13.3 Lapse, Reinstatement Evidence, Servicing Loans/CSV/RPU/ETI Decisions
Key Takeaways
- After a 4.1 review shows a cash-flow problem, the servicing decision is whether to keep the original contract in force (pay, APL, or a policy loan), elect a non-forfeiture option (CSV, reduced paid-up, extended term), or let a valueless contract lapse and later seek reinstatement.
- Chapter 7 taught the mechanics of CSV, automatic premium loan, reduced paid-up, and extended term; this section tests when each choice matches the remaining need. Ordinary term has no non-forfeiture menu.
- A common provincial pattern is a grace period of 30 days or the longer contract period; death during grace is a claim minus the overdue premium. Some statutes then allow a further 30-day premium-only reinstatement while the life insured is alive.
- If that short window is missed, a typical Insurance Act pattern requires the insurer to reinstate within two years of lapse if the owner applies, pays overdue premiums and indebtedness with interest, and produces evidence satisfactory to the insurer of good health and insurability — confirm the e-book.
- Statutory reinstatement generally does not apply to group or fraternal contracts, or once CSV has been paid or reduced paid-up or extended term has been elected. Contestability and suicide limitations commonly run again from the latest reinstatement.
Servicing decisions that a 4.1 review actually produces
Section 7.2 taught how cash surrender value, automatic premium loan (APL), reduced paid-up (RPU), and extended term insurance (ETI) work on traditional whole life. CISRO 4.1 is the when. An updated needs analysis that says “the household cannot write this year’s cheque” is not a single answer. It is a fork: keep the original bargain in force, shrink it, date it, cash it, or let it die and try to revive it.
This independent OpenExamPrep section teaches those forks for the Life module. It is not legal advice. Grace periods, reinstatement windows, and interest caps are provincial. Ontario Insurance Act ss. 182 and 189 are the wording many manuals use; British Columbia s. 57 and Newfoundland and Labrador’s Life Insurance Act s. 20 are the same family. Confirm the e-book for your sitting.
Grace first: the contract is still on the books
After the initial premium, a later premium that is not paid on its due date may still be paid during grace: commonly 30 days, or the longer period the contract states (some policies print 31 days). During grace the contract is in force. If the life insured dies before the overdue premium is paid, a common pattern treats the contract as if the premium had been paid when due, and — except for group and creditor’s group — the insurer may deduct that premium from the insurance money (section 12.2).
If grace ends with the premium still unpaid:
- Ordinary term with no CSV lapses. There is no RPU or ETI to elect. The remaining tools are reinstatement (if the statute and contract allow) or a new application (full underwriting, new contestability).
- Permanent contracts with CSV typically offer a non-forfeiture menu and, on many Canadian whole-life contracts, APL as the automatic way to keep the original face in force by borrowing the premium from CSV.
Do not confuse grace with the 10-day free look, with the further 30-day premium-only reinstatement some statutes add after grace, or with the two-year evidence-based reinstatement path.
When to use APL, a policy loan, CSV, RPU, or ETI
Match the tool to whether coverage is still needed, for how long, and whether the client needs a cheque today. The contract names the automatic option if the owner stays silent; many Canadian permanent policies default to APL so long as CSV can support the premium. That is a product rule, not a US-style “ETI is always the statutory default.” Read the policy. Term-100 with little or no CSV may have no real menu — CISRO already flagged that as a T-100 limitation.
| Tool | What stays in force | Premiums | When a 4.1 review points here | Main cost |
|---|---|---|---|---|
| Pay the premium / change mode | Original face and design | Resume | Income dip is tiny; PAD failed; annual-to-monthly would fix it | None beyond the premium |
| APL (or a requested policy loan used to pay premium) | Original face and riders as the contract keeps them | “Paid” by a growing loan | Short cash crunch; client intends to resume; need is still the original amount | Loan + interest reduce the death benefit; can still lapse when CSV is eaten |
| Policy loan taken in cash | Original face, net of the loan | Continue (plus optional loan interest) | Client needs living dollars and still needs the death benefit | Interest; possible policy gain if the loan exceeds ACB; lapse risk |
| CSV surrender | None — coverage ends | None | Client needs the cash and does not need the death benefit (or will replace it — then LIRD) | Coverage gone; possible taxable policy gain (proceeds − ACB) |
| Reduced paid-up | Smaller permanent face, for life | None | Cannot pay; need is still lifetime (funeral, disabled child, remaining estate tax) | Face drops; riders often end |
| Extended term | Original face for as long as CSV buys term | None | Remaining need is dated (mortgage that ends in eight years) and the client wants the full face until that date | When the purchased term ends, coverage is zero |
Dana Okonkwo still needs $750,000 on her life for 16 years of child support. She misses two monthly whole-life premiums after a job loss but expects employment in 90 days. APL (or paying from a small policy loan) keeps the original face while she bridges. RPU would shrink the face she still needs. ETI would start a clock that may not match a lifetime slice. Surrender would leave the children uninsured.
