| Buying
something tangible — a shirt for example —
is usually not a stressful
decision. Either you like it or you don't. And you can always take it back. Buying
a life insurance policy, however, is a different story.
Once you sign a contract, you
may only have a few days to change your mind and back
out of the deal, or no time at all. If
a few weeks, months, or years go by and you find you
don't want the policy anymore, you have
the option of lapsing it. However, if you do this often
enough, you could suffer some
consequences. "You
might have a plausible explanation" as to why you have
so many lapsed policies, says
Lynn Patterson, chief underwriter at Zurich Kemper
Life Insurance Co. "But it had better be
a good one." Why Lapse Your Policy?
A
life insurance policy lapses — or cancels itself
— when you stop paying premiums
on it. If you have a whole life insurance policy that
has accumulated cash value, the cash
value, the cash value is drained to pay your premiums
until it runs out, and then the policy
lapses. There
are many reasons why someone may lapse a policy. He
may feel he is paying too much for
insurance, so he'll buy one at a better rate and lapse
the old one. If he has a whole life
policy, he may be unsatisfied with the amount of cash
value he is accumulating, so he'll
lapse it and look for another policy with a rosier financial picture. Some
insurance companies don't care. Primercia Life Insurance
Co., for example, does not
even ask about previous policies on the application.
"It doesn't come into play at all,"
says Mark Supic, a spokesperson for Primerica. "We
would have no way of knowing what the
person's [lapse] history was." At
State Farm Life Insurance Co., you won't be rejected
for having a high number of lapses,
but you may have to pay your premiums in one annual
payment rather than the more flexible
option of paying monthly, says Steve Zitney, an underwriting
consultant in State Farm's life
and health department. That's because a high number
of lapses may indicate financial
instability, and the insurer wants to know that a full year's premium will be paid. Yet
other insurance companies may reject your application
if you have had a high number of
policy lapses. Some insurers may think you'll leave
them for a better deal at the drop of a
hat. They may think you are financially strapped and
have a hard time paying your premium
bills. Some may even think you're involved in a scam
with your agent in which you're getting
a kickback on the agent's commission. David
Potter, a spokesperson at Hartford Life Insurance Co.,
says that if an applicant has a
high number of policy lapses, the company would look
for the reasons behind them. If a
person failed to pay premiums on several policies,
he would likely be denied insurance. But
if the person was a past victim of churning —
a process where an agent uses the cash
value in an old policy to replace it with a new one
— his application would more likely
be accepted because the lapses were prompted by illegally mishandled policies. Patterson,
of Zurich Kemper Life Insurance Co., says that a person
may be rejected for life
insurance by his company due to a high number of policy
lapses, but it's rare. He says that
if an applicant had two lapses in three years, or perhaps
three lapses in five years, it
would be cause for alarm. And if the lapses were policies
with large death benefits, there's
an even greater chance Zurich Kemper would reject the
applications. That's because, in most
cases, agents' commissions are paid as a percentage
of the first year premium. So the
greater the death benefit, the higher the premium —
and the higher the agent
commission. An agent's life insurance commission can
be more than 50 percent of the first
year's premium, so the insurer has to spend money to
insure the customer but may never
realize any financial gain. For
example, Patterson recalls one case where a customer
took out a $2 million policy with
Zurich in 1993 and lapsed it in 1995. He took out another
$2 million policy in 1995 with
another insurer, and lapsed it in 1997. He then went
to a third insurer and took out a $2
million policy in 1997. He took out another $2 million
in 1998 with the same insurer. When
he went to Zurich again in 1999 and applied for a $4
million policy, the company rejected
his application. "It's
not a profitable piece of business," Patterson explains.
"Nobody's making any money on
this guy, except for the agent." Watch
Out for "Rebating"
If
an agent approaches you about giving you a chunk of
his commission if you agree to lapse
your policy and apply for a new one, watch out. That's
a practice called "rebating" and it's
illegal in all states except for Florida and California,
according to Jack Dolan, a
spokesperson for the American Council of Life Insurers.
Rebating applies to any sales
practice in which an agent entices a customer to buy
an insurance product by giving him or
her part of the commission. Rick
Sabo of Money Concepts International in Gibsonia, Penn.,
a former agent with
Metropolitan Life Insurance Co. who is now a consultant
to policyholders and attorneys in
insurance lawsuits, says that rebating is extremely
rare. And even if agents convince a
person to lapse an old policy, the customer may not realize what they are doing, he says. Randy
McConnell, a spokesperson for the Missouri Department
of Insurance also says that
rebating is much rarer than other forms of insurance
fraud, such as churning. He says that
if an agent wants to illegally mishandle a policy,
they have greater incentive to do it on
their own rather than team up with the insured because
they will not have to split the
commission. Rebating "is not a high volume kind of thing," he says. Lisa
Santucci, a senior attorney with the Florida Department
of Insurance, receives a number
of inquiries from agents and insurance companies asking
if they can give a cash bonus to a
customer who buys a policy or annuity from them. But
she has not seen any cases where an
agent and a customer "teamed up" to churn a policy
and split the commission on the new
policy. Buy It Once — But Do Your Homework
Most
life insurance experts will tell you to buy life insurance
when you're young since it's
more expensive as you grow older. The potential hazards
you face in the future for lapsing
policies make a strong argument to buy the right policy once,
and review your
coverage needs as your life changes. Otherwise, you
and your beneficiaries could suffer in
the future. By
Mark
Cybulski
insure.com |