How Lapsing Your Life Insurance Policy Hurts You

January 8, 2024 | By Adam Lippman

How Lapsing Your Life Insurance Policy Hurts You

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A life insurance policy offers your loved ones a financial safety net at the end of your life. Missing a premium payment and lapsing your life insurance policy may terminate your coverage completely. A lapsed policy creates a ripple effect as it takes away the financial support you have built by investing every month. Reinstating your policy can be costly, with higher premiums and a reduced death benefit. Sometimes, you forfeit any cash value accumulated up to this point.

If you anticipate missing a policy payment, several options can allow you to access a portion of your investment early or take a payment break for a specified period without letting your coverage lapse.

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Financial Implications

One downside of lapsing your life insurance policy is the significant financial implications. However, most insurance providers have a grace period, often up to 31 days, so you can catch up on that payment for most life insurance types without losing your coverage. Most policy lapses will not affect your credit score.

Some whole life insurance policies may cover missed premiums through automatic premium loans. This means the insurance company automatically pays your missed premium by taking on a loan from your cash value. Making up your missed premiums this way incurs interest, which you are liable to pay.

Loss of Death Benefit

The death benefit is the monetary value paid to your beneficiaries after you pass away. Losing this death benefit is the most significant impact of lapsing your life insurance policy. Without coverage, you lose your entire death benefit and the monetary safety net for your beneficiaries.

Challenges Obtaining New Coverage

If you want to reinstate your policy, you may face increased premiums and requalification, which can come with underwriting hurdles from new health changes. As you age, these potential health changes create a higher risk profile, so insurers charge more for the same coverage. If your insurance provider used an automatic premium loan, you will also have to pay the interest on that loan.

Insurers may also hesitate to offer you new coverage, reducing the number of available insurance provider options. If you find a new provider or your current provider will reinstate your policy, you may face a waiting period before your new coverage takes effect. This elimination period leaves a gap in protection, which is concerning if you need coverage immediately.

Steps to Take When Your Policy Lapses

You must pay the missed premiums to reinstate your policy during the grace period. It is always a good idea to consult your financial advisor, who can help you assess the situation and recommend the best course of action based on your circumstances. Generally, you’ll follow these steps to reinstate your policy:

  • Contact your insurer:¬†Contact the insurance provider to understand the options or alternative steps you can take.
  • Evaluation:¬†Ask about the process to reinstate your policy and any additional requirements, including other payments or information you need to update.
  • Explore alternatives:¬†Look into your other options or insurance policies that better suit your current needs.
  • Act quickly:¬†It is best to reinstate your policy quickly to avoid further penalties and ensure adequate coverage.

Alternatives to Lapsing Your Policy

A few alternatives exist to lapsing your life insurance policy due to changing circumstances. These options can be especially helpful if you need cash to fund medical expenses, care facilities, or maintain your lifestyle. Explore the alternatives available to you and see which will suit your current and future needs the best if reinstating your existing policy is not a priority.

A few alternatives exist to lapsing your life insurance policy due to changing circumstances. These options can be especially helpful if you need cash to fund medical expenses, care facilities, or maintain your lifestyle.

Policy 1035 Exchange

Consider exchanging your life insurance policy for one that aligns with your current or future needs through a 1035 exchange. This option lets you trade your policy as-is for another one. You can conduct this exchange between products in the same company without incurring taxes. For this exchange, the policy owner:

  • Must remain the same.
  • Cannot take receipt of the funds directly to buy a new policy.
  • Must transfer to the new policy immediately.

Reduce Your Coverage

If high premium payments become challenging, contact your insurance broker to see if you can reduce your coverage to decrease your monthly payment amount.

Partial Surrender

You can consult with your insurance broker about surrendering part of your policy and keeping a portion to ensure your beneficiaries can access part of the death benefit. If your policy’s terms and conditions allow this, you can withdraw some of the policy’s cash value and maintain the remainder at the same monthly premium.

A Life Settlement or Viatical Settlement

To access your policy’s cash value, you can sell your life insurance policy to a third party with the help of a Life Settlement broker. There are two options for selling:

The buyer becomes the owner and beneficiary, meaning they make the premium payments and receive the death benefit. Partner with a reputable Life Settlement broker to guide you through the process and find a buyer who will make a fair offer.

Discover if You Qualify for a Life or Viatical Settlement

Sell Your Life Insurance Policy With Settlement Benefits Association

Allowing your life insurance policy to lapse due to non-payment can cause detrimental consequences, starting with coverage termination. Reinstating a lapsed policy can lead to significantly higher premiums ‚ÄĒ if you qualify following an obligatory health analysis. Making timely payments or employing alternative solutions empowers you to avoid losing the cash value of your life insurance policy.

Founded in 2002, Settlement Benefits Association is your independent Life Settlement broker. We are fiduciaries here to help you find buyers for your life insurance policy, ensuring you get the highest offer possible. Use our Visual Valuator to determine the initial valuation of your policy, and contact our knowledgeable brokers to help you start selling your life insurance policy.

Sell Your Life Insurance Policy With Settlement Benefits Association

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