I often see life insurance companies deny death benefits based on the allegation that the policy lapsed for nonpayment of premiums before the insured died. This result is particularly unjust because the policyholder is often sick, hospitalized, or otherwise incapacitated shortly before their death. In other words, the are not in a good position to make their premium payment. Meanwhile, the life insurance company gladly cancels the policy just before policyholders death and only after receiving premium payments for (in many cases) well over a decade. Some states (such as California) are working to prohibit this life insurance “gottcha” by extending mandatory grace periods.
If a life insurance company is claiming that a policy lapsed shortly before the policyholder’s death, it is imperative that a highly experienced life insurance attorney (who is licensed to practice in your state) review the particulars.
I have recovered substantial sums for beneficiaries after they were initially told that the policy lapsed shortly before the policyholder died.
When a Minnesota life insurance claim is denied because of a policy lapse, important questions can include when the premium was due, whether the policy provided a grace period, whether the insurance company sent required notices, whether a payment was actually made or attempted, and whether the policy had cash value or other provisions that affected the coverage.
If you are a beneficiary and have been told that the life insurance policy was no longer in force on the date of death, it can be important to determine exactly how and when the insurer says the coverage terminated.
What Does It Mean When a Life Insurance Policy Lapses?
Life insurance generally requires premiums to be paid to keep the coverage in force.
When a required premium is not paid, the policy may eventually lapse. A lapse means that the insurance coverage has terminated according to the terms of the policy.
But a policy does not necessarily terminate the moment a premium payment is missed.
The policy itself and Minnesota law may provide additional protections, including a grace period during which the coverage remains in effect.
Depending on the type of policy, there may also be cash value, automatic premium loans, extended-term insurance, paid-up insurance, or other policy provisions that need to be considered before determining whether coverage actually ended. Further, I have observed scenarios where life insurance companies missed bonus payments due under the policy which would have increased the cash value and extended the viability of the policy.
That is why the question should not simply be:
“Was a premium missed?”
The more important question is:
“Was this life insurance policy actually and lawfully terminated before the insured died?”
Minnesota Life Insurance Policies Generally Have a Grace Period
Minnesota law generally requires individual life insurance policies subject to the statute to contain a provision providing a one-month grace period for payment of every premium after the first premium.
During that grace period, the insurance remains in force.
This can make the date of death extremely important. The date of death on the Death Certificate is not always certain because sometimes the date of death is an approximation or merely the date on which the decedent was located. An expert witness may be needed to opine on the exact date of death.
For example, suppose a premium was due on June 1 but was not paid. If the insured died several days later, the fact that the June 1 premium had not been paid does not necessarily mean there was no coverage on the date of death.
The policy's grace-period provision needs to be examined. Minnesota Statutes § 61A.03 Subd. 1 provides that “No policy of life insurance may be issued in this state or by a life insurance company organized under the laws of this state unless it contains the following provisions:…A provision for a one month grace period for the payment of every premium after the first, during which the insurance will continue in force…”
Minnesota law also permits the policy to provide that if the insured dies during the grace period, the overdue premium can be deducted from the policy settlement.
In other words, a missed premium and a lapsed policy are not necessarily the same thing.
Minnesota Also Requires a Final Lapse Notice for Individual Life Insurance. For example, see Minnesota Statutes § 72A.20 Subd. 24 which provides, in part “No insurer shall, within one year after default in the payment of any premium on an individual life insurance policy, declare the individual life insurance policy to be canceled or nonrenewed for nonpayment of premium unless it mails or delivers to the policy owner, at the policy owner's last known address, at least 30 days before lapse, final notice of the cancellation or nonrenewal and the effective date of the cancellation or nonrenewal. For purposes of this subdivision, "individual life insurance policy" includes policies in default on or after August 1, 2011.”
This means that when an insurer denies a life insurance claim because the policy supposedly lapsed, one of the documents worth examining is the insurer's lapse-notice history.
Questions can include:
What premium does the insurer say was missed?
When was that premium due?
What grace period applied?
When does the insurer claim the policy actually lapsed?
