Life and Health Insurance · Life Insurance · 6 min read
Reinstatement and Contestable Claims
- Distinguish between policy lapse and voluntary surrender, identifying when a policy qualifies for reinstatement.
- Explain the contractual requirements, advantages, and financial trade-offs of reinstating a lapsed life insurance policy.
- Describe how the incontestability clause operates on both original issue and reinstatement, including its limitations and exceptions.
Lapse Versus Voluntary Surrender
A policy lapses when coverage ends under its terms after the grace period, generally because a required premium was not paid or, for a flexible-premium policy, because its value cannot cover policy charges. A lapse results directly from nonpayment of premium rather than an explicit request from the policyowner to end coverage. If the policy actually lapses, coverage ends, but the owner may have a contractual right to reinstate it; an automatic premium loan or nonforfeiture option may instead keep coverage in force.
Voluntary surrender is fundamentally different. Voluntary surrender occurs when the policyowner actively requests to cancel the policy and receives any remaining cash surrender value. A policyowner who voluntarily surrenders a cash value life insurance policy terminates the contract permanently.
Because surrender is a permanent termination initiated by the owner, a surrendered life insurance policy cannot be reinstated under standard policy provisions. In contrast, a policy that lapses solely for nonpayment of premium is generally eligible for reinstatement if the required conditions are met.
Common mistakes
- Believing that a voluntarily surrendered policy can be reinstated by paying back premiums. Voluntary surrender permanently terminates the contract.
- Assuming the new contestability period after reinstatement allows the insurer to re-examine statements made on the original policy application. It applies to material misrepresentations made in connection with reinstatement, not merely to statements on the reinstatement application.
- Thinking that the incontestability clause prevents the insurer from adjusting benefits for an incorrect age or sex. Misstatement of age or sex provisions allow adjustments at any time, even after the contestable period expires.
- Assuming that a suicide exclusion automatically restarts whenever a policy is reinstated. Whether it applies depends on specific state law and policy terms.
Key points
- A policy may lapse after a required premium remains unpaid past the grace period or, for a flexible-premium policy, when its value can no longer cover policy charges; voluntary surrender is an owner-requested termination.
- Reinstatement allows a lapsed policy to be restored, commonly within three to five years, provided the policy was not surrendered or its extended term period expired.
- To reinstate, the owner generally must follow the policy's request and evidence-of-insurability requirements, make the payments its reinstatement provision requires, and address outstanding loans as required.
- Reinstatement restores the original contract and its cash value rights under its terms; compare its required payments and future costs with those of a new policy, which is generally priced using the insured's current age.
- The standard incontestability period is two years in most states, preventing insurers from voiding policies for application misstatements once it expires.
- Incontestability does not bar claim denials for nonpayment of premium, enforcement of valid exclusions like a war clause, or benefit adjustments for misstated age or sex.
- Reinstatement generally starts a new contestability period, typically two years, for material misrepresentations made in connection with reinstatement; it does not restart the original application's contestability period.
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