Author
Bowtie Team
Updated on
2025-05-28
Disclaimer: This article is translated with the assistance of AI.
What Happens When Premiums Go Unpaid? Failing to handle your policy properly can lead to serious consequences, such as a lapse in coverage. This not only wastes the premiums you’ve already paid but also leaves you unprotected when you need it most.
What is a Grace Period?
Insurance policies generally include a grace period for premiums, typically one month or 31 days. During this grace period, even if premiums are unpaid, the policy remains in effect.
As long as the policyholder pays the premiums before the grace period ends, coverage will not be affected. Even if a claim is made during the grace period, the insurance company will process it according to policy terms, though they may deduct any unpaid premiums first.
What Happens If I Miss the Grace Period for Premiums?
Some insurance companies offer a premium savings account that holds prepaid or excess premiums from the policyholder. If this account has sufficient funds to cover the due premiums, the company will automatically deduct the amount. If there is no premium savings account or insufficient funds, it depends on whether the policy has cash value or accumulated dividends.
Case Study
John bought a critical illness insurance policy years ago and has been paying premiums via automatic bank transfer. Recently, he closed that bank account but forgot to notify the insurance company to update the payment account records, leading to untimely premium payments. John is worried this might cause his policy to lapse. Additionally, his health is not as good as before, and he’s concerned that purchasing a new policy may not offer comprehensive coverage.
In his case, he purchased a critical illness policy with cash value. According to the policy terms, if premiums are not paid after the grace period, the insurance company will automatically use a loan from the policy’s cash value or accumulated dividends to cover the premiums and charge loan interest.
If the cash value or dividends are sufficient to pay the overdue premiums and the policyholder still does not pay, the company will continue to use loans for subsequent premiums until the policyholder settles the outstanding premiums and accrued interest.
However, the insurance company may set a deadline, after which this option ends, and the policy will lapse.
How to Handle a Lapsed Insurance Policy?
If the policy lapses but the policyholder still wants coverage, they can apply for reinstatement within a specified timeframe (usually within one year) by submitting to the insurance company’s underwriting process, which includes health declarations.
In John’s situation, since the policy was bought years ago and his health has deteriorated, the company might add exclusions or even deny reinstatement. It could also be difficult to obtain another policy with comprehensive coverage. Fortunately, John managed to pay his premiums within the grace period and continues to enjoy full coverage.
On the other hand, since medical insurance typically has no cash value, paying premiums on time is especially important. Reinstatement after a lapse can be quite troublesome.
What Is The Best Approach?
The best approach is to use automatic bank transfers for premiums. Most insurance companies now send reminders via email or text before premiums are due. By logging into the company’s website or app, you can easily check your policy status, updates to coverage, or the latest offers, so it’s advisable to use these tools regularly.
Since different insurance companies have varying procedures, it’s recommended to thoroughly understand your policy details and consult a professional financial planner.
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