Why Permanent Life Insurance Policies Lapse and What You Can Do About It

Business Bites
November 27, 2023
4 min read

Permanent universal life insurance policies, including Indexed Universal Life (IUL) plans, are designed to provide lifelong coverage and accumulate cash value over time. However, lapses in these policies can occur due to several reasons, often stemming from financial or personal circumstances that policyholders may face.

  1. Premium Payments: The primary reason for lapses in permanent universal life policies like IULs is the inability to pay premiums. These policies require consistent premium payments to remain active. Financial hardships, unexpected expenses, or changes in income can lead to difficulties in maintaining these payments, causing the policy to lapse.
  2. Market Conditions: Indexed Universal Life policies are tied to market performance through indexes such as the S&P 500. If the market underperforms, the cash value growth might not be sufficient to cover the policy's expenses, including the cost of insurance. A prolonged bear market or consistently low returns could strain the policy's cash value, making it challenging to sustain the coverage without increased premiums.
  3. Policy Mismanagement: Some policyholders may not fully understand how their IULs work or may not regularly monitor the policy's performance. Inadequate understanding of the policy's intricacies, such as the impact of fees, the indexing method, or loan interest rates, can lead to unexpected policy lapses.
  4. Interest Rate Fluctuations: Universal life policies often come with adjustable interest rates. If the interest rates decrease significantly over time, the policy's cash value growth may not meet the anticipated projections, leading to a shortfall in covering insurance costs and increasing the risk of lapse.
  5. Policy Design: Certain IUL policies might have complex structures or features, such as minimum interest rate guarantees, which, if not thoroughly understood, can result in unexpected lapses or insufficient cash value accumulation.

To mitigate the risk of lapse in permanent universal life policies like IULs, it's crucial for policyholders to:

  • Maintain a stable financial situation to consistently pay premiums.
  • Regularly review the policy's performance and adapt to changing financial circumstances.
  • Understand the policy's terms, fees, and how market conditions may affect its performance.
  • Work closely with financial advisors or insurance professionals to ensure the policy aligns with their long-term goals and needs.

To prevent lapses, policyholders must stay informed, regularly reassess their financial situation, and understand the complexities of their policies. Instead of putting yourself in the same position thousands have been in before you, do something different. Get it and forget it.