What it means
Insurance policies lapse when premiums are not paid by the end of the grace period. Many policies include a reinstatement provision that allows the policyholder to restore cover within a stated time, often a few years for life insurance.
To use it, the policyholder normally pays the overdue premiums plus interest and may need to show evidence that they are still insurable. For life insurance in particular, the insurer can ask for a health statement or medical evidence, because it does not want to restore cover for someone who has become uninsurable.
Other types of insurance, such as car or home cover, may allow reinstatement only for a short window after cancellation. The details are set out in the policy.
The word is used in lending too. A borrower who has fallen behind on a mortgage can often reinstate the loan by paying all missed payments, late fees and costs by a set date, which stops foreclosure and returns the loan to its normal schedule.
This differs from paying off the loan in full, which is called a payoff. Reinstatement is also used in other settings, such as restoring a suspended licence, restoring an employee after a dismissal that was overturned or restoring a company's legal registration after it was struck off.
In each case the idea is the same: the original arrangement comes back, subject to conditions. The financial planning point is to act quickly.
The longer the gap, the higher the back payments and the harder it can be to reinstate. A business that lets a key insurance policy lapse should check the reinstatement terms immediately, since a gap in cover can be costly even if it is later repaired.
Businesses should also treat reinstatement terms as part of their risk checklist. A finance team can record the grace period and reinstatement window of each key policy in a calendar, so that a missed payment is spotted quickly.
Doing so costs little and can prevent a serious gap in protection.
In practice
Real-world examples.
Example
A manufacturer's property insurance is cancelled because a premium payment was missed during a cash shortage. The company pays the overdue amount within the allowed period and the cover is restored from the original date.
Example
A homeowner who lost income falls three months behind on the mortgage. By paying all missed instalments and late fees before the sale date, she reinstates the loan and keeps the property.
Example
A founder lets a personal life policy lapse after a move abroad. Two years later, she applies to reinstate it, pays the back premiums with interest and completes a health questionnaire.
Formula
Calculation
Reinstatement cost = overdue premiums + interest or late charges
A business owner misses four quarterly premiums of $250 each on a key-person life policy, and the policy lapses. Overdue premiums = 4 x $250 = $1,000. The insurer charges $45 of interest, so the cost to reinstate = $1,000 + $45 = $1,045, subject to the insurer accepting new evidence of health.Case study
Seen in the real world.
Oakline Print Works is an illustrative, fictional printing company. During a slow season its owner postponed a premium on the company's business interruption policy, and the insurer cancelled the cover after the grace period.
Two weeks later a fire damaged one of the presses. Oakline rushed to use the policy's reinstatement provision and paid the overdue premium with interest, and the insurer restored the cover for the future. It refused the fire claim, however, because the loss had happened while the policy was lapsed. The illustrative lesson is that reinstatement restores cover going forward and does not always repair the gap, so a policy should never be allowed to lapse.
Oakline now keeps a calendar of every policy renewal and premium date, and its finance manager receives a reminder two weeks before each one. The owner also arranged for premiums to be paid by direct debit, so a cash shortage can no longer cause a lapse by accident.
Watch out
Common mistakes.
- Assuming that reinstatement is automatic, when the insurer may require evidence of health or good standing.
- Believing that cover is continuous after reinstatement, when events during the gap may not be covered.
- Confusing reinstatement of a loan with paying it off, when reinstatement only brings the loan back up to date.
Questions
People also ask.
How long do I have to reinstate a life insurance policy?
The policy states the period, and it is often between one and five years, so check the contract wording.
Does reinstatement cost more than keeping the policy active?
Usually yes, because you must pay the missed premiums and possibly interest, and the insurer may price in new health information.
Can a lender refuse to reinstate a mortgage?
In many places the borrower has a right to reinstate before a set date if all amounts are paid, but the rules vary by location and loan terms.
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