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What to do if you're the beneficiary of a "lapsed" life insurance policy

lapsed-life-insuranceIf you’re the beneficiary of a life insurance policy and you’re counting on receiving that money, you’re at the mercy of the policy’s owner. If that person stops making payments, the policy will lapse and could become void. You might not even know the policy has lapsed – until you try to make a claim after the insured dies.

Is it possible to recover any money from a lapsed life insurance policy?

Hope there was cash value

If a permanent life insurance policy lapses, there may be enough cash value built up to keep it in force for a while. Often an insurance company will tap into a policy’s cash value to cover premium payments if it stops receiving payments and doesn’t hear from the policy owner.

Michael Hartmann, a life insurance expert and CEO of FindYourPolicy.com, adds. “If the cash value can no longer sustain the premiums, the policy will eventually lapse and no longer be in force.”

Term life insurance, on the other hand, has no cash value to tap and will lapse right away. You could contact the company and ask about making up payments if the lapse is recent.

Hope they had a waiver of premium rider – and used it

George Burke, a spokesperson for the American Council of Life Insurers (ACLI), a Washington, D.C.-based trade group, says some companies have a provision that keeps a policy in force even if the policy owner misses payments – but the policy owner would need to use the provision.

These riders come under a variety of names, but in general a “waiver of premium” rider is an optional rider that one adds to the policy at the time of purchase. It keeps a policy in force if the owner can’t make payments because he is unable to work due to a disability or serious illness. The insurance company waives the premium for as long as the disability lasts. There are age limits to taking advantage of a “waiver of premium” – such as age 55 or 60. The exact terms vary by insurance company.

Make the policy payments yourself

If the beneficiary of a life insurance policy is fully aware of a policy owner’s diminished mental capacities, then he could hire an attorney to execute a power of attorney. This way the beneficiary can take over financial matters, including life insurance payments.

Whatever the situation, if you discover you’re the beneficiary of a policy that lapsed, contact the insurance company to see what, if anything, can be done.

“Most companies try to be compassionate with everyone’s needs,” says Burke. “They work with the families to reach the best possible outcome.”

Bottom line: If you find yourself in this situation, contact the insurance company and ask if anything can be done to restore a death benefit, particularly if there are extenuating circumstances involved, such as illness.

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