Lots of people go through the trouble and expense of buying life insurance. But they’d be surprised and shocked to learn that their beneficiary on the life insurance may not collect. I think that’s terrible. Don’t you? Let’s discuss why that happens and what you can do to make sure it doesn’t happen to your beneficiaries.
There are two main reasons why your life insurance fails. Obviously if you don’t pay the life insurance premium, the policy will lapse. And if you die after the policy lapses the insurance company won’t pay and your beneficiaries will be out of luck. That goes for whole life and term life coverage as well.
Also, if you lie about your health situation or lifestyle activities you are walking on thin ice. If you later die as a result of either unreported medical history or dangerous activities, the life insurance company will give your beneficiaries the total of all the premiums you paid in. But the beneficiaries won’t get the death benefit.
If you own cash value life insurance, the insurance company will use that cash value to make premium payments if you fail to do so. In other words, if you don’t cancel the life insurance policy the company will take the premiums out of your cash value and make the premium payments for you. They ‘ll do this until the cash value runs out. But once you run through that cash your policy lapses.
This might make you think that cash value life insurance is a smart way to go but that’s not the case. It’s true that cash value can be used to make your life insurance payments. It’s also true that term insurance has no cash value. As a result it may lapse 30 days after you fail to make your premium payments.
So why isn’t whole life a better way to go? Because whole life is far more expensive than term. In many cases, it could be 10 times more expensive. As a result, you are far more likely to stop making whole life premium payments than to stop making your term policy payments.
What I’m trying to say is that one reason so many people allow their whole life policy to lapse in the first place is precisely because it is so expensive. In other words, people who buy expensive whole life insurance often die without having any life insurance in place what-so-ever because sooner or later they learn they can’t afford the coverage they really need.
Let’s get back to the lifestyle and health issue. If you smoke, face some health challenges, hang glide or mountain climb, you can buy life insurance. But it’s much more expensive than what you’d pay if you didn’t engage in these activities.
But if you buy a policy and lie about your health or lifestyle activities the life insurance company is selling you a policy based on a lower risk that they actually face. That’s a complete breach of contract and it allows the insurance company to give your beneficiaries the premiums you paid in – and nothing else. This is true with respect to both whole and term life insurance.
My hat is off to you if you make the effort to protect your family by purchasing the right kind and the right amount of life insurance. Just make sure to pay your premiums and be completely honest about your health situation, hobbies and lifestyle activities. Once in a while, an agent will try to convince you not to fully disclose your situation but don’t fall for it. You may save a few bucks in the short run but your family will end up paying the price in the long run.