Lapse

What is Lapse?

Lapse meaning refers to the termination of the policy or a license because of the inactivity or passage of time. Lapse is common due to inaction, which happens when the person who is supposed to receive the privilege fails to comply with the terms and conditions associated with the policy. In other words, a lapse is likely to occur when the individual does not meet the requirements mentioned in the contract.

In the case of an insurance policy, a lapse occurs when an individual or a company breaches one or many conditions mentioned in the agreement form. If a party fails to fulfill the obligations, then it will result in the policy lapse. Take insurance policy, for example. If the buyer fails to make the payment for the premiums monthly or annually, then the insurance policy will be lapsed because of the failure to meet the obligations. Another common reason for the contract lapse is the passage of time. When the option contract expires or reaches the maturity period, then the contract will lapse. That means the option holder cannot trade the Underlying asset.

Let’s take a look at the lapse in the insurance Industry and stock Market.

A Lapse in the Insurance Policy

As soon as the contract has lapsed, the perks and the features mentioned in the contract will no longer remain in effect. When the buyers Fail to pay premiums, the policy will lapse. The coverage included in the policy will not remain active anymore. Should the insured person experience any mishap, they won’t be able to approach the insurance provider as the contract has lapsed. Their claim will be considered invalid after the termination of the policy. However, the insurance contract does not lapse if the insured person fails to pay the premium for one month. If they fail to pay the premiums, they will be allowed a grace period.

Each insurer has to offer a grace period to the insured, until which the policy cannot lapse legally. Mostly, the grace period is no longer than a month. If the insured fails to pay the premium within the grace period, then the insurer can terminate the policy. As mentioned before, the insurer is not legally bound to offer any benefits mentioned in the insurance policy after the lapse. All the claims of the insured will be considered invalid. However, insurance providers can allow the insured to reinstate the contract within 30 days of the grace period. That means the policyholder gets a chance to get the policy into effect after it is terminated.

A Lapse in the Stock Market

Some companies can provide shares to their employees as rewards or incentives. However, the company implements certain restrictions on the purchase and sale of these shares for a particular duration. As soon as the company lifts the time restrictions, the employee is declared as the owner of these stocks. Now, the restrictions imposed on the sale and purchase of the shares are considered as the lapse.