What happens if I do not repay?

How it works

read one illustration as two documents

What is guaranteed, and what is not

1. Cash valueGuaranteed: Set out in the schedule at issue. Not guaranteed: Projected totals, which assume the current scale holds.
2. Death benefitGuaranteed: Guaranteed, subject to the contract terms. Not guaranteed: Anything the declared dividends add to it.
3. The annual decisionGuaranteed: A level premium, fixed by the contract. Not guaranteed: Dividends, declared annually and never guaranteed.

Interest that is not paid is added to what is owed, so the following year runs on a larger figure. The insurer compares that total to the collateral it holds. Two curves are moving toward each other, and only one of them is under your control.

The insurer's administration system runs this comparison automatically, once a year in most cases, on the contract's own anniversary date. It applies the interest rate set for the loan, adds that amount to the balance already owed, and checks the new total against the value currently securing it. Nobody at the household has to request this calculation; it happens whether or not the annual statement has been opened.

Only when the balance actually reaches the specific threshold the insurer has set does an actual person become involved in the file at all. At that point the insurer's own collections or policyholder services staff issue a written notice to the owner of record, describing the balance, the value it is measured against, and the options available, which typically include a partial repayment, a reduction in coverage, or accepting that the contract will end.

Nothing about this sequence depends on the household's income or on any promise made when the loan was first taken. The insurer is not extending patience or withdrawing it; it is simply comparing two numbers on a fixed schedule and acting once one crosses the other, the same way it would for any owner at all, regardless of the specific reason the balance happened to build up over the years.

What can vary

To be accurate about it. The interest rate charged on an unpaid balance is set by the insurer and is not the same figure from one company to the next, nor is it fixed for the life of the contract in every design; some contracts adjust the rate periodically against a benchmark, while others hold it level for years at a time. A rate that seemed manageable at issue can therefore look different a decade later even without a single missed payment.

The threshold that triggers a formal notice also varies by insurer and by the specific wording in the contract, since the calculation depends on how the contract itself defines the value securing the balance. Two contracts of the same face amount and age, from two different insurers, will not necessarily reach that threshold in the same year even carrying an identical unpaid balance.

The year itself matters too, separate from the contract's own age. An insurer that adjusts its loan rate against a benchmark can raise or lower the interest charged in a given year for reasons that have nothing to do with the household's contract at all, so the pace at which the balance grows is not entirely fixed, year over year, even on an otherwise completely unchanged loan.

The cost or the catch

nobody can promise you approval

What the insurer can decide

1. 01Accept the application as it was made
2. 02Rate it, and issue at a higher premium
3. 03Exclude a stated cause from the coverage
4. 04Postpone the decision until a later date
5. 05Decline the application altogether

Partial payment at any moment lowers both the figure and the interest running on it, and nothing has to be settled at once. The alternative is a letter demanding action from a household that has stopped watching, in a year that was chosen by arithmetic and not by anybody. An outstanding balance like this is also one of the ordinary reasons a contract stops performing the way it was illustrated, and my policy is not performing as illustrated sets it out alongside the others.

The bad news, when the letter finally arrives, is rarely only about the coverage. A contract that ends this way because the balance was left to grow unchecked can produce a tax result at the same time it produces a loss of coverage, since any amount owed above the contract's tax cost can be treated as income for that year even though no cheque was ever issued to the household. Two separate problems can therefore land in the very same year, both traced back to the same single cause left unattended.

Who this matters to most

one payment doing three jobs

Where a permanent premium goes

1. 01Part meets the cost of the insurance itself
2. 02Part covers the insurer's expense and the premium tax
3. 03Part builds the contractual value of the policy
4. 04The split is not itemised on an illustration
5. 05A level premium is fixed for the life of the contract

This matters most to a household with a large balance relative to the value securing it, particularly one that stopped watching the contract years ago, since that combination is exactly what produces the letter described above, often arriving at a moment the household neither chose nor felt prepared for.

It matters least to a household with a small balance relative to the contract's value, or one making regular partial payments even without a fixed schedule to do so, since a small and stable gap between the two figures gives the household years of warning, often a decade or more, before either curve comes close to the other.

What to ask, and of whom

Ask the insurer, in writing, for the current interest rate on the balance, the current value securing it, and the specific figure at which it would issue a formal notice, since none of these three numbers is guaranteed to match what a household remembers, sometimes inaccurately, from when the loan was first taken years earlier.

Ask an accountant, separately, what a lapse caused by an unpaid balance would mean for that year's tax return given the household's other income, since the answer changes with the household's income in a way the insurer's own letter will not explain, and realistically cannot be expected to explain on its own.

What to check every year

a licence is provincial, and so is advice

Where this practice is not licensed

1. 01No advice is offered to residents of those places
2. 02The explanatory pages remain open to anyone reading
3. 03A licence is provincial, and so is permission to advise
4. 04Checking a licence is a public register search

The annual statement lists both figures side by side and not a single total, which makes it possible to see whether the gap is widening or holding steady from one year to the next. A household that checks this statement every year knows before the insurer does whether a partial repayment has become useful, rather than learning it from a letter.

The statement is also the place to confirm the current interest rate being charged, since that figure can move even when the household has made no changes of its own, and a rate that has risen since the loan was first taken is one of the clearest early signs that the two curves described earlier are closing faster than expected, well before any actual letter has been sent.

What this page will not do

This page describes how the balance grows and what follows if it is left unchecked. It does not say at what balance a particular contract will actually reach its own threshold, since that exact figure depends on the specific values sitting in that specific contract and can only ever be confirmed by requesting an in force illustration from the insurer directly, in writing.

It also does not calculate what a household would owe in tax if the contract ended this way, since that depends on the contract's tax cost and on the household's other income for the year. An accountant working from the insurer's actual figures is the professional who can answer that question properly, not a general page written well before any of those specific figures exist. Slow decisions age better than fast ones.