Everyone can fall on hard times - unexpected expenses leave you looking for places to cut corners. When you have a life insurance policy, it's good to know the impacts of not paying your monthly premium. Depending on the type of policy, the coverage and the policy terms and conditions, the resulting impact can differ.
Term Life Insurance
Term life insurance is very simple - in the event of a death within the assigned number of years (usually a max of thirty), the policy pays out. There are no other benefits associated with this type of policy and, as such, when payments lapse, so does your coverage. It's critical you keep up payments on this type of policy.
Permanent Life Insurance
With permanent life insurance, there are a few other options:
- Non-Forfeiture -- Depending on your policy details, you may be able to take advantage of the reduced, paid-up option. This allows you to stop paying your premium but results in a reduced death benefit. Another option might be to convert the policy into an extended term life policy for a specified time period - depending on the current cash savings in the policy.
- Cash Out -- You can stop payments and receive all the available cash savings; however, you'll no longer have any life insurance coverage. Keep in mind that you will have to pay taxes if the cash value exeeds what you have paid in premiums.
- Policy Lapse -- Insurance companies do not cover policyholders that do not pay their premiums. There are, however, opportunities to reinstate the policy later - within five years. At the time of reinstatement, you will likely have to undergo another physical examination and pay back the missed premiums with interest. Because of this, it's wise to shop new policies rather than just reinstating your old one - it might be cheaper.
Reference: www.iii.org
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