Insurance is designed to provide peace of mind with financial protection for unexpected events. Preventing a lapse in coverage, or periods when your insurance is not in effect, can help you keep that sense of security.
Let’s look at how insurance coverage can lapse, the consequences you could face, and how to prevent or resolve a lapse.
- An insurance lapse can be risky if you face unexpected events when your coverage is not in effect.
- Many insurance companies offer grace periods to help you avoid an insurance lapse due to missed payment.
- After an insurance lapse, you may have to pay higher rates to get new coverage.
What Is an Insurance Lapse?
An insurance lapse is the period where you didn’t have insurance because your policy ended and you didn’t have new coverage to replace it. This can happen for reasons including:
- You miss a premium payment.
- The premium payment wasn’t received by the due date.
- You don’t renew the policy.
- Your insurer cancels your policy for reasons such as too many claims filed.
- You don’t properly time the start and end of new and old policies.
When Does Coverage Lapse?
Insurance lapses can happen at different times, depending on the type of insurance. For example, with car insurance, your policy may lapse soon after you miss your payment. The same can happen with many kinds of insurance policies, unless your policy has a cash value such as with some whole life insurance policies. In that case, your policy may lapses after its cash value is exhausted.
Insurance policies often provide grace periods after missed payments so that the policy doesn’t immediately terminate. During the grace period, you retain the coverage provided by the policy, or at least limited benefits, if you can make the payment and reinstate it before the insurance company officially cancels it.
Grace periods can vary by company and state laws. With car insurance, for example, state laws usually give between a 10- and 20-day grace period before your insurer can cancel your coverage.
Consequences of Different Types of Lapsed Insurance
Below are some of the possible consequences associated with different types of insurances when a policy lapses.
Most states have minimum car insurance liability limits. If you drive without insurance, you could face hefty fines, license suspensions, jail time, and more. You could also have your car impounded and be required to carry an SR-22 for a number of years.
If you lease or finance a car, your lender may require you to have certain coverages at all times, usually more than the state minimum. If there’s an insurance lapse, they could either purchase a policy and charge it to you (often at a higher rate) or repossess your car. Your loan terms would have more information on this.
Driving without insurance is also a serious risk. If you can’t get your policy reinstated, you could be held liable for accident-related expenses, including damage costs to the vehicles and hospital bills for the other party and yourself. If you can’t afford those costs upfront, you could have your wages garnished.
Moreover, insurance gaps due to cancellation can make insurers see you as a high-risk driver, and charge accordingly if your state allows it. Some insurers may only offer you a policy after you’ve had continuous insurance for a length of time.
Getting a new policy may be more expensive than maintaining continuous insurance because some companies offer discounts for holding continuous insurance.
Even if you don’t need car insurance because you won’t be driving your car for a while, like when traveling abroad, you should keep your policy active. Otherwise, you may face a higher rate for a new policy when you start driving again.
State laws don’t mandate you have home insurance, but your mortgage lender can require this under your loan terms. If they do and there’s a coverage lapse, they could purchase a policy for you (again, often at a much higher rate) and make you pay the premiums.
Coverage lapses could also cause your insurer to see you as a higher insurance risk. They could refuse to reinstate your coverage, leaving you uninsured if something happens to your home or if guests are hurt on your property. In that instance, finding new coverage could prove challenging or expensive.
Your home is a valuable asset. Even if you’ve paid off your home, keeping it insured protects your investment from costs connected to unexpected events.
You could lose the protection and security from your life insurance policy if it lapses. You cannot count on death benefit payouts for the insured person’s beneficiaries during a lapse.
If you have had a gap in life insurance coverage, you may have to make up missed premiums with interest or reapply for a policy with new underwriting. This means the insurance company will reconsider the cost of insuring you based on your age and health changes, potentially increasing your premiums.
If you have a whole life insurance policy and have accrued cash value, your insurance company may deduct from the cash value to pay for missed payments. This way, the company keeps your policy intact and helps you avoid a coverage lapse.
How To Restore Coverage
Reinstating a lapsed policy typically allows you to maintain continuous coverage so you are still covered.
Because reinstatement procedures can vary, you’ll want to call your insurance company directly to determine what you need to do to reinstate your policy. This could mean paying a past-due balance or renewing your policy. If you can’t reinstate your policy, you’ll likely have to get a new one with the same or different provider.
How To Prevent a Lapse
Coverage lapses can be risky, so try to avoid a lapse altogether. The simplest way to prevent a lapse is by paying your insurance premium by its due date. Setting up auto-pay for your account can help add a layer of certainty with making your payments “set it and forget it.”
Other ways you can prevent a coverage lapse include:
- Shop for the most affordable policy for the coverages you want.
- Talk to your insurer if you’re having difficulty meeting your payments.
- Know when it’s time to renew, or set up automatic renewals.
- Make sure there’s no gap between the start and end dates of policies when you switch insurances.
While insurance lapses may have consequences, there’s plenty you can do to ensure it doesn’t happen to you.