Cancellation and non-renewal of insurance policies have both similar and dissimilar consequences. The application of these concepts also differs according to the type of life insurance considered. A policy is cancelled when coverage ceases due to surrender of the policy, non-renewal or voidance. Non-renewal is simply the non-payment of renewal premiums.
Policy cancellation is known as surrender from the policy owner’s perspective. If an insurer cancels a policy, this action is known as voiding the policy. However, an insurer cannot cancel a policy on a whim. There must be proper evidence to suggest a breach of contract or misrepresentation. With general insurance, an insurer can include a provision to cancel if the risk becomes too great after the policy is issued. Non-renewal applies to all forms of insurance. In general insurance, non-renewal effectively cancels the policy contract. With life insurance, non-renewal may or may not lead to policy cancellation.
Like general insurance, non-renewal leads to cancellation eventually with non-cash value life insurance. Unlike general insurance, life insurance provides a grace period of 31 days typically. After this the policy is considered lapsed and the liability of the insurer ceases to exist. With term life insurance, if a policy is cancelled due to lapsed status, it may be reinstated under a reinstatement provision.
Where cash-value life insurance is concerned the distinction is more acute. A cancelled policy cannot be reinstated while a policy that is not renewed may either remains in force or eventually lapses. Lapsed cash-value insurance policies can be reinstated. Non-renewal of cash-value plans would also lead to automatic premium loans, cash surrender or conversion to a reduced paid up permanent insurance. These options are available primarily because of the accumulation of a cash value. The option exercised may be dependent on the cash value as well. In some instances, the reduced paid-up option would be in effect automatically if there is a clause that specifies such in the event of non-renewal.
Non-renewal is typically a more informal process than cancellation. Where cancellation is effected with cash-value life insurance, a surrender form is usually submitted to the insurer. The insurer would then calculate the net cash value based on factors such as advanced premiums, premiums loans and dividends. Cancellation is some cases can be considered a forced action whereas non-renewal can occur without intervention.