Freeze Life Insurance Payments? Here's What You Need To Know

Life insurance is a crucial financial product that provides peace of mind and security for individuals and their loved ones. However, maintaining coverage can be challenging during difficult financial times. While it is not possible to freeze life insurance payments, policyholders can explore several options to manage their payments and avoid policy lapse. Understanding the available choices is essential to make informed decisions and ensure continued protection for their families.

Grace periods

If you miss a payment, it's important to act quickly and take advantage of the grace period to bring your account back into good standing. You can contact your insurance agent or company representative to understand your options and make the necessary payments. Setting up automatic payments or payment reminders can also help you avoid missing future payments.

If you don't make your payment within the grace period, your policy will likely lapse, and you will need to take additional steps to reinstate your coverage. The consequences of missing a payment can vary depending on the type of policy you have. With term life insurance, your coverage will typically lapse if you miss a payment. On the other hand, permanent life insurance policies may offer more flexibility, such as cashing out the policy or converting it to a reduced benefit or extended-term policy.

It's important to review your policy documents or contact your insurance provider to understand the specific grace period and reinstatement options available to you.

Policy lapses

A life insurance policy lapse occurs when you stop paying your policy's premium and the contractual grace period has expired. If you let your life insurance lapse, coverage will end. Depending on the type of policy and the terms and conditions set forth by the insurance provider, your policy may not automatically lapse from a missed payment.

Grace Periods

Most insurance providers offer a grace period for making late payments, usually around a month from the due date. During the grace period, you can reinstate your life insurance policy by paying the outstanding premium and any associated late fees. Grace periods typically last around 30 days, but can be up to 60 or 90 days depending on your policy. Insurers are legally required to notify you when you've missed a payment and your policy is in danger of lapsing.

Term Life Insurance

If you have a term life insurance policy, coverage will lapse if you miss a payment. Once you miss a payment, the policy immediately moves into a grace period. If a payment isn't received by the end of the grace period, the policy lapses and your beneficiaries will likely not be able to claim your death benefit.

Permanent Life Insurance

Permanent life insurance is more expensive than term life insurance, but it is also more forgiving of non-payment. If you have permanent life insurance, you might be able to take advantage of features that allow you to stop paying your premium without your policy lapsing. For example, the "reduced paid-up" feature allows you to reduce your guaranteed death benefit in exchange for your policy being considered fully paid.

Permanent policies with a cash value component, such as whole life policies, almost always have an automatic premium loan component. If so, the insurance company will use the cash value of the policy to cover your premium if you miss a payment. If there isn't enough cash value in the policy to pay the premium, or once the cash value has been used up due to continued non-payment, your policy will slip into the grace period.

Reinstating a Lapsed Policy

Life insurance policies typically have a reinstatement provision that details the requirements that must be met for reinstatement. For example, you may need to provide evidence of insurability by confirming that there have been no changes to your health since the policy was written, or you may need to undergo the life insurance application and underwriting process again. Regardless of when you reinstate your policy, you'll be required to pay all back premiums due and penalties that have accrued.

Non-forfeiture Options

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.

Cashing out

The cash value of your policy is built up over time. Every time you make a payment, the insurance company puts a portion of it aside, and this fund grows with interest. The cash value can eventually add up to hundreds or thousands of dollars.

There are four main ways to cash out your life insurance policy:

• Withdraw: You can withdraw your entire cash value, but this will require you to surrender your policy, so your coverage will end. You will have to pay surrender charges and income taxes on the money.
• Partial Withdrawal: You can take out some but not all of the cash value of your policy. This means your loved ones will still get a death benefit when you die, although it will be smaller. Check whether the money you receive will be taxable.
• Borrow: If you've had your policy for several years, the insurance company may allow you to borrow from your policy's cash value. You won't have to pay taxes on the money you borrow, but the insurance company will deduct interest payments from your cash value balance. If you pay back the loan and interest in full before you die, your loved ones will get the full death benefit. If you don't, the balance you owe, plus interest, will be subtracted from the death benefit.
• Surrender: When you surrender your insurance policy, you cancel it and take the surrender value cash payment. You will have to pay surrender fees and taxes on the money you receive. Your beneficiaries will not receive a death benefit from the policy when you die.

It's important to carefully weigh your options before cashing out your life insurance policy, as doing so will impact the amount of money available to you, your death benefit, and your account's growth. You may also want to consider alternatives to cashing out, such as taking out a loan or applying for a personal loan.

Non-forfeiture options

• Reduced Paid-Up Insurance: This option allows policyholders to use the cash value of their policy to purchase a smaller, fully paid-up policy with no further premiums due. The death benefit of the new policy will be reduced, but it will continue to build up cash value over time.
• Extended-Term Insurance: With this option, the policyholder uses the cash value of their original policy to purchase a term insurance policy with the same death benefit for a specified period. This allows the policyholder to maintain their coverage without paying additional premiums, although the coverage will expire at the end of the term.
• Cash Surrender Value: This option allows the policyholder to terminate the policy and receive the accumulated cash value as a lump sum payment. The policy is cancelled and cannot be reinstated, and the insurer's responsibility under the contract ends.
• Automatic Premium Loan: In this case, the insurer automatically uses the policy's cash value to cover missed premium payments, essentially taking out a loan against the cash value. The loan does not need to be paid back, but it will reduce the death benefit paid out to beneficiaries.
• Annuity Conversion: The policyholder can choose to convert their policy's cash value into an annuity, which provides future income. This option also results in the loss of life insurance protection.

It is important to note that non-forfeiture options may not be available for all types of life insurance policies. They are typically offered for permanent life insurance policies with cash value, while term life insurance policies usually do not include these options. Additionally, there may be tax implications and other financial considerations when choosing a non-forfeiture option. It is always advisable to consult with a financial professional or tax advisor before making any decisions regarding your life insurance policy.

Reinstating coverage

If you miss a payment on your life insurance, you will enter what is known as a "grace period". This is usually around 30 days, but it depends on your policy and provider. During this time, your policy will remain in force. If you die during this period, your beneficiaries will still receive a payout, but the insurance company will likely subtract the premium payment owed from the death benefit.

If you miss a payment, it is recommended that you call your insurer to pay what you owe by phone or log on to your account to make an online payment. If you cannot afford to pay the insurance premiums now, discuss your payment options with your insurer.

If you do not make a payment during the grace period, your policy will lapse, and your coverage will end. However, you may be able to have it reinstated. The sooner you act, the better, as the process of getting your coverage back can become more involved over time.

Insurers typically allow three to five years to reinstate a policy after it lapses, but they will have certain requirements for reinstatement. You will usually have to submit a reinstatement application, fill out a questionnaire about your health, and attest that your health condition hasn't changed since your policy was approved. Your insurer may also check your medical records or require you to take a life insurance medical exam. If your health has changed for the worse, the insurance company might not reinstate your policy.

If the insurer agrees to reinstate the policy, you will have to pay all of the premiums owed, plus interest. The benefit of reinstating an existing policy rather than applying for a new one is that you'll likely pay less. If your health hasn't changed, your insurer will honour the original pricing on your policy.

Frequently asked questions