REINSTATEMENT: TRYING TO GET YOUR INSURANCE BACK

If you miss a premium payment, getting your insurance coverage reinstated takes more than money.

Even with pre-authorized payments, you might miss a premium. Maybe you change banks or your account runs low. You might not notice because you’re on an extended trip. You could be in the hospital for an extended stay.

On Purpose

If you're short of money, you may decide to stop paying your insurance premiums temporarily. That’s gambling. You never know when you need coverage.

In 2012, we lost Sage Stallone (36, heart attack), Rodney King (47, accidental drowning), Whitney Houston (48, accidental drowning), Michael Clarke Duncan (54, heart attack), Sally Ride (61, pancreatic cancer), Donna Summer (63, lung cancer) and Tony Scott (68, suicide).

Your health could change. This week, Malcolm in the Middle's Frankie Muniz got a mini-stroke for his 27th birthday (see ABC interview). He’s recovering but has affected his chances of getting insurance in the future.

The Process

A reinstatement is not automatic. You've broken the contract, which means you're not entitled to any special treatment. If you want your coverage back, the insurer is naturally suspicious. Maybe you've got a reason to think you're likely to make a claim. What do you know that they don't know?

Here’s what usually happens (your policy contract will have the specifics for you). When you miss a premium payment, the insurer mails you a notice. You get a grace period of a month to pay.

However, you may not get the letter if you've moved and your mail isn't getting redirected properly. Maybe you forgot to provide a change of address or the redirection period expired. The letter could also go astray. The letter might arrive but you could be away.

Key Dates

You can only request reinstatement within 24 months (say) of the lapse.

If your coverage is reinstated, the two year contestability period restarts. The suicide exclusion clause restarts too. This means there’s extra scrutiny since early claims are not expected. Maybe you know something you didn't disclose.

The Cost

You're often asked to repay the premiums you missed plus interest. Wait, you say. Why should you pay for the months you weren't covered? If a claim had occurred then, you wouldn't have been paid.

True. But you wouldn't qualify for coverage now either.

Consider payment of back premiums as a penalty. The insurer spends money on the re-underwriting and might not pass the costs on to you. There's also a deterrent element to stop you from stopping/restarting your coverage whenever you want.

If you think a reinstatement is like buying a new policy, you're right.

Why Bother?

Why wouldn't you buy a shiny new policy instead of reinstating the old one? Say you bought the original policy when you were 41 and now you're 44. If you reinstate, you pay the premiums of a 41 year old. If you buy new, you the premiums of a 44 year old. That's because you're older. 

Your old policy could be an excellent deal because newer policies have been increasing in price for reasons unrelated to your age and health (see three reasons life insurance premiums are shooting up).

The Winners

The insurer wins if you can cancel your coverage after a few years. You've been paying them money and they've paid nothing to you. That’s profitable. If you buy a new policy, the rates are higher since you’re older. The guarantees may be reduced too.

Some policies like Term 100 have been priced to be "lapse-supported", which means the insurer makes money when you cancel than when you stay. Don't expect an insurer to make exceptions to help you restore your coverage.

Your advisor also wins. If you cancel coverage in the first 24-36 months, your advisor may be forced to pay back part of the compensation. After this chargeback period, the advisor earns more by selling you a shiny new policy.

Protecting Yourself

Your advisor may not be informed if you skip a premium but only after coverage has  lapsed. It's then too late to get the insurance back without going through the reinstatement process.

To make sure your insurance stays in effect, pay the premiums. The onus is on you. Examine your bank statements to ensure the premiums are getting deducted. If you use Mint.com, you'll get notified of deviations from your normal spending patterns.If you’re spending less than usual on insurance, investigate why.

Term Insurance

You can’t prepay your term insurance (life or health). If you pay monthly, you’ve got 12 chances to miss a premium each year. If you pay annually, you can only make one mistake a year. You also get a discount.

Permanent Insurance

Universal life insurance has a savings component. If you pay more than the minimum, you build up tax-sheltered savings. You can then skip premiums as long as the savings remain. Whole life insurance (wiki) doesn't let you skip premiums but may allow an Automatic Premium Loan against the savings to keep coverage going.

Cancellation

If you think you no longer need insurance, do talk to an advisor you trust. You might be making a decision that’s expensive and not reversible.

Links

• Insurer cannot deny claim after reinstating a policy unintentionally (Canadian Insurance Law Blog, May 2011)
• Does your insurer win when you cancel your coverage?
• Three keys to getting your insurance claim paid
• image courtesy of FrankU

Podcast 198

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PS You’ll find lots about insurance on the Riscario wiki  at riscario.com