Almost everyone has forgotten to pay a bill on time at some point.
Life insurance premiums are due at regular intervals, such as monthly, quarterly or annually. Policyholders must realize the importance of paying the premium on or before the due date. Life insurance companies will offer a 30-day grace period before the policy lapses and coverage expires. This series of events can cause hardship for the beneficiaries if the unthinkable happens while the policy is in a “lapsed” status.
If the Policy Lapses for Non-Payment
Immediate contact with the insurance company must be established to determine what steps could be taken to reinstate the lapsed policy. A phone call during business hours will place the policyholder in contact with customer service, or the insurance agent.
- Checking account information should be readily available to make an electronic payment during the call.
- Internet access is helpful if the company offers a webform for the reinstatement application.
- A printed form, from the company’s website, might be required to reinstate the policy. This form would be mailed to the address provided on the website.
Intricacies of the Lapsed Life Insurance Policy
Life insurance is a highly intricate instrument that is packed with various calculations, which are based on the policy’s issue date. Continuous coverage ensures that the commissions, premiums, cash value and death benefit are accurate for the agent, policyholder and beneficiaries. Lapses cause the policy amounts to become inaccurate and out of sync with elapsed time. The policyholder will be asked to pay all unpaid insurance premiums at the time of reinstatement.
Consequences of Late Life Insurance Payments
Unlike most bills, the life insurance premium is more important since it sustains the existence of the policy. A number of events will be set in motion when the policyholder fails to pay the bill on or before the due date.
- If available, the cash value will be used to pay the premium until the cash value reaches zero.
- A term policy has a 30-day grace period to allow the policyholder to pay the premium before dropping the insurance coverage.
- After 30 days, the term life insurance coverage will cease to exist.
- The insurance company will attempt to contact the policyholder to determine the reason for non-payment.
- Beneficiaries will not be paid if the policy is not in force when the policyholder dies.
- All funds paid to the insurance company are forfeited.
- The cash value has been used up to pay premiums and no longer exists.
Correcting the Life Insurance Policy Lapse
Significant life events can cause the policyholder to miss multiple monthly payments on the life insurance policy. Insurance companies have extended grace periods for these circumstances if the policyholder is able to pay all missed premiums and interest on whole life policies. Reinstatement after a lapse will be expensive in the short-run. Retaining the original policy is important since the insured’s age and annual premium were lower. Medical conditions can cause the insurance company to refuse to underwrite a new policy. In some instances, the insurance policy lapse can allow the insurer to cancel the policy because of the medical condition.
Unintended Consequence of a Life Insurance Lapse
Other insurance companies can refuse to underwrite a life insurance policy for applicants who allow policies with competing companies to lapse through non-payment of premiums. Investigating past policies is a common practice, especially when large policies are purchased. Agent commissions are paid based on the first-year commissions on a life insurance policy, and the years of premiums that follow are used to recover those costs. Applicants with a reputation for buying a new policy can be refused in the effort to save the insurance company money.
Ways to Avoid Lapsed Life Insurance Policies
Insurance shoppers know that insurance coverage is an important facet of the financial portfolio. Certain steps should be taken to prevent a lapse in the life insurance policy coverage from occurring at any point in time.
- Choose an affordable policy that is not difficult to pay at the selected interval, which could be annual or monthly.
- Select the auto-pay option for the policy to allow the insurance company to withdraw the premium from the checking account automatically.
- Pay at least three months of the premium at the time the policy is issued; then make regular payments.
- Set automated reminders in the computer, smartphone and tablet to remember to make sufficient funds available in the checking account to pay the premium.
Policyholders are wise to read the policy documentation prior to signing the insurance contract. Grace periods and reinstatement procedures are documented clearly. Insurance companies are held firmly to state laws since their roles are so important. Lapsed policies are handled according to the laws of the state in which they were issued. Understanding the fine print is important to prevent problems when the beneficiary needs the proceeds from the policy most.