Is It Bad to Let Insurance Coverage Lapse?
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Spoiler alert! Yes, it is generally bad news to allow your insurance to lapse, no matter what type of insurance you’re talking about.
Insurers don’t like it for a few different reasons, and in most cases, you can expect to shell out more of your hard-earned dollars if you let your coverage expire.
Why Do Insurers Hate Lapsed Coverage?
Insurance is a business of promises…and paperwork…lots of paperwork. Any time a policy lapses, i.e. 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? 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.
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. Think again.
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.
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 the payment as is, 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. Lapse too many times or for too long of a period, and the insurer may choose not to reinstate your current 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.”
What If My Insurer Won’t Reinstate My Current Policy?
So you’ve lapsed 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 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.
Special Tip for Home Insurance
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.
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.
Worst Case Scenario?
This depends on the type of policy we’re discussing. None are good, 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 – 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 die and your family is left with 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 this. Have fun repaying the mortgage for the next 30 years, while living in your parents’ basement.
In summary, make it a habit to ensure your insurance payments are up-to-date and never lapse.
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?