A lapse is the termination of a policy because a premium wasn't paid by the end of the grace period. Reinstatement is putting a lapsed policy back in force on its original terms, within a set period and on stated conditions. The grace period, lapse, and reinstatement rules for each state come from its own statutes; the figures below are the national model standards.

How a policy lapses

• Grace period – coverage continues for a time after a missed premium. The IIPRC Compact standards for life policies require at least 31 days; the NAIC health model (#180) sets minimums of 7, 10, or 31 days by premium mode. A death or claim during the grace period is paid, less the overdue premium.
• Lapse – if the premium is still unpaid when the grace period ends, coverage stops.
• Cash value life policies – instead of simply ending, the cash value goes to a nonforfeiture option: the policy names one (often extended term) that applies automatically if the owner doesn't choose within 60 days (NAIC Model #808). An automatic premium loan, if elected, pays the premium from the cash value and prevents the lapse.
• Universal life – lapses when the account value can't cover the monthly deductions after its grace period.

Reinstating life insurance

Under the IIPRC standards, the owner can reinstate a policy that lapsed for nonpayment for at least 3 years after lapse, typically by:

• paying overdue premiums with interest,
• repaying or reinstating any policy loan, and
• providing evidence of insurability if the insurer requires it.

A policy surrendered for cash can't be reinstated. Reinstatement restores the original issue age, rates, and values, which is why it is often better than buying a new policy. The reinstated policy has a new 2-year contestable period, limited to statements in the reinstatement application.

Reinstating health insurance (NAIC Model #180)

• If the insurer accepts a late premium without requiring an application, the policy is reinstated.
• If it requires an application and issues a conditional receipt, the policy is reinstated on approval, or on the 45th day after the receipt unless the insurer disapproves in writing.
• The reinstated policy covers accidents occurring after reinstatement and sickness beginning more than 10 days after it.

A simple example

An owner misses a whole life premium. The grace period passes and the policy lapses. Eight months later the owner applies to reinstate, pays the back premiums with interest, and answers health questions. The insurer approves, and the original policy is back in force at the original rates.

Don't confuse it with…

• Lapse is termination for nonpayment; cancellation is termination for other reasons.
• The grace period prevents a lapse; reinstatement is the remedy after one.
• Reinstatement revives the same policy; a new policy is priced at the current age.

On the exam

Know the sequence: missed premium → grace period → lapse (or nonforfeiture) → reinstatement. For life: at least 3 years under the IIPRC standards, back premiums with interest, possible evidence of insurability, and a new contestable period. For health: the 45-day rule and the 10-day sickness wait.