What Is a Lapse?
Let me explain what a lapse really means. It's essentially the removal or expiration of a privilege, right, or policy because of time passing or some kind of inaction on your part. If you're the one supposed to benefit from it, but you don't meet the conditions in the contract or agreement, that's when the lapse kicks in.
Take insurance policies, for instance—they lapse when someone fails to uphold their end of the deal, like not paying premiums, or if a term is breached. In derivatives trading, an options contract lapses at maturity, meaning you lose the right to buy or sell the underlying asset.
Understanding Lapses
When something lapses, the benefits and terms in that contract stop being active. You need to know this term is most common in insurance, where it means a lapse in coverage—no more benefits or protection for you.
But lapses happen elsewhere too. It's not just insurance; it can apply to other agreements where rights expire due to neglect or time.
Lapsed Insurance Policies
If you stop paying premiums and the policy's cash value is depleted, your insurance policy lapses. Don't worry, it doesn't happen instantly with every missed payment—insurers must give you a grace period, usually 30 days, to catch up.
For policies like whole life, variable universal life, or universal life, they dip into the cash value to cover missed payments during that grace period. If that's not enough, the policy lapses, and the insurer owes you nothing. Term life is different; it has no cash value, so it goes straight to grace period and then lapses if you don't pay.
Most insurers let you reinstate during or shortly after the grace period. If it's within 30 days of lapsing, you might not need extra proof. Between 30 days and six months, expect to provide health and financial docs. Longer than that, up to five years, depends on the company.
Consequences of Lapsed Car Insurance
Most states mandate auto insurance, so driving without it puts you at serious risk—even if you have money to cover damages, your assets like savings or property could be on the line.
Your auto policy might lapse from missed payments or too many violations. Insurers see you as higher risk then, especially if it lapsed due to accidents or bad driving, assuming the pattern continues. Missed premiums also hurt their ability to cover claims.
That means higher premiums for you if your coverage lapsed. Some might even be uninsurable except through high-risk providers. The longer the lapse, the steeper the rate hike. States add penalties too, like license suspension in Alabama with a $200 fee, or requiring an SR-22 filing, which jacks up your rates even more.
Lapses in Shares of Stocks
Companies sometimes grant stock shares or options to employees as incentives, but with restrictions on selling or trading for a set period, often tied to how long you've been there.
If you don't exercise the option in time, it lapses—you forfeit the shares, and they go back to the employer. For example, if you're granted options to buy 100 shares at $20 each within six months and you don't, that right expires.
Example of a Lapse
Consider Sam, who has a term life policy with a $1 million benefit, paying $100 monthly for 10 years. He pays fine for two years, then gets laid off and misses payments past the 30-day grace period—the policy lapses, leaving no coverage if he dies.
Later, Sam gets a new job and asks to reinstate; the insurer agrees, he resumes payments, and coverage is back.
Lapse FAQs
You might wonder about lapse rates—in 2018, individual life insurance policies lapsed at 4.7%, groups at 5%. For car insurance, a lapse means higher rates; up to 30 days might add 8%, over 30 days about 35%.
Does it hit your credit? Usually not, unless you owe money and it goes to collections, then yes, your score could drop.
The Bottom Line
Lapses often stem from missed premiums, increasing risks for insurers and rates for you. If you're at risk of lapsing, reach out to your insurer to explore options and avoid it.
Key Takeaways
- A lapse deactivates contract benefits due to unmet requirements.
- It can result from inaction, time, or non-payment.
- Stock options lapse if not exercised on time.
- Lapsed policies mean higher insurance rates.
- Reinstatement is possible within grace periods.
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