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Lapse

In New Zealand, a lapse in insurance occurs when a policyholder does not renew their policy by the end of its term, effectively allowing it to expire. This means the insurance coverage ceases, and the policy is no longer active.

What is a Lapse in Insurance?

A lapse in insurance, specifically in the context of New Zealand, happens when a policyholder decides not to renew their insurance policy at the end of its term. Unlike cancellation for non-payment, which happens when premiums are not paid, a lapse occurs when the policyholder actively or passively chooses not to continue the coverage. This means they do not renew the policy, either by not taking any action or by formally informing the insurer of their decision.

Example:

Consider a small business owner who has a commercial property insurance policy that expires annually on June 30th. As this date approaches, the insurance company sends reminders about the upcoming renewal. If the business owner decides they no longer need this coverage or simply forgets to renew it, the policy will lapse on June 30th. From July 1st onwards, the business will no longer be covered for any risks previously insured under that policy.

Key Components of Lapse

1. End of Policy Term:

A lapse happens at the end of the policy term if the policyholder does not renew the insurance. The term could be annual, semi-annual, or based on another period specified in the policy.

2. Non-Renewal:

Non-renewal is a deliberate or unintentional action by the policyholder to not extend the coverage. This could be due to a conscious decision or oversight.

3. Termination of Coverage:

When a policy lapses, the insurance coverage terminates. This means the insurer is no longer obligated to cover any claims made after the lapse. To regain coverage, the policyholder must purchase a new policy.

Types of Lapse

Business Insurance Lapse

This occurs when a business owner does not renew their commercial insurance policy. It can include policies such as general liability, property, or professional liability insurance. Without renewal, the business is left unprotected against various risks.

Life Insurance Lapse

A life insurance lapse happens when the policyholder chooses not to renew their term life insurance. Consequently, the beneficiaries will not receive any death benefits if the policyholder dies after the policy has lapsed.

Health Insurance Lapse

This type of lapse occurs if the policyholder does not renew their health insurance policy. Without renewal, the individual is left without medical coverage, which can be risky if unexpected health issues arise.

Auto Insurance Lapse

An auto insurance lapse happens when the policyholder does not renew their car insurance policy. This means the driver is no longer legally insured, leading to fines, legal issues, and significant financial risk in the event of an accident.

How Insurance Covers Lapses

To manage and prevent lapses, insurance companies often provide several mechanisms:

Renewal Reminders:

Insurers typically send reminders well before the policy’s expiration date. These reminders can be through email, SMS, or postal mail, ensuring the policyholder is aware of the upcoming renewal.

Automatic Renewal:

Many insurers offer automatic renewal options. If the policyholder agrees, the insurer will automatically renew the policy at the end of the term, ensuring continuous coverage.

Review of Coverage Needs:

Policyholders should regularly review their coverage needs before the renewal date. This ensures that they are aware of what they need and can make an informed decision about renewing their policy.

Premium Financing:

For businesses, premium financing can help manage renewal costs. This involves taking out a loan to pay the insurance premium, allowing the business to make smaller, more manageable payments over time.

Grace Periods:

While grace periods are more commonly associated with cancellations for non-payment, some insurers might offer short grace periods for renewals, giving policyholders a little extra time to decide on renewal without losing coverage.