable to take risks or emergencies that the policy has made to cover.

Impact on No-claim bonus: In health or vehicle insurance, a lapsed policy might lead to the loss of accumulated no claim bonus , which can result in higher premiums in the future. 

Forfeiture of benefits: Certain benefits, such as bonus or accrued value, can be reduced or forfeited. 

Challenges in reinstatement: Reinstating the lapsed policy can require a policyholder to pay overdue premiums and penalties, undergo a fresh underwriting process, and probably face higher premiums.

 

How to Avoid Insurance Policy Lapse

To avoid lapses, policyholders are advised to pay premiums on time, set reminders, or make use of automatic payment options. Other than this, a policyholder can take a few steps to confirm their insurance policy does not end or lapse and remain active. Let’s understand some effective ways to prevent your policy from lapse.

●       Timely Premium Payments (Set reminders on mobile or mark on calendar)

●       Auto-debit Facility: Allow banks to deduct premiums automatically from your bank account.

●       Don’t miss the Grace period: Most of the insurance companies provide a grace period of 15 days after the premium due date. You can pay a premium within this time to avoid a lapse.

●       Select a convenient Premium Payment frequency as per your income cycle.

●       Review your Policy details: Be habitual to monitor policy documents to know about payment schedules and coverage terms.

●       Maintain an emergency fund to make certain that you can pay the premiums even in financially difficult times.

●       Reinstatement of Health Insurance if policy lapses : If a policy lapses, it can be reinstated immediately within a particular period (1 or 2 year) if a policyholder contacts the company person.

 

Can a lapsed policy be reinstated after a long period?

Yes, a lapsed insurance policy can be reinstated after a long time period. Usually, the companies allow policyholders to reinstate their lapsed policies between 2 to 5 years from the date of last unpaid premium. But it also depends on the type of policy and the insurance companies rules. A number of challenges are involved in reinstating the insurance policy. Sometimes, purchasing a new policy would be a great choice.

 

General Conditions for Reinstating a Lapsed Policy

Reinstating a lapsed policy required to fulfill specific conditions set by the insurer. Some common general conditions to reinstate a lapsed policy are

●       Connect to insurer: Contact your insurance company or agent first and discuss your lapse policy.  

●       Submit an application for reinstatement: Submit a formal request by filling a reinstatement application form to the insurance company.

●       Reinstatement timeframe: As we have mentioned that the insurer allows policyholders to reinstate their lapsed policies between 2 to 5 years in the above section, policies that lapsed beyond this time period, cannot be eligible for reinstatement.

●       Overdue Premium payment: A policyholder needs to pay all premiums during the lapse period that they missed.

●       Late Fees: A reinstatement fee or penalty can be charged to policyholders, which varies depending on the insurer and the duration of lapse.

●       Updated Documentation: Provide needed docs such as proof of identity and address, updated income or financial details if required.

 

Why is it important to reinstate a lapsed policy?

There are several reasons for this are

●       Delay in reinstating can result in accumulation of interest and fees and also increase premiums.

●       If your health gets worse during the lapse period, it might become difficult to reinstate the policy.

●       Reinstating a lapse policy soon requires lesser requirements. As, there is no need for fresh medical examinations or risk assessment in detail.

●       Quick reinstatement continued coverage and minimized financial risk to the policyholder and their families. 

 

FAQs 

Are there Additional Charges for Reinstating a Lapsed Policy?

Yes. Reinstating a lapsed insurance policy comes with the additional charges. The charges may vary by policy type, length of lapse and insurer. 

What Percentage of Life Insurance Policies Lapse?

In India, the percentage of policy lapse is low. As per the stats, each year, the percentage of life insurance policy lapse is 4.2%. The number may vary depending on the factors like type of policy, insurer, and policyholder’s financial situation. 

Does an Insurance Lapse Affect Your Credit Score?

No, insurance companies do not report to credit bureaus regarding the policy status so it does not affect your credit score directly.