Lapse

Reviewed by Sweta | Updated on Sep 30, 2020

Introduction

Lapse refers to a stoppage/cessation that occurs due to inactivity or non-fulfilment of the terms of a contract. A benefit or a privilege will lapse when an individual fails to fulfil the terms and conditions or requirements as mentioned in a contract or agreement.

In the case of an insurance policy, the benefits of the policy may lapse due to non-payment of premiums. Similarly, any rights conferred under a contract also lapse upon the non-fulfilment of obligations under the contract.

Understanding Lapse

  1. Investors must be aware of their legal obligations under a contract.

  2. The impact of failure to meet the legal obligations could be a loss of benefits and lapse of the contract.

  3. In insurance contracts, a grace period is provided to renew the policy by paying the premium due under the contract. The policy does not lapse upon missing payment of a single premium. The insurance company is bound to give a grace period for payment of the premium.

  4. In the case of premium lapse of certain policies such as whole life, variable universal life, and universal life insurance policies, the policy's account may be used to pay the premium dues. If the policyholder's account value is insufficient to pay the premium, the policy may lapse. However, term insurance does not have this feature since it does not have a cash value.

  5. Most insurers allow reinstating a policy within the grace period. Some insurers are willing to reinstate a lapsed policy during the grace period, 30 days to six months from the premium due date, without any documentation on the health and finances of the insured.

  6. In the case of stock options, an option lapses upon expiry of the options contract when the option holder no longer has the right to buy or sell the underlying asset.

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