When is a Life Insurance Policy Payable to a Beneficiary?

A loved one has passed away, and you’re named as beneficiary of their life insurance policy. Will there be proceeds for you to collect? This depends on whether the premiums were paid.

The payment requirements depend on the type of policy in question:

• Whole Life Insurance: If the policy is a whole, or permanent, life insurance policy, then the policy must be “paid up” in order for the policy to be considered “in force” and therefore payable in full to you as beneficiary. Generally, this means that your loved one needs to have paid every insurance bill up until his or her death. Some policies, however, allow for a shorter payment period.
• Term Life Insurance: If your loved one had a term life insurance policy, then as long as the premium payments were up to date and he or she died within the policy period, you should be able to collect.

What happens if your loved one stopped paying his or her insurance premiums? In this case, the policy is considered “lapsed.” For term life insurance, this spells the end of the policy, and there will be no death benefit to collect.

On the other hand, if your loved one purchased a whole life policy and made several years’ worth of premium payments, then the policy might have built up what’s known as forfeiture value.  Under these circumstances, the insurance company will likely take one of two courses of action:

1)      Convert the policy to an extended term policy, meaning that the money your loved one invested in his or her whole life policy will be used to buy a term policy. The exact term will depend on the cash value of the whole life policy as of the time it lapsed; the new policy will be for the longest term that can be purchased with the cash value. Once the policy is converted in this manner, your receipt of a payout will depend on whether your loved one passed away during the policy period for the term policy.

2)      Convert the policy to a reduced paid up policy, meaning that the policy will be treated as paid in full and therefore in force at the time of your loved one’s death, but the death benefit will be reduced.

So, your ability to collect on a loved one’s insurance policy depends a great deal on what happened with regard to the policy before the policy owner’s death.