What is a forfeiture?
An interruption is the termination of a privilege, right or policy due to the passage of time or inaction. Forfeiture of lien due to inaction occurs when the party who is to receive the benefit does not meet the conditions or requirements set out in a contract or agreement.
When a policy lapses, it usually happens because a party is not meeting its obligations or one of the conditions of the policy is violated; an insurance policy will expire if the cardholder does not pay the premiums, for example. The right conferred by an option contract expires when the option expires, on which date the holder will no longer have the right to buy or sell the underlying asset.
When a policy lapses, the benefits and all that is stipulated in the contract are no longer active. When policyholders stop paying premiums and the value of the policy account is already used up, the policy lapses. The term itself means “forfeiture of coverage”, a direct translation of how an expired policy no longer pays or no longer provides coverage.
Key points to remember
- Lapse occurs when the benefits and all that is stipulated in a contract are no longer active because the contract holder has not complied with the requirements and conditions set out in a contract or agreement.
- Examples of lapses are expired life insurance policies and stocks.
Outdated life insurance policies
A policy does not go out every time a premium payment is missed. Insurers are legally required to grant a grace period to policyholders before the policy lapses. The grace period is generally 30 days. Insurers give the insured a period of 30 days to pay the premium period not respected.
Whole Life, Variable Universal Life and Universal Life policies use the existing surrender values of the policies in the event of non-payment. If policyholders still do not pay within the grace period, a policy can use the value of their own account to pay the unpaid premiums. If the value of the account is not sufficient to pay the premiums of the policyholder, the policy will be considered to have lapsed. Once the policy has expired, the insurer has no legal obligation to provide the benefits provided for in the policy.
Term life insurance does not have this advantage because it does not gain monetary value. In this case, when the premium payments are missed, the policy goes directly to the grace period and then lapses when the grace period is over.
Most insurers offer policyholders the benefit of reinstating a policy during a grace period. The conditions for reinstating a policy depend on the time that has elapsed since the end of the policy. For example, insurers do not need documentation or proof of health if the policyholder wishes to reinstate a policy within 30 days of its end. Health and financial documents may be required in some cases, if the term of a policy is between 30 days and six months. Any period of more than six months to five years depends on the insurance company.
Lapses of shares
Actions are sometimes granted to employees as an incentive. They are normally subject to a restriction which prevents employees from selling or trading shares during a given period. These restrictions vary from company to company and depend mainly on the vesting period or the length of time the employee spent with the company. When the restrictions are lifted, the employees become the direct owners of the shares. Lapse of shares refers to actual restrictions and limits.
Example of forfeiture
Tom has a life insurance policy in which he is required to pay a monthly premium for a period of 10 years. During the first two years of the policy, Tom makes monthly payments to the police as needed. After two years, however, Tom is laid off and can no longer afford to make the payments. Tom’s 30 day grace period is over, Tom’s policy expires. Before the end of the following month, Tom finds another job. He asks the insurance company to reinstate his policy.