Stopped Paying Your Insurance Bill? It Could Cost You

By Robert Lewis, InsWeb.com

Sondra Wright and her husband run a successful commercial landscape construction business in Greensboro, N.C. But after a major contract with the state was canceled due to budget cuts, the Wright family found it difficult to make ends meet, and began looking for ways to reduce expenses. Their hefty private health insurance premium was the first item on the chopping block.

“We had to make some cuts, and the $700 per month medical insurance premium was the first to go,” she said. “It was the obvious first choice.” And though the Wrights rarely used their health insurance for services other than routine physicals, they’re apprehensive now that they’ve joined the ranks of the uninsured. Those who lose their health insurance may face financial ruin in a worst-case scenario.

“Thank God we’re in good health,” she added.

With the recession hitting Americans hard, the story of consumers eliminating insurance policies is becoming all too common. Unfortunately, most consumers fail to realize that letting an insurance policy lapse can make it more difficult—and costly—to find coverage down the road.

According to Timothy Gaspar, an insurance agent with FMS Financial Partners in Encino, Calif., a policy lapse will almost always have negative consequences for the insured regardless of the type of coverage.

With auto insurance, which is required by law in all but two states, the consequences for letting an insurance policy lapse can be pricey. “Many auto insurance companies give consumers a discount for what they call ‘persistency,’ which is a discount for the amount of time you have had continuous insurance,” Gaspar explains. “If you let this coverage lapse, the persistency credit will disappear, causing an increase in your rate.”

Letting a home insurance policy lapse can lead to even more serious financial jeopardy. Most preferred carriers will not accept a homeowner whose coverage has lapsed, and homeowners who fail to pay their premium for more than 45 days may be limited to a high-risk policy.

“I’ve had clients who let their homeowners insurance lapse for three or four months and suddenly find themselves unable to get coverage with anyone but a surplus lines carrier,” said Gaspar. “It can really turn into an ugly situation.”

For life insurance, the matter is simple: If a premium isn’t paid, coverage typically terminates after a 31-day grace period, and consumers will have to go through an entirely new application process to reinstate coverage. The applicant may be charged more for coverage, especially if he has grown notably older or has gained weight since his last life insurance exam; if his health has deteriorated significantly, he could be denied coverage altogether.

But the financial headache doesn’t end there. Depending on the type of coverage, a lapsed policy could end up as a negative mark on your credit report, and the insurance company that carried your policy may be reluctant to insure you again.

The bottom line: If you’re having difficulty paying an insurance premium, it’s better to look for ways to save on your policy than to cancel it altogether. Explore quick and simple ways to save on insurance by visiting InsWeb.com’s Insurance Learning Center.