Mark Colbert EnterprisesIs Lapsing a Life Insurance Policy in Your Best Interest?
by Mark. J. Colbert, Owner of Mark J. Colbert Enterprises

The effects of lapsing your life insurance policy:

Buying something tangible ---- a shirt, for example ---- is usually not a stressful decision. Either you like it or you don't. If it doesn't meet with your approval or is no longer in style, you can always take it back.

Buying a life insurance policy, however, is a different story altogether. Once you sign a contract, you may only have a few days to change your mind and back out of the deal, or no time at all. If a few weeks, months, or years go by and you find you don't want the policy anymore, you have the option of lapsing it, meaning to stop making premium payments. However, if you do this often enough, you could suffer the consequences. You might have a plausible explanation as to why you have so many lapsed policies, but it had better be a good one in the eyes of insurance companies.

A life insurance policy lapses ---- or cancels itself ---- when you stop paying premiums on it. If you have a permanent life insurance policy that has accumulated cash value, the insurance company uses your cash value to pay your premiums until it runs out, and then the policy lapses. There are countless reasons why someone may lapse a policy. You may feel you are paying too much for insurance, so you'll buy one at a better rate and let the old one to lapse. If you have variable life insurance, for example, you may be unsatisfied with the amount of cash value you are accumulating, lapse it, and look for another policy with a more promising financial picture.

Some insurance companies, such as Primerica, don't care and won't even ask about previous policies on the application. A high number of lapses may indicate financial instability, and the insurer wants to know that a full year's premium will be paid. Others will review your history and decide on a case-by-case basis. At State Farm Life Insurance Co., for example, you won't be rejected for having a high number of lapses, but you may have to pay your premiums in one annual payment rather than the more flexible option of paying monthly. That's because a high number of lapses may indicate financial instability, and the insurer wants to know that a full year's premium will be paid.

Hartford Life Insurance Co. will look for the reasons behind the lapses. If a person failed to pay premiums on several policies, he would likely be denied insurance. But if the person was a past victim of churning ---- where an agent uses the cash value in an old policy to replace it with a new one ---- his application would more likely be accepted because the lapses were prompted by illegally mishandled policies.

Yet other insurance companies may outright reject your application if you have had a high number of policy lapses. Some insurers may think you'll leave them for a better deal at the drop of a hat. They may think you are financially strapped and have a hard time paying your bills. Some may even think you're involved in a scam with your agent in which you're getting a kickback on the agent's commission.

Zurich Kemper Life Insurance Co. may reject an applicant due to a high number of policy lapses, but it's rare. If an applicant had two lapses in three years, or perhaps three lapses in five years, it would be cause for alarm. And if the lapses were policies with large death benefits, there's an even greater chance Zurich Kemper would reject the applications. That's because, in most cases, agents' commissions are paid as a percentage of the first year premium. So the greater the death benefit, the higher the premium and the higher the agent commission.

Typically, commissions for the sale of life insurance policies can be more than 50 percent of the first year's premium for term life insurance and can rise above 60 percent for whole life insurance before adding on production bonuses, promotional trips and other incentives that insurance companies use to encourage sales. So the insurer may very well pay out more money than they take in on a new policy in the first year.

If an agent approaches you about giving you a chunk of his commission if you agree to lapse your policy and apply for a new one, watch out. That's a practice called "rebating" and it's illegal in almost every state. Rebating applies to any sales practice in which an agent entices a customer to buy an insurance product by giving him or her part of the commission. However, rebating scams are rare in comparison to schemes like churning.

Most life insurance experts will tell you to buy life insurance when you're young since it's more expensive as you grow older. The potential hazards you face in the future for lapsing policies make a strong argument to buy the right policy once, and review your coverage needs as your life changes. Otherwise, you and your beneficiaries could suffer in the future.


If you'd like more information or have any questions, please contact us by e-mail at mark@markcolbert.com or complete our contact us form.

Mark J. Colbert Enterprises
Insurance Services
California Insurance License #0809888
Life Insurance Fraud Investigations / Consulting Services / Expert Witness
1328 Fairway Drive
Atwater, CA 95301
(209) 357-3423 Office
(209) 357-3387 Fax
Web Site: www.markcolbert.com