Renewal premiums have a different impact on the life insurance contract than the initial premium. Since the life insurance policy is a unilateral contract, the policyowner has no obligation to pay renewal premiums. After the insurance contract is in effect, it will exist according to its terms for a certain period of time even if no renewal premiums are paid. While renewal premiums are unrelated to the creation of the contract, they are vital to the continuation of the contract.

According to most courts, the payment of renewal premiums is a condition precedent to the performance of the insurer�s obligations under the contract. In effect, the payment of each renewal premium continues the insurer�s obligation to perform for an additional period of time. A minority of courts have held that the failure to pay renewal premiums is a condition subsequent that will terminate the contract. While the distinction between the two views is important, the condition subsequent theory is not the trend in the law.

As it can with the initial premium, the insurance company can set the requirements for payment of the renewal premiums. The provisions controlling the policyowner�s payment of the renewal premiums are usually contained only in the policy. The provisions governing the payment of the initial premium are found in the application and often in the policy as well. This difference is because notice to the policyowner about the payment of renewal premiums is not relevant to the creation of the contract.

Because the insurer�s promise to pay policy benefits is conditioned upon payment of the policy�s premiums, the contractual provisions governing how and when the renewal premiums are to be paid are very specific. The contractual language governing renewal premiums typically requires that premiums for any particular period of time are due in advance on or before the due date specified in the contract.

Sample contractual provisions on renewal premiums read as follows:

Note that although these provisions identify both a date and a recipient for proper payment of the premium, all insurers accept payment of the renewal premiums by mail as a matter of standard business practice. Consequently, if the available evidence establishes that the policyowner mailed a properly addressed renewal premium payment to the insurer sufficiently in advance of the due date that he or she could reasonably expect the post office to deliver the premium on time, the premium will be deemed paid on time even if the mail is delivered late or not at all. This is known in the law as the mailbox rule.

During the 1860s, many policyowners in the United States were unable to pay insurance premiums due to the American Civil War. The consequence of that excuse for nonpayment of premiums has varied somewhat over the years. Some cases held that the policy lapsed for nonpayment of premiums. Other cases held that the policy was suspended during the war, and after the war�s conclusion, the contract was revived by payment of back premiums. In 1876 the United States Supreme Court held in New York Life Insurance Company v. Statham, 93 U.S. 24, that the policy could be terminated by the insurer but that the policyowner was entitled to the reserve value of the contract.

This case is probably not generally applicable today, however. The Treaty of Versailles, which concluded World War I, created an option for policyowners to surrender the policy as of the date during the war when the policy lapsed for nonpayment of premiums or to reinstate the policy by paying the unpaid premiums. No similar provisions were instituted after World War II. However, the modern requirement that insurance policies contain the standard non- forfeiture provisions should resolve these issues today.

The contract may also contain a rider, such as a waiver of premium in the event of disability. If so, the terms of that rider govern if the premium is not paid due to a disability. Similarly, the terms of the dividend election (discussed later in this chapter) control if the policyowner has selected the option that applies dividends to reduce the premium. Finally, the automatic premium loan provision�s terms (also discussed later) are applied if that contractual benefit is available to pay policy premiums. Because the payment of renewal premiums is required to keep the policy in force and the contractual language is so specific, a policyowner who fails to pay a premium when it is due (and not paid by a rider or dividend election) has very few excuses that will prevent the insurer from lapsing the policy.

There are a few cases where policyowners have tried to pay premiums but the insurer�s agent has refused to accept the payment or where the insurer�s agent had a responsibility to collect premiums but did not fulfill that responsibility, thereby preventing a policyowner from paying premiums. In these cases, the insurers were precluded from lapsing the policy because the policyowner had an acceptable excuse for failing to pay the premium.

As it can with the initial premium, the insurance company may waive any of the requirements for payment of renewal premiums. An example of such a waiver is the extension of time for payment of a premium (also known as a late remittance offer) that companies sometimes make at their discretion after the grace period has expired. Beyond this offer, companies do not normally waive these requirements. (This practice is discussed later in this chapter.) The offer by the insurer to reinstate a policy after lapse may also be viewed as a form of waiver since the insurer gives up its right to lapse the policy if the policyowner complies with the conditions of the reinstatement offer. (Reinstatement is discussed in chapter 8.)

Insurance companies do not want the actions of their agents to be treated as a waiver of those premium payment requirements. Consequently, the provisions discussed that limit an agent�s power to modify the terms and conditions of the contract are also applicable to reduce the chance that an insurance agent�s actions may inadvertently waive one of those renewal premium requirements.

