Don’t Let That Life Insurance Policy Lapse ― Here’s Why (MoneySmart 2020)

Don’t Let That Life Insurance Policy Lapse ― Here’s Why (MoneySmart 2020)

As a policyholder, your main responsibility is to pay off your insurance premiums on time. But there are certain events in life that you can’t control, like this pandemic, or getting laid off. As a result, you are unable to pay your premium until your insurance policy lapses.

In this Moneysmart article, find out what you can do to keep your insurance in force and what options you have in case it does lapse.

What does it mean when a life insurance policy has lapsed?

A life insurance policy is considered lapsed when it’s no longer an active contract. When this happens, your life insurance coverage stops. Should something happen to you that can lead to your disability or death, you or your beneficiaries will no longer receive a payout from your insurance company.

How does grace period work?

A life insurance policy will only lapse when you still have not settled your insurance premiums after the grace period.

Insurance companies give a 30-day grace period for a missed payment, and it starts after the day that the payment is due.

You are still fully covered during the grace period. But if you want to continue your insurance coverage, you need to settle your missed premium payment before the end of the grace period.

Grace period during the COVID-19 pandemic

This pandemic has certainly put a toll on everyone. For most Filipinos, it’s been a struggle to make ends meet, let alone pay insurance premiums on time.

But a bit of good news. Policyholders can enjoy a one-time 60-day grace period on premium due dates falling between the date Republic Act (RA) No. 11494 took effect, which was on September 11, 2020, until December 31, 2020.

This extended grace period can be very helpful if you’re going through unemployment or financial hardships. It will give you more time to regain control of your finances without losing your insurance coverage.

What causes a life insurance policy to lapse?

Life can get so busy and frantic that sometimes you forget to pay your insurance on time. Other times, you fail to check your email notifications, or you misplace the bills, causing you not to make a payment.

But the most common reason for a policy lapsing is budget. Your budget no longer can pay for your insurance premiums.

Can you reinstate your life insurance policy when it lapses?

The answer is yes. You just need to contact your insurance company to begin the reinstatement process.

Typically, insurance companies can allow you to reinstate your insurance coverage within 3 years from your last due date.

You need to settle all past unpaid premiums and pay for other fees and penalties as well (e.g. overdue interest).

There’s also a health declaration form that you need to sign stating that your health has not changed since the policy lapse.

In other cases, you may need to prove your evidence of insurability or go through a new contestability period (first 2 years of your policy where insurance companies can review, reduce, or deny claims because of intentional errors).

Insurance companies have different reinstatement policies and guidelines. It’s best to speak with your financial advisor or your insurance company for your next steps. Once you do all the steps or complete all requirements, your life insurance policy will be in force again.

Should you reinstate your old life insurance policy or just get a new one?

The answer will depend on your current situation. Paying off past unpaid premiums will cost a lot because it’s usually a one-off payment.

But a new policy also means higher premiums because of your age and any new medical condition you may have.

Check your finances and your health situation to see which one will be more cost effective and provide you with the coverage ASAP.

What can you do to avoid a life insurance policy lapse?

If you’re having a hard time paying your insurance premiums, there are a few simple steps that you can take to help you avoid missed payments.

Enroll in auto debit arrangement

Most life insurance companies offer automatic debit arrangements for insurance premium payments. You can authorize credit card payments or enroll in bills payments so you don’t need to do it yourself or remember due dates.

If you can afford to pay semi-annually or annually, this can also reduce your responsibility of paying your premiums every month. You can save money on annual premiums compared to monthly ones.

But at the end of the day, choose a payment plan that will help you pay on time and is best for your budget.

Reduce riders on your policy

Riders are good, but you may be paying so much for riders that you don’t need. No one knows what the future holds, so a critical illness or accident and dismemberment rider is good to have. Just prioritize which rider to keep to make your insurance premiums more affordable.

Talk to your beneficiaries

If your beneficiaries are in a position to help you with paying a premium or two, do so rather than risk your insurance policy to lapse.

Most of the time, your beneficiaries are family members or spouses, so your close relationship will make it easier for you to ask them for help when you can’t make the payment this month.

Pay with dividends or cash value

If you have enough cash value or dividends to pay for your premiums, you can use that to pay for your premiums until your financial status improves.

Reduce your insurance benefit

You can also opt to reduce your insurance benefit to get more affordable insurance premiums. Most insurance companies in the Philippines will allow you to decrease the sum assured after the first policy year.

Final Thoughts

Don’t let your insurance policy lapse. Not only will you lose your coverage and benefits. You will not be refunded for all the money that you paid in premiums, too.

You will get several notices from your insurance company when your policy is about to lapse or has already lapsed. Don’t hesitate to speak with your financial advisor if you’re having problems paying your premiums. There are many options you can explore so that you won’t lose your insurance coverage.