Want to surrender the peace of mind, guaranteed contingency plan, and tax-deferred* growth in cash value acquired with the purchase of your whole life insurance policy? Then let it lapse.

A “Lapse” – short for “Lapse in Coverage”, occurs when premium payments on an in-force whole life insurance policy are not paid. After a policy lapses, it will no longer pay a death benefit for the policyholder.

On the opposite end of the scale is a fully paid-up policy, where all premium payment obligations have been met and the client has full access to policy benefits. A fully paid-up policy remains in-force for the entirety of the policyholder’s life and continues to pay dividends*. The accumulated cash value can be utilized at the discretion of the policy holder.

In the event of a missed whole life insurance policy premium payment, the carrier may automatically take out a loan on the cash value to cover the balance due and keep the policy in-force. These are called “Automatic Premium Loans” and are generally activated upon the purchase of the policy. Additionally, some policies offer a grace period after a missed premium payment where the policy is still technically in-force or offering reduced benefits. However, a whole life insurance policy will lapse once the cash value has been exhausted to fund loans and the grace period has passed.

Nonetheless, there still may be an opportunity to reinstate the policy even in the event that it does lapse. At the very least, the missed premium payments would have to be paid with the accrued interest. And depending on how old the policyholder is when the lapse occurred, new underwriting may be mandated by the carrier. Taking into account health changes and time passed since the purchase of the policy, reinstating a whole life insurance policy after a lapse may very well result in higher premiums for the same amount of coverage.

Simply put, a lapse not only causes a complete loss of coverage and all other policy benefits, but it may also mean paying more to get that same level of protection back at a later date. At Kensington, we utilize a holistic approach to policy analysis and always make our clients aware of the options available to them to ensure that their policies stay in-force and their loved ones protected.

* IRS Circular 230 Disclosure: Kensington Financial Group does not provide legal, tax, or accounting advice. To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this message (including any attachments) was not intended or written to be used, and cannot be used for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matters addressed herein. You should obtain your own independent legal, tax or accounting advice based on your particular circumstances.

*Refer to official materials provided by your carrier for details about the expiration age and dividend guarantees of your specific whole life insurance policy.