What Action Will an Insurer Take If an Interest Payment Is Missed?

Insurance often focuses on premiums and claims. However, some financial arrangements include an interest component. Understanding the consequences of missed interest payments is important for policyholders.

Common Scenarios for Interest Payments in Insurance

Policyholders may encounter interest payments through common arrangements. One scenario involves policy loans, available with permanent life insurance policies that accumulate cash value. When a policyholder borrows against this cash value, the insurer charges interest on the borrowed amount, treating the cash value as collateral. This allows access to funds without a traditional loan or credit checks.

Another situation is premium financing, where a third-party lender or the insurer provides funds to cover insurance premiums. This arrangement is common for high-value policies with substantial premiums, where the policyholder prefers not to use liquid assets upfront. The policyholder repays the financing company, usually monthly, with accrued interest. The policy often serves as collateral for this loan.

Insurer Actions for Unpaid Policy Loan Interest

When interest on a life insurance policy loan is not paid, the insurer takes actions impacting the policy’s value and longevity. Policy loans accrue interest; if unpaid, it compounds and adds to the outstanding loan balance. This continuous compounding causes the total loan amount to grow.

As the outstanding loan balance, including compounded interest, increases, it reduces the policy’s available cash value. The cash value used as collateral stops earning interest or dividends, slowing the policy’s growth. The growing loan balance diminishes the death benefit, as any unpaid loan and accrued interest are deducted from the payout to beneficiaries upon the policyholder’s death.

A risk of unpaid policy loan interest is policy lapse. If the outstanding loan (principal plus compounded interest) exceeds the policy’s cash value, the policy can terminate. Coverage ends, and beneficiaries receive no death benefit. Insurers send notifications as the loan balance approaches the cash value, alerting policyholders to the lapse risk and providing prevention opportunities. If the policy lapses due to an outstanding loan, tax consequences can arise, as the outstanding loan might be treated as a taxable distribution if it exceeds the policy’s cost basis.

Insurer Actions for Unpaid Premium Financing Interest

Unpaid interest on premium financing triggers policy cancellation and debt collection. Premium financing involves borrowing money, often from a third-party finance company, to pay insurance premiums. If interest payments are not made, the policyholder defaults on the financing agreement.

Upon default, the financing company, often with a power of attorney from the policyholder, can cancel the insurance policy. This cancellation occurs due to non-payment of the financed amount, including interest, terminating coverage. The finance company sends notices of default and intent to cancel to the insured and, in some cases, the broker, usually after a payment is missed for 30 days.

Following cancellation, the financing company collects any return or unearned premium from the insurer and applies it toward the outstanding debt. If the policy’s cash value or unearned premium does not cover the full outstanding loan balance, including accrued interest and fees, the policyholder remains responsible for the remaining debt. The financing company may pursue collection efforts for this balance, which can involve legal action or referral to a collection agency.

Broader Implications of Unpaid Interest

Failing to meet interest payment obligations can lead to broader consequences for the policyholder. An implication, particularly with premium financing, is potential damage to the policyholder’s credit score. While insurance premium payments generally do not directly impact credit reports, unpaid bills sent to collection agencies can negatively affect credit scores. A collection entry can remain on a credit report for up to seven years, influencing future borrowing and financial opportunities.

The loss of insurance coverage is another major consequence. Whether through policy lapse from an unpaid policy loan or cancellation due to unpaid premium financing, the policyholder loses the financial protection the insurance provides. This can leave individuals and families vulnerable to financial burdens if an unforeseen incident occurs. For instance, a lapsed life insurance policy means beneficiaries receive no death benefit.

Obtaining new insurance coverage after a lapse or cancellation for non-payment can be challenging and more expensive. Insurers may view non-payment as an increased risk, leading to higher premiums for new policies. Some insurers might be unwilling to offer coverage, or they may impose stricter terms, such as requiring full upfront payment instead of monthly installments. This can create ongoing financial strain and limit future insurability.