Lapsed policy

What it means

A policy lapses when premiums stop and any grace period expires. A permanent policy may keep itself alive for a while by drawing on its own cash value, and then lapse when that is exhausted.

Most states require an insurer to notify the policyholder, and many allow a policyholder to name a third party to be notified as well.

A lapsed policy can often be reinstated within a limited period, usually with back premiums and evidence of health.

Why it matters

It is a common and avoidable loss, and it happens most to exactly the people it should not: an older person whose memory is failing, living alone, with the notices going to an address they have left.

Naming a third party to receive lapse notices costs nothing and is one of the most effective protections a family can put in place.

When you are likely to meet it

• When helping a parent review their insurance.
• When a claim is refused after a death.
• When premiums are being paid from an account nobody is watching.

How this varies by state

What notice an insurer must give before a policy lapses, and whether a third party may be named to receive it, are set by state law.

Related terms

• Accelerated death benefitA payment from a life insurance policy to the insured person while they are still alive, when they are terminally or chronically ill.
• Cash surrender valueWhat a permanent life insurance policy is worth if it is cashed in during the insured person's lifetime.
• Contestability periodThe window, usually two years, in which a life insurer may investigate and rescind a policy.
• Death Master FileA federal record of reported deaths, used by insurers and institutions to identify account holders who have died.
• Group life insuranceLife insurance provided through an employer, union or association rather than bought individually.
• Life policy locatorA free search service run by the insurance regulators, which asks participating insurers whether a person held a policy.
• Long-term care insuranceA policy that pays toward help with daily living — at home, in assisted living, or in a nursing facility — which health insurance and Medicare do not cover.
• Unclaimed propertyMoney and accounts a business has lost touch with the owner of, turned over to a state which then holds it indefinitely.

Sahvelo guidance that uses this

• Finding life insurance
• Life insurance