Missed payments, lapse, cancelling and reinstatement

Nothing happens immediately

A missed payment does not cancel a policy on the day it is due.

Every Canadian life policy includes a grace period, commonly around 30 days and sometimes 31, during which the coverage remains fully in force. Pay within it and nothing has happened.

Importantly, if a death occurred during the grace period, the claim is normally paid, with the outstanding premium deducted. The policy was in force.

What happens after that

Term policies. There is no cash value to fall back on. Past the grace period the policy lapses and the coverage ends.

Permanent policies often have provisions designed to prevent exactly this, and they operate automatically without anyone telling you.

An automatic premium loan provision, where present, uses the policy’s cash value to pay the premium, creating a loan against the policy. The coverage continues. The loan accrues interest and reduces the death benefit, and if it keeps happening the cash value eventually runs out and the policy lapses anyway.

Non-forfeiture options may convert the policy to reduced paid-up coverage or extended term coverage rather than letting it end outright.

Which of these applies is in your contract. It is worth knowing before you need it, because a policy quietly running on automatic premium loans for four years is not a good outcome even though it feels like nothing went wrong.

Reinstatement

Most policies allow a lapsed policy to be reinstated within a limited window, often around two years, and it is not automatic.

Typical requirements: an application for reinstatement, payment of the overdue premiums usually with interest, and evidence of insurability, meaning fresh health questions and sometimes a medical.

That last requirement is the catch. If your health has changed since the policy was issued, reinstatement may be refused, or offered on different terms. The favourable pricing you had was based on your health then, and reinstatement puts your health now back on the table.

Reinstatement also generally starts a new contestability period in relation to the information given at reinstatement. See the contestability period.

Where reinstatement is not available, buying a new policy is the alternative, at your current age and health.

If the premium is the problem

This is the situation worth spending time on, because people cancel when they did not need to.

Reduce the coverage amount. The simplest fix and almost always available. A smaller policy costs less and it is still a policy. Someone who bought $800,000 for a mortgage that is now mostly paid may not need $800,000 any more.

Reduced paid-up, on a permanent policy. The cash value is used to buy a smaller amount of fully paid coverage. No further premiums are ever due, and the coverage continues for life at the reduced amount. For someone who cannot sustain the premium, this is frequently better than surrendering and it is rarely volunteered.

Extended term. Another non-forfeiture option, using the cash value to keep the full death benefit in force for a defined period rather than for life.

Change the payment frequency. Paying annually rather than monthly usually costs slightly less over a year, though it requires a larger single payment.

Use dividends to offset the premium, on a participating policy where they have accumulated. See participating policies and dividends.

Call the insurer and ask what is available before doing anything else. These options exist in the contract and nobody applies them for you.

Deliberate cancellation

If you have decided the coverage is genuinely no longer needed, the mechanics differ by type.

A term policy has no cash value. Cancel it, or stop paying. There is nothing to recover.

A permanent policy should not be surrendered without checking the alternatives and, critically, the tax. The gain above the policy’s adjusted cost basis is fully taxable as income in that year, and that bill catches people out. Ask for the projected figure first. See surrendering a permanent policy.

One rule regardless: never cancel existing coverage before a replacement is issued and in force. Underwriting can come back with a rating or a decline, and someone who cancelled first has no way back.

How lapses actually happen

Rarely by decision. Usually by accident.

An expired credit card. A bank account change that broke the pre-authorized debit. A change of address meaning the notices went somewhere else. A policy the person paying it forgot existed after a separation or a death in the family.

Two things prevent almost all of it. Pay from an account that will not quietly fail, and check once a year that the policy is still in force and the contact details are current.

A lapsed policy nobody noticed is the most common reason a death benefit is not paid. See why claims are denied.