Reasons Why Companies Can Cancel Your Life Insurance

Auto Insurance, Insurance
Reasons Why Companies Can Cancel Your Life Insurance

You can cancel your life insurance policy at any time — not that you should. But a life insurance company can cancel a policy only if you:

  • Stop paying premiums
  • Commit fraud when applying for the insurance

Here’s a look at both scenarios and how to avoid them.

Nonpayment

After a payment deadline passes, life insurance customers get a grace period, usually 30 days. The life insurance company will send a late-payment notification. As long as you pay during the grace period, the coverage stays intact.

But once the grace period passes, the life insurer can cancel the policy. You can ask to have it reinstated but act quickly. The longer the coverage has lapsed, the more likely the insurer will ask for new health information or require another medical exam.

Here are tips for avoiding cancellation for nonpayment:

  • Set up automatic payments from a bank account or credit card
  • Ask a trusted friend or relative to serve as backup. Fill out a form provided by the insurer to designate someone to receive late-payment notices. The company will send notices to the policy owner and the designated person.

» MORE: Life insurance payment grace period defined

Fraud

Lying on a life insurance application can have terrible consequences. If the insurer doesn’t discover the truth during the application process, it could cancel the policy during the contestability period, which is typically the first year or two of the policy.

Cancellation isn’t the only concern. A life insurance company could refuse to pay the claim if it discovered fraud after the insured person died. The contestability period gives life insurance companies the right to investigate claims and dispute them if it learns that the applicant purposely lied. Insurers don’t investigate every claim, and they still pay legitimate claims during the contestability period.

Staying safe from cancellation

As long as you’re truthful on the application and pay the premiums on time, the coverage continues for as long as the policy dictates. Term life insurance expires at the end of the term, with no payout if the insured person is still alive. Permanent life insurance, such as whole life, ends and pays out when the insured person dies.

Life insurance companies can’t cancel policies if you:

  • Start an unhealthy habit like smoking after buying the policy
  • Buy other life insurance
  • Move
  • Get older
  • Get sick

Rules for life insurance benefits at work

Group life insurance is coverage made available through an employer. The employer owns the coverage and can decide to stop offering it. Or the coverage likely ends when you leave the job. You might have the chance to continue it if you pay for it. Ask the employee benefits department at work for details.

» MORE: The best life insurance companies

Barbara Marquand is a staff writer at NerdWallet, a personal finance website. Email: bmarquand@nerdwallet.com. Twitter: @barbaramarquand.