What Happens If You Stop Paying Your Life Insurance Premiums?
- By the dedicated team of editors and writers at Newsletter Station.
Life insurance provides financial support to your beneficiaries after you die, helping with expenses such as mortgage payments, childcare, education costs, debts, and everyday living expenses. But to keep a policy in force, you must pay premiums according to its terms.
If your financial situation changes and you can no longer afford those premiums, simply stopping payments can put your coverage at risk. What happens next depends largely on whether you have term life insurance or a permanent policy, as well as the specific provisions of your contract.
Before allowing a policy to lapse, it's worth contacting your insurance company. You may have options to keep some coverage or preserve part of the value you've built in the policy.
What Happens When You Stop Paying?
Your Policy May Enter a Grace Period
Life insurance policies generally include a grace period after you miss a premium payment. The exact length varies by policy and applicable state law, so don't assume every policy gives you the same amount of time.
During the grace period, coverage generally remains in force. If the insured person dies during this period, the insurer may pay the death benefit, typically less any unpaid premium, subject to the policy's terms.
The key point is that a missed payment doesn't necessarily end your coverage immediately. Contact your insurer as soon as you realize you've missed a payment so you know exactly where your policy stands.
A Term Policy Can Lapse
Term life insurance generally doesn't have a cash-value account to draw from. If you don't pay the required premium by the end of the applicable grace period, the policy can lapse, and coverage can terminate.
For example, if you have a 20-year term policy and stop paying premiums, you could lose the death benefit even though you previously paid premiums for several years.
A lapse can become especially problematic if your financial or health circumstances have changed since you originally purchased the policy. Replacing the coverage later could be more expensive or, depending on your health and circumstances, more difficult to obtain.
A Permanent Policy May Work Differently
Whole life and other permanent life insurance policies can build cash value, but that doesn't mean you can stop paying premiums without consequences.
Depending on the policy, you may use accumulated cash value to cover premiums or keep the policy in force for a period of time. However, loans, withdrawals, fees, interest, and other factors can affect how long the policy remains active.
Universal life insurance policies require particular attention because coverage can depend on the policy's cash value being sufficient to cover ongoing charges. A policy can eventually lapse if it runs out of cash value.
Don't assume that because a permanent policy has cash value, it will remain active indefinitely without additional premiums.
You May Have Options to Reduce or Preserve Coverage
Some permanent life insurance policies offer alternatives to letting the policy lapse. Depending on the contract, these can include:
Reduced paid-up insurance: You may use the existing cash value to purchase a smaller amount of permanent coverage without future premium payments.
Extended-term insurance: Some policies may let you use cash value to fund a term policy for a limited period.
Surrender: You may be able to give up the policy in exchange for its available cash surrender value, subject to applicable charges and tax considerations.
Using cash value to cover premiums: Some policies let you use accumulated value to pay premiums. However, this can reduce the policy's value and affect how long coverage lasts.
These choices can have very different financial consequences. Ask the insurer for a current illustration or explanation of what would happen under each option before deciding.
What About Reinstating a Lapsed Policy?
A lapsed policy may be eligible for reinstatement, but the requirements and time limits depend on the policy and insurer.
Reinstatement can involve paying overdue premiums, interest, and other amounts specified by the insurer. You may also have to provide evidence of insurability or complete additional underwriting.
This is one reason not to ignore a missed payment. If you know you want to keep the coverage, contact the insurance company promptly rather than waiting until the policy has been inactive for an extended period.
What Should You Do If You Can't Afford Your Premium?
If your budget has changed, you may have options beyond canceling the policy.
Contact your insurer first. Ask whether the policy has a grace period, what happens if you miss additional payments, and whether you can reduce premiums or coverage.
Review the policy itself. Look for provisions concerning lapse, reinstatement, cash value, surrender, paid-up insurance, and policy loans. If you aren't sure what the terminology means, ask the insurer to explain it.
Consider whether your coverage still matches your needs. Your financial responsibilities may have changed since you bought the policy. At the same time, don't cancel existing coverage simply because a new policy appears less expensive. A new policy may involve different underwriting, costs, exclusions, or coverage amounts.
Get professional advice when appropriate. An insurance professional or qualified financial advisor can help you compare the potential consequences of keeping, reducing, replacing, or surrendering a policy.
Don't Cancel Before Understanding the Consequences
Stopping life insurance premiums isn't always as simple as turning off a monthly bill. With term insurance, missed payments can eventually result in a loss of coverage. With permanent insurance, cash value and policy provisions may offer alternatives, but they can also add costs and risks.
Before allowing a policy to lapse, find out exactly what will happen to your coverage, cash value, beneficiaries, and future options. Talking with your insurer while the policy is still active may give you far more choices than waiting until after it lapses.
