What does ‘lapse’ mean in insurance? In the context of insurance, when we refer to a ‘lapse’, it means that the policyholder has stopped paying the premium and thus, the grace period as given in the contract has expired. Remember, when you take out an insurance policy, you enter into a contract with your insurer. You pay them a premium in exchange for which they offer you coverage and when a lapse occurs, then it means you will not be able to make a claim.
What Happens If Insurance Policy Lapses?
As most policyholders would want to keep the policy active, insurers tend to provide a second chance. This is to enable policyholders to continue with their policy. The premium can be paid monthly, quarterly, half-yearly or annually. If a policyholder stops making these payments, the policy would end, or it will lapse. Simply put, you would lose the coverage and won’t be able to reap any benefits; most importantly, you lose your right to make a claim.
Does Lapse mean Cancel?
‘Lapse’ does not mean ‘Cancel’. While missing a payment can lead to a policy lapse, most insurers allow some leverage. Once the premium date is missed, the policyholder is given a grace period during which the premium must be paid. Usually, insurers give up to 30 days for making the payment as part of a grace period.
Remember, a lapsed policy can be revived once you pay the past premiums and any additional charges that the insurer levies.
Concept of Lapse Across Different Insurance Policies
Let us see how the concept of lapse affects different types of policies.
In a car as well as health insurance, a policyholder’s coverage is typically valid for 1 year. However, you can renew it for a longer duration to avoid the chances of lapsation. But, in both these plans, the coverage is specified for a tenure, after which if not renewed on time, your policy would lapse, i.e. the cover would cease to exist.
However, most insurers provide a tenure of 15-30 days of grace during which they accept premiums with continuity benefits. It is important to double-check your policy document to verify the number of days that are indicated in it.
However, a notable point is that if there is a claim during the lapsed period, it would not be admitted.
Let’s understand this with an example.
If you have a health insurance plan from 1-Jan-20 to 31-Dec-20, and you pay your renewal premium on 5-Jan-21, you would still get continuity benefits without a break in your policy. However, if there is a claim between 1-Jan-21 to 4-Jan-21, the same would not be accepted.
Also, being caught without a valid insurance plan can cause a penalty and also legal action against you. Also, if policies are not renewed within 90 days of the expiry date, the acquired no-claim bonus is also lost.
Similarly, in a health plan, after the grace period, you may lose out on the continuity benefits such as a no-claim bonus, waiting period, etc. Also, you might have to undergo medical tests to restart your health plan.
How to avoid a lapse in coverage?
When it comes to life insurance, a policy lapse can have severe consequences, as you are risking the financial future of your family. In case something happens during this time, the nominee would be at a great loss. However, a silver lining is that most insurers come forward with special offers or schemes to help revive lapsed policies, whereby they may choose to waive additional charges or penalties.
So, remember, a delay in premium payment and a policy lapse could cost you much more than the premium outstanding and hence is not worth the risk. Instead, you could opt for standing instructions for your premium to be paid automatically every year/month from your credit or debit card. Prioritise this as a prudent decision to ensure financial security.
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Lastly, the best approach is to avoid risking any lapses in your insurance policy and make sure to keep track of your premiums every month.
