22 February 2013 0 Comments

When the Premium Stops

Glass Half FullWhen the music stops the dance is usually over.  When the premium stops, the life insurance may not be over.  At least that’s true with policies other than term insurance.

Policies that develop cash values—and even some Universal Life contracts that do not—provide the policy owner with potential benefits even after premium payments have been discontinued.  These are often referred to as Non-Forfeiture Benefits.  The simplest such benefit—found in either Whole Life or Universal Life Policies—is the Cash Surrender Value.  If you stop paying premiums and request withdrawal of the Cash Surrender Value, that’s just what you’ll get and the policy will terminate.  There are, however, options available other than surrendering the policy for its cash value.  In describing these, I’ll differentiate between Whole Life and Universal Life.

Whole Life

The Automatic Premium Loan is technically not a Non-Forfeiture Benefit, but is an option often elected when the policy is issued that will kick in at the end of a grace period when the premium has not been paid.  If this option has been elected, when the whole life’s required premium is not paid, a loan is automatically created from any cash value in the policy sufficient to pay the premium.  This loan will create an interest charge, so if that interest is also not paid it will be added to the policy loan.  When the premium and interest continue not to be paid, the loan will continue to grow and will ultimately cannibalize the policy.  The Automatic Premium provision needs to be watched closely and shoul likely be used only for a short duration.

Reduced Paid-Up is a non forfeiture option that can be elected that applies the cash value to, essentially purchase a single premium whole life policy.  This reduced amount is paid up and its cash value will continue to grow.  Once this option has been elected, there is no way to reinstate the original amount of insurance.

The Extended Term option applies the cash value to purchase term insurance for the current amount of coverage for a specified period of time.  At the end of that time the policy terminates with no value.  This term policy has no cash value.  Normally once this option has been elected the original policy may not be reinstated without providing evidence of insurability and paying all back premiums plus interest.  This is not a bad option to consider if the insured has a life threatening illness that will result in death prior to the end of the term extension.

In the case of participating Whole Life, another way to provide premium relief without terminating or reducing the original policy would be to use dividends to pay premiums.  If dividends are accumulating at interest, surrender any accumulation to pay premiums and change the option henceforth to “Reduce Premiums”.  If dividends are purchasing paid up additions, you may not want to surrender any of those additions if your health has deteriorated since each dollar of cash produces an increased amount of death benefit.  It’s always good to get the advice of your agent in these matters.

Next, I’ll continue with how Universal Life works when premiums have been discontinued.

Leave a Reply