Can a Life Insurance Policy Expire?
Understand the factors that determine how long your life insurance policy remains active and the conditions under which coverage can cease.
Life insurance functions as a contract between a policyholder and an insurer, where the company provides a sum of money to designated beneficiaries upon the insured’s death. This agreement outlines terms, premium payments, and coverage specifics. Understanding how policies remain active is important for policyholders. This article explores how life insurance policies can cease to be in force.
How Policy Types Determine Expiration
Whether a life insurance policy “expires” largely depends on its fundamental type: term or permanent. Term life insurance provides coverage for a specific period, often 10 to 30 years. If the insured individual passes away within this defined period, beneficiaries receive the death benefit. Once the term concludes, coverage ends, and it effectively expires unless renewed, typically at a higher premium, or converted to a permanent policy. Term policies do not accumulate cash value, meaning there is no financial component to “cash out” at the end of the term.
Permanent life insurance, including whole life and universal life policies, is structured to offer coverage for the insured’s entire life, provided premiums are consistently paid. These policies have no set expiration date and are intended to remain in force indefinitely. A distinguishing feature is their cash value component, which grows over time on a tax-deferred basis. Policyholders can access this cash value through loans or withdrawals. While permanent policies do not expire, they can cease to be active if the cash value is depleted or premium payments are not maintained.
Other Ways a Policy Can End
Beyond a term policy reaching its scheduled end, various situations can lead to a life insurance policy no longer being active. The most common reason for a policy to end prematurely is the non-payment of premiums. If premiums are not paid by the due date, insurers typically provide a grace period, often 30 to 90 days, during which the policy remains in force. If the payment is not made within this grace period, the policy will lapse, meaning coverage terminates and the insurer is no longer obligated to pay the death benefit. For permanent policies, accumulated cash value may sometimes be used to cover missed premiums to prevent immediate lapse, but this can deplete the policy’s value.
Policyholders can also voluntarily terminate their coverage by surrendering the policy. For permanent life insurance policies, surrendering means the policyholder receives the cash surrender value, which is the accumulated cash value minus any surrender charges or outstanding loans. Surrender charges can be substantial in the early years of a policy, generally diminish over time, often disappearing after 10 to 15 years. While surrendering provides access to funds, it also means forfeiting the death benefit, and any amount received above the total premiums paid may be subject to income tax.
A policy may also be voided or rescinded by the insurer, particularly within a contestability period, typically the first two years after policy issuance. This period allows the insurer to investigate the application for material misrepresentations or fraud. If the policyholder provided inaccurate or incomplete information that would have affected the insurer’s decision to issue the policy or the premium rate, the policy could be voided. In such cases, the insurer may return the premiums paid, but no death benefit would be paid out.
Consequences of a Policy Ending
When a life insurance policy ceases to be active, the most immediate consequence is the loss of the death benefit. Regardless of whether a term policy expired, a policy lapsed due to non-payment, or was voluntarily surrendered, beneficiaries will not receive a payout upon the insured’s death. This outcome leaves dependents without the financial protection intended by the policy.
For permanent policies that are surrendered, the policyholder receives the cash surrender value, which provides a lump sum. If the amount received exceeds the total premiums paid into the policy, this gain is considered taxable income by the Internal Revenue Service (IRS). This taxable portion is treated as ordinary income, not capital gains, which could increase the policyholder’s tax liability for that year.
The termination of a policy also means the policyholder no longer has coverage, potentially necessitating a new policy. Acquiring new life insurance later in life typically comes at a higher cost due to increased age and potential health changes. If a policy lapses, reinstating it often requires paying all overdue premiums with interest and, in some cases, undergoing a new medical examination to prove insurability.