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What if Death is the Cause of a Lapsed Life Insurance Policy?

By Compuquotes Team on March 26th, 2008

If a loved one has recently passed away, then you might be wondering about their life insurance policy to help cover the costs of the funeral and of moving on without him or her. In some cases, however, you only figure out who the insurance company was when they send you a notice stating that your payments are late and the policy has lapsed. Does this mean that your insurance benefits are gone?

The answer is: no. There is no statute of limitations for claiming life insurance benefits, and the payments should cease as soon as the insured passes away. In fact, if the death took place long enough in the past, you should receive insurance benefits plus interest. The life insurance company, however, does not always know that the deceased is no longer living, and will continue to bill the individual. This is not what is supposed to happen.

When the insured passes away, the policy becomes payable. Any automatic payments that the company may have withdrawn since the maturation of the policy should be refunded to the estate of the deceased, and the policy becomes payable immediately upon presentation of a certificate of death to prove the date of demise of your loved one.

What happens when the policy lapses?
In some cases, the lapse of a policy will not automatically cancel the policy. Notices are sent to try to collect payment, and a search is sometimes initiated to find the policy holder. If the person is not reported as dead, however, then the policy will lapse into one of two options. Either the policy will become "extended term", or it will be paid at a reduced amount. The second option means that the beneficiaries (if the deceased were to die after the policy lapsed) would be able to collect from the insurance policy at a reduced payment. The other option, "extended term", means that the cash value of the life insurance policy would be used to pay for a short term policy and thus remain open for a while longer.

No matter which of these happens, providing proof that the insured died before the policy lapsed will allow you to collect the original benefits, even if it does become a bit of a hassle for you and the insurance company to sort through records and straighten things out on their end. You will, of course, need to provide the death certificate as usual so that the company has documented proof of death as well as the date of the death.

How can I avoid this problem for my own policy?
The best thing you can do to prevent your own beneficiaries from going through this mess is to contact them directly and inform them that they are the beneficiary on your policy. If this is something you would rather not share, make sure that a trusted third party like a family member is aware of the status of your policy so that he or she can make it known upon your own death.

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