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Beware an Insurance Lapse

Life insurance is purchased for a multitude of reasons, most of which revolve around a need for money at the time of the death of the insured. Whether the insurance is to replace income earned by a family breadwinner, to fund gifts to loved ones, to pay off obligations or perhaps just to provide liquidity at death, it is an essential part of the insured’s estate planning and so will affect many people.

At the time of the purchase of the insurance, death usually seems far in the future and the owner likely is certain the insurance will be there when it is needed. This may change over time and it is important for an insured or the policy owner (or both) to keep track of the status of the policy.

What can go wrong? As the insured ages, the cash values of permanent insurance at first grow and then tend to decline, with the cost of pure life coverage steadily increasing with age. This problem is exacerbated by the fact that low interest rates over time will erode the expectations of the policy holder and insurance company with the result that cash value will decline even faster.

Why does this matter? Many policies will lapse when cash value drops to the point that there are no longer any funds to cover the cost of the insurance. If the insured is still living at the time of a lapse, that insurance benefit counted on for the estate plan will not be there.

What can you do? In most cases, the insurance company will let the owner of the policy know about the potential for a lapse and will provide information about additional premium payments necessary to keep the policy in force. However, delay in taking advantage of the additional premiums may require even larger future payments, while any level of additional premiums may be at a prohibitive cost to the owner.

Bottom line: If life insurance is an essential piece of your plan, make sure the insurance you buy works, even many years into the future. 

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