Did the insurer send a final lapse notice? I have observed scenarios in which the life insurance company repeatedly claimed that it sent the notice yet could not provide proof of mailing.
When was that notice sent? I have observed multiple scenarios in which life insurance companies claim to have mailed a lapse notice on the date indicated on the notice, but the proof a mailing reflects a later date. That gap can be extremely significant given the policy’s grace period and other protections afforded by Minnesota law.
Where was it sent?
What effective date did the notice identify?
What records does the insurer have showing the notice was mailed or delivered?
Those questions can be especially important when the insured died relatively close to the date on which the insurer claims coverage ended.
What If the Insurance Company Says It Mailed the Notice?
A beneficiary may say:
“My husband never received a lapse notice.”
The insurer may respond:
“Our records show that we mailed it.”
Those are not necessarily the same issue.
Minnesota's lapse-notice statute provides that proof of mailing the required notice to the policy owner's last known address is sufficient proof that the required notice was given.
As a result, a lapse dispute may involve the insurer's records concerning the notice rather than simply whether family members remember seeing the notice.
That is one reason it can be useful to obtain the insurer's actual documentation rather than relying solely on the explanation contained in the claim-denial letter. Life insurance companies will likely interpose delay in providing this information or will outright refuse to do so. Often, I see life insurance companies using third-party mailing vendors. These vendors may not maintain adequate records, and they may not mail have adequate systems in place to ensure mailing.
What If the Insured Had Moved?
Address issues can become important in lapse disputes.
The Minnesota statute refers to sending the required notice to the policy owner's last known address.
If the insured had recently moved, important questions might include whether the insurer had been given the new address, when the address was changed in the insurer's system, where premium notices had previously been sent, and where the final lapse notice was mailed.
Relevant evidence could include emails, online-account records, change-of-address confirmations, correspondence with the insurer, or communications with the insurance agent.
The particular facts matter.
What If the Premium Was Supposed to Be Paid Automatically?
Automatic payments can create a different type of lapse dispute.
Many policyholders expect their life insurance premiums to be withdrawn automatically from a bank account or charged to a credit card.
If that process fails, it can be important to determine why.
For example:
Was the insurer authorized to withdraw the premium?
Had automatic payments worked successfully in previous months or years?
Did the insured change bank accounts?
Did a payment attempt fail because of insufficient funds?
Did the insurer stop making withdrawals?
Did a credit or debit card expire?
Did the insurer notify the policyholder that the automatic payment had failed?
Was a payment actually deducted and later returned?
Did the policyholder contact the insurer about the problem?
Bank statements and payment records can be particularly important in these cases.
A beneficiary should not assume that an insurer's statement that “no premium was received” resolves every question about whether the policy properly lapsed.
What If the Insured Mailed or Submitted the Premium?
Timing can also become an issue when a premium was sent close to the end of a grace period.
Preserve any evidence showing when and how payment was made or attempted.
That may include:
canceled checks;
bank statements;
credit-card statements;
online payment confirmations;
email receipts;
screenshots from an insurer's website;
postal records;
correspondence with the insurer; and
communications with an insurance agent.
The policy terms and circumstances surrounding the payment need to be examined before determining its effect on coverage.
Cash-Value Life Insurance Can Make a Lapse More Complicated
Not every life insurance policy works like a simple term policy.
Permanent life insurance policies may accumulate cash value. Depending on the policy, that value may affect what happens after premiums are not paid.
Minnesota's own statutory consumer disclosures recognize that when a life insurance policy with cash surrender value lapses, the insurer may use the value to purchase extended-term insurance or paid-up insurance. Some policies may also permit the insurer to borrow against cash value to pay premiums.
This can make the coverage analysis more complicated.
The relevant question may not be simply whether the original premium was paid. It may also be necessary to determine:
whether the policy had cash value;
whether there was an outstanding policy loan;
what nonforfeiture option applied;
whether an automatic premium loan provision existed;
whether extended-term coverage resulted;
whether reduced paid-up insurance resulted; and
how long any resulting coverage remained in force.
