You must have wondered what happens when you stop paying your life insurance premiums. Does the life insurance lapse right away, or do insurers offer some leniency? What happens if you don’t pay during the life insurance premium grace period as well? You often think about whether there will be a total loss of your coverage and death benefits to your beneficiaries, or some deductions for failed premiums, and if there will be any policy revival.

In this article, we will break down the default consequences of missed insurance premiums one by one. 

We will cover the following concepts

What is Life Insurance Premium?

Life insurance premiums are regular payments for a life insurance policy that you make to the insurer in exchange for coverage. You can pay monthly, quarterly, or annually, depending on your policy. Apart from the policy type and coverage amount, the premium depends on factors such as your age and health.

Types of Life Insurance Policies

There are three types of life insurance policies, and the consequences of not paying the premiums may vary in each case.

Term Life Insurance: The life insurance policy where you pay premiums for a specific ‘term’, a period of 10, 20 or 30 years. If you pass away during this term, then the death benefit is given to your nominee. However, if you outlive it, then no benefit is given. Some insurers provide the option of a term plan with a return of premiums (TORP) policy. It’s usually cheaper than other policy types but offers no cash value.

Whole Life Insurance: As the policy name indicates, unlike the term policy, it covers you for life, typically up to 100 years. It is a permanent policy with a cash value component. You pay fixed premiums throughout, and your beneficiaries receive a pre-determined amount as a death benefit. You can also withdraw a partial amount in times of urgency. It is more expensive than a term policy.

Universal Life Insurance: Similar to a whole life insurance policy, but does not have a fixed premium. You get the death benefits from the amount you accumulate over the years through paid premiums and market-based performance. It is a hybrid policy where you can adjust premiums and death benefits. You can also take a loan from your cash value in emergencies.

What Happens if You Miss or Stop Paying The Life Insurance Premium

If you miss a premium payment, you get a grace period to make that payment. If you miss that, your policy lapses. While some insurers may allow revival after a fine payment, in some cases, it may not be possible. Check out the effects of non-payment of premiums on different types of life insurance policies -

  • Your term policy will expire if you fail to pay during the life insurance grace period.
  • Your whole life policy may cover some missed premiums from the accrued cash amount. Once the cash deposits go low, and you fail to pay, the policy will lapse.
  • The impact on a universal life insurance policy is the same as a whole life insurance policy. It may be covered temporarily by accumulated cash value, but after depletion, the whole life policy will lapse if there’s no payment.

Policy Lapse vs Policy Surrender

Policy lapse is when the policy ends or lapses due to premium non-payment, whereas policy surrender is when you willingly surrender the policy before its maturity. When you voluntarily surrender the policy, you may get a pre-determined payout known as surrender value, decided at the time of purchasing the policy. After deducting some charges, you receive it.

In case of a lapsed life insurance policy, you do not receive the premium payback. Insurers may allow policy revival after recovering the missed premium payments.  However, the policy reinstatement also has a certain timeline. Additionally, they will fine you for your missed payments.
In both cases of policy lapse and policy surrender, the coverage expires.

Also Read: How to Make Term Insurance Premium Payment Online?

How to Avoid Life Insurance Policy Lapse?

Now that you know the consequences of not paying the life insurance premium, it is better to avoid it. You can try some regular premium payment options in India -

  • Set up an auto-pay, that is, an automatic payment for your policy premium payment. The money will be automatically deducted from your account on the scheduled date, and you will not miss it.
  • If you are struggling to pay, you can contact your insurer to check alternative options, like adjusting premiums by restructuring your plan. You can also check policy terms and surrender value for policy surrender.

What to Do If You're Struggling to Pay?

Policy lapse is both the loss of your money and the coverage, so if you find yourself in a position where you can no longer afford your premiums, don't just let the policy lapse. You can take proactive steps that can save you from losing your coverage.

  • Manage your budget and re-evaluate your expenses. Cut down on non-essential ones for a temporary solution to your financial issues.
  • As mentioned earlier, reach out to your insurance company, which can help you with reduced premiums, loans, or withdrawals, especially if you have a whole life or universal life insurance policy. You can also explore other policies that are less expensive and check with your insurer if you can convert the current one into the new, cheaper policy.
  • Check out the non-forfeiture clause of your policy, which explains the full or partial premium refund or other benefits you may receive after the policy lapses. There are several non-forfeiture options which you can choose from. You can opt for premium refunds, extended coverage for a limited period by purchasing a new policy with previously paid premiums, or policy continuation for reduced coverage with paid premiums. They differ from the surrender value.

Summing Up

If you stop paying the premiums, you impact your coverage and death benefits to the beneficiary, which in turn affects your financial planning and financial protection. You should avoid policy lapse by ensuring payments are made on time or during the grace period. If you still miss it, you must reinstate the lapsed life insurance policy within the specified time frame, or you will lose your insurance benefits forever. Discuss with a life insurance advisor for a more mindful decision.

FAQs

What is the grace period in a life insurance policy?

A grace period is the additional time that policyholders get to pay the life insurance policy premium they missed on the scheduled date. It ranges from 15 to 30 days, depending on the payment intervals (monthly, quarterly, yearly).

How long can a life insurance policy stay lapsed?

A life insurance policy can stay temporarily lapsed for up to a certain revival period, typically 3 to 5 years. After that, the policy will lapse permanently with no revival point.

If I don’t pay my insurance premium, will it affect my credit score?

Yes, in most cases, mostly when your insurance company hires a third-party agent or firm to collect the dues, it may affect your credit score. It does not impact immediately, but if your grace period ends, and you keep missing your premiums.

Policy Lapse or Policy Surrender - which is better?

Policy surrender for obvious reasons. You are making a conscious choice to end the policy by informing your insurer, whereas you become the defaulter in case of policy lapse due to failed payments. With Policy surrender, you also have options to get surrender cash value, policy loan, or new policy replacement. With a policy lapse, you lose coverage, death benefits, and accumulated cash.

What is paid-up life insurance?

When you stop paying premiums for an existing life insurance policy, you can continue it with a reduced death benefit, but you must pay for a specific time, like 1 or 2 years. It will provide a partial coverage with a reduced benefit amount or paid-up value, calculated on the premiums paid versus the total premiums initially planned for the policy. This continued policy is known as paid-up life insurance.