Not everything in life works out, including, sometimes,
life insurance policies. If you stop paying premiums, your
life insurance policy lapses — meaning coverage ends.
If you stop paying for a term life insurance policy and
exceed the insurer's grace period (possibly 30 days), your
policy lapses. Make sure that's a consequence you intend:
You're not insured after the grace period and can't
"reactivate" the same life insurance policy.
If you stop paying on a whole life insurance policy, you
may have more leeway. If you have accumulated cash value
within the policy, your insurer will likely draw down the
cash value account to cover premiums.
According to the 2007 "U.S. Individual Life Insurance
Persistency Update" by LIMRA International and the Society
of Actuaries (SOA), the overall annual lapse rate is 3.5
percent for whole life insurance, 7 percent for term life
insurance, 4.6 percent for universal life insurance (UL)
and 5.7 percent for variable universal life insurance (VUL).
Some folks pay for decades and decades on their life
insurance policies and then throw in the towel and lapse
their policies. What happened?
There are countless reasons someone might decide to lapse a
life insurance policy. Most have to do with no longer
having the discretionary income to continue paying
premiums. John Dressner, Senior Vice President of LIFE
Foundation, a nonprofit consumer-education organization,
says, "Lapses are usually not for lack of desire for
coverage but because of financial conflicts."
Life insurance experts have seen people lapse life
insurance policies when a job loss, divorce, large medical
expense or business loss means budgets must tighten. Or
they buy a new television rather than pay their life
insurance premiums. (True story.)
Other times, policyholders are replacing their current
policy with a new one.
Sometimes the decision to lapse is more emotional: The
benefits seem too far off in the future.
And sometimes policyholders lose contact with the agent who
originally sold them the life insurance policy, so they
feel nobody is available to address their questions about
lapsing it.
Dressner points out that "someone bought it for a reason,
because they wanted the protection." If you're thinking of
lapsing a current life insurance policy, think carefully
about whether you'd want coverage in the future, when
buying a new policy may result in higher life insurance
rate due to your age and possible health problems.
While there are no studies on the exact reasons people have
lapsed their policies, we can learn from past life
insurance buyers who jumped ship. Here are some tips for
life insurance shopping based on lapses by other buyers.
Choose a guaranteed level premium for the entire period you
need coverage.
If you're looking at term life insurance, consider buying a
policy with guaranteed level premiums for the entire period
you want to be insured, rather than face an increase after
your guaranteed-premium period ends. The LIMRA/SOA study
shows that lapse rates spike after the guaranteed-level
premium periods. Perhaps policyholders were satisfied
paying the level premiums but weren't willing to continue
at a higher life insurance rate.
Consider this: Among buyers of 10-year level term, 40
percent dropped their policies when the guaranteed-premium
period ended, and 30 percent of holders of 15-year level
term stopped paying when the premiums went up.
Further, those who pay "substandard" rates (issued due to
ill health) abandon their policies in larger numbers after
initial rate-guarantee periods, according to LIMRA and SOA.
Buy enough life insurance coverage for your needs.
Are you buying a life insurance policy with a small face
amount? Think carefully about whether that policy is
sufficient coverage for you, because history shows that
almost half of people with whole life insurance policies of
$5,000 or under abandon them within the first year (over 45
percent do, according to the LIMRA/SOA study). People with
larger whole life insurance policies are far more likely to
hold on to them.
This trend extends to other policy types. For example,
buyers of annual renewable term policies under $200,000
lapse them more in the first five years than buyers of
larger policies. (After year five the gap closes.)
The difference in life insurance policy size is quite
noticeable with UL, where about 33 percent of those with
policies under $15,000 lapse their policies in each of the
first three years, as opposed to about 5 to 10 percent of
those with larger face amounts.
If you're buying whole life insurance, commit long-term.
The highest lapse rates for whole life policies are in the
first five years. After that, lapse rates settle down at
between 3 to 5 percent for whole life policies, according
to LIMRA and SOA. Don't throw away your money by paying
into a whole life policy for one to five years, only to
abandon it.
Make sure you understand what you are buying.
This is true especially if you are looking at universal
life and variable universal life, which can have many
"moving parts" that affect your premiums due and death
benefit.
Match your coverage to your life stage.
If you're under age 30 and buying a life insurance policy,
consider carefully whether you're committed to paying that
premium bill. Others like you, age 20 to 29, abandon their
policies in higher numbers than older buyers, according to
LIMRA and SOA.
Find the easiest way to pay.
Consider paying your premium bill through electronic funds
transfer from your bank account. Policyholders who pay that
way are more likely to keep their policies, perhaps because
they never have to sit down and write a check.
Add a "disability waiver of premium" rider to your life
insurance policy.
Life insurance experts see many policies lapse due to a
disability that puts the policyholder out of work. A
disability waiver of premium rider will cover your premium
payments in this case.
Shop for a good life insurance rate from the start.
If you will be issued a policy with a smoking or
"substandard" rate, make sure you can keep up with premium
payments. People in those rate classes lapse their policies
more often in the first five years. For example, about 18
percent of smokers with whole life policies lapse them in
the first year as opposed to 11 percent of nonsmokers,
according to LIMRA and SOA.
No matter what rate class you fall into, knowing that you
secured a competitive life insurance price will make paying
your premium bill easier.
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Amy Danise is a staff writer for http://insure.com . Visit
http://insure.com for a comprehensive array of comparative
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