A majority of our site’s readers can relate to the process of paying bills. Utility bills, car payments, mortgage payments and many other types of periodic payments seem to be part of the average, American lifestyle. Those familiar with this type of bill pay are most likely aware of the repercussions of failing to make timely payments - late fees, negative impact to your credit score, or repossession of the applicable collateral are all potential outcomes. However, with life insurance policies, many individuals may suffer irreparable damage from missed premium payments. Depending on the insurance provider and related policy documents, missing a payment may result in a lapse in coverage and an easy excuse for a insurance company to rely on for a denied claim response when a beneficiary comes calling. For this reason, it is important for readers to understand how life insurance premiums work and the risks associated with missed payments.
The simplest way to define insurance premiums is to associate them as the “bill” due to keep your insurance policy active. These premiums can be set as annual, semi-annual, quarterly, or even monthly. The premium amount is calculated based on various factors, including the policy holder’s age and health, amount of coverage in policy, and type of policy. The difference between a life insurance policy and other types of bills, like a car payment, is the liability to the opposing party in your contract.
In a car payment situation, the dealer is liable to provide you with a car and you are liable to keep making payments until the balance of the loan is fulfilled. The dealer is not liable for much more than the product itself. However, in an insurance policy situation, the “dealer” or insurance policy provider is liable to provide the “product” of the insurance coverage regardless of whether the balance of the policy is met. The goal is for the insurance company to make money based on their calculations of how long you should live. However, in the unfortunate event of a policy holder dying early, the insurance provider is still on the hook to payout even though their profit is not yet met. Up until a certain payment, the insurance policyholder actually has somewhat of a financial advantage over the insurance company.
Due to the advantage that life insurance policyholders have over insurance companies up to a certain number of premium payments have been made, insurance companies will expect policyholders to make timely payments on a strict schedule as a way to alleviate this financial risk. If payments are not made in a timely fashion, a majority of insurance companies can use this as a means of escape from the risk or liability of having to pay out. For the sake of your beneficiaries, make sure you do not provide for this avenue of escape by insurance providers by forgetting to make a timely premium payment. Always be aware of due dates, set electronic calendar reminders or simply schedule automatic payments from your bank account to the provider.