What Does It Mean When an Insurance Policy Lapses?

The insurance is designed to provide peace of mind with financial protection in the event of unexpected events. Avoiding coverage gaps or periods when insurance is out of force can help you maintain that sense of security.

Let's look at how insurance coverage can expire, the consequences you could face, and how to prevent or resolve a lapse.

What is the expiration of an insurance?

An insurance lapse is the period when you were uninsured because your policy terminated and you did not have new coverage to replace it. This can happen for reasons that include:

A prize payment is lost.
Premium payment was not received by the due date.
You do not renew the policy.
Your insurer cancels your policy for reasons such as too many claims filed.
You have not correctly scheduled the start and end of the new and old policies.
When does the coverage expire?
Insurance expiration can occur at different times, depending on the type of insurance. For example, with auto insurance, your policy can expire immediately after you miss a payment. The same can happen with many types of insurance policies, unless your policy has a cash value, like some life insurance policies. In that case, your policy may expire after its cash value is depleted.

Insurance policies often provide grace periods after late payments so that the policy is not immediately canceled. During the waiting period, you keep the coverage provided by the policy, or at least the limited benefits, if you can make the payment and reinstate it before the insurer officially cancels it.

Grace periods may vary by company and state laws. With auto insurance, for example, state laws generally allow a grace period of 10-20 days before your insurer can cancel your coverage.

Consequences of different types of expired insurance

Below are some of the possible consequences associated with different types of insurance when a policy expires.

Car insurance

Most states have minimum limits on automobile insurance liability. If you drive without insurance, you could face hefty fines, license suspension, incarceration, and more. It is also possible to have your car impounded and forced to carry an SR-22 for several years.

If you rent or finance a car, the lender may require you to have certain coverages at all times, usually more than the state minimum. If the insurance expires, they can buy a policy and charge you (usually at a higher rate) or repossess your car. The terms of your loan would have more information on this.

Driving without insurance is also a serious risk. If you are unable to reinstate your policy, you may be liable for expenses related to the accident, including vehicle damage costs and hospital bills for the other party and for you. If you cannot pay these costs up front, you can garnish your wages.

Additionally, gaps in insurance due to cancellation can cause insurers to view you as a high-risk driver and cover you accordingly, if your state allows it. Some insurers may only offer a policy after you have continued the insurance for a period of time.

Obtaining a new policy can be more expensive than maintaining continuous insurance because some companies offer discounts for maintaining continuous insurance.

Even if you don't need car insurance because you won't be driving your car for a period, such as when traveling abroad, you must keep your policy active. Otherwise, you may face a higher rate for a new policy when you start driving again.

Home insurance

State law does not require you to have homeowners insurance, but your mortgage lender may require it according to the terms of your loan. If they do and there is a gap in coverage, they can buy you a policy (again, often at a much higher rate) and make you pay the premiums.

The coverage gap can also make your insurer see you as a higher insurance risk. They may refuse to reinstate your coverage, leaving you uninsured if something happens in your home or if guests are injured on your property. In that case, finding new coverage can be difficult or expensive.

Your home is a valuable asset. Even if you've already paid for your home, keeping it insured protects your investment from costs related to unexpected events.

Life insurance

You could lose the protection and security of your life insurance policy if it expires. You cannot rely on death benefit payments to the insured's beneficiaries during an expiration period.

If you had a shortfall in life insurance coverage, you may need to make up the lost premiums with interest or reapply for a new underwriting policy. This means that the insurer will reconsider the cost of insurance based on your age and changes in health, potentially increasing your premiums.

If you have a whole life insurance policy and have built up cash value, your insurer may deduct the cash value to pay for late payments. In this way, the company keeps your policy intact and helps prevent the expiration of coverage.

How to restore coverage

Reinstating an expired policy generally allows you to maintain continuous coverage so that you are still covered.

Because reinstatement procedures can vary, you may want to call your insurer directly to determine what to do to reinstate your policy. This could mean paying off a balance owed or renewing your policy. If you can't reinstate your policy, you will likely need to get a new one from the same provider or from a different provider.

How to prevent a lapse

Coverage gaps can be risky, so try to avoid them entirely. The easiest way to avoid a forfeiture is to pay your insurance premium on the due date. Setting up automatic payment for your account can help add a layer of certainty when making your "set it and forget it" payments.

Other ways to avoid a coverage gap include:

Buy the cheapest policy for the coverage you want.
Talk to your insurance company if you are having difficulty making your payments.
Know when it's time to renew or set up automatic renewals.
Make sure there are no gaps between the policy start and end dates when changing insurance.
While expiration of insurance can have consequences, there is a lot you can do to make sure this doesn't happen to you.

 

We hope you enjoy watching this video about What Does It Mean When an Insurance Policy Lapses?

Source: Hannigan Insurance Agency

 

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