Life Insurance Policy Lapse

What it means, why it happens, and how to avoid it

What is a policy lapse?

A life insurance policy lapses when it terminates because premiums were not paid within the grace period. Once a policy lapses, coverage ends — meaning the insurer is no longer obligated to pay a death benefit if the insured person passes away.

Lapse is one of the most consequential things that can happen to a life insurance policy, and it often occurs during a period of financial stress — exactly when coverage may matter most.

The grace period

Canadian insurance law requires insurers to provide a grace period — typically 30 days — after a missed premium. During the grace period, the policy remains in force and coverage continues. If you pay the overdue premium within the grace period, the policy does not lapse.

If the insured person dies during the grace period before the premium is paid, most policies will still pay the death benefit, minus the outstanding premium amount. Check your specific policy for the exact terms.

Why do policies lapse?

• Missed automatic payment due to a changed bank account or expired credit card
• Financial hardship making premiums unaffordable
• Not realizing the payment was due (especially with annual billing)
• For permanent policies: insufficient cash value to cover the cost of insurance
• For universal life policies: investment returns lower than assumed, depleting the policy fund

What happens after a lapse?

After a lapse, you typically lose all coverage immediately. For term life insurance, the policy simply ends. For permanent policies, any remaining cash value may be used to extend coverage temporarily (depending on the non-forfeiture options in the policy), but once that's exhausted, coverage ends.

Reinstating a lapsed policy may be possible — see below — but is not guaranteed.

Reinstating a lapsed policy

Many insurers allow you to reinstate a lapsed policy within a certain window (often 2–3 years from lapse, though this varies). Reinstatement typically requires:

• Paying all overdue premiums, often with interest
• Demonstrating evidence of continued insurability (medical questions or a new exam)
• Meeting the insurer's reinstatement requirements

Reinstatement restores the original policy terms, which is particularly valuable if your health has changed since you first applied — you would not be able to get the same terms with a new policy.

Preventing a lapse

• Use pre-authorized debit or automatic payment where possible
• Keep your payment information current with your insurer
• Set a calendar reminder if you pay annually
• Review your universal life or whole life policy illustrations periodically to ensure the fund is performing as projected
• Contact your insurer immediately if you're facing financial difficulty — some have hardship provisions or premium deferral options