How lapses in life insurance policies hurt you

This article will ... Review the procedures surrounding life insurance policy lapses. Note that sometimes there are valid reasons for letting a policy lapse. Show the benefits of avoiding a lapse by sharing the tale of a WWII vet.

Want to give up the protection and security you gained when purchasing a life insurance policy? Let it lapse.

Simply put, a lapse occurs when premium payments on a life insurance policy are missed and, depending on the type of insurance, the cash value is exhausted. “Lapse” is shorthand for a “lapse in coverage,” which means the policy will no longer pay a death benefit for the insured person.

At the other end of the spectrum is a paid-up policy, where all the premium obligations have been met and the policy remains in force for the rest of the insured’s life. We have a 76-year-old example below.

Lapse procedures

A missed payment doesn’t necessarily mean immediate termination of a policy. Life insurance policies often have a grace period after a missed payment where the policy is still in force or at least offers some limited benefit.

For whole life insurance policies, missed premium payments are sometimes automatically covered by loans from the cash value to keep the policy in force. These are called automatic premium loans and typically have to be elected when the policy is purchased. Other types of insurance, like universal life, will also tap into any account value to keep the policy in effect. (Related: Understanding different types of permanent insurance)

But once grace periods have passed and possible cash value is used up, a lapsed policy will terminate and the life insurance benefits will be gone.

But sometimes, depending on the type of life insurance and its terms, there are opportunities to reinstate the policy.

At a minimum, missed premiums have to be made up with interest. Also, depending upon when the policy is reinstated, new underwriting may be required, meaning that the insurance company will reassess the cost of your insurability. Given age and possible health changes, this process will likely result in your premiums increasing from when you originally purchased the policy. In fact, the situation might amount to simply buying a new policy with a higher premium.

So, a lapse not only can result in a loss of protection, but it can also mean having to pay more to get that protection back.

Lapses by the numbers

Nevertheless, lapses do occur. By one estimate, lie insurance industry lapse rates for ordinary life insurance — which doesn’t include group, term, or business policies — was 5.2 percent by number of policies and 3.8 percent by amount of insurance in 2021.¹ The lower a lapse ratio, the better, since it indicates, in part, that fewer people may have been dissatisfied with their policy or the carrier’s service.

Of course, sometimes there are justifiable reasons for letting a policy lapse.

For instance, term policies, which offer coverage for a specific period of time, are sometimes used to protect against a specific risk, like a mortgage or business loan. Once that obligation is over — the mortgage paid off or the loan repaid — that insurance may no longer be necessary. (Related: 4 times when term insurance may be the answer)

That’s why certain types of insurance have different lapse rates.

Life insurance policy longevity

A study of 2009–2013 data by LIMRA, a life insurance industry group, and the Society of Actuaries found that the lapse rate of whole life insurance was about half that of term policies.²

“Whole life insurance is a powerful tool for so many reasons,” said J. Todd Gentry, a financial professional with Synergy Wealth Solutions in Chesterfield, Missouri. “It is a guaranteed contract, and as long as premium commitments are met, it will not lapse. Of course, this necessitates that wise decisions at purchase be made, like staying within your budget and building a plan that can grow with you.”

Indeed, as of 2023, more than 128,602 life insurance policies have been with MassMutual for 50 years or longer.

In fact, MassMutual as recently as 2021 paid a death claim on a policy written back in World War II. It was bought in 1943 by a mother for her 17-year-old son, who soon joined the U.S. Army’s 42^nd Infantry Division, commonly known as the “Rainbow Division.” That unit ended up being one of the primary units driving into Germany and Austria in 1944 and liberating the infamous Dachau concentration camp in April 1945.

“He was a 93-year-old guy and pretty cool,” said Brandon Jordan, a financial professional with the Arch Advisory Group in Atlanta, Georgia. “He was a veteran and served his country bravely, winning two Bronze Stars and a Purple Heart. And he was devoted to his family. He had over 70 years to surrender the policy and take cash, but he cared more about his family than doing so. And not too many insurance companies have policies that are more than 76 years old.”

The policy originally had a face value of $1,000. But, owing to dividends over time, ended up paying out about $15,000.

And all because the policy didn’t lapse.

Discover more from MassMutual …

Single? Reasons you might still need insurance

Understanding life insurance policy riders

Estate planning and keeping a farm in the family

This article was originally published in October 2021. It has been updated.

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