Life Insurance Face Value: Lost When Lapses?

Life insurance is a crucial financial safety net for your loved ones after you pass away. The face value of a life insurance policy is the amount that your beneficiaries will receive after your death. This is also known as the death benefit, face amount, or coverage amount. It is important to distinguish between the face value and the cash value of a life insurance policy. The cash value is an additional amount that accumulates over time and can be accessed by the policyholder during their lifetime. However, it does not increase the face value or death benefit.

If you have a term life insurance policy and it lapses due to non-payment of premiums, you will likely lose the entire policy. On the other hand, permanent life insurance policies may provide some flexibility, such as using the cash value to pay premiums or borrowing against the cash value. Nonetheless, failing to repay any loans or withdrawals from the cash value will reduce the face value of your policy.

Grace periods for term and whole life insurance policies

A life insurance grace period is a set amount of time, usually 30 days, after your premium is due, during which you may make a premium payment without losing coverage. Grace periods are included in most insurance policies because insurance companies would like you to keep your coverage, which helps them meet their business goals.

If you miss a payment and your grace period kicks in, you are on a tight timeframe to bring your life insurance payment obligation current. If you don’t make your payment by the end of the grace period and your coverage lapses, you may be able to apply to have it reinstated, but you will have to pay the overdue bill plus interest. Reinstatement periods can last for up to five years and vary by insurance company. If your lapse is longer than a couple of months, you’ll likely need to prove that your risk profile hasn’t changed significantly by answering health questions or taking another life insurance medical exam.

• Create calendar reminders for life insurance bill due dates.
• Set up automatic payments from your bank account, but make sure you have enough money in your account when the payment is due.
• Pay your premium annually if you have the flexibility to do so. A single annual payment is generally easier to remember than paying monthly or quarterly.
• Designate a second person to get late payment notices as a backup.

Term Life Insurance Grace Periods

A term life insurance policy usually has no cash value, so 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. Your beneficiaries will likely not be able to claim your death benefit, and you'll lose the premiums you've already paid.

Whole Life Insurance Grace Periods

Permanent policies with a cash value component, such as whole life policies, almost always have an automatic premium loan component. If you miss a payment, the insurance company will use the cash value of the policy to cover your premium. 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. Your policy will officially lapse once the grace period ends, meaning your coverage will end and no death benefit will be paid.

Reinstating a lapsed policy

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 policy lapse, your coverage will end. However, depending on your policy, you might be able to reinstate it by meeting certain requirements.

Grace period

In most cases, you'll have a grace period between missing a payment and your policy officially lapsing. 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 some insurers may extend them up to 60 or 90 days. Your insurer is legally required to notify you when you've missed a payment and your policy is in danger of lapsing.

Reinstatement provision

Life insurance policies typically have a reinstatement provision that details the requirements that must be met for reinstatement. For example, if your policy has lapsed for more than 60 days, you may need to provide evidence of insurability, such as confirming that there have been no changes to your health since the policy was written. You may also need to undergo the life insurance application and underwriting process again.

Reinstatement process

To reinstate a lapsed policy, you should start by contacting your insurer directly to find out your options. At a minimum, you'll need to submit a reinstatement application and fill out a questionnaire about your health. You'll also be required to pay all back premiums due and any penalties that have accrued.

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.

Waiver of Premium provisions

A waiver of premium rider is an optional add-on to a life insurance policy that waives or pays your insurance premiums if you become disabled and unable to work. This ensures your policy stays in force even if you can no longer afford the premiums yourself.

The waiver of premium rider is a financial safeguard, waiving premiums during severe illness or disability. The premiums are either paid by the insurer or completely waived, ensuring the policy remains active.

This rider is a comprehensive protection, often covering disabilities, critical illnesses, and even unemployment in some cases. However, the specifics of this rider, such as costs, waiting periods, and coverage, can vary among insurance providers.

While the rider offers significant benefits, it comes with an added cost and specific conditions. Here are some key things to know about the waiver of premium rider:

• Cost: The cost of adding a waiver of premium rider to your life insurance policy can vary widely based on factors like age, occupation, health, and the type of policy. For example, a young, healthy individual with a low-risk occupation may find the cost of this rider to be relatively minimal. On the other hand, someone in a high-risk job or with pre-existing health conditions might face a higher expense.
• Activation and Waiting Period: The waiver of premium rider doesn't activate immediately after a disability or illness is reported. There is typically a waiting period, usually around six months, during which you must continue to pay premiums. If your claim is approved, many insurers will reimburse the premiums paid during this period.
• Continuation of Policy Benefits: A waiver of premium rider ensures that your policy's benefits continue as if you never missed a payment. If you have whole life or variable life insurance, the policy will continue to accumulate cash value and dividends, preserving the policy's intended financial security for beneficiaries.
• Specifics of Total Disability: The definition of total disability that triggers the waiver of premium provision can vary among insurers. Some may define it as the inability to perform your regular job, while others may require that you be unable to perform any job.
• Benefits: A waiver of premium rider can serve as a financial safety net, offering financial protection, preventing a lapse in coverage, and providing peace of mind during difficult times. It also isn't limited to one use, so you may use it several times as long as you meet the qualifications.
• Drawbacks: Adding a waiver of premium rider can increase the overall cost of your policy, and there may be a waiting period before the benefit kicks in. Additionally, qualifications for qualifying disabilities or illnesses may vary, and some riders might not cover partial disabilities. There may also be duration limits, and you may need to undergo medical examinations to continue the benefits.

Policy reinstatement requirements

If your life insurance policy has lapsed, you may be able to reinstate it by meeting certain requirements. The reinstatement process varies across insurance companies and types of insurance policies. However, there are some general requirements and steps you can take to reinstate a lapsed life insurance policy.

Grace Period

Life insurance policies typically offer a grace period, usually 30 to 31 days, during which you can pay your missed premium and any associated late fees to reinstate your policy. If you die during the grace period, your beneficiaries will still receive a payout, although the missed payment will be deducted from the total payout.

Contact Your Insurer

If you want to reinstate your policy, contact your insurer directly to understand your options and requirements. Your insurer may require you to submit a reinstatement application and provide evidence of insurability, such as an updated medical examination or confirmation that there have been no changes to your health since the policy was issued.

Pay Outstanding Premiums and Interest

In most cases, you will be required to pay all overdue premiums, plus interest, to reinstate your policy. The interest rate on past-due premiums is often around 6%. Additionally, if you have any outstanding loans on the lapsed policy, you may need to pay back the full loan amount.

Act Quickly

The sooner you act to reinstate your policy, the better. While some companies offer a 15- to 30-day buffer after a policy lapses with minimal requirements, the longer you wait, the more involved the reinstatement process may become. Most insurers allow three to five years to reinstate a policy, but after six months from termination, you will likely need to go through the full underwriting process again.

Compare Costs

Before reinstating your policy, ask your insurer to calculate how much you owe in interest and past payments. Then, shop around and compare prices for new policies. In some cases, applying for a new policy may be less expensive than reinstating an old one, especially if your health has not changed.

Policyholder rights

If your life insurance policy has lapsed due to non-payment of premiums, you do have some rights and options to consider. Firstly, it's important to understand the difference between term life insurance and permanent life insurance policies. With term life insurance, you generally lose your policy if you fail to make the required premium payments. On the other hand, permanent life insurance policies often have features that allow you to maintain coverage even if you can't keep up with payments.

Grace Period

In most cases, you'll have a grace period—usually around 30 days, but sometimes up to 60 or 90 days—after missing a payment before your policy officially lapses. During this time, your insurance company is legally required to review your beneficiaries' claims for the payout, although missed payments will be deducted from the total payout. You can reinstate your policy by paying the outstanding premium and any associated late fees during the grace period.

Reinstatement

Even if your policy has lapsed, you may be able to reinstate it by meeting certain requirements. These requirements vary by insurer but generally include providing evidence of insurability, paying all overdue premiums with interest, and possibly undergoing a new waiting period. Most insurers have a reinstatement period, often ranging from 2 to 5 years from the date of the lapse, during which you can reinstate your coverage.

Policy Riders

If you have a rider on your policy, such as a waiver of premium rider, it may help you pause your premiums for a specific period without losing your coverage.

Reduced Paid-Up Feature

If you have a permanent life insurance policy, you may be able to reduce your guaranteed death benefit in exchange for your policy being considered fully paid-up. This means you can stop paying premiums while maintaining some level of coverage.

Dividends

If your permanent life insurance policy pays dividends, you may be able to use these to offset your premium payments or take out an automatic premium loan.

Switching to Term Life Insurance

If you have a permanent policy, you may be able to discontinue it, take the cash value (minus any fees), and use the money to purchase a term life insurance policy. Term life insurance premiums are generally less expensive, but there is no cash value component, and your beneficiaries will only receive a payout if you die within the term of the policy.

Legal Recourse

If you believe your insurer has not complied with their obligations regarding premium payment notifications and grace periods, you may have legal recourse to argue that your coverage never actually lapsed. This is a complex area, and it's recommended to consult a law firm experienced in insurance law to explore your options.

Frequently asked questions