Term life insurance is a unilateral agreement between you and the life insurance company. A unilateral agreement or contract is on in which the obligation rests on only one party. In this case that party is the life insurance company.
A term life insurance policy is similar to an auto insurance policy, in that in order to maintain coverage you must continue to pay the premiums when due. If you do not, the policy will simply lapse and you will not be covered.
We often have customers ask if letting a term life insurance policy lapse this will hurt their credit. The answer is — NO! As this is a unilateral agreement, there is no obligation on your part to pay the premiums. Unlike a bank loan or credit card, missed payments are not reported to consumer reporting agencies or credit bureaus by the life insurance company.
So now you know if you don’t pay your premium your policy will lapse. But what if you accidentally miss the payment date or can’t make the premium payment on time for some reason? Well — there’s no need to panic. You have some options.
Behold The Grace Period
All term life insurance policies allow some sort of grace period for making your premium payment. The most common length is 30 days. Your policy will not lapse as long as the life insurance company receives and applies your payment within the grace period. Keep in mind each company has its own guidelines and you should refer to your policy to verify the grace period and specific rules.
One important point to note — you are still covered during the grace period. If you die, the company will still pay the death benefit.
Reinstatement — Sometimes It’s Better to Ask for Forgiveness
If you do happen to go past the grace period without paying your premium the policy will lapse. So what then? Well, if you decide you still want the coverage you can apply for reinstatement. Once again, each company has its own guidelines for reinstatement. Most will allow you to apply for reinstatement up to five years from the end of the grace period. Here’s what is usually required.
- Reinstatement Application – All companies will ask for you to complete this. It is similar to the original application you completed when you first applied for the policy.
- Health Statement – Most companies will ask questions regarding your current health status. They want to see if anything has changed since your original application.
- New Paramedical Exam – This varies widely by the life insurance company. Most do not require this if your reinstatement application is received within 90 days of the end of the grace period. Others will give you up to a full year before they will require a new exam.
However, if you have had a change in health status or provide answers on the health statement that suggest health changes, the life insurance company will most likely require you to complete a new paramed exam, regardless of the time passes since the end of the grace period.
If you are approved for a reinstatement, you will be required to pay the premiums due from the end of the grace period. And that can be a significant amount if it has been several months or even years since your policy lapsed. For that reason, applying for a new policy altogether may be a better choice.
Cancel the Policy Entirely
You may ultimately decide you don’t want your term life insurance policy anymore. Maybe you bought a less expensive policy recently and just want to cancel your old one. Or maybe you simply no longer need the coverage. Either way, you have a couple of options for terminating the policy.
- Stop Paying – You can simply stop paying the premiums and the policy will lapse, as we’ve already discussed. However, if you pay your premiums annually or even semi-annually, you may be leaving some money on the table. Which leads us to the second option …
- Formally Cancel – Call the life insurance company and tell them you want to cancel the policy. Give them a specific date and ask them to refund any ‘unused’ premiums you have already paid. Most companies will oblige and give you back a prorated share of the premiums. So, if you are three months into an annual payment of $1,200, you would be able to recover $900 in unused premiums!
The most important thing you can do if you find yourself falling behind on premium payments or unsure about continuing your coverage is to contact your agent or the life insurance company. Ask about your options so you can make an informed decision. One that will ensure your loved ones remain protected!