Not paying your credit card bill can drop your credit score 100 points or greater.
Not paying your life insurance bill…
That could have catastrophic effects on both you and your family.
Unfortunately, I almost found this out the hard way.
NASDAQ.com says that “lapse” is one of the 5 most terrifying life insurance words.
Before consolidating to a $2.5 million term policy, I used to have three separate individual term policies. I bought the policies at different stages in my life:
- I purchased the first policy after I got married.
- The second one was purchased after our first child, and
- the third after we were having our second child.
All were 30-year term policies and were with the following carriers: Transamerica, ING Reliastar (which is who Philip bought his $500,000 20 year term policy through), and MetLife. My reason for moving around: I bought them at 3 different stages of my life and at 3 different amounts, each time a different carrier came back as the cheaper option.
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Having three policies wasn’t much of an inconvenience. But it was important to keep track when to pay for them because all of the premiums had different due dates. Since we like to pay our premiums on an annual basis, we wait until the bill comes in from the insurance company before we send the check.
The third policy I had taken out was a $1 million term policy and I was considering dropping the smallest one of the three, the $250,000 term policy with ING. I told my wife that whenever the bill comes in for the $250,000 term policy, to go ahead and let it expire.
What I didn’t do was a good job of explaining to her which policy was which. Turns out she let the $500,000 Metlife 30 year term policy lapse instead of the $250,000. Whoopsies! What compounded the problem was that I hadn’t discovered the error until several months after the premium was due. Double whoopsies!
Luckily I was in good health. I knew if I did have to reapply for insurance, that it shouldn’t be a big deal. I should still be able to lock in another cheap term life policy without a hitch. Nonetheless, I knew it was going to be a pain in the butt going through the whole underwriting process again. Hoping that there was a quick solution, I got on the phone and called the insurance company immediately. I was reassured when I learned that reinstating the policy was a rather quite simple.
Almost Saved By Grace
While on the phone with the customer service representative I learned that most insurance companies offer a grace period in the event you miss your premium payment. The grace period (required by some states) is usually 30 days after the premium was due. Since it had been more than 30 days since my premium was due, I missed the graced period and my life insurance policy had officially lapsed.
How to Get Your Lapsed Policy Reinstated
I had to request an “Application for Reinstatement” form and have them send it to my home address. On the form I had to answer some basic medical questions to make sure that my health hadn’t had made a drastic changes for the worse since my policy lapsed. I could see how this could be a major issue for someone that applied that already had pre-exisiting conditions. Another reason to not let your policy lapse!
After filling out the form and sending in the annual premium that was due, my policy would be reinstated after they reviewed it. Easy breezy.
Note: I would be sure to follow up with the insurance company to make sure that the policy was, in fact, reinstated. Don’t assume anything. Once verified, write down the person’s name and extension and the date you talked to them so you have it on file.
Don’t Make the Same Blunder
There are plenty of things you can screw up when buying life insurance, but letting your policy lapse after you have it is a bonehead mistake. Don’t make the same blunder I did.
I was lucky that nothing happened to me during that time, but what if? Yes, I did have two other policies in-force but it would’ve been very foolish of me to have let a fairly sizeable insurance policy lapse to where my wife and family would not have been benefited in the event something happened.
Life lesson learned.
Jeff Rose is a proud Iraqi combat veteran and certified financial planner. He blogs at Good Financial Cents and Life Insurance By Jeff, but primarily spends his day craving the next time he can eat In-N-Out Burger again.