20 May 2014 0 Comments

The Language of Life Insurance

shutterstock_177694112I’m guilty!  There are times when I banter around terms that mean something to me, but are meaningless—or downright misleading—to non-insurance people.  That’s why I included a Life Insurance Terminology tab on this site.  But, even with that assist, much of our “insider’s terminology” needs clarification.  So, here goes on some of those terms that might need a little more help:

Grace Period

A premium is due on a given date.  If it’s not paid by that date, the policy will continue in force as long as the premium is paid within the grace period.  This grace period on most policies is for 30 days following the date on which the premium was due.  However, the grace period on most Universal Life policies is 60 days.  Don’t mistake the meaning of the word grace with forgiveness.  The premium is not forgiven, it’s just that the insurance company must accept a late premium as long as it is received by them prior to the end of the grace period—no questions asked.  Beyond the grace period the insurance company may offer a longer reinstatement period during which time they will reinstate the policy if premiums are received.  However, the insured would be required to provide evidence that he/she was still an acceptable risk and this replacement period is not a contractual right.

If death occurs during the grace period a legitimate death claim will be honored, but with the delinquent premium subtracted from the claim payment.

Automatic Premium Loan

When a policy holder has requested the Automatic Premium Loan provision, if a premium that is due is not received by the insurance company within the grace period, a loan will automatically be made from the policy’s cash value sufficient to pay the premium.  This provision is available on Whole Life Policies.  This added protection to keep a policy from lapsing may be good, but keep in mind every time a loan is made from the policy, loan interest will be added to the amount due on the next policy anniversary.  So if this provision is applied very often, the loan interest grows and if it is not paid when due it is added to the loan, thereby increasing next year’s interest.  The cannibalization of the policy may be at hand.

The Automatic Premium Loan provision is not necessary on Universal Life policies because if a premium is not paid as planned, funds will automatically be transferred from the policy’s cash value sufficient to pay for the pure cost of insurance and any policy fees.  This is not a loan, so no interest payments are created and a full whole life type premium is not withdrawn.  Policy cannibalization can still follow, but not as quickly as when the Automatic Premium Loan provision is constantly triggered.

More terminology clarification coming up.

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