Shuman Roy is an entrepreneur, business owner, and musician. He started RoysNoys, LLC in 2013 as a music production and education service company. He also offers small business consulting and advisory services to help businesses get from start-up mode to turn-key operations. Shuman earned his M.B.A from the Stern School of Business in 2001 and has an undergraduate degree from Manhattan College in ...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Joel...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Sep 28, 2021

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Spoiler alert! Yes, it is generally bad news to allow any sort of insurance lapses to occur, no matter what insurance company you’re working with or what sort of coverage you’re paying for. There are penalties involved that could end up causing you a massive amount of stress. And if you think grace periods are going to offer you any  sort of financial protection, keep in mind there may still be late fees if you don’t pay on your due date.

Insurers don’t like lapsed coverage for a few different reasons, most of which can all be traced to expenses, and in most cases, you can expect to shell out more of your hard-earned dollars with these penalties if you let your coverage expire.

Why do insurers hate lapsed coverage?

With regards to an insurance company as a business, there are many promises to keep. And paperwork…lots and lots of paperwork. Any time a driver allows for policy lapses – which means that your coverage stops because you stop making payments on time or let a policy expire without another policy lined up – the insurance company has more work to do.

It begins with the agent or customer service representative who has to take you phone call in order to set up a new policy or reinstate the policy that lapsed.

Once the phone call is handled, the paperwork begins. You may have to sign a ‘statement of no loss’ if you are reinstating an existing policy (which proves you didn’t have a claim while the coverage lapsed) or completely re-write your insurance policy, which means starting at the beginning again.

Big deal, right? It’s just some paperwork. Why are insurance companies complaining about paperwork? Well, there are also financial costs involved with getting you back on track.

Not to mention the profit the insurer expects to make is calculated assuming your policy only has to be ‘touched’ once per term, assuming there is no insurance claim activity. When you have a gap in coverage, it means that they have to poke and prod at your policy, which isn’t going to help anyone involved.

(How do insurance companies make money?)

Additionally, the insurer may have to re-run your insurance score, MVR and C.L.U.E reports, which all cost money.

Each time the policy is ‘touched’ the overall profit margin shrinks. Again, who cares, right? Insurers make a lot of money and this is the nature of the business. Except if they’re losing money, they have to somehow make up for that lost profit, which is where your risky behavior is going to cause you and your wallet some money troubles.

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What is going to be your cost for a lapse in coverage? 

There are a number of ways you can be ‘dinged’ for allowing your coverage to lapse. First, the obvious ‘reinstatement fee’. Remember the reports and paperwork from earlier? Well, don’t think the insurers are just going to eat that cost. It’s not just paperwork anymore. That lapse in coverage will now cost you money, because it’s costing them money.

You may be able to get away with one short-term lapse on a policy by getting the fee waived, but let it happen twice or more and you can expect to start paying the fee regularly. If you are having trouble making your monthly payments as they already are, you’ll certainly struggle if your insurer tacks on a $25 fee each time you’re late.

This fee can be the least of your problems if you are a habitual offender. A repeated lapse of coverage or one that lasts for a long period of time, and the insurer may choose not to reinstate your current policy. And if you think the additional penalties for a lapse was bad, try driving with a lack of coverage. That’ll slap you with a major headache. Not to mention an honorable mention on your driving record, and with you getting labeled as a high-risk driver.

Hopefully within a decent time frame, you contact your provider about your lapse, and ask them to work with you on a new auto policy. Now you are in the re-write stage, where you can expect to re-pay the non-refundable policy fee…on top of making the last payment you missed to ‘catch up’. This is what we meant when we said a lapse in coverage can affect your wallet.

What if my insurer won’t reinstate my current policy?

So you’ve ended up with a gap in coverage one too many times or for an extended period of time…this may result in your insurer refusing to re-issue a new policy for you because your previous policy was inactive for too long a period of time.

Now you may have to obtain coverage from a different type of insurer, one who will certainly charge you more for you overall policy.

Why? Because the new insurer doesn’t use fees to get you in line…they simply make you pay more from the beginning, as the cost of doing business with people who allow their policy to lapse is “built in” to their pricing structure.

But wait…there’s more! You may lose out on discounts for previous, non-lapsed, coverage. The same policy may cost much more with a previous lapse in coverage than it would for someone with continuous coverage for a certain period of time.

Are there any special tips for home insurance? 

We’ve covered what your auto insurance carrier will put you through if you suffer a coverage gap with your vehicle, but what about your home? Can you suffer a lapse of insurance on your house as well? You absolutely can, even though you shouldn’t. Make it a habit to keep your home insurance paid up to date, especially if you have a mortgage. Your lender will be notified if your home coverage lapses.

If this occurs, you will enter the world of lender forced property coverage. It’s not a pretty place. Be prepared to fill out form after form after form. All that paperwork is no joke now, is it?

Not only does this coverage not protect your home’s contents or your liability (neither are of the slightest concern to your lender), but it can cost as much as three times what coverage would cost from an actual insurer.

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So what are the worst case scenarios by insurance type? 

This depends on the type of policy we’re discussing. None are good (that’s why they’re the worst cases), but let’s take a look at some possible outcomes of a lapse in coverage with different policies:

Car Insurance: You cause an accident that “totals you car” and someone else’s. The other driver is taken to the hospital with a severe neck injury. The result? Pull out your check book and get a second and third job to pay for all of the damages out of your own pocket…as well as your bankruptcy lawyer’s fees.

Life Insurance: You miss a payment and the coverage lapses. You end up passing away, and your family is left with their grief, a mountain of bills, and none of your much needed income. Thanks Dad!

Home Insurance: You were dropped by one insurer and didn’t bother to pick up a new policy…during tornado season.

You see where we are going with these cases. Have fun repaying your mortgage for the next thirty years, on a house that was eaten by a tornado, while living in your parents’ basement.

In summary, make it a habit to ensure your insurance payments are up-to-date, don’t rely on grace periods, and never allow a lapse to occur. It’ll lead you into a world of financial hardship that may be incredibly difficult to come out of.

No matter what’s standing in the way of making the payment on time, try to imagine how busy or difficult your life would be if any of the above examples happened to you.

Read more: Is insurance paid monthly or yearly?