A Trustee’s most common fear is that a ball drops, and a policy in their care lapses. Unintended lapses do occur, and when they do, knowing how to fix the problem is essential. In this post, I will provide some guidance.
Policy lapse can occur when the premium is not paid within the grace period (typically 31 days after the premium due date) in policies that do not have underlying cash values to support the policy. Most lapses occur in term policies, or permanent policies with dwindling cash values, or significant loans.
The most crucial factor when remedying a policy lapse is speed. For most policies, there is a period after a lapse when the policy can be reinstated by paying the back premium. The period is short but allows you to reinstate the policy without underwriting or answering any health questions. The grantor not even be aware the policy lapsed.
What if you are beyond the window for this simple reinstatement? In that case, the insured will likely have to fill out a reinstatement form that includes many of the items included on the original policy application. As long as the insured’s health has not deteriorated, the policy typically can be reinstated with a check for the policy back payments.
A Few Helpful Hints:
- Do you have a contact at the carrier, especially one who works in marketing or sales? Reach out. I once worked a case for a bank that allowed a term policy to lapse while onboarding the client. The lapse was outside the reinstate-with-premium-only window. Calls to policy service provided no solution; they would not budge. A call to a marketing rep at the carrier got the policy reinstated without notifying the client. Even if you cannot get the carrier to budge, the marketing rep who generates revenue for the carrier may.
- Cannot get the policy reinstated? Review all policy lapse notices from the carrier. I once took over a portfolio of life insurance at a bank, and one policy listed in the file, a whole life policy with large loans, had lapsed, potentially causing a taxable event. A review of correspondence turned up some carrier communication inconsistencies. After conversations with legal counsel for the bank, the carrier reversed the lapse. The policy limped along (with small interest payments applied to the loan) until the insured passed away, avoiding any taxation to the trust.
- Struck out with all options, but the client is still healthy? Find a good life insurance advisor who works with a skilled underwriter to research your options. Just because the existing carrier will not reinstate the policy does not mean you cannot get cost-efficient coverage. I was once called out of the blue by a trustee (not a client) who had allowed a policy to lapse and had no recourse. She got a new policy issued for her client that saved the trust some premium dollars.
It is not easy to manage a life insurance policy, and policy lapses do occur, even for the most responsible trustee. Knowing what to do next can mean the difference between dodging a bullet or writing a (large) check.