Lapse . . . of judgment?

Today’s interesting statistic: In 2005, 3.5 million life insurance policies paid death benefits.

Today’s amazing statistic: In 2005 18.5 million life insurance policies lapsed.

(These numbers were recently reported by the Insurance Information Institute.)

I’m no insurance expert, but this seems like a lot of lapses. I’m sure many of these policies were owned by retirees who simply quit paying premiums when their perceived need for insurance declined with their retirement (no more earning power to protect and fewer if any financial dependents). Or, maybe it was just that money got a little tight.

There may have been good reasons for the majority of these lapses, but I’m sure some were simply bad financial decisions. Before letting a policy lapse, the policy owner really should give strong consideration to the following:

What benefits does the policy still provide (tax advantages, estate planning, etc.)?

What is the economic value of the policy today if I live to my normal life expectancy (present value of proceeds at death less present value of premiums paid between now and then)?

What alternatives do I have to maintain coverage (borrow to maintain premiums, convert to a paid-up policy, etc.)?

If I can’t or don’t want to maintain the policy, what alternatives do I have besides letting it lapse (give or sell the policy to someone who will maintain the premiums and designate them as beneficiary)?

Most policyowners should work with an insurance expert to fully evaluate these (and probably other) alternatives. This is especially true when considering selling a policy; this “life settlements” arena has seen lots of shady dealings and abuse, both from buyers and sellers, so be careful.

But, don’t just let your life insurance policy lapse without considering the alternatives. That could be the worst lapse . . . of judgment.