Lapse (Insurance)
The termination of an insurance policy due to non-payment of premiums or failure to meet other policy requirements. When a policy lapses, coverage ends and the policyholder loses protection until the policy is reinstated or replaced.
Example
“Sarah's car insurance lapsed after she forgot to pay her premium for 30 days, leaving her without coverage until she could reinstate the policy.”
Memory Tip
Lapse = 'Let it slip' - when you let premium payments slip, your coverage lapses.
Why It Matters
A lapsed policy leaves individuals completely unprotected against financial losses, and gaps in coverage can make it difficult or expensive to obtain new insurance. Some coverage types, like life insurance, may lose accumulated value when they lapse.
Common Misconception
Many people think they have a long grace period or automatic reinstatement rights, but most policies lapse within 10-31 days of missed payments. Some assume lapsed policies automatically restart when payments resume, but reinstatement often requires reapplication and proof of continued insurability.
In Practice
A driver's auto insurance lapses after missing a $150 monthly payment. Three days later, they cause an accident resulting in $25,000 in damages and $15,000 in medical bills. Without active coverage, they must pay the entire $40,000 personally and may face license suspension. Additionally, the coverage gap means their new policy will cost $300 more annually due to the lapse in coverage history.
Etymology
From Latin 'lapsus,' meaning 'to slip or fall.' In insurance context, it refers to coverage 'slipping away' due to non-compliance with policy terms, primarily premium payments.
Common Misspellings
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Related Terms
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See Also
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