Life Insurance Payments: Can You Press Pause?

Life insurance is a crucial financial safety net for your loved ones, but what happens when you can no longer afford the premiums? The consequences of missed payments depend on the type of policy and its specific terms and conditions. Term life insurance policies are more rigid, and failure to pay premiums typically results in a lapse of coverage. However, permanent life insurance policies offer more flexibility. While missing payments can lead to a policy lapse, permanent policies often have built-up cash value that can cover premiums for a while. Understanding the grace period, exploring payment alternatives, and considering policy adjustments are essential to navigate this complex situation.

Grace periods

If you exceed the grace period without making the payment, your policy will typically enter a "lapse pending" status, and you will have another 30 to 60 days to make the payment and restore your coverage. After this extended period, you may need to apply for reinstatement, which could involve answering health questions or undergoing another medical exam. Reinstating a lapsed policy will also require paying past-due premiums, possibly with interest and penalties.

Waiver of premium rider

A waiver of premium rider is an optional add-on to a life insurance policy that allows you to pause premium payments if you are experiencing a qualifying disability. This ensures that your coverage does not lapse if you are unable to work due to your disability.

The waiver of premium rider is particularly useful if you are concerned about maintaining your financial health in the event of an injury or illness. It is available for most types of life insurance policies, including term, whole, and universal life insurance policies.

To activate the rider, you will need to file a claim with your life insurer. This typically involves providing a statement from your doctor that details your condition and confirms that you are unable to work. You may also be required to submit a notice from the Social Security Administration (SSA) to verify your inability to work.

It is important to note that there may be a waiting period before the rider takes effect, during which you must continue making premium payments. Additionally, the rider may increase your insurance premium by 10% to 25%.

The waiver of premium rider can provide valuable financial protection, but it is important to carefully review the terms and conditions before adding it to your life insurance policy.

Dividends

• Cash or check: You can request that the insurer send you a check for the dividend amount. This option is usually the best as dividend payments received from participating life insurance policies are generally not subject to taxes. You can then reinvest the proceeds in an investment vehicle that could earn more income.
• Premium deductions: You can use the dividend to put towards future premiums to offset the cost.
• Additional insurance: You can use the dividend amount to purchase additional insurance or prepay on your policy.
• Savings account: You can keep the dividend with the insurance company to earn interest on the amount.
• Pay premiums in advance: Dividends can be used to pay premiums as far in advance as possible.
• Repay a loan or lien: If you have a loan or lien against your policy, you can use your dividends to pay down the amount you owe.

It is important to note that dividend amounts can increase over time to sufficient levels to offset some costs associated with premium payments. Additionally, dividend amounts may be guaranteed or non-guaranteed, so it is essential to carefully review the policy before purchasing. Policies that provide guaranteed dividends often have higher premiums to make up for the added risk to the insurance company.

Cash value

If you have a permanent life insurance policy, you can use the cash value in multiple ways, including using it to pay premiums by making a withdrawal from the cash value. If you've had the policy for several years, you might have built up enough cash value to cover some payments. However, if the amount you withdraw exceeds the amount you've paid toward the cash value portion of your policy, you'll pay taxes on the difference. Withdrawals also reduce the death benefit.

You can also borrow against the cash value and use that money to pay your premium (or other expenses). Interest will accrue on the amount you borrow. If you don't pay back the loan, your death benefit will be reduced, and your beneficiaries will get a lower payout.

You can also use the cash value to convert your policy to a paid-up status. This will allow you to keep some coverage in place without paying additional premiums. However, this will also likely reduce the death benefit paid to beneficiaries.

Another option is to cash out the policy. This means that you can stop paying the premium and collect the available cash savings. You will no longer be covered by life insurance, but you will at least save some of the proceeds of the policy. You may, however, have to pay taxes on some of the cash value if the sum exceeds what you have paid in premiums.

Policy reinstatement

If you've missed a payment, it's recommended to call your insurer to pay what you owe by phone or log on to your account to make a payment online. This will be the fastest way to fix the problem. If you can't afford to pay the insurance premiums now, discuss your payment options with your insurer.

If your policy has lapsed, you may be able to reinstate it, 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. You'll likely just have to pay the premiums you missed, plus interest.

The reinstatement process is not the same for every type of insurance policy or upheld in the same way by every insurance company. Some life insurance companies may allow the reinstatement of a policy even if the insured has gone past its grace period.

Insurers typically allow three to five years to reinstate a policy after it lapses. However, they have certain requirements for reinstatement. At a minimum, you'll 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 from your doctor and require you to take a life insurance medical exam—as you may have done when you first applied for coverage. 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. A rate of 6% is common.

Benefits of Reinstatement

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. If your health has changed, that could affect your rate, but your age won't be a factor because the premium will still be based on the age you were when you first applied for coverage.

Reinstatement Within 30 Days of Lapse

After the non-payment of a life insurance premium, a policy enters its grace period. During the grace period, the insurance company remains responsible for paying death benefits on valid death claims. If the insurance company does not receive a premium payment during the grace period, the policy will lapse. At this point, the insurance company is no longer responsible for paying a claim.

A life insurance policy may typically be reinstated within 30 days of a lapse without additional paperwork, underwriting, or attestations of health. Insureds often pay a reinstatement premium, which is larger than the original premium. Insurance companies add the additional reinstatement premium to the accumulated cash value of the policy and pay administrative expenses incurred from the lapse.

Reinstatement After 30 Days of Lapse

After the grace period ends, the life insurance company may still permit the reinstatement of a policy. The insured may be required to make legally binding statements about their health. For example, the insured may have to identify significant, potentially harmful changes in health that occurred after the policy lapsed. If the insured developed a major health condition during that time, the insurance company might decline reinstatement.

Special Consideration

After six months from the termination of the policy, an insurance company typically requires the insured to go through the underwriting process again for reinstating an insurance policy. Because people tend to face more health issues as they age, full underwriting means a higher likelihood of uncovering a health concern that may make reinstatement difficult or impossible.

Frequently asked questions