Reviewed by Chad G. Boonswang, Esq.

It depends on the kind of policy. If it was term life insurance, there’s usually nothing to get back: term coverage has no savings component, so the premiums bought coverage only while the policy was in force. If it was a permanent policy, such as whole life or universal life, it probably built up cash value, and that money doesn’t disappear when premiums stop. State nonforfeiture laws generally require insurers to give the owner some value back.

Term Life Insurance: Usually No Refund

A term policy pays only if the insured dies during the term. It doesn’t accumulate cash value, so when a term policy lapses, there’s no cash value to return. There are a few exceptions:

  • A “return of premium” term policy may refund some or all premiums if the insured outlives the term. Check how the policy treats a lapse, because many of these policies pay little or nothing if premiums stop early.
  • If a premium was paid for a period after the coverage ended, ask the insurer whether any unearned premium is refundable.
  • If the policy lapsed recently, you may be able to reinstate it instead. Reinstatement usually requires new evidence of insurability and payment of the missed premiums.

Permanent Life Insurance: Cash Value and Nonforfeiture Options

Whole life and many universal life policies build cash value over time. When premiums stop, state nonforfeiture laws generally require the insurer to offer the owner at least these options for the value that’s built up:

Cash Surrender Value

The owner can take the cash surrender value: the cash value minus any surrender charges and any outstanding policy loans. The coverage ends. Part of the payment may be taxable if it exceeds the total premiums paid.

Reduced Paid-Up Insurance

The cash value is used to buy a smaller, fully paid policy. No more premiums are due, and coverage continues for life at the lower death benefit.

Extended Term Insurance

The cash value is used to buy term coverage for the full death benefit, for as long as the cash value will pay for it. When that period ends, the coverage ends.

If the owner doesn’t choose an option, the policy names a default, often extended term insurance. That default matters: a policy the family believes has lapsed may in fact still be in force under extended term coverage.

Automatic Premium Loans

Some permanent policies have an automatic premium loan feature. When a premium is missed, the insurer borrows from the cash value to pay it, and the policy stays in force until the cash value runs out. If the insured died while premiums were being paid this way, the policy should still pay, minus the loan balance.

What to Ask the Insurer

  1. Was this a term or a permanent policy, and what was the cash value on the date of the lapse?
  2. Which nonforfeiture option applied, either by the owner’s choice or by default?
  3. Were any premiums paid by automatic premium loan, and what is the loan balance?
  4. Is there any unearned premium or surrender value still owed?

When the Insured Has Already Died

If the insured has died and the insurer says the policy lapsed, don’t settle for the cash value without checking whether the lapse was valid. Insurers have to follow grace period and notice rules before a policy lapses, and a nonforfeiture option such as extended term insurance may have kept the full death benefit in force. My full guide to lapse denials explains what to look for.

If you think a death claim was wrongly denied because of a lapse, an experienced life insurance dispute lawyer can review the policy. Contact me for a free case review.