July 20, 2019

To Lapse Or Not To Lapse: Know Your Options To Make An Informed Decision

Life insurance is a critical protection for many policy holders when they take out their policy- it can help protect a business, a young family, or ensure a mortgage can be paid off for example. But for many policy holders, there comes a time when they must evaluate whether their coverage is still well suited to their current life circumstances.

As we age, our life circumstances can shift dramatically. For individuals who took their policy out to protect their home, their children’s education etc., once the mortgage is paid off and the kids are out of school those goals are no longer a priority, or in other words their insurable interest has changed. In addition, many policies will get more expensive over time, so too many policy holders will let their policy lapse just by stopping paying the premium. It is important to know that this is not the only option for policy holders.

Knowing Your Options

A policy holder who can no longer afford their premiums, or does not believe their life insurance coverage is suited to their current life circumstances, may have more options available to them than they realize. In our work and advocacy for policy holders in the life settlement market, we have found many policy holders do not know of the option to sell their policy through a life settlement transaction, but even more importantly too many policy holders do not know they may qualify for a waiver of premium  or an accelerated death benefit directly from their insurance company!

Life Settlements

A life settlement is the sale of a life insurance policy to a third party for more than the surrender value, but less than the death benefit. So instead of lapsing the policy and giving the policy back to the insurance company (which they would love) you can ask an investor what your policy is worth to them. That is very much over-simplified, it is highly recommended to discuss your case with a life settlement broker or provider who is licensed in your state. They have the experience and expertise to guide you to the highest valuation for your policy.

Waiver Of Premium

For individuals who feel they can no longer afford their premium from a change in employment or income due to becoming disabled, they may have the option to qualify for a Waiver of Premium through their insurance policy depending on how it was issued by the carrier. If the insured meets the requirements of the insurance carrier, and provides the necessary documentation, the carrier can waive the premium payment requirement which can keep the policy in effect to the policy’s maturity as long as the insured remains disabled. In some cases, the carrier may require proof annually that the insured is still disabled.

Accelerated Death Benefit

For individuals whose medical costs have increased dramatically due to a terminal illness making the life insurance premium payments unmanageable, they may be able to qualify for an Accelerated Death Benefit. An Accelerated Death Benefit is an early payout of a certain amount of the policy’s death benefit. To qualify, if their policy has such a rider or feature, most insurance companies require a signed letter from the insured’s doctor stating that in their professional opinion the insured has fewer than a certain amount of years or months left to live- the specific life expectancy is defined by the individual policy or product. After taking an Accelerated Death Benefit, the policy holder then has a reduced premium expense as the death benefit has been reduced in the amount of the Accelerated Death Benefit issued.

To see if either of the latter two options are available to you, make sure to speak with your life insurance agent or call the insurance carrier’s home office. These benefits are often policy- or product-specific.