Early in my career, I met with someone who had a disability insurance policy cancelled due to nonpayment. This cancellation (or lapse) occurred due to no fault of the policy owner. To make a long story somewhat short, this guy – a professional musician with a symphony orchestra — moved to a new home and had given the insurance company the address change with plenty of notice. His premium payment was set up on a quarterly direct billing mode. He received the premium invoice a little late, but managed to send in his premium payment within the standard 31-day grace period. Somehow, the insurance company did not receive the premium payment in time and cancelled the policy. He didn’t send the premium with any tracking, so he couldn’t prove when he sent the premium. When he told them he sent the premium on time, this large, reputable insurance company wouldn’t budge. He was not one to give up easily, so he persisted in his efforts. He showed me meticulous notes, copies of letters with the insurance company, and even correspondence with the Georgia Department of Insurance. All this work, but to no avail.
Policy Reinstatement
Well, in most cases, this problem is easily solved by something called “policy reinstatement”. This entails payment of back premium due, along with completion of a short questionnaire to verify good health. Unfortunately, this guy was diagnosed with cancer a couple of years earlier, so the company rejected his request for reinstatement. Even with tremendous effort and complaints registered with the Georgia Insurance Commissioner’s office, nothing changed. My client was worn out and frustrated, to say the least. On a positive note, my client was successfully treated, the cancer is in remission, and I was able to get him a non-traditional disability policy through a specialty carrier — underwritten by Lloyd’s of London. It was much more expensive, but it was the best we could do.
I’ve seen this happen (unintentional policy lapses) a few other times with my clients, and in most cases, reinstatement was possible. There are documented cases of policy lapses during time of claim for all types of insurance. This has not happened to my clients, but I have read about these tragic occurrences: Someone on a hospital bed, learning that their health insurance policy lapsed, realizing they’re on the hook for twenty or thirty thousand dollars. I can’t imagine a spouse learning that a life insurance policy had lapsed due to nonpayment when they expected to receive a death benefit – all that on top of incredible grief! These are very sad, and often times, preventable situations.
Paying by EFT
So, this is why I strongly recommend that my clients pay their premiums by EFT (electronic funds transfer) or what some companies refer to as “automatic bank draft”. Alternatively, paying premiums by electronic bill-pay can minimize the risk of policy lapse. If someone pays by quarterly or semi-annual direct billing, it’s possible the invoice could get lost in the mail. What if someone in the family is hospitalized and somehow the bill gets overlooked? Or, in the case of the musician, the company simply says they never received the payment? The musician (and his wife) were highly organized and never missed a bill payment. There are numerous scenarios where a policy can lapse unintentionally if one pays bills using “snail mail”. Even with electronic billpay, the burden is still on the policyowner to make sure the payment is made…and things can go awry.
Objections to EFT
Some folks object to EFT, and I understand their concern. We have all heard stories of how a health club or some other less-than-reputable company overcharged checking accounts and then went out of business. Yes, there is a very small risk involved in giving an insurance company your checking account information. However, I believe it’s the lesser of two evils. I have even heard the venerated Clark Howard say it’s better to pay INSURANCE premiums by EFT. Now, that says a lot coming from a consumer advocate who normally advises against giving anyone your checking account information. I have never had one complaint resulting from problems with EFT, although billing problems happen and insurance companies can make mistakes. So, it’s not a good idea to put your payments on autopilot and assume errors will never occur. It’s important to closely monitor bank statements every month.
Some prefer the control of paying bills themselves, either by electronic bill pay or by mail. I’ve had clients who have to juggle their accounts to make sure they have enough funds. They don’t like getting hit with overdraft charges that can result from bankdrafts. I understand that concern, but I think it’s better to ensure the funds are in your account…and you can always cancel EFT for a time if needed.
Premiums are higher if paying monthly!
Yes, you can save quite a bit of money if you pay semi-annually or annually. You can save a slight amount by paying quarterly. Some carriers will allow you to pay by EFT regardless of the premium mode, but many don’t. If paying premiums every 3, 6 or 12 months, then it is extra important to make sure you monitor the funds in your account carefully. If the carrier only allows EFT for monthly payments, then it might be a good idea to pay by electronic bill pay if you need to pay on a monthly basis.
What policies should you pay by EFT or Online Bill Pay.
# 1: Life Insurance (exceptions are permanent life policies): Term life insurance policies have a 31-day grace period in Georgia and most other states. Most carriers will allow reinstatement for many months, even years after a policy lapses – but only if good health can be verified. Cash value policies will borrow against the policy (assuming there is money in the account), so this is a safeguard against policy lapse.
#2: Disability Insurance: A 31-day grace period is standard.
#3: Health Insurance: Again, most policies have a 31-day grace period. Some carriers are flexible and will allow a slightly longer period. Due to the Affordable Care Act, risking the loss of “creditable coverage” won’t be an issue. However, if someone lapses a
personal plan, they won’t be able to get coverage again until Jan 1 of the following year!
#4: Long-term care insurance: Most long term care insurance carriers afford policyholders a protection against lapse. If a premium payment is late, they will contact a person that is designated at time of application. Carriers are required to send out notices alerting policyholders of the option to update their contact person. These notices are sent every year or two.
Since I’m not an expert on other types of insurance such as auto and homeowner’s – I won’t discuss those lines of coverage. Although, I can say from personal experience, EFT can be a good way to go for ALL policies you want to ensure stay in force. Be smart and keep your policies in force – after all, EFT is really just another way to protect yourself. Think of it as insuring your insurance!
Greg Sanders Peachtree Insurance Advisors 678-236-1600
