How To Press Pause On Your Life Insurance

Life insurance is a crucial safety net for many, but what happens when you can't keep up with the payments? Depending on the type of policy, there may be a few options to keep your coverage. Term life insurance is often lost entirely if you fail to make the required premium payments, but permanent policies offer more flexibility. You may be able to pause your payments for a period, but this will depend on the cash value of your policy compared to your premiums. If you're facing financial hardship, it's worth exploring alternatives to keep your coverage.

What are the consequences of not paying?

The consequences of not paying your life insurance premiums depend on the type of policy and coverage you have, as well as the terms and conditions of your specific policy. Here are some possible outcomes if you fail to make your premium payments:

Term Life Insurance

If you have term life insurance and stop paying premiums, your coverage will lapse, and your policy will no longer be active. This means that if you pass away during the lapsed period, your insurer can deny any death benefits to your beneficiaries.

Permanent Life Insurance

If you have permanent life insurance, you may have more options. Some policies may not automatically lapse from a missed payment, and you might be able to access the cash value of your policy. Here are some choices you may have:

• Cash out the policy: You can stop paying premiums and collect the available cash savings. However, you will lose your life insurance coverage, and you may have to pay income taxes if the amount received exceeds what you paid in premiums.
• Non-forfeiture options: Some insurers offer a "reduced paid-up" option, where you can stop paying premiums in exchange for a reduced death benefit and no cash savings. You may also be able to convert your permanent policy to an extended-term policy based on the accumulated cash savings.
• Policy lapse: If your permanent policy does lapse due to non-payment, you may be able to get it reinstated. Some insurers allow reinstatement within five years of lapsing, but it may require a physical examination and paying back premiums with interest.

Grace Periods and Reinstatement

It's important to note that many insurance providers offer a grace period, typically 30 days, before they cancel your policy. During this time, you can bring your account back into good standing by catching up on payments. Even if you've missed several payments, your policy may be eligible for reinstatement. Contact your insurance provider to discuss your options and work with them to create a plan to get your coverage reinstated.

What are my options with a permanent life insurance policy?

Permanent life insurance provides coverage for the full lifetime of the insured person. It is more expensive than term insurance but permanent policies combine a death benefit with a savings component that earns interest on a tax-deferred basis.

If you have permanent life insurance and can no longer afford the premiums, you have several options:

• Cash out the policy: You can stop paying the premium and collect the available cash savings. You will no longer be covered by life insurance, but you will save some of the proceeds of the policy. You may have to pay taxes on some of the cash value if the sum exceeds what you have paid in premiums.
• Non-forfeiture options: There may be a “reduced paid-up” option where you can stop paying premiums in return for a reduced death benefit and no cash savings. You may also be able to convert the permanent policy to an extended-term policy for a time period based on the accumulated cash savings in the policy.
• Policy lapse: If your policy lapses, you can see if it can be reinstated. Some insurers may allow this if you do it within five years of lapsing. You will most likely have to pass a physical examination for the reinstated policy and pay back the premiums you missed, plus interest. Annual premiums for the reinstated policy may be lower than those for a new, comparable policy.

It is important to note that the options available to you may depend on the specific permanent life insurance policy you have. Consult with your insurance provider to explore your options.

How can I avoid missing payments?

Life insurance is a significant financial commitment, and it can be easy to forget to make payments. Here are some ways to ensure you don't miss any payments:

Set up automatic payments

Arrange for automatic payments to be taken from your bank account each month. This way, you won't have to remember to make the payment manually, and you can avoid any potential late fees or penalties. Just be sure to keep enough money in your account to cover the payments.

Pay annually

If you have the means to pay for your life insurance annually, this can be a great way to avoid missing payments. With only one payment to remember each year, you reduce the risk of forgetting to pay. Plus, paying annually can often result in cost savings, as some insurance companies charge additional fees for processing frequent payments.

Set up calendar reminders

If you prefer to make manual payments, set calendar reminders for the due dates. This can be done on your phone, computer, or paper calendar. Setting reminders can help ensure you don't forget when payments are due and allow you to plan your finances accordingly.

Designate a second person to receive late payment notices

Consider asking a trusted person, such as a family member or close friend, to receive late payment notifications. This creates a redundant system, providing an extra layer of security in case you miss a payment.

Contact your insurance provider

If you're having trouble making payments or are concerned about missing a payment, don't hesitate to contact your insurance provider. They may be able to offer alternative payment options or due dates that better suit your financial situation. It's in their interest to work with you to find a solution and keep your policy active.

What happens if my policy lapses?

If your life insurance policy lapses, you will no longer have coverage, meaning your insurer will not pay a death benefit to your beneficiaries if you die.

However, you may be able to reinstate a lapsed policy, depending on how long ago it lapsed. Many companies will give you a 15- to 30-day buffer after a policy lapses to reinstate it without any additional requirements. After this period, you will likely have to submit a reinstatement application, fill out a questionnaire about your health, and pay back the premiums you missed, plus interest.

The process for reinstatement varies for each company, and some may require you to undergo a medical exam. The sooner you act to reinstate a lapsed policy, the better. If you wait too long, you might be denied coverage.

Term life insurance

If you have term life insurance, a lapse is fairly straightforward. Once you stop paying premiums, you lose coverage and you don't receive a refund of any premiums you paid previously.

Cash value life insurance

Most cash value life insurance policies, such as whole life insurance, include a feature called an automatic premium loan. This allows your insurer to use your policy's cash value to pay your premium if you miss a payment and the grace period ends.

However, if there isn't enough cash value to cover your premiums or if it's depleted by continued non-payment, your policy will lapse. You may need to pay a surrender fee if your policy is less than 10 years old.

What are my options if I can't pay my term life insurance bill?

If you can't pay your term life insurance bill, there are a few options to consider. Firstly, take advantage of the payment grace period, which is typically 30 days from the payment due date. During this time, your coverage will remain active, and you can make the payment without penalty. If you're facing temporary financial hardship, this can give you some breathing room.

If you have a permanent life insurance policy with a cash value, you may be able to use that cash value to cover the payment. However, this option could reduce your death benefit, so it's important to review the impact on your policy.

Another option is to reduce your coverage amount, which will lower your premium. Contact your insurance company to discuss this possibility and understand the impact on your overall coverage.

If you have a permanent policy, you might consider switching to a term policy, which is generally less expensive. However, term policies do not build cash value and only provide coverage for a specified period.

In extreme cases, you could consider surrendering your policy, which means cancelling it and potentially receiving any cash value that has accrued. This decision may have tax implications, so be sure to review this option carefully.

Finally, you may be able to sell your life insurance policy to a third party in what is known as a life settlement. The third party would take over premium payments and receive the death benefit when you pass away.

It's important to review your policy details and contact your insurance provider to discuss your specific options and how they may impact your coverage.

Frequently asked questions