When payment of a renewal premium is made to an agent who is authorized to receive the payment, no problems are likely as long as the agent promptly forwards the payment to the insurer. As far as the policyowner is concerned, payment to an authorized agent of the insurer is the same as payment to the insurer directly. If the agent retains the premium, the problem of collection lies between the insurer and its agent.

Payment of premiums to an insurance agent who is not authorized by the insurer to receive premium payments may or may not be an effective payment of the premium. If the agent delivers the policyowner�s payment to the insurance company prior to the due date, the agent�s lack of authority will not cause a problem. If the unauthorized agent of the insurer does not properly deliver the policyowner�s premium payment, the efficacy of the payment will depend on whether the unauthorized agent had the apparent authority to accept the premium payment. Apparent authority is governed by the law of agency and is based on the reasonable belief of a third party (in this case, the policyowner) arising from the conduct of the principal (the insurer). Apparent authority can exist even if there has not been a grant of actual authority. (See chapter 16 for a complete discussion of actual and apparent agency authority.)

It should be clear that payment of a premium to an agent of the policyowner (as opposed to an agent of the insurer) does not constitute payment to the insurance company. A transfer from a principal to the principal�s agent is not a transfer at all so far as third parties are concerned. In the life insurance industry this is somewhat complicated by the imprecise usage of the term agent. An insurance producer is rarely the agent of the client. Although there are statutory distinctions in the state insurance codes between agents and brokers, those distinctions are not always recognized by the courts. (See chapter 16 for an explanation of agency law as applied to life insurance producers.)

Remember that the payment of renewal premiums is a condition precedent to the insurer�s obligation to pay the policy benefits. If it were not for the grace period provisions and the nonforfeiture benefits, an unpaid renewal premium would release the insurer from the obligation to pay any benefits under the contract. This raises the issue of what date is applicable for the payment of renewal premiums�the issue date or the policy date.

The issue date is the date on which the contract is prepared by the insurer and sent to the agent for delivery.

If the applicant has paid an advance premium and been given a premium receipt, the policy may be dated as of the date of the premium receipt. This will, of course, be an earlier date than the issue date. The policy date may also be earlier than the issue date if the applicant has asked that the policy be backdated. A policy is backdated, when permitted by state law, to treat the insured as if he or she had purchased the policy at a younger age. It is done to give the insured the benefit of the lower annual premium appropriate to the lower age. State law and insurance company practice often limit the length of time allowed for backdating a policy. Normally, a policy cannot be backdated for more than 6 months before the application date.

When the policy date is used to provide life insurance coverage under a premium receipt, the insured receives a full year�s protection for a full year�s premium. The insurance protection begins with the date of the premium and receipt and continues until the renewal date. This is not the case with backdated policies, because the applicant pays for insurance protection during the period prior to issuance of the policy when no coverage was provided. Thus the first year�s premium does not buy a full year�s coverage under a backdated policy.

When backdating or premium receipts are not involved and the premium period is measured by the issue date of the policy, there will also be a slight shortage in the length of coverage provided in the first year. This is because the insurance coverage will not be effective from the issue date; it will begin only when the policy has been delivered and the initial premium has been paid. However, the premium payment period will begin to run on the issue date. Some companies have tried to resolve this problem by dating the policy as of a few days after it has been issued to allow time for delivery.

Regardless of which of the above methods is selected, the courts have uniformly supported the insurer�s ability to set forth in the contract the due date for the payment of renewal premiums. The necessity for a clearly defined date, which is to be used for calculation of premiums, loan values, paid-up insurance, and nonforfeiture benefits, outweighs the relatively minor loss of a few days of coverage. Where there has been any ambiguity in the selection of the appropriate measuring date, the courts have resolved the matter in favor of the policyowner or beneficiary.

Modern insurance contracts universally provide for the date for payment of renewal premiums. This is defined in the policy, not in the application. The following are some sample policy provisions:

When renewal premiums are not paid, the policyowner is in default on the contract and the policy is in danger of lapsing�which is usually not in the best interests of the insurer, the beneficiary, or the policyowner. Consequently, insurers try to help their policyowners avoid a lapse whenever possible. As briefly mentioned earlier in this chapter, two methods used to avoid lapses are premium payment grace periods and extensions of time for payment of the premium after expiration of the grace period. If these two methods fail to keep the policy in force, insurers normally offer the policyowner the chance to reinstate the policy. (Reinstatement is covered in chapter 8.)