It can be emotionally draining to watch aging parents lose control of their finances. But it can be positively devastating to learn after the fact that they forgot to pay the premiums on their life insurance policies and accidentally allowed them to lapse -- especially if you and your family were the beneficiaries. How can you prevent such a sad scenario?
Fortunately, state laws and insurance regulations require issuers to provide some safeguards on life insurance policies that have a cash value, such as whole life and universal life, to protect against accidental lapses when age or illness interfere with cognition. Term life policies, which have no such cash value, do not have a similar array of safeguards, however.
We asked Michael Roscoe, vice president of The Hartford, and Jessica Ong, spokeswoman for MetLife, to walk us through the anti-forfeiture safeguards -- and point out the trapdoors -- in their life insurance products.
Note: Most of these safeguards pertain to fixed premium (or "whole life") policies with monthly premiums. In flexible premium (or "universal life") policies, the monthly costs are typically paid as deductions from the accumulation fund. The policy remains in force as long as there are sufficient funds present to cover the deductions. As its name implies, a flexible premium contract allows the insured to pay premiums when they choose.
Life insurance safeguards ... Grace period Autopay Reinstatement Secondary addressee Automatic premium loans Extended term insurance Reduced paid-up option Cash surrender value
Safeguard: Most insurance policies have a 30-day grace period. That means if Mom missed making her premium payment by a few days, she'll still be covered. If there are no other provisions in place to pay that premium, she will be sent a notice advising her that her payment is past due and payable by a certain date.
Trapdoor: If payment is not received by that date, she will very likely forfeit her policy -- in insurance lingo, her policy will "lapse."
Safeguard: The easiest way to avoid a lapsed policy scenario is to have Mom's policy set up on autopay, which automatically initiates an electronic funds transfer from the bank account of her choice whenever a premium comes due. "The phrase we use is 'set it and forget it,'" says Roscoe.
Trapdoor: Signing Mom up for autopay may be prudent, as long as you monitor the balance in the account from which her premiums will be paid. If the balance runs below the premium amount, she could still accidentally lapse her policy.
Safeguard: Should her policy accidentally lapse, Mom can apply for reinstatement, based on the terms of her contract. If she is reinstated, the policy remains in effect just as if it never lapsed. However, she may have to pay back premiums plus interest to bring the policy current. Added plus: She will not have to pay a surrender (or policy) charge as she would if she obtained new coverage.
Trapdoor: Reinstatement is by no means automatic. Mom will have to prove that she is in insurable health. If Mom is elderly and struggling with memory loss, dementia or confusion, known in legal terms as diminished capacity, her prospects of reinstatement may be dim.
"Age 70 is where you will see insurance companies start to pay more attention to diminished capacity," says Roscoe. "In the life insurance world, diminished capacity is an indicator and is an insurable risk element that, especially above age 70, carriers might decline because of that. Unfortunately, those are people who are susceptible to accidents, and that has an impact on mortality at advanced age -- the broken hip that turns into pneumonia. Age comes into play; the older you are, the more indicative diminished capacity is as an increase in mortality factor. If the scenario is diminished capacity, I wouldn't bet on reinstatement happening."
Safeguard: Most major insurers will add you as a secondary addressee so you will receive the same policy statements and notices as your insured parent. If you are helping an aunt, uncle or friend, you may have to present a durable power of attorney to monitor their premium payments in this way.
Trapdoor: It is possible for a policy to lapse without generating a premium due notice. If you are monitoring an account, be sure to open all correspondence
Automatic premium loans
Safeguard: In whole life policies where a premium is required, an automatic premium loan feature enables the insurer to use the cash that has built up in the policy to pay future premiums. Interest is usually charged on this dip into the fund, however.
Trapdoor: If you use this convenience too much, it may be possible on some policies to run your cash value down below the level required to keep the policy in force without ever generating a premium due notice. Monitor such accounts closely.
Extended term insurance
Safeguard: "Extended term insurance uses the cash value of the policy to purchase term insurance equal to your current death benefit for a limited period of time," says Metlife's Ong. "Once this period is over, insurance coverage ends." That's right, it's a term life policy on your life insurance.
Trapdoor: Extended term insurance, one of two typical life insurance contract default options to prevent forfeiture, will keep the policy in force, but it will also draw down your cash value and dividend earnings over time.
Reduced paid-up option
Safeguard: If Mom can no longer pay her premiums, this second anti-forfeiture default enables her to reduce the death benefit amount of the life insurance policy she originally purchased. That guarantees the policy will remain fully paid up, albeit at a lower amount, and she will never pay a premium again.
For instance, if the current policy value on a $500,000 whole life policy stands at $300,000, Mom can reduce the amount of the policy to $300,000 without ever making another payment.
Trapdoor: Aside from losing the difference between the original face value and the reduced value, this is a foolproof way to keep a policy in place. And like extended term insurance, this option can be activated at any time.
Cash surrender value
Safeguard: As a final option, Mom can always surrender her policy for its cash value plus any dividends.
Trapdoor: If she does, she should bear in mind that any outstanding indebtedness on the policy will be deducted from the amount she receives.
Life insurance contracts are among the most complex and confusing legal documents a layman will ever see. That said, if you're just getting your first concerned look at Mom or Dad's policy, the best first step is to call the agent who sold them the coverage and enlist their help. It doesn't hurt to call the customer service number of the life insurance company as well; both should be able and willing to assist you in assessing your options to safeguard your parent's policy.