In order for a life insurance claim to be paid, several requirements must be met: there must be valid coverage at the time of the insured’s death, the beneficiary must produce a certified copy of the death certificate and file a notice of claim, and the insurance company must make sure the claim is payable (e.g., policy exclusions do not apply).

The most important requirement of all, however, is the existence of valid coverage at the time of the insured’s death, because a claim can only be paid if the coverage was in effect. An active policy at the time of death means that the policyowner paid the policy premiums on time and did not allow the policy to lapse. If the policyowner missed premiums and the insured died before reinstating the policy, even if a claim is filed, the insurance company will likely use this as a reason to deny paying benefits. There are many factors that affect the validity of a policy lapse.

In this article, our life insurance attorneys will explain what a life insurance lapse is, what happens when the policyowner fails to pay life insurance premiums, and what you should do if you are the beneficiary of a lapsed policy.

When Does a Life Insurance Policy Lapse?

A life insurance policy lapses when a premium is not received on the due date, and the policy has no cash value to cover a missed premium. Insurance companies are legally required to provide a life insurance grace period, usually, 31 or 60 days (it varies in different states) which begins on the date a premium is due and is not paid. Once this grace period expires and premiums remain unpaid, the policy lapses, and the insurer is no longer legally obligated to pay the death benefit to the insured’s beneficiaries.

What Happens When Life Insurance Lapses?

The consequences of a lapsed policy vary depending on the type of policy:

Permanent life insurance lapse

This policy offers lifelong coverage and accumulates cash value over time. Missed premium payments are almost always automatically covered by loans from the cash value to keep the policy in force after the end of the grace period. These are called automatic premium loans and typically have to be elected when the policy is purchased. If there is not enough cash value in the policy to pay the premium, or once the cash value has been used up due to continued non-payment, the life insurance policy lapses.

Term life insurance lapse

Term life insurance policies offer affordable coverage for a set period and have no present cash value. Once you miss a payment, the policy immediately moves into a grace period. If payment is not received by the end of this period, the life insurance policy lapses.

What Happens if the Life Insurance Policy Is Not in Force at the Time of Death?

When a life insurance policy lapses, the policy is no longer active (not “in force”), and the insurer is no longer legally obligated to pay the death benefits to the insured’s beneficiaries. However, not all life insurance lapses are valid, and a life insurance claim denied because the policy had lapsed may still be recovered.

What Can Cause Wrongfully Denied Claims?

Laws in many states provide wide protections to beneficiaries and policyowners by restricting insurance companies regarding when a policy may lapse. Both life insurance companies and policyowners have certain responsibilities when it comes to keeping policies in effect.

A Policyowner’s Responsibilities

Policyowners are responsible for making sure their policy does not lapse by paying premiums on time. If premium payments are automatically drawn from a bank account, it is the policyowner’s responsibility to make sure the account always has sufficient funds to cover premiums. If a premium is not fixed and may increase, it is the responsibility of the policyowner to keep track of increased premiums payments to make sure a correct amount of premiums is submitted to the insurance company.

Finally, life insurance companies tend to communicate to policyowners via regular mail. Important policy documents such as premium-due notices, grace period letters, premium increase letters, and lapse notices usually arrive in the mail to the address last known to the insurance company. It is the policyowner’s duty to timely inform the insurer of an address change, bank account closure, etc. If the policyowner cannot receive mail, he/she must designate another person to receive and read important life insurance notices.

A Life Insurance Company’s Obligations

Just as policyowners have duties under life insurance policies and laws, insurance companies also have certain obligations. These obligations differ from state to state and may include the following:

• Send the policyowner a premium-due notice to the correct address: Keeping an updated record of the policyowner’s correct address may seem easy. Still, hundreds of life insurance claims are denied routinely because an insurance company sends a premium-due notice to an insured’s old address or the wrong address. 
• Send a premium-due notice to the policyowner within a certain period: If the policyowner does not receive a premium-due notice during that specific time frame, he/she may not even find out that a premium is due before the lapse. This is especially true when premiums are paid annually or when a premium is automatically withdrawn from the insured’s bank account.
• Provide the policyowner with a lapse notice that complies with state laws: These statutes vary from state to state, but they are all designed to protect policyholders and beneficiaries from wrongfully lapsed life insurance policies. They usually require an insurer to send specific, clear lapse notices that tell the policyowner exactly when the premium is due, when the grace period begins, and when the policy will lapse if a missed premium is unpaid.
• Send annual notices to policyowners informing them of their right to designate a third party to receive mail about due premiums: Several states have enacted protections to shield consumers from losing life insurance coverage because of a missed premium payment. These laws require that insurance companies annually send policy owners letters asking them to designate another person to receive their premium due notices, grace period, and pending policy termination mail in case of an illness or incapacity. These requirements protect policyowners — including the elderly, hospitalized, or incapacitated and those who may be particularly vulnerable to missing a premium payment — from losing coverage. California is one of the states that enacted such laws. Our lawyers explain more about this in our article on the California life insurance lapse law.

Failure to Convert or Port the Employer-Provided Life Insurance Policy

An employer-provided group life insurance policy may also lapse due to non-payment of premiums. This usually happens when an employee is terminated or retires. In group life insurance cases governed by ERISA, employers have a duty to timely provide correct information regarding life insurance benefit changes to their employees. If there is an option to convert or port group coverage, employers may have a duty to notify the employee that their policy may terminate and they need to port or convert the group policy to an individual policy. 

Unless the insured fills out a conversion/portability application and submits it to the insurance company within a designated time frame, the policy will lapse. If you or a loved one have issues with a denied ERISA claim, our lawyers can help. We have successfully handled many cases where life insurance companies denied coverage due to lapsed policies. Call us at (888) 510-2212 for a free case evaluation.

Can a Lapsed Life Insurance Policy Be Reinstated After Death?

Reinstatement is the process of making a life insurance policy active again after it has lapsed. Reinstatement is offered after the grace period has ended and the contract is no longer in force, leading to the termination of all the benefits and coverages provided for beneficiaries. A life insurance policy cannot be reinstated after the insured’s death.

What to Do if You Are the Beneficiary of a Lapsed Life Insurance Policy?

Life insurance claims denied due to lapse are very common, and insurance companies often use nonpayment of premiums as a reason to deny a life insurance claim even when it should be paid. As a beneficiary, you have the right to know whether the insurance company sent premium-due notices to the correct address,  whether the notice clearly warned the insured of the impending lapse and grace period, and whether it gave the policyowner the exact date of when the policy will lapse if a missed premium is unpaid.

If the insurer fails to meet any of these obligations, you may have a chance of recovering your life insurance death benefits. However, many policyowners and beneficiaries are not aware of these laws and may take the insurance company’s denial as the final verdict. When a life insurance claim is not paid because the insurance company claims the policy has lapsed, you need to speak to a life insurance lawyer to understand your rights as a beneficiary.

The insurer may have made a mistake in denying your claim, or there may be new life insurance laws that provide more protections to you as the beneficiary. If your life insurance claim has been denied, contact our life insurance lawyers now for a free consultation. Call us at (888) 510-2212.