If you are the owner or beneficiary of a life insurance policy, it is important that you understand how the policy works in the event premium payments are not paid or if the policy lapsed. Understanding the exact policy type is important to figuring out the options available.
Assuming you are beyond the contestability period of the policy, below are certain options that may be available.
If the policy type is a term life insurance policy, the option available is very simple. Simply stated, if the owner of the policy dies during the term life of the policy and the policy did not lapse, the beneficiary should have no problems collecting the policy benefits. If the policy lapsed due to non-payment of policy premiums, the policy most likely is not in force and any claims will be denied.
If the policy type is a whole life, permanent life or other similar policy, the policy will most likely have a cash surrender value. If the owner of the policy dies and the policy never lapsed, the beneficiary should have no problems collecting the life insurance benefits. However, if the policy lapsed due to non-payment of policy premiums, the policy may still be in full force and effect. This is true because life insurance companies will automatically convert a whole life or similar life insurance policy into an extended term policy or reduced paid up policy.
Unlike term life insurance policies, with whole life or similar life policies if premiums are not paid, the insurance company will start drawing against any cash surrender value to continue paying the premiums in order to prevent the policy from lapsing and becoming worthless. Other times, the life insurance company will keep the policy in force, but at a lower death benefit. Regardless of the method chosen by the life insurance company, once the cash surrender value is depleted and premiums are no longer paid, the policy will lapse and become worthless. If the owner of the policy should die during this period, the beneficiary may have death benefits payable. In between the time the owner failed to make premium payments and the insurer applying the cash surrender value to the policy in order to continue the premium payments, the life insurance company will attempt to contact the owner and beneficiary of the policy to communicate this fact and attempt to prevent the policy from lapsing.
If the reason premium payments stopped was because the owner died, the beneficiary should have no issues collecting the benefits, even decades later.