What may happen if a whole life insurance policy lapses?

When a whole life insurance policy lapses, the policyholder loses life insurance coverage, meaning that the financial protection that the policy would have provided in the event of the insured's death is no longer available. Additionally, there can be tax implications. If the cash value of the policy has accumulated and the policyholder has received any distributions or loans against that cash value, these amounts may be subject to taxation upon the policy’s lapse. The Internal Revenue Service requires that any gain on withdrawals may be taxed as ordinary income, complicating the financial situation further.

Retaining all associated cash values indefinitely is not accurate; if the policy lapses, the rights to the cash value are generally lost unless specific conditions were met beforehand. The idea that the policy converts to a term policy is incorrect, as the nature of a whole life policy and a term policy are fundamentally different; a lapse results in termination, not conversion. Lastly, a guarantee of a refund on premiums paid does not apply universally. While some policies may have a return of premium feature, many do not, and a lapsed policy typically results in no refunds from premiums paid. Therefore, the most accurate depiction of the consequence of a whole life insurance policy lapse is that life insurance coverage becomes void and tax