Life Insurance Policy Lapse
An all-too-common complaint we receive is the one in which someone purchased a universal life insurance policy several years ago, they have been paying premiums faithfully, and they unexpectedly receive a life insurance policy lapse notice.
The Notice states, “…your premium is not enough to cover the policy expenses, please submit (a lot more) money to keep your valuable coverage”.
Or, you were never notified the policy lapsed. The insured dies. When you go to make a claim the insurer refuses to acknowledge the policy.
We’ve recovered $$ millions of death benefits from life insurance policies that lapsed before the insured died.
If you need help, call us today: (888) 428-4868
Here are some things you should consider to maintain your valuable coverage.
What happens when a life insurance policy lapses and what you can do
What can you do when you receive a lapse notice for your universal life insurance policy? Here are a few things:
1. Lower the death benefit to an affordable amount. The lower the death benefit the lower the fees will be.
2. Ask for the amount of premium necessary to keep the policy in-force (active) to an age less than 100.
In other words, a universal life insurance policy will stay in-force until the insured’s age 100. Fees are set based on this age assumption. If you tell the insurer you only want the policy to stay in-force to age 86 (for example) the premium required will be less.
3. Ask the insurer if they offer a less expensive insurance product that you can exchange your policy for.
4. Get the assistance of a qualified agent to help you understand and make decisions about your policy.
How premiums and fees interact in a life insurance policy lapse
The basic construction of universal life insurance is a flexible premium. In fact, many policies have the wording on the cover-page, “this is your flexible premium life insurance policy”.
This feature means that there is not one premium amount that must be paid. Instead, there is a flexible range of premium that can be paid and a certain minimum required.
Often the policy owner thinks of universal life insurance the same way they think of auto insurance. They receive a premium notice, they pay the premium amount stated on the notice, and they believe they have met their requirement to secure the coverage.
What they don’t realize is that the premium amount on the billing notice is set at the amount they stated they would pay when they completed the application — not based on what they must pay.
And even worse is that the billing notice does not state the amount needed to keep the policy in-force.
Premium is not the same as the policy cost. Premium is what you pay to the insurance company. The policy fees are the cost of the coverage.
As the insured gets older the universal life insurance policy costs more. This is where the trouble usually happens. At some point in time, and often unbeknownst to the policy owner, the policy expenses exceed the premium.
This triggers a feature in the policy which allows the insurer to take money from the policy’s cash value, without having to notify the policy owner, to make-up any shortage of policy expenses.
As this event occurs every month, the universal life insurance policy will be depleted of its cash value and move towards a lapse.
Life Insurance Lapse Notice
Before a universal life insurance policy lapse, the insurer will send a pre-lapse notice which allows the policy owner 31 days or 60 days (depending on the state regulations) to pay enough premium to cover one month’s worth of expenses.
The problem, however, is that the expenses will typically have greatly exceeded the amount of premium the owner had been paying.
We speak with many people whose new premium is three or four, or even more, times as much as they had been paying. This thereby puts the cost of coverage out of their financial reach.
One thing you can do to make sure you aren’t caught off guard by increasing policy fees is to review your policy with an agent every year.
In this meeting you should bring a recent Annual Statement for the policy and the agent should bring in-force illustrations. These are the tools that will best inform you of the policy’s expenses and where your premium amounts should be set for the year.
How We Can Help
If your policy is going to lapse, call us for help.
We’ve reviewed hundreds of life insurance policies and done extensive research with the Department of Insurance of California and Connecticut, and we’ve discovered that many carriers are increasing cost of insurance rates in violation of their State filings. In so doing they are unfairly lapsing life insurance policies by making the premium payments so large they are unaffordable and the owner has no choice but to let their policy lapse. It’s a practice that’s more common than many may think.
If this happens to you, you may be entitled to refunds on past premiums, credits for future costs and the lowering of your premiums.
Also Read:
Life Insurance Policy Lapse Violations
Why So Many Term Life Insurance Policies Lapse
Are Life Insurers Over-Charging Policyholders?