Can Universal Life Insurance Lapse?

Purchasing universal life (UL) insurance can help offer your family or other beneficiaries a sense of financial security for when you pass away, as they’ll receive the death benefit outlined in the policy. Without this insurance coverage, your spouse, children, or other dependents could experience a financial impact upon your death, especially if you are the sole earner in the household. 

Unlike some other life insurance solutions, a universal life policy could also be beneficial to you as the policyholder because it typically allows you to build cash value, which you can borrow or withdraw from, provided there is sufficient cash value remaining to keep the policy in force. 

However, you need to fulfill certain requirements to enjoy these benefits, including making the required premium payments on time. If you don’t, the insurance policy may lapse, which could put all of your loved ones at risk.

You likely don’t want to lose your UL coverage and benefits. If your policy lapses, you may have to start the application process over again and risk having to pay higher premiums, subject to policy provisions.  

The main reason why UL coverage lapses is because the policyholder has not made the minimum premium payment. If you’re unable to make your premium payments, you could also lose protection and security for your family because your beneficiaries will no longer receive a death benefit.

Your UL policy might also lapse if the accumulated cash value is depleted, because there wouldn’t be a buffer to cover any premium payments. 

If you have accumulated enough cash value, you can typically withdraw from that value, or borrow against it. 

You can accumulate cash value by adding extra money to your monthly minimum payment, which then earns interest. The interest rate is determined by your insurer. When a substantial amount of cash value has accrued in the account, policyholders usually can borrow against their universal life insurance policy.

You can also arrange with your insurer to pay your premiums from your cash value fund for a specific period of time, if you were to lose your source of income or experience other financial hardship. 

If you deplete your cash value and are still unable to make premium payments, your coverage could lapse and you could lose the benefits under the policy.

Sometimes, depending on your insurer and your specific policy, you may be allowed to reinstate your lapsed UL policy, subject to policy provisions. However, reinstatement often comes with strict conditions.

For example, you may be required to pay the missed premiums with interest at a rate determined by the insurance company. Other companies might require underwriting review, which could involve reassessing the cost of insurance. Insurance companies will also consider your age and health risks to determine the cost of your reinstated UL policy. In many instances, a new policy could cost more than the original one.

Your UL policy can lapse if you fail to pay your premiums. If you decide to pay your premiums from your cash value, your policy could lapse when your cash value is depleted. However, some insurers will reinstate your policy, albeit with new terms, subject to policy provisions.

• Can You Borrow Against Your Universal Life Insurance Policy?