Life insurance can be a great decision to help protect your family in the event of your passing. While there are many ways individuals can secure life insurance, what happens if you make the decision to stop paying your life insurance premiums, be it from life circumstances or by choice? While the results of stopping your life insurance premiums will vary from policy to policy, especially dependent upon the terms and conditions of your policy, type of policy, and coverage type, let’s explore some possible consequences of suspending your life insurance policy premium payments.
How Life Insurance Works
Before we dive into what happens if you stop paying your premiums, it’s first important to know how life insurance works. There are two types of life insurance: term life and whole life. The consequence of non-payment will depend upon the type of coverage you have.
Term life usually covers you for a specific term, or number of years. The specified time period varies from policy to policy, and premium amounts can be more expensive as you age. Again, this depends upon your policy. Should you pass away while within the term limit and while the policy is in effect, your death benefit will be paid out to your beneficiaries in most cases.
Whole life, on the other hand, can cover you for life. Your whole life policy may provide death benefits in addition to cash value accumulation that builds during the life of the policy. There may be different qualification criteria, such as a health exam, and your premiums might be higher than that of a term policy, but the premium amount should not increase over time.2
The Risks of Not Paying Life Insurance Premiums
Again, what happens if you stop paying your premiums depends on the type of policy you have, be it a term or whole life policy? In general, if you stop paying your premiums on a term policy, your coverage may lapse. Some companies offer a specified grace period during which you can catch up on payments and still remain covered, but this varies from policy to policy and is based on policy-specific terms and conditions.
For whole life policies, you may have a few options if you stop paying your policy premium.
1. Cash Out the Policy
With this option, you stop paying the premium and collect any available cash value in the policy. You won’t be covered by the policy, nor will your beneficiaries receive a death benefit after you cash out, and you might have to pay taxes on some of the cash value depending on your particular situation.1
2. Reduced Paid-Up or Non-Forfeiture Options
In general, to be “paid up” means that you have paid for the policy in full with the premiums you have already paid (or by using dividends from the existing cash value to pay premiums) and the policy is still in-force.3 In the case where your policy isn’t paid up in the traditional sense, you might be able to stop paying your premiums completely and in turn receive a reduced death benefit (and in many cases you will lose any cash value accrued to date as well). This is referred to as a “reduced paid-up” option. Another option similar to this is converting your whole life policy into an extended term life policy, but this varies on what options are presented by your insurer.1
3. Policy Lapse
If you stop paying your premiums, the policy could simply lapse and you lose coverage. If this happens, your beneficiaries will not receive your death benefit, and you will forfeit any cash value accumulated to date. In some cases, the policy may be reinstated by the insurer by request. The time limits in which you could potentially reinstate a policy vary from insurer to insurer, and you may have to pass a health exam and pay back missed premium payments.1
If you’re facing a decision whether or not to pay your life insurance premiums, the first step is to contact your insurer and see which options may be available to you to retain your coverage.
Final Things to Consider
If you’re facing a decision whether or not to pay your life insurance premiums, the first step is to contact your insurer and see which options may be available to you to retain your coverage. Life insurance can be a good choice to help protect your family in times of crisis, such as your passing. Consider your choices before you stop paying for life insurance coverage.