When an Insurance Policy Lapses

Insurance companies might overlook one policy lapse but if you lapse policies enough times, it could cause problems. A life insurance policy lapses or cancels itself, when you stop paying premiums. If you have a permanent life insurance policy that has accumulated cash value, the insurance company drains your cash value to pay your premiums until it runs out after which the policy lapses. There are many reasons why someone might lapse a policy. You might feel your premium is too high, so you'll buy one at a better rate and lapse the old one. If you have variable life insurance you might be unsatisfied with the amount of cash value you are accumulating. 

Some insurance companies are negligent and might not even bother to ask about your previous policy lapses on the application. But there are some and they will actually review your history and decide on a case-by-case basis. If you failed to pay premiums on several policies, you would likely be denied a new life insurance policy. Some insurers might think you'll leave them for a better deal at the drop of a hat. They might think you are financially strapped and have a hard time paying your bills. Some might even suspect your involvement in a scam with your agent in which you're getting a kickback on the agent's commission. The insurer holds the right to call the policy null and void. 

Innumerable lapses cost huge amount to the insurance companies because the commission of the agents are paid as certain percentage of the first year’s premium. Approving a new policy means paying another commission to an agent. Typically commissions for the sale of life insurance policies can be more than 50 percent of the first year's premium for term life insurance. Commissions can go even over 60 percent for some whole life insurance policies. Agents also receive incentives depending on the number of new policies they sell. 

So typically you will be categorized as a bad risk which will affect your financial history. In the future your any kind of transactions will be scrutinized carefully. In conclusion, to avoid such circumstances and haphazard, it is advisable to inform your insurer about your decision to cancel the policy. And more important, it is better to understand the policies properly before you decide to buy them. This will avoid all the other unwanted problems from arising.