If an insurer says a permanent life insurance policy lapsed, obtaining a policy-value history or transaction history may help explain what happened.
As noted, I have observed scenarios where contractual bonuses were not applied to policies. These bonuses (had they been applied correctly) would have extended the life of the policy and prevented lapses.
Policy Loans Can Also Affect Coverage
Some permanent life insurance policies permit the policyholder to borrow against the policy's value.
An outstanding loan can affect the amount of available cash value and, in some circumstances, the continued operation of the policy.
Minnesota law also contains protections concerning forfeiture for failure to repay certain policy loans or interest. For policies subject to those provisions, the policy generally cannot provide for forfeiture based on failure to repay a loan or loan interest while the total indebtedness remains below the policy's loan value. The statute also addresses notice before certain forfeitures involving policy indebtedness. See Minnesota Rules part 2750.1400, item E.
Therefore, if the insurer's lapse determination involves a policy loan rather than simply an unpaid premium, the loan history and applicable policy provisions should be examined carefully.
Can a Lapsed Life Insurance Policy Be Reinstated?
Many life insurance policies provide an opportunity to reinstate coverage after a premium default.
Minnesota law requires certain policies to contain a reinstatement provision under specified circumstances. The statute provides for reinstatement within three years after default when the statutory conditions apply, including satisfactory evidence of insurability and payment of premium arrears with interest.
The policy itself should be reviewed to determine the applicable reinstatement requirements.
Reinstatement can also create additional questions when the insured attempted to restore coverage shortly before death.
For example:
Did the insured submit a reinstatement application?
Did the insurer accept premium payments?
Was evidence of insurability requested?
Did the insurer approve or reject reinstatement?
When did reinstated coverage become effective?
What communications occurred between the insured, agent, and insurer?
The answers may matter in determining whether coverage existed on the date of death. Note that reinstatement will require the policyholder to be alive, and insurable. Often, the life insurance company will claim that the policyholder is no longer insurable. In that scenario, we may be able to file a lawsuit demanding specific performance, namely, that the policy be reinstated.
Employer-Provided Life Insurance Is Different
If the life insurance was provided through the insured's employer, the analysis can be different.
Minnesota's individual-policy provisions do not necessarily apply in the same manner to group life insurance. Employer-sponsored coverage may also be governed by the federal Employee Retirement Income Security Act, commonly known as ERISA.
Coverage may terminate because employment ended, the employee became ineligible, premiums were not deducted, or the employee failed to convert or continue coverage.
Minnesota law also contains provisions concerning conversion and continuation rights for certain group life insurance coverage.
If an insurer denies an employer-provided life insurance claim on the ground that coverage terminated before death, documents from both the insurance company and the employer may be important.
What Documents Should a Beneficiary Request After a Lapse Denial?
If an insurance company denies a claim because the policy supposedly lapsed, consider gathering the documents that establish the history of the coverage.
Those may include:
the complete life insurance policy;
the original application;
the insurer's claim-denial letter;
premium billing statements;
a complete premium-payment history;
the insurer's policy transaction history;
grace-period notices;
lapse or termination notices;
proof of mailing of any final lapse notice;
reinstatement notices or applications;
bank and credit-card statements;
automatic-payment authorizations;
returned-payment notices;
correspondence between the insured and insurer;
communications with the insurance agent;
policy-loan records; and
records concerning the policy's cash value.
The objective is to reconstruct the policy's history and determine whether the insurer's claimed termination date is supported by the policy, the payment history, the required notices, and applicable law.
In my experience almost every life insurance company is very slow in providing the foregoing information. Beneficiaries should be extremely vigilant in not allowing too much time to pass before hiring an attorney. A life insurance company may stall until the appeal deadline and/or statute of limitations has passed. This is particularly true in ERISA cases where deadlines are short.
What If the Insured Died During the Grace Period?
This can be one of the most important questions in a lapse case.
For individual policies subject to Minnesota's statutory grace-period requirement, coverage continues during the required grace period.
If the insured died during that period, an unpaid premium does not necessarily eliminate the death benefit. The policy may instead permit the insurer to deduct the overdue premium from the amount payable.
The precise dates should therefore be established:
Premium due date → grace period → lapse date claimed by insurer → date of death.
I often see a difference of only a few days making all the difference.
Can the Insurance Company Deny a Claim After the Two-Year Contestability Period Because of Unpaid Premiums?
Potentially, yes.
The contestability period and nonpayment of premiums are different issues.
Minnesota's required incontestability provision generally makes a covered policy incontestable after it has been in force during the insured's lifetime for two years, subject to statutory exceptions. One of those exceptions is nonpayment of premiums.
Therefore, the fact that a policy is more than two years old does not necessarily prevent an insurer from asserting that coverage ended because required premiums were not paid.
The question then becomes whether the policy actually lapsed before the insured's death.
What Should You Do If a Minnesota Life Insurance Claim Is Denied Because the Policy Lapsed?
Start by getting the insurer's explanation in writing.
Then determine the exact date on which the insurer says coverage ended and ask for the records supporting that determination.
Do not rely only on a statement such as:
“The policy was not in force on the date of death.”
Find out why.
Was a premium missed? When was it due? What grace period applied? What notices were sent? Was there an attempted payment? Was the policy on automatic withdrawal? Did the policy have cash value? Was there extended-term coverage? Was reinstatement attempted?
Those details can determine whether a lapse denial warrants further investigation.
Read more: Life Insurance Claim Denied in Minnesota? What to Do Next.
Frequently Asked Questions About Lapsed Life Insurance Policies in Minnesota
Does a life insurance policy lapse immediately when you miss a payment?
Generally, no. Minnesota law requires certain individual life insurance policies to provide a one-month grace period for premiums after the first premium, during which the insurance remains in force.
What happens if the insured dies during the grace period?
For a policy subject to Minnesota's statutory grace-period requirement, the insurance remains in force during the grace period. The policy may provide that the overdue premium will be deducted from the settlement.
Does an insurance company have to send notice before a Minnesota individual life insurance policy lapses?
Minnesota law generally provides that, within one year after a premium default on an individual life insurance policy, the insurer may not declare the policy canceled or nonrenewed for nonpayment unless it mails or delivers a final notice to the policy owner's last known address at least 30 days before lapse. The statute contains specific terms and should be considered together with the policy and facts of the particular case.
What if the insured says the premium was paid but the insurance company says it was not?
Payment records should be examined. Bank statements, canceled checks, credit-card records, electronic payment confirmations, and the insurer's own transaction history may help establish what happened.
What if automatic payments suddenly stopped?
Determine why the payment was not made and what notices were sent afterward. Obtain records from both the financial institution and the insurer when available.
Can cash value keep a life insurance policy from lapsing?
Depending on the type of policy and its provisions, cash value may result in an automatic premium loan, extended-term insurance, reduced paid-up insurance, or another nonforfeiture option. The policy and transaction history should be reviewed.
Can a life insurance policy be reinstated after it lapses?
Some policies can be reinstated if applicable requirements are satisfied. Those requirements can include payment of overdue premiums, interest, and evidence of insurability. The particular policy and applicable law determine the requirements.
Does the two-year contestability period prevent a lapse denial?
Not necessarily. Minnesota's required incontestability provision contains an exception for nonpayment of premiums. A policy that has been in force for more than two years can therefore still present a coverage issue if the insurer contends that premiums were not paid and the policy terminated before death.
Minnesota Life Insurance Claim Denied Because of a Policy Lapse?
A life insurance company's statement that a policy “lapsed” should not necessarily be the end of the inquiry.
The premium history, grace period, lapse notices, policy provisions, cash value, automatic payments, reinstatement history, and date of death may all be relevant in determining whether coverage actually ended.
Mark Santi represents beneficiaries in Minnesota life insurance disputes, including claims denied because an insurer contends that the policy lapsed before the insured's death. For hourly matters, Mark requires a minimum 10 hour retainer. A contingency arrangement (no fee unless we collect) will be considered for claims of $100,000 or more.