Discontinuing payment on your life insurance policy can have variable consequences. The reason for the variability is due primarily to the wide range of different insurances plans that are available. There can also be differences in company provisions and policies. Insurance companies may consider the insurance police as lapsed or for cash value insurance plans there could be non-forfeiture options. Before you invest in any insurance plan you need to clarify this issue. Here are the different outcomes that can result when you discontinue payments on your life insurance policy.
Policy Lapse
Most insurance plans have 31 day grace periods. With term life insurance, the policy lapses at the end of the grace period. With cash value plans, if there is an insufficient cash value over surrender charges for deducing the premium from then the policy may lapse. If a life insurance policy does lapse, most insurance companies will offer an extended period during which the insured can have their policy reinstated.
Policy Loan or Automatic Premium Loan (APL)
Policy loans or automatic premium loans only apply to cash value plans. A policy loan occurs when you borrow against your cash value in your Universal Life or Whole Life plan. Or a premium loan goes into effect if your insurance company deducts the value of the premium for your policy’s cash value. You may be required to repay both the loan as well as interest, depending on your insurance company’s policy. Other insurance companies will waive automatic premium loan or policy loan provisions. In this case they are considered interest free loans and there is no repayment requirement that is mandatory.
Paid-up Policy is Reduced
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It’s very important for you to know whether or not your life insurance plan includes a clause for a paid-up policy for cases of non-payment. With a such a clause the net cash value of the policy is used in the form of a single premium payment to buy permanent life insurance that is a reduced amount. The original policy would set the premium rate and minimum coverage.
Cash Surrender
This is an option for cash value plans only. A provision detailing the cash surrender will state that when the policy owner discontinues making payments on their policy, they will have an option of surrendering their policy and receiving the cash surrender value of the policy. Once a surrender has occurred, the plan cannot usually be reinstated. A policy’s cash surrender value might not be the same as the cash value of the policy. The difference between the two would be surrender or administrative charges being deducted from the cash surrender amount. Some insurers are willing to be flexible and understand situations that individuals sometimes face. For best results you should communicate your situation with your insurance through your agent or directly. Don’t wait until after the fact to find out what options are available to you if you ever are unable or unwilling to continue making life insurance policy payments.
