There are variable consequences of discontinuing payment on a life insurance policy. This variability is primarily due to the array of life insurance plans available. It is also due to differences in company policies and provisions. Insurers may consider the policy lapsed or provide non-forfeiture options (with cash-value plans). This topic is an issue that you should clarify even before you purchase a particular plan. The outcomes of discontinuing payments on life insurance policies are as follows:
1) Policy lapse
Life insurance plans generally have a grace period of 31 days. With term plans, the policy would lapse after the grace period has ended. Cash-value plans may lapse if there isn’t a sufficient cash-value above any surrender charges to deduct the premium amount from. In the event of a policy lapse, insurers generally provide an extended period in which the policy can be reinstated.
2) Automatic premium loan (APL) or Policy loan
Automatic premium loans or policy loans apply only to cash value plans. The latter occurs if you borrow against the cash-value of your Whole Life or Universal Life plan. Alternatively, a premium loan would be in effect if the company has to deduct the premium value from the cash-value. Depending on the policy of the company you may have to repay the loan with interest. Some companies waive the policy loan or automatic premium loan provisions and treat them as interest-free loans with no mandatory repayment requirement.
3) Reduced paid-up policy
It is important that you know whether the life insurance plan that you are taking has a paid-up-policy clause in event of non-payment. This clause results in the policy’s net cash-value being utilised as a single premium to purchase a reduced amount of permanent life insurance. This would occur on the basis of minimum coverage and premium rates set out in the original policy.
4) Cash surrender
By definition, this option applies specifically to cash-value plans. The cash surrender provision states that a policy-owner who discontinues payment on a policy would have the option of surrendering the policy in full and receiving the policy’s cash surrender value. Following the surrender, the plan generally cannot be reinstated. The cash surrender value may be different from a policy’s cash value. The difference would be that the cash surrender value would involve the deduction of any administrative or surrender charges.
Fortunately, some insurers are flexible and understanding of peoples’ situations. It is better to communicate what your position is to the insurer either directly or through your agent, for best results. Do not wait until too late to discover what your options are if you are unwilling or unable to continue payments on your life insurance policy.