Samira Haddad, 58, cannot pay and will not be able to pay. She does not need a cheque. She still needs some coverage for life for a disabled adult child. RPU is the 4.1 match: CSV buys a smaller paid-up whole-life face, no further premiums. ETI would keep the original face only until the purchased term ran out — the opposite of a lifetime dependent. Chapter 7 already used this fork; the exam will ask it again in a service stem.
If Samira’s remaining need were only a mortgage that matures in nine years, ETI for the original face can be the better election — provided the ETI period the CSV actually buys is long enough. If the table buys only six years of term, ETI under-covers the loan. Then the honest recommendation may be a smaller RPU plus a conversation about whether any term can still be purchased, not a slogan that “ETI always keeps you whole.”
Accessing value on UL follows the same service logic with Chapter 8 mechanics: a withdrawal from the account value is a partial disposition and reduces the death benefit under the contract’s option; a policy loan is often treated differently for tax than a withdrawal; leveraging is not a 4.1 casual suggestion. If the 4.1 review is “we need $20,000 for a roof,” walk through loan versus withdrawal versus a non-policy source before you strip an exempt policy.
Reinstatement: two typical Canadian windows
Once the contract has lapsed, you are no longer electing non-forfeiture on a living policy. You are asking the insurer to put the old contract back. A widely used provincial pattern (Ontario s. 189; British Columbia s. 57) is:
- Does not apply to group, creditor’s group, or a fraternal contract.
- Premium-only window. If the contract lapsed at the end of grace because the premium due at the start of grace was not paid, it may be reinstated by paying the overdue premium within a further 30 days after grace, but only if the person whose life was insured is alive when payment is made. This is not extra grace for a death claim after lapse.
- Evidence window — two years. If that short window is missed, the insurer shall reinstate if, within two years of the lapse date, the insured applies, pays all overdue premiums and other indebtedness with interest (Ontario caps the rate by reference to the Courts of Justice Act prejudgment rate; some other provinces still print a 6% compound cap in older wording), and produces evidence satisfactory to the insurer of the good health and insurability of the life insured.
- Those reinstatement rights do not apply if CSV has been paid or if paid-up or extended insurance has been elected. Choosing RPU or ETI uses up the statutory put-back.
Evidence is whatever the insurer reasonably needs to underwrite the old risk again: applications answers, a paramedical, an APS, maybe labs. “Satisfactory to the insurer” is the statutory phrase. The agent does not waive it. If Jonah Park’s health has deteriorated, reinstatement can be refused on evidence even though he is still inside two years. A new policy might also be refused — reinstatement is not a magic preferred offer, but it does bring back the original contract terms (original issue age, original exclusions, original CSV schedule) if it is accepted.
Clocks restart. Section 12.2 already taught that suicide limitations run from the latest reinstatement, and that incontestability applies with necessary modifications to statements made to reinstate. Ontario’s accident-and-sickness wording even says the two-year incontestability period commences from the date of reinstatement. Teach the Life-module result: a reinstated policy is not “old” for suicide and contestability the way a never-lapsed policy is.
Jonah’s term lapsed eight months ago. No CSV was paid (there was none). He is alive and now insurable. Inside two years he can apply, pay back premiums plus interest, and submit health evidence. If instead he had surrendered a whole-life policy for CSV, the statute’s reinstatement right is gone; he is a new applicant. If he had elected ETI, he is on the extended-term contract, not on a lapsed original he can simply pay up.
Dana still needs the original $750,000 face for child support. She has whole-life cash value, a temporary job loss, and a realistic plan to resume premiums in a few months. She does not want a surrender cheque. Which servicing choice matches that 4.1 review?
Jonah’s individual term policy lapsed eight months ago. No cash surrender value was paid. He is alive and wants the original contract back. Under the common provincial Insurance Act pattern (confirm in the e-book), what must generally happen?
Samira can no longer pay whole-life premiums, does not need a cheque today, and still needs some coverage for the rest of her life for a disabled adult child. Which non-forfeiture election matches that need?