Thursday, December 29, 2016

What if you missed paying your life insurance premium?

Life insurance policies can be a complicated affair if not downright unintelligible. A good analogy to understand term insurance is through the analogy of buying vs. renting. With term life insurance, the insurance is never really yours. Term life insurance is an autonomous contract between the life insurance company and you. It means the obligation rests only on one party and that is the life insurance company. Just like how an auto insurance offers you coverage till you pay the premiums and the policy lapses when you don’t pay, term life insurance too offer coverage only until you pay the premiums.

life insurance

At Policy Bazaar, we are often asked if lapse of life term insurance policy may hurt the credit of our customers. The answer is a resounding no. Life term insurance is a unilateral agreement and so there are no obligations on the customer’s part to pay the premiums. Contrary to credit cards or bank loans, missed payments are not reported to credit bureaus or consumer reporting agencies.

When you don’t pay your premiums, your term policy lapses. But what happens when you miss a payment date? Does this mean your policy lapses? Well, missed payments doesn’t need to be a reason to panic. Life insurance companies offer some options to counteract missed payments.

The Grace Period

All term life insurance offers you some kind of grace period (ranging from 15 to 30 days. In some cases, it could go even up.) The policy won’t lapse if your life insurance company receives the payment within the grace period. It is also important to note that even during your grace period you will be covered with life insurance and in case of unfortunate event like your death, the company is still bound to pay the death benefit. However, each company has their own guidelines when it comes to life insurance policy and you need to be aware of the specific rules regarding the grace period.

Reinstatement

The next question is what happens when you go past the grace period without payment of your premium? If you still want the term coverage, you have the option to apply for reinstatement. As stated earlier, every company has their own guidelines for reinstatement however, most companies will allow to apply for reinstatement up to even five years from your grace period. So how can you apply for reinstatement?

Fill a Reinstatement Application – Just like how you filled the original application for the application of the policy, you would need to fill a reinstatement application.

Health Statement – You may also be asked to provide a health statement about your current health status to see if something has changed since your original application.

New Paramedical Exam – You may have to give paramedical exam depending on the requirement of a life insurance company. In general, most of the companies don’t require a paramedical examination if the application is received within 90 days from grace period. However, if you had a change in health status regardless of the time period from grace period, your life insurance company will most likely require a paramedical examination. 

You need to note that once your reinstatement gets approved, you will need to pay all the premiums from the end of grace period which could be significant amount if it has been several months or years since the lapse of the policy. If the amount is significantly high, it may be a better choice to apply for a completely new policy.

Cancel the Policy

If you decide to terminate the life insurance policy because you found a less expensive policy or because the old policy’s reinstatement amount is significantly higher, you have couple of options to terminate the policy.

Stop Paying – This is the simplest way to cancel the life insurance policy. You just need to stop paying the premiums and the policy will lapse. However, in case you pay your premiums once or twice a year, it may mean leaving good money on the table for which you can formally cancel the policy.

Formally Cancel – you can formally cancel the policy by calling the life insurance company and asking them to cancel the policy. Provide them a specific date and they may refund all ‘unused’ premiums that you have paid.

The best thing that can be done in case you lag behind in the premium payment is to contact them, ask their opinions and then make an informed decision.

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