A few weeks back I wrote a post on different aspects of life insurance policy, the guts if you will. In that post I covered the grace period and reinstatement. In a nutshell, if you are late with a payment your policy goes into a grace period. See the first page of the following attachment.
As long as you get the premium paid during the grace period there is no evidence of insurability required. If you died during the grace period, the company would pay the death benefit minus any premium due.
Then there is the reinstatement clause. This reinstatement period can vary from company to company. I have seen companies willing to reinstate policies that had lapsed anywhere from a year to five years previously. Reinstatement requires evidence of insurability. This can be as simple as a good health statement saying that your health hasn’t changed, to full blown underwriting where you can be declined. If approved for reinstatement you have to pay all past due premiums to put the policy in force.
In spite of these safeguards, people let policies lapse all the time. Frequently this will happen when someone is paying annually, gets the big bill and doesn’t have the cash flow. Instead of calling their agent, or the company, to see if they can change to paying quarterly or monthly, they just grit their teeth and hope for money until the policy lapses. This is why all of my life insurance is paid monthly by automatic bank draft. Even I can’t mess it up. I brag to my wife that it is the longest string of on time payments I’ve ever had.
So, what happens if your policy lapses. Well, obviously, if you die your beneficiary gets nothing. So, why not wait until your finances are better and apply for a new policy. Well, that works as long as you are still insurable or at least insurable at a cost you can afford. A change in health can put you right out the life insurance business.
Bottom line. Unless you are great at paying bills and know that the cost of your life insurance is well within your budget, put it on a monthly bank draft. Bomb proof that piece of paper so that you know it will be there when it’s needed.