What Happens if You Stop Paying Your Life Insurance Premiums?
Hiccups happen in life, which may cause you to fall behind on paying your bills – including those for your life insurance policy.
How much effect, if any, late payments will have on the continuity of your coverage can vary. Factors that affect the impact include how many payments are missed, the type of policy you own and how long it takes you to catch up on your account.
Why policyholders stop or miss payments
The best intentions to stay current on important bills, including those for life insurance, can be undone for reasons that include:
- Confusion around policy terms or payment schedules: Some policies require monthly payments, while others may require quarterly or annual payments. If you don't set payment reminders or sign up for automatic payments, you may miss a payment.
- Financial challenges: If you lose your job, become ill, or have other financial emergencies, your budget may become overstretched, and you may not be able to afford your premiums.
- The policyholder dies: After a policyholder passes away, their survivors may miss a payment (or more) as they get a handle on the person’s financial affairs.
What happens when you miss a life insurance payment
The consequences to your policy for missing a payment depend, firstly, on how late you are in paying. While specific timelines vary by insurance provider, it’s typical to have a grace period of a month before the policy is considered in default. If you pay your bill within the grace period, the policy stays in effect.
Fail to meet that extended deadline, though, and the policy could lapse. If that happens, you may not be covered, and your loved ones will no longer be entitled to the policy’s death benefit.
An exception occurs, though, if it's a whole life policy that has a cash balance. The insurer will then draw the unpaid premium from the policy’s cash component, and continue to do so until the policy’s value is exhausted or regular payments resume.
Your estate also gets a reprieve if you pass away during the grace period. Were that to happen, your beneficiaries would still receive the policy's death benefit, minus the owed premium.
Why the type of policy matters
The impact of missed payments varies according to the type of life insurance coverage you have: term life or whole life.
Term life insurance
Term life policies provide coverage for a set period, such as 10 to 30 years. If you miss a payment and don't make it within the grace period, the policy lapses, and you don't get any money back. Typically, the only way to get coverage is to apply for a new policy.
Whole life insurance policy
A whole life policy is a form of permanent life insurance. Unlike term life policies, whole life insurance policies also build cash value. That value can be utilized in several ways, including to cover your premiums.
If you fall behind on your whole life policy's premiums, the insurer may dip into your cash value to cover the missed payments. But that value may or may not be sufficient to make the needed payments. It typically takes a few years for a whole life policy to build cash value. Also, the policyholder can borrow against that value once it accumulates. That means any cash in the policy may already be spoken for when the need arises to tap into it to pay premiums.
Reinstatement options
A missed payment won’t necessarily trigger the cancelation of the policy. In some cases, insurance companies will allow you to reinstate a lapsed policy. Although the period can vary, you may be able to reinstate a lapsed policy for up to a few years after its lapse date.
To reinstate the policy, you'll have to contact your insurer and pay the missed payments (potentially with interest). You may also have to undergo a new medical exam and go through the full underwriting process again.
Costs of reapplying
The reactivated policy may differ from the original. If it's been a few years since you purchased the original policy or if your health has changed — for example, if you developed a chronic condition — you may have higher rates and different coverage options. You may not even qualify for the same policy type.
Tips to avoid losing your life insurance
To avoid missing a payment, follow these tips:
- Automate the payments: Sign up to pay the bill automatically to prevent missing payments. Stay on top of any mail or electronic notifications from your insurer so you don't inadvertently miss a critical communication.
- Contact your insurance company: If your financial situation changes for the worse, contact your insurance company. The insurer may offer flexible payment options or temporarily reduce your premiums. If you're worried about policy lapses due to future emergencies, your insurance agent may recommend adding policy endorsements like a waiver of premium riders should you become disabled and unable to pay. Or, they may recommend a different type of coverage that better suits your budget.
This story was created in partnership with Money.com.
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ALIC14525 Sep-27