Widow gets two million dollars after the life insurance company declared the policy to have lapsed when she and her husband failed to make a timely premium payment while he was dying in the hospital. The insured was a physician who had invested $350,000 in premiums in the policy (roughly $4,000 per month), in order to provide for his aging wife and their blind and disabled son. Because she did not receive the policy value, the widow actually ended up losing her home.
The agent notified the insurer in August that the insured was seriously ill. The December premium notice was purportedly mailed out, but the widow said she never received it. Shortly after her husband died in January, she noticed the oversight and sent in two payments that were rejected. The insurance company returned the payments, saying the policy was paid in full. Then it returned them and said it was not honoring the death claim. This life insurance company claimed that it sent multiple premium notices and would have accepted the late payments if the husband had not passed away.
Fortunately, with the help of a life insurance lawyer, the widow was paid, after a hard fight. The insured should receive damages above the face value of the policy with interest, in order to provide just compensation and deter this type of conduct. This is especially warranted in this case where the insurance company was on notice that the insured was seriously ill. It could have reached out to the family to make sure that payments were timely made and the policy remained in force. Of course, it did not do so.
It is important to realize from this case that insureds frequently, when they are very ill and on their deathbeds, neglect to pay their premiums. An insured should investigate purchasing a policy rider that covers premiums in the event of a disability. It is also important to note that insurance companies regularly earn profits from this type of situation. It's not just a fluke that happens once in a while, but rather, life insurance companies know this is a significant source of revenue. Insureds will invest considerable sums in life insurance policies only to have their coverage lapse during their final days because they missed one premium payment. It is unfortunate that this occurs, and in my view a shameful way to consciously earn profits year after year, but it happens all the time.
What are the rules life insurance companies must follow when there is a lapse of premium?
When a life insurance policyholder fails to pay the required premiums, causing a lapse in the policy, life insurance companies generally follow certain rules and guidelines. However, it's important to note that specific regulations can vary by country and jurisdiction. Here are some common practices and regulations followed by life insurance companies in the event of a premium lapse:
- Grace Period: Most life insurance policies have a grace period, which is a specified period (typically 30 or 31 days) following a missed premium payment. During this period, the policy remains in force, and the policyholder can make the overdue payment without penalty or loss of coverage.
- Notice of Lapse: If the premium remains unpaid beyond the grace period, the insurance company is typically required to send a notice of lapse to the policyholder. This notice informs the policyholder that the policy is at risk of being terminated due to non-payment.
- Reinstatement: To reinstate a lapsed policy, the policyholder usually needs to fulfill certain conditions. These may include paying all overdue premiums, interest, and any applicable fees, as well as providing evidence of insurability, such as updated medical information or a new medical examination. The reinstatement process varies by company, and there may be a time limit for reinstatement after the lapse occurs.
- Policy Termination: If the policyholder does not reinstate the policy within the specified period or does not meet the reinstatement requirements, the insurance company will typically terminate the policy. In such cases, the policyholder will no longer have coverage, and any premiums paid up to that point are generally not refundable.
- Surrender Value or Non-forfeiture Options: Depending on the type of life insurance policy and its provisions, a lapsed policy may have a cash surrender value or non-forfeiture options. The surrender value is the amount the policyholder is entitled to receive if they surrender the policy voluntarily. Non-forfeiture options, such as reduced paid-up insurance or extended term insurance, allow the policyholder to maintain some coverage or convert the policy into an alternative form without paying additional premiums.
- Consumer Protection Regulations: Many jurisdictions have consumer protection regulations in place to safeguard policyholders' interests. These regulations may include provisions for grace periods, notice requirements, and the provision of information about reinstatement and non-forfeiture options.
A life insurance policy is designed to protect beneficiaries in the event of the death of the insured. It is of course known that insureds may be incapacitated prior to death and therefore may miss premium payments. You would think a feature that safeguards this from happening would be built into each and every policy, but unfortunately it is not. Our life insurance attorneys will get you the money to which you are entitled.
If your claim has been denied based on an alleged lapse of the policy for nonpayment of premiums, do not give up just yet. An experienced life insurance attorney can help you get the claim paid. Just like the insured must pay premiums in order to keep the policy active, the insurer must follow certain rules as well.