There are two basic types of life insurance, and premium payments are processed differently for each of them. Failure to pay your premiums will have a different effect on your policy depending on the type of insurance you’ve purchased.
Term insurance is the more common of the two types of life insurance, and is also the easier of the two to understand. When you purchase the policy, you choose a period of years for which you would like coverage (20 years is the most common). The insurance contract is an agreement between you and the insurance company, where you agree to pay your premiums every month, quarter, year, etc., and the insurance company agrees to provide you with a death benefit for the duration of the term period. At the end of the period, you stop paying and the company stops insuring you. It’s really that simple.
As with most bills, the life insurance company allows a grace period after the official due date of the premium payment. If you’re premium mode is monthly and you do not send payment, the insurance company will alert you of the fact that you’ve missed a monthly payment and will expect you to send it immediately, or simply double up on your next monthly payment. If the second monthly due date passes and you do not send payment, you would again receive notice that you are now two months behind on your premium payments, and another grace period will start. By the time the third premium due date arrives, if you still have not mailed in the previous two payments the insurance company will terminate your policy for non-payment.
Permanent insurance is the other type of life insurance, and it can be a bit more complicated to understand the internal workings of the policy, especially because there are multiple forms of permanent insurance (whole life, universal life, variable life, etc.). All permanent insurance, regardless of the type, is designed to provide life insurance coverage forever, hence the title of permanent. To a life insurance company, “forever” is usually between 95 and 100-years-old.
As time passes, permanent policies actually build a small amount of equity inside of them known as “cash value”. However, far too much focus is put on the cash value of the policies by both marketers and agents, and in reality the cash value should not even be an issue for the average consumer who simply wants to make sure that a death benefit will last forever. The equity inside these policies is actually a type of escrow account in which customers are saving future premium payments. The customer’s monthly payment will remain level forever because in the early years he is actually paying more than necessary to provide the death benefit, which is how the cash value accumulates. However, as the customer ages and approaches average life expectancy, the internal cost of providing the death benefit will increase dramatically. Therefore, the policy is designed to reverse the flow of the cash value and begin supplementing the true cost of the insurance alongside the regular premium payment.
If a monthly payment is skipped on a permanent policy, the provisions of the contract stipulate that the cash value account will be assessed the internal cost of the insurance. So, provided there is enough cash value to cover the monthly cost of the insurance, the customer may actually be able to go for quite some time without making a payment. It is for this reason the some types of permanent insurance are referred to as Flexible Premium policies.
The danger in skipping payments and allowing the cash value to be reduced is that this decrease will have a much more significant effect on the long-term life of the policy. When in fact the internal cost of the policy increases to a point above the existing monthly premium payment, and the cash value is legitimately required to supplement monthly payments, the customer will then be required to provide the additional premium due if the cash value is not sufficient. If the customer cannot or will not pay the additional premium, it is then the policy will lapse.
Both types of life insurance policies can be reinstated within a reasonable amount of time if the customer provides the necessary premium to bring the payments current, and also fills out a standard reinstatement form in which he certifies that his insurability has not changed.