When they were in their 30s, Robert and Maria applied for a $250,000 life insurance policy on Robert’s life. They wanted the policy so that Maria would not have to work after her planned retirement at age 65 should Robert die first. They paid $500 per month for over 20 years. Their life agent told them that the policy would build up a large savings component. This would pay the premiums if they decided not to after 15 years of payments. Robert is now 60, and quite ill. He cannot work, and money is running short. They cannot afford to pay the monthly premium. After a few months, the life insurance company sends them a Lapse Notice. First comes a warning the policy will terminate. Then, they terminate it. How could this happen? What happened to the savings in the policy? Robert and Maria are devastated. They face financial hardship.
In a life insurance contract both parties have obligations. The insurer’s main obligation is to pay the death benefit when a valid claim for the death benefit has been made. The owner of the policy, usually the same person as the life insured, is responsible to make the premium payments when they come due. Payments are usually made each month or year. If the owner misses a payment, the insurer will send out a warning that the policy may lapse. This warning is called a lapse notice. If the premiums are not paid, the policy of insurance comes to an end. It lapses.
How to pay the premiums
The owner usually pays the premiums in one of two different ways. First, and most common, is pay as you go. in this method, the owner of the policy pays the premium at the beginning of each month or year. You should understand that if you pay monthly, you are paying a very high interest rate to your insurance company. You are much better off paying each year in advance.
The second method is with one or more large payments early in the policy. This sets up a kind of prepayment so that the policy builds up a savings component. The deposits are greater than necessary to pay what the insurer refers to as the “true cost of insurance”.
Many whole life and universal insurance policies incorporate a combination of the two methods. The owner makes payments during the policy to build up the savings component. The premiums do this automatically where they are greater than the true cost of insurance. Often the owner has the right to make increased payments during the policy to build up the savings component even faster.
Sometimes, the true cost of insurance increases each year. As we get older, the chance of our death in the next year increases. 35-year-olds are not likely to die at that age. 50- year-olds are much more likely to do so. You can arrange with the life insurance company to spread the risk over the term of the policy, so the payments don’t change. Or, you can start with lower payments and then higher payments as you age. This increasing premium option, called yearly renewable term (YRT), will be the subject of another article.
In any event, you must pay the premium to keep the policy in good standing.
Failure to make the annual or monthly payments leads to a lapse notice. The life insurance company gives the owner a short time to fix the default by paying the past due premium. One major risk of such default is that the life insurance company may require that the person whose life is insured submit to new medical exams. If so, there is the chance that the insurance company will refuse to renew the policy without an increase in the premiums. Any lapse is a dangerous event that requires immediate action.
When the policy was created, the agent may have said that the policy would build up capital that would cover the premiums in the future. Often, these are based on rosy predictions about what the markets would do. Quite often, markets don’t behave that well. The policy runs out of money. How this can happen will be the subject of another article.
If the owner cannot come up with the money to keep the policy in good standing, it will lapse. Permanently.
What you can do when you get a lapse notice
Get advice. Right away.
When your policy is about to terminate for non-payment, your insurer must warn you about the risk of lapse. The notice must also advise you how to cure the lapse. The cure may be impractical or unaffordable. Receipt of the lapse notice should be a wake-up call. Think about your policy. Has it gone the way you thought it would? Were you given good advice when you purchased the policy? You may have been ill-treated. If so, you should consider whether the life insurance agent or the insurer was negligent in their projections and advice. Successful claims for these errors are common.
When faced with the lapse of your life insurance policy, you should take immediate action. Either you should act to preserve the policy or, in some cases, you might allow the policy to terminate. What is most important is that you receive advice from someone other than the selling agent or the life insurance company. The agent and the insurer are in a significant conflict of interest. They may be responsible for what happened.
In the case of the insurer, it wants the policy to lapse. It has already earned all the profit it will make from contract. There was little risk of a claim in the early years, and so they made a profit then. As you have aged, the risk of death increases, and they no longer earn the same profit. Both the agent and the insurer may act to protect their own interests, rather than yours.
The answer is to seek the advice of a lawyer experienced with the specifics of life insurance claims. A knowledgeable lawyer can assess the costs and benefits of pursuing the life insurance agent or company. In our experience, almost all such claims are resolved once the insurer takes the time to consider the facts and law. Sometimes, the insurer will agree to reinstate the policy on terms that are favourable to the client.
If you have a claim for a death benefit denied by a life insurance company, contact the experienced lawyers of the Financial Loss Advisory Group of MBC Law Professional Corp. For more information, visit www.lifeclaimdenied.ca.
Robert and Maria are both 45. They apply for a $250,000 life insurance policy on Robert’s life so that Maria will not have to work after her planned retirement at age 65. They consult a life insurance agent. When Robert dies prematurely at age 60, the life insurance company denies Maria’s claim. It turns out that Robert did not disclose that he was a regular smoker. The insurer claims, “If we had known that fact, we would not have taken on the insurance risk on Robert’s life.” Maria is devastated. She must stay at her work long past age 65 or face financial hardship.
If the denial is valid, what happens then?
Sometimes the life insurer has good reason to refuse to pay a death benefit claim. In those cases, it has a choice. It can honour the claim even if it does not have to do so. Or it can refund all the premiums. There is no other choice. What happens if the insurer does neither?
Let’s assume that the insurer has refused to make good on a life insurance claim for valid reasons. Why should it keep the money paid? The insurer says that it was duped into selling the policy by lies made in the policy application. If the beneficiary does not want to challenge the insurer’s position, what then?
In some cases, the misrepresentation appears to be obvious. For example, Robert smoked all his adult life. However, he claimed to be a non-smoker when he applied for life insurance. This is an obvious and significant misrepresentation. When the insurer learns of this lie, it still has legal options. It can declare that the policy was void from the time of its creation. In effect the policy never existed.
When it voids the policy, the insurer still has a legal obligation. It has received money over the years for no purpose. The insurer is not entitled to keep this windfall. It is the property of the estate of the deceased. In some cases, the insurer does not return this money. It does not advise the estate that they are entitled to this money. The insurer is acting in its own interest – it neither pays the claim nor returns the premiums paid.
Think of it this way. If you put money down to buy a house and then the seller refuses to sell it to you, you have a choice. You can demand the house, or you can demand your money back. If the seller did not sell you anything, then you get your money back. The same is true with life insurance. If Robert, in our example, had lived to his expected age, then the life insurance company would have received enough premiums to make a profit even with paying the death benefit. How could it be in a better position if it refuses to honour the policy?
If an insurer refuses to honour the policy, demand a refund of all the premiums paid. If the insurer refuses to refund this money, take legal action.
Seek the advice of a lawyer who knows about the specifics of life insurance claims. Such a lawyer can also assess the cost-benefit of pursuing the death benefit. The fallback position is to claim the total of all the premiums paid on the policy plus interest on those premiums. Almost all such claims are resolved once the insurance company takes the time to truly consider the facts and law.
If you have a claim for a death benefit denied by a life insurance company, contact the experienced lawyers of the Financial Loss Advisory Group of MBC Law Professional Corp. for more information, visit www.lifeclaimdenied.ca.
Harold Geller is a founding member of the FLAG, the Financial Loss Advisory Group of MBC Law Professional Corporation. He is often consulted by regulators and consumers organization about life insurance industry issues.