What to Do with a Lapsed Whole Life Insurance Policy

By Jim Sloan on April 14th, 2010

Sometimes policyholders of whole life insurance are forced to make hard financial decisions when it comes to making premium payments on their policies. In hard financial times, you might be forced to choose between a premium payment or groceries.

Others stop paying premiums because they no longer need the insurance. In cases where you stop making payments on a life insurance policy, the policy lapses.

Whatever your reason is for allowing whole life insurance to lapse, the policy may still hold value for you.

Lapsed Whole Life Insurance Policy Options

Here are some options to consider if your whole life insurance policy lapses:

  • Make a late payment: In most cases, you have a 30 or 31 day grace period to make up for a missed payment, so even if you are late, you can keep the policy in force by catching up. According to the American Council of Life Insurers (ACLI), if a policyholder dies within the grace period, beneficiaries still receive the benefits left after the overdue payment is deducted. But if the insured person dies after the grace period, beneficiaries do not receive the death benefit.
  • Reinstate the lapsed policy: ACLI says that most policies can be reinstated within five years of lapsing, as long as past premiums are paid up and any loans you have against the policy have been satisfied. However, you may have to prove your insurability again. ACLI says the process of reinstatement is usually cheaper than purchasing a new policy.

Alternatives to Lapsing

Before giving up on your policy and walking away, ask your life insurance company about the "surrender value" of your policy. The longer you've held it, the higher the cash surrender value will be. In some cases there is a surrender charge that is deducted from the value. Still, it's better to get something rather than nothing.

If you've built up enough cash value, you can ask your insurer to consider the policy "paid up" at a level supported by your cash value (which will be smaller than the original face value). You then no longer have to make premium payments and you'll have a death benefit to pass on.

You can also sell your whole life insurance policy in a transaction known as a life settlement. Instead of allowing a policy to lapse or withdrawing the cash value, an increasing number of policyholders are selling their unwanted life insurance policies to investors. Investors take over the payments, are named the beneficiaries, and collect death benefits when policyholders pass away. Life settlements are typically conducted by institutional investors that want a higher return than can be found in the bond market.

What to Know About Selling Your Policy

If you are thinking about selling your whole life insurance policy as a life settlement, here are some things you should be aware of:

  • This option is typically available to policyholders who are at least 65 and have life expectancies of 12 years or less.
  • The amount you can get for your whole life insurance policy depends on your life expectancy, the face value of the policy, and how much investors will have to pay to keep the policy in force. Most policies acquired by investors are worth at least $250,000, although some are worth less.
  • The broker's commission comes out of your proceeds, so shop around to investigate rates.
  • Although life insurance proceeds are tax-free to beneficiaries, you may have to pay taxes on any life settlement that exceeds the amount you've paid in premiums.
  • How much is your policy worth to an investor? It varies, but a rule of thumb is that it is worth three times the amount you'd get from cashing in the policy.

Before allowing your whole life insurance policy to lapse, or deciding to sell it or cash it in, consider your initial reasons for obtaining the policy. Are your beneficiaries financially protected in the event of your death?

Also, keep in mind that insurance companies pay attention to your habits, so if you have a history of lapsing life insurance policies, you'll generally have trouble buying a new policy in the future.

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