What Happens If You Stop Paying Whole Life Insurance Premiums?

Thang Truong
Thang Truong
Updated on:

Most services in life are pretty straightforward. If you don’t pay your bills, like the electric bill, you get your services cut off. Life insurance exists in its own little world as far as that goes. If you can’t afford to pay your premiums at a certain time, many companies and policies allow you to pay those out of the investments built up in the account. However, what happens if you stop paying whole life insurance premiums? With this insurance, you have a few options. 

What Happens if You Stop Paying Premiums on Life Insurance?

According to the Insurance Information Institute (III), different plans operate under certain stipulations. For instance, if you don’t pay your premiums on a term life insurance policy, your policy simply lapses, like many other services in life.

However, since whole life is a type of permanent life insurance, things get a little more interesting. With permanent life insurance, you have a few options if you can no longer afford the premiums or simply do not wish to pay them, according to the III.

Cash out or surrender the policy:

In this case, you can stop paying premiums and collect any cash value you may have built up in the policy. This is also call cash surrender value of the policy. You are then not covered by that insurance, but you at least get cash back that you may even be able to invest in another policy that works better for your current situation. However, you may have to pay income taxes using this method. Review a case study in which the policyholder of a whole life policy surrendered the policy since he couldn’t afford to pay premium any more. He used cash surrender value to buy a variable life insurance with one single payment of premium that provides him with much better benefits (more guaranteed face value) and no longer pay premium any more.

>>MORE: How to Calculate Cash Value in Whole Life Insurance Policy?

Non-forfeiture options:

Depending on the policy and how much value you have built up on the policy, you may be able to stop paying premiums directly. Now those premiums are covered by money taken out of the death benefit or cash value.    

Lapse the policy:

In this case, you simply will not be covered while you are not paying premiums. In certain cases, you may be able to reinstate the policy on permanent life insurance options. However, there may be a time period in which you can do this, such as five years. Often, you could have to take a medical exam to reinstate the policy or even pay back the premiums plus interest. As such, this might not be the best option, unless those reinstated premiums are less than a new policy. 

Keep in mind, this covers overall permanent plans for a comparison. What happens if you stop paying whole life insurance premiums? Below we’ll look at how whole life insurance policies work if you stop paying premiums.  

>>MORE: How to Cancel Whole Life Insurance Policy?

What Happens If You Stop Paying Whole Life Insurance Premiums? 

According to MassMutual’s blog, missed premium payments on whole life plans may be automatically paid by loans from the cash value so that the policy stays active. If missed premiums are a concern, look for the term “automatic premium loan,” which often has to be selected when you purchase the policy.  

Plans that tap into any account value tend to be plans like universal life insurance, however.

So, what happens if you stop paying whole life insurance premiums? You may also have grace periods on your policy that give some leeway if you are struggling to make premium payments. However, after those grace periods are ended and the cash value on the policy is used up, then the whole life plan will terminate.  

You might also want to consider the wisdom of using cash value to cover premiums with a whole life plan. Cash value on whole life plans tends to be a bit smaller, since investments are paid out at a fixed rate.  

Also, if you have only had the policy for a few years, the cash value might not have had time to grow. In one of our sample whole life policies, the cash value by the 5th year was $7,111. By year 25 of the policy, it was $80,882. That’s a long time building that investment to chip away at it paying premiums. It might make sense to cash out the policy and find a new policy with premiums you can more easily afford, even when you are old and have retired, similar to one of our clients, Bob, who is 73 years old and retired. He simple couldn’t continue paying whole life premium anymore. We helped him replace with a much better VUL policy that he doesn’t need to pay premium any more, yet has a higher face value policy.

>>MORE: Why is Whole Life Insurance Not Worth It?

What Happens When a Policy Lapses?

What happens if you stop paying whole life insurance premiums? And then your policy lapses? The fact is, when you let your policy lapse, you are in effect cutting off your beneficiaries from the benefits they may need to pay off a mortgage or cover other expenses in the event of your passing.    

So it makes sense to reinstate it as soon as possible, assuming you didn’t find another plan that meets your current needs better.

There are typically time frames in which you can reinstate the policy that result in different or no penalties.

30 days or less: Let’s say that you just forgot to make a monthly payment or funds were short for just a month. Possibly you were paying the premiums with the cash value and the plan accidentally lapsed beyond that point. Many companies will allow you to reinstate that policy within 30 days with no underwriting or questions. You often just have to fill out a reinstatement application and catch up on premiums.

30 days to six months: Now the insurance companies start assessing your health. You may have to answer some health questions, as well as fill out the reinstatement application.  

90 days to five years: At this point, insurers start to differ widely on how they handle reinstatement, especially in terms of medical exams. You will need to discuss this situation with your agent, ideally before you lapse for this long. Many major insurers allow you to reinstate for a period of five years but be sure to check with your company.  

Also, it’s not a simple matter of re-upping the policy. You will most likely have to pay back the premiums and possibly any fees or penalties. However, if you are older, that might actually be cheaper than purchasing a new policy. 

Thang Truong

Thang Truong covers small business insurance and small business success at BravoPolicy. He is a licensed P&C insurance agent. Previously, he held product leadership positions at realtor.com, Capital One, NerdWallet, and Mulberry Technology. He holds a MBA degree from UC Berkeley - Haas School of Business.

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