Definition
Policy Lapse
A policy lapses when the holder fails to pay a due premium within the grace period before the policy has acquired any surrender value, terminating the cover.
Lapse typically affects policies in their early years, before the minimum premiums for acquiring value have been paid. Once lapsed, the life cover ceases and no benefit is payable; in many traditional plans, premiums paid in the early lapse period are forfeited.
Lapse is one of the biggest sources of value destruction in Indian life insurance, driven by mis-selling and affordability issues. Lapsed policies can usually be revived within a fixed period by paying arrears with interest and meeting health requirements, which is generally cheaper than buying a fresh policy at an older age.
Related terms
- Paid-Up ValuePaid-up value is the reduced sum assured a policy retains if the holder stops paying premiums after acquiring surrender value, instead of surrendering it.
- Grace PeriodThe grace period is the extra time after a premium due date during which the policyholder can pay without the policy lapsing and while cover continues.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.