Life Insurance: Unused, Unclaimed, And What's Next

Life insurance is a financial safety net for your loved ones after you die. It's a way to ensure your family can pay for your funeral, cover any remaining debts, and maintain their lifestyle without your income. While it's not a nice thing to think about, it's an important part of financial planning. If you don't use your life insurance before it expires, you won't get your money back, but your loved ones will be spared the financial burden of your death.

You can reinstate a lapsed policy by filling out a reinstatement application and paying outstanding premiums

If you stop paying your life insurance premiums and your policy lapses, you may be able to reinstate it. The process for reinstating a lapsed policy will depend on the insurance company and the type of insurance you have. In some cases, you may simply need to fill out a reinstatement application and pay any outstanding premiums. You may also be required to undergo a medical exam to ensure your health condition hasn't changed dramatically since purchasing the policy.

The right to ask your insurer to reinstate a lapsed policy is often included in life insurance policies, but it is usually limited by time. Therefore, it is important to familiarise yourself with this option and act quickly if your coverage ends due to non-payment of premiums. Many insurance providers are willing to work with you to bring your policy back into good standing, so it is worth reaching out to discuss your options.

To avoid having your life insurance policy lapse in the first place, it is important to make regular premium payments. The cost and frequency of these payments will depend on the policy you select. Some insurance providers offer various payment options, such as paying annually, semi-annually, or quarterly. To avoid missing payments, you can set up automatic payments through your bank or pay your premium annually, so you only have one payment to remember.

If you miss a payment, the consequences will depend on the type of life insurance you have. With permanent life insurance, the policy may have built-up cash value that can be used to cover the cost of premiums and keep the policy active. If there is insufficient cash value, the policy will lapse, and the benefit will end when premiums are not paid. With term life insurance, there is usually a grace period during which you can bring your account back into good standing before the policy lapses.

Permanent life insurance policies with sufficient cash value can cover premium costs to keep the policy active

Permanent life insurance policies, such as whole life insurance, are designed to offer lifelong protection. They are more expensive than term life insurance policies, but they also offer more flexibility. One of the key features of permanent life insurance is the ability to build cash value over time. This cash value component is a savings account that grows tax-free and can be used for various purposes while the policyholder is still alive.

The cash value in a permanent life insurance policy is built by dividing premium payments into three categories. A portion of the premium goes towards the death benefit, another portion covers the insurer's operating costs and profits, and the remaining portion contributes to the policy's cash value. Over time, as the policyholder continues to pay premiums and earn interest, the cash value grows.

The cash value in a permanent life insurance policy can be used in several ways. One option is to borrow against the cash value, allowing the policyholder to take out a loan at a competitive rate without having to undergo a credit check. The cash value can also be used to pay policy premiums, which can be especially useful for retirees who no longer have a steady income. Additionally, the policyholder can choose to withdraw cash from the policy, although this may result in a reduction in the death benefit.

It's important to note that the funds allocated to the cash value decrease as the policyholder ages, as the cost of insuring their life increases. Therefore, the cash value accumulation is typically higher in the early years of the policy and slows down as the policyholder gets older. Permanent life insurance policies with sufficient cash value can be a valuable tool for policyholders, providing financial flexibility and the potential to maintain their coverage even if their income declines during retirement.

Term life insurance policies do not build cash value and coverage ends when the term expires

Term life insurance is a temporary contract between the policyholder and the insurance company. It is designed to offer coverage for a specific period, typically ranging from 10 to 30 years. Term life insurance policies are simple, lack cash value, and do not last a lifetime. This means that they are cheaper than whole life insurance policies. Once the term ends, the policy's coverage ends, and the policyholder stops paying premiums.

When a term life insurance policy expires, the policyholder will receive a notice, and premium payments will stop. The policy will then lapse, and there will be no death benefit. However, if the policy included a return-of-premium feature, the policyholder would receive a refund for the premiums paid during the term.

Term life insurance policies do not build cash value over time. This means that if you stop making payments, the policy will lapse, and there will be no benefit paid out. This is in contrast to permanent life insurance policies, which do build cash value and can be used to cover the cost of premiums to keep the policy active.

If you have a term life insurance policy and you are concerned about building cash value, there are a few options to consider. Firstly, you could look into adding a return-of-premium rider to your policy. This optional add-on allows you to receive a refund for the premiums paid if you outlive the policy term. However, this will increase your premiums, so you will need to budget accordingly.

Another option is to convert your term life insurance policy into a permanent life insurance policy. Permanent life insurance policies last for the entire life of the policyholder, provided that premiums are paid. They also include a cash value component that can be used as a wealth-building vehicle. With a permanent life insurance policy, a portion of your premium payments will go towards the policy's cash value, which will earn interest over time. You can access this cash value by withdrawing funds, taking out a life insurance loan, or surrendering the policy.

In summary, term life insurance policies do not build cash value, and coverage ends when the term expires. If you are looking for a policy that offers lifelong coverage and the opportunity to build cash value, you may want to consider a permanent life insurance policy.

You can extend term life insurance coverage by paying increased premiums

If you find yourself needing to extend your term life insurance coverage, you have a few options. Firstly, you can renew your current term policy on a year-to-year basis until you are 95 years old. Most term life policies have a guaranteed renewability feature that allows you to extend your coverage without undergoing a new medical exam. However, the insurance company will typically increase your premium as you get older. While this option can make sense for some, it may not be the most cost-effective choice in the long run.

Another option is to convert your term policy into a permanent policy. Many term life policies now include a conversion rider, which allows you to make this change without providing evidence of insurability. Different insurance companies have different ways of handling term-to-permanent conversions, so be sure to review your policy. There is usually a deadline for conversions, and some insurers may only allow conversions during the first few years of coverage or up to a certain age. Converting to a permanent policy can be advantageous if you've developed a health condition, as it may be challenging to obtain a new insurance policy. However, permanent policies are inherently more expensive, and premiums will increase with conversion due to age.

If you are still in good health and want to maintain a substantial level of coverage, you can also consider purchasing a new term-life policy. This may be the most cost-efficient way to get the desired death benefit. You will likely need to undergo a new medical exam, and your premium will be higher due to your increased age and reduced life expectancy. Nonetheless, this option provides flexibility in adjusting the death benefit level to match your current needs.

You can convert a term life insurance policy into a permanent policy

If you have a term life insurance policy and are considering permanent coverage, you can convert your term policy into a permanent one. Here's what you need to know about the process and the benefits it offers:

How to Convert Term Life to Permanent Life Insurance

Converting a term life policy to a permanent policy is a relatively straightforward process. Here are the steps you can take:

• Check your term life policy: Review the terms and conditions of your existing term life insurance policy. Look for any mention of a conversion option or a term conversion rider. This will indicate if you have the ability to convert your policy.
• Understand the conversion period: If your policy allows for conversion, there is usually a specified conversion period during which you can make the switch. This period may be limited to a certain number of years or up to a certain age, such as 75. Make sure you are aware of any deadlines to ensure you don't miss the opportunity to convert.
• Contact your insurance company: Get in touch with your insurance provider to discuss the available options for permanent life insurance policies. They can guide you through the specific process and requirements for conversion.
• Fill out the necessary paperwork: You will need to complete a life insurance conversion application and provide relevant information, such as the amount of coverage you desire and your preferred billing method for premiums.
• Sign and submit the application: Once you have completed the application and made your selections, sign and submit it to your insurance company to initiate the conversion process.

Benefits of Converting Term Life to Permanent Life Insurance

Converting your term life insurance policy to a permanent policy offers several advantages:

• Extended coverage: A permanent life insurance policy provides lifelong coverage as long as you continue to pay the premiums. This can be especially beneficial if your circumstances change and you find that you need coverage for a longer period than initially anticipated.
• No medical exam required: When converting a term policy, you typically won't need to undergo a new medical exam or answer health-related questions. This can be advantageous if your health has changed or if you've developed conditions that would make obtaining a new permanent policy more challenging or expensive.
• Lock in rates: Converting a term policy allows you to lock in rates based on your original underwriting class. This means your age at the time of conversion won't affect your premium rates, which is a significant benefit as premiums tend to increase with age.
• Build cash value: Permanent life insurance policies often include a cash value component that grows over time, tax-deferred. This can provide additional financial flexibility and can be used for various purposes, such as collateral for loans or withdrawals.
• Peace of mind: Converting to a permanent policy can offer peace of mind, knowing that you have continuous coverage in place. It also ensures that your loved ones will receive a death benefit, regardless of when you pass away.

Factors to Consider

While converting a term life policy to a permanent one has its benefits, there are also a few considerations to keep in mind:

• Increased premiums: Permanent life insurance policies generally come with higher premiums than term life policies. Make sure you carefully review the cost of the new permanent policy and ensure it fits within your budget, both now and in the long term.
• Limited policy options: When converting, you may be restricted to certain types of permanent policies offered by your insurance company. It's important to understand the available options and choose the one that best aligns with your goals and needs.
• Alternative options: Before converting, explore other alternatives, such as purchasing a new term or permanent policy. Shop around and compare rates and coverage options from different insurers to find the best fit for your circumstances.

Frequently asked questions