If you’ll remember back, we discussed that an insurance policy is basically a contract between the policy owner and the insurance company providing the coverage. These contracts require the insured or the party getting the insurance, to pay for this coverage at regular intervals, often times monthly. It likewise requires the insurer or the company managing the risk, to pay the insured or his beneficiaries at a certain point in time, agreed upon in the contract.
The cost of insurance can sometimes be high and many people who get insurance policies end up not paying their premiums until it is already too late. The question often comes up as to whether or not the policy owner can recover what he has paid into his policy, once it lapses or is everything lost and all the funds kept by the insurance company?
It can happen that all is lost to the policy owner, but, most insurance policies these days offer nonforfeiture benefits, which provide that even if the owner fails to pay the policy and it lapses after a specific period, the insured or policy owner gets something back from the policy. Under the nonforfeiture clause of an insurance policy, the policy holder, who fails to continue paying his premium, has a choice of getting the cash surrender value of his insurance or the loan value. There are several nonforfeiture options that are available to a policy holder but even if he fails to choose, the law provides that the specific nonforfeiture value indicated in the insurance contract will automatically take effect.
In New York City, for example, the law mandates the existence of a nonforfeiture benefit for care insurance with long term payment options. Another nonforfeiture option which is common for long term care insurance is the reduced paid-up benefit. This option provides that if the policy holder fails to pay his policy and it lapses after a specific period, the policy will still exist but the benefits are reduced.
Common sense would tell us that you should not buy insurance coverage, if you know that you cannot pay the premiums. Of course, things do happen and situations change, which is why the nonforfeiture provisions of an insurance policy are there to assure us that the payments already made, will not be lost. But, such a provision will not ensure that a policy holder will get the full benefits of the original policy or 100% of their money back either.
Before signing any insurance contract, one should always check the specified period of time before the nonforfeiture provisions go into effect, should they be needed. It is also important to note that the policy holder will have to pay extra, for any nonforfeiture provisions included in their policy.
Another important part of an insurance policy is the settlement options, which are the choices available to the insured person or his/her beneficiaries, as to how the insurance proceeds will be paid. To make things easier for the beneficiaries, the policy holder will typically choose a method by which the proceeds of the insurance will be paid to his beneficiaries upon his/her death. If he/she fails to do so, the choice of distribution falls to the beneficiary.
The owner of an insurance policy or the beneficiaries can choose to have the proceeds paid in a lump sum or on an installment basis, for an agreed period of time, with varying payment rates. The beneficiaries can also choose not to get the proceeds, but only the interest on the proceeds, leaving it to be managed by the insurance company.
Some choose a life settlement or viatical settlement. This is when a beneficiary sells the insurance policy before it matures. The amount he/she gets is lesser than the face value of the policy, but it can be a better option because while the sale value is less than the face value, it is more than likely greater than the cash surrender value would be.
This option is one that is chosen many times by persons who become terminally ill. They know that their time is severely limited and they use the money for a variety of reasons that they may not have otherwise worried about.
People buy life insurance for protection, for savings purposes, for retirement and for investment. While most people would like to be secure, having their own insurance policies, many people simply cannot afford to purchase one or are hesitant because they are not sure if they can continue paying the policy for the years to come.
The options offered by the nonforfeiture provisions of an insurance policy provides these people with an assurance that if they do fail to pay their policy and it lapses, the premiums that they have already paid will not be wasted, because they can still recover a portion of it or enjoy some portion of the benefits provided for in the insurance contract.
Always be sure to contact your independent insurance agent, to get you the best and most current information regarding any insurance purchase, before you sign any contract!