What Can Beneficiaries Do if the Life Insurance Policy Lapses?

So you’re the beneficiary on another person’s life insurance policy. That means when the insured person passes, you’ll receive a cash payment based on the amount of coverage they purchased, which might be $10,000 or $2,000,000 or more, or anywhere in between. Life insurance can be essential to helping a spouse pay off a mortgage or at least keep up with payments, or replace lost income after the death of a wage-earning spouse. It can also be critical to helping a child who was dependent on the deceased transition to becoming financially independent. Many life insurance policies list the spouse as the primary beneficiary and the child (or children) as a contingent beneficiary.

But life insurance policies are only valuable so long as the insured continues to keep up with premium payments, which might be set up to be paid monthly, semi-annually or annually. If those payments stop, the policy is said to lapse. Once the policy lapses, it is no longer in force, and no benefits will be paid when the (formerly) insured passes on. A lapsed whole-life policy might have built up some cash value and be worth something as part of the deceased’s estate, but a lapsed term life policy is not worth anything at all.

Beneficiaries who were counting on that life insurance can be devastated to learn that the policy has lapsed and no benefits are due. This happens more than you might think; as insured individuals get older, they are more likely to be living on a reduced income or encounter expensive medical problems that impact their income or savings and ability to keep up with payments, or they might experience cognitive decline like age-related memory loss that makes them more apt to miss a payment and unwittingly let an insurance policy lapse.

Here is how California deals with the problem of a potential lapsed life insurance policy and termination for nonpayment of premiums.

Policyholders Must Be Notified Before a Policy Lapses

All states require insurers to offer a grace period for a policyholder to make up any missed payment before the insurance company can allow the policy to lapse. Grace periods differ from state to state, but a 30-day grace period is the most common (see Life Insurance Policies: Grace Periods and Policy Lapses, posted December 9, 2021). California, however, requires a 60-day grace period to make up a missed payment (not to be outdone, New York’s mandated grace period is 61 days).

Insurance companies are required by law to notify the policyholder of a missed payment and their right to make up the payment within the grace period. In California, this notice must be sent within 30 days of the missed premium. Additionally, insurers must also send written notice to the policyholder at least 30 days before terminating a policy for nonpayment (lapse). Any termination made without complying with these notice procedures is ineffective. Beneficiaries can still receive benefits, despite a missing premium payment (although the insurer could deduct any unpaid premiums from the benefit amount).

Beneficiaries Can Get Lapse Notices as Well

California goes even further by giving policyholders the right to designate other individuals to also get the notice of missed payment. By law, insurance companies must inform policyholders of their ability to designate others to receive notice. Additionally, insurers must send out an annual reminder to the policyholder of their right to designate others to receive notice, including the ability to change designees or add new designees annually.

It’s a good idea to designate the beneficiaries of a life insurance policy to get notice of a missed premium payment and potential policy lapse. Beneficiaries are often close family members who might be on joint accounts with the policyholder or hold a power of attorney that enables them to pay the insured’s bills if the insured is incapacitated. Even if not, beneficiaries are interested parties who can bring the missed payment to the attention of the insured or another individual, provided they have been designated to receive notice.

If the policy did lapse, most insurers allow policyholders to apply to reinstate their policy with the same coverage. The insured will have to complete a new application and medical questionnaire, and they might not get reinstated if their health has changed significantly. They will also be required to make up any missed premiums, plus interest, and they’ll be subject to a new contestability period. Most policies provide a reinstatement period of anywhere from two to five years.