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Are you going through a financial rough patch and can't afford to pay your life insurance premiums? Not making your payment as agreed could have some serious consequences, depending on the terms and conditions of your policy. Keep reading to learn about the possible effects of missing one or more life insurance premium payments.
How Do Life Insurance Payments Work?
Depending on your agreement with your life insurance provider, premium payments may be due monthly, quarterly, semi-annually or annually. Due to their frequency and reduced size, monthly or quarterly payments are typically easier to budget for. However, some insurance companies charge additional fees to process these frequent payments, which can cost you more overall.
Opting to pay premiums on a semi-annual or annual basis can help you avoid any added costs, but it'll mean making a large and infrequent lump-sum payment. No matter your payment structure, it's important to make sure it's factored into your budget, and to take steps to free up cash for payments if money's tight.
If you purchase life insurance through your employer, premium payments will likely be deducted from your paycheck. You may have the option to take the policy with you if you leave your employer, but you would need to work with your insurer to convert your plan to a whole life policy. You'd then begin making payments directly to the insurance company in order for the policy to remain active.
Does Your Policy Lapse if You Miss a Payment?
Whether your policy will lapse if you miss a payment depends on the type of policy and the terms and conditions set forth by the insurance provider. If you have a term life insurance policy, expect coverage to lapse if you miss a payment.
Your policy may not automatically lapse from a missed payment if you have permanent life insurance, though. You can cash out the policy, agree to a reduced death benefit that no longer accumulates cash value or convert to term coverage if you stop paying premiums.
If you cash out the policy, the insurance company will disburse the cash savings to you. Use the funds how you see fit, but be mindful that you'll no longer have life insurance coverage. You could also be responsible for paying income taxes if the amount you receive is more than what you paid in premiums.
Some providers also offer a non-forfeiture option that allows you to stop paying altogether. You have to agree to a smaller death benefit in exchange, and the policy will no longer build up cash value. Or you may be able to convert to an extended-term policy with a death benefit equal to the value of cash savings already accumulated in the policy.
But there are instances where cash-out or non-forfeiture options are unavailable on permanent life insurance policies. Consult with your insurance provider to explore your options. Also, know that many insurance companies offer a 30-day grace period before they cancel your policy.
How to Avoid a Life Insurance Policy Lapse
Stay on top of your premium payments by enrolling in autopay through your insurance provider or using your financial institution's bill payment service. If these methods don't work for you, schedule your premium payments at the beginning of the month several days before the due date to ensure timely processing. To better prepare for large annual or semi-annual payments, you might consider setting up an automatic transfer to another savings account to be prepared when the time comes. That way, you can incorporate the transfers into your monthly budget.
If you're already behind on payments, reach out to your provider and ask about payment options that can help you get back on track. They may offer to modify the due date or break up the past-due premium payments into smaller chunks until you bring the account current without canceling your policy.
What to Do if Your Policy Lapses
Non-payment can result in your policy being canceled by your insurance; if this happens, reach out to the insurance provider promptly and ask what you can do to have it reinstated. This process could be as simple as making premium payments to bring the policy current if not much time has passed since the policy lapsed.
Even if you've missed several payments, your term or permanent life insurance policy may be eligible for reinstatement. Some insurance providers give you up to five years to get current on your premium payments plus any applicable interest, but a medical examination may be required before your policy can become active again.
The Bottom Line
It's not the end of the world if you miss a life insurance premium payment. If this happens to you, work with your provider to create a plan to get current. And if your policy lapses, start taking the necessary steps to get your coverage reinstated right away.