Sometimes life does not always go as planned, which is one big reason term life insurance is a great financial product to own. But what happens if you suddenly can’t afford to pay the premiums on time? Maybe you were injured and are out of work, or an emergency called for a large amount of your savings, or you simply forgot to send in the check; whatever the reason, you suddenly realize you didn’t pay your premiums. What happens now?
A term life insurance policy is a contract between you and the life insurance company. You agree to pay a certain amount and they promise to pay out a lump-sum to your beneficiaries should you die. If you stop paying the agreed upon amounts, then your policy will simply lapse and you would no longer be covered. Don’t panic immediately though, all term life insurance policies include some sort of grace period.
Payment Grace Period
All term life insurance policies have a grace period for making your premium payment. Most grace period lengths are 30 days. As long as you make the payment and the insurance company receives and processes your payment within that grace period your policy will not lapse. While it is important for you to make your payments on time, you will be relieved to know that you are still covered during the grace period.
If you aren’t able to make the premium payment by the due date or within the grace period your policy will lapse. A lapsed policy means that it is no longer active. You will not be covered and your beneficiaries would not receive a death benefit if you died. You will not be refunded any of your past payments if your policy lapses. After a policy first lapses, the owner may have the option to reinstate the policy within a certain period of time depending upon the company, but you may have to prove your insurability again by going through an underwriting process.
Reinstating a Lapsed Policy
If your policy lapsed, but you still want to be covered you can apply for reinstatement. Each company has its own guidelines for reinstatement but most will allow you to apply up to five years from the end of the policy’s grace period.
This is what is usually required when applying for reinstatement:
- Reinstatement Application – All companies will ask you to complete a reinstatement application which is similar to the original application you filled out for the policy.
- Health Statement – Most companies require this to see if anything has changed with your health since you first applied. If you apply for reinstatement within 30 days of the grace period ending, many insurance companies won’t even need this statement and no underwriting would be necessary to reinstate the policy.
- New Medical Exam – Most companies won’t require this if you apply for reinstatement within a certain amount of time, typically within six months of the end of the grace period, but this varies by insurance company.
Even if you apply for reinstatement within a couple months you may still be asked to complete a new medical exam if the answers on your health statement suggest health changes. It would not be wise to attempt to trick the system and lie on your health statement. If it is discovered during the claims process that you lied, the insurance company can dispute all or part of the benefit your beneficiaries were to receive upon your death.
As a general guideline, the less underwriting the better because if a new health condition is discovered you may no longer qualify for the same rates and your premiums would increase when reinstated. Also, if you are approved for reinstatement you will be required to pay the premiums due from the end of the grace period. Consider this if you let your policy lapse for a few years; that would be a significant amount. If you let it lapse for a considerable amount of time applying for a new policy altogether may be a better choice.
If the reason your policy lapsed is because life got crazy and you simply forgot to send in a check, switch to automatic payments. All major life insurance carriers offer the ability to automatically draft your premium payments from your checking account. Set it and forget it, as they say. Make life easier on yourself. With automatic payments, you will never need to worry whether your loved ones are financially covered should you die unexpectedly.
If your life insurance policy has lapsed and you are shopping for a new one, take a minute to see how little it would cost you to get a new term life insurance policy. No need to enter any personal contact information and you are able to see your quote instantly and adjust the coverage amount and term length as needed before starting your application. Term life insurance is peace of mind ensuring your loved ones